To reap the rewards of a direct-to-consumer (D2C) strategy, manufacturers need to understand and overcome the risks. Here’s how.
Many manufacturers have made significant efforts in recent years to move closer to a D2C retail strategy. Nike Inc. for example announced plans to stop selling to wholesale partners including DSW, Olympia Sports Inc., Urban Outfitters Inc. and more. While this sent initial shockwaves through the industry, others are beginning to follow suit as a way to reduce the risk of their supply chain being disrupted.
Nike’s D2C sales have increased by nearly 20% in the past decade. That number will likely increase further in coming years with Nike’s new strategy. Yet while D2C retail strategies remove the complexity of multi-layer supply chains and increase manufacturers’ profits, companies that are new to D2C will need to be strategically proactive in their planning to ensure they don’t sacrifice their brand reputation or customer experiences (CX). Product delivery delays, product shortages, lost or unfulfilled orders, and product safety will soon be the full responsibility of manufacturers that engage D2C retail strategies.
With massive supply chain upsets, such as the Suez Canal blockage or the ongoing risk of ransomware attacks on supply chain companies, how can manufacturers ensure that D2C product deliveries and customer experiences are not compromised now that the company is managing its own source-to-consumer supply lines?
A New Responsibility
We’ve never been in a time in history with such massive consumption and massive demand, where the manufacturer is responsible for carrying out selling to consumers, and as a result being responsible for the end user experience. For example, in the past, I’d walk into a shopping mall and go to a store and pick out a product, like a pair of shoes. Then I show the shoes to the clerk and ask for a pair in my size, and they go to the back to find the right pair. Sometimes you have to deal with issues like the store not having the correct color in your size.
These issues create a poor customer experience because the customer has to wait while the clerk finds the product in the right fit and style. Sometimes there are issues with the knowledgeability of the clerks, and if they don’t think you’re going to buy anything or if they’re new to the store and don’t know much about their job yet, they may not be much help at all. Even if you walked out of the store with the new pair of shoes you wanted, you’re going to say, “that was a horrible experience.” But you would blame the store for that experience, not the manufacturing brand that produced the shoe.
High value retail store brands, those that are well-known for their positive customer experiences and product quality, become the focus of consumer anger when customers have bad experiences in their stores. However, in a D2C retail strategy, manufacturers are solely responsible for the customers’ experiences.
This is especially true in e-commerce situations. For example, say a consumer is purchasing an item on a popular brand’s website and is notified that there are 10 items left in stock. So, the customer orders the item right away. However, afterwards they receive an email telling them their item is out of stock and won’t ship for another two months. Now, the customer is upset, because the inventory count on the website wasn’t up-to-date and they needed that item soon for a specific event or purpose. Now, the consumer is mad at the manufacturer’s brand, not at a store.
So, having fulfillment technology that enables manufacturers to get orders right every time and maintain accurate transparency on inventory counts and pricing is critical. Because if you get one order wrong, you’ve lost a customer to a negative brand experience.
Managing order fulfillment and customer expectations is a matter of taking systems that manufacturers and retailers have used for a long time now, and being able to integrate those systems. That’s the capability that ecosystem integration provides to manufacturers — control, governance and visibility over order fulfillment.
Through all of the disruption and pandemic in 2020, we learned what massive direct distribution and direct fulfillment can truly be. The technology that exists now, which allows companies like Nike to have massive fulfillment, is a combination of the technologies we see when Amazon drops packages on our porches every day. Companies using these technologies and processes are now going to be responsible for managing the final mile of the customer experience.
When customers have a bad experience these days, everyone knows about it. They post to social media, and use tools like hashtags to amplify their posts and ensure the brand and its followers see their complaints. This has become an even more effective tool for customers with the boom in video-based social media platforms over the past few years, which can visually explain product delivery mishaps and mistakes.
The technology for fulfillment, like an ecosystem integration platform, where you can ensure products are in the right place, at the right time because applications and systems are integrated for real-time updates and coordination — that’s only half the battle. The other half is maintaining a brand that can continue to flourish as millions of shipments are being sent directly to customers. Not every one of those shipments will be perfect every single time unless you have some sort of strategy to ensure successful order fulfillment.
Risks for Manufacturers
Companies shifting to a D2C strategy are ultimately taking more control over their ecosystems and order fulfillment, but they also take on the risk of staking their brand reputation on the success of their D2C operations. But it doesn’t stop there. There are other risks associated with D2C strategies.
You have to be very careful, especially with companies that have high profile reputations and high expectations from consumers, when eliminating distribution points and product delivery endpoints. Those distribution and delivery endpoints are also used for product returns and exchanges. So, reverse logistics technology also becomes an issue when manufacturers not only have to figure out how to successfully deliver products to maintain brand reputation, but also how to successfully take products back when consumer expectations aren’t met.
Say a company uses the United States Postal Service to fulfill orders. Can a customer simply take the product back to the post office to return it in a prepaid package? Will the return shipping label already be printed out and included in the delivered product, or will the consumer have to print it out? If the company uses a private mail delivery service, will that service collect the returned products as well? On top of that, how will the manufacturer handle products once they are returned? They can’t turn the product around and re-sell it as a brand-new item. So, manufacturers need to figure out how to move their returned, potentially damaged or dysfunctional products.
These are the issues that must be figured out before D2C initiatives can be undertaken successfully. (Managing returns is one of the things Amazon.com Inc. is doing really well by engaging Kohl’s Corp. as a partner to accept returned products in-store, for example.)
Rewards of D2C Success
The risks associated with D2C manufacturing and retail strategies aren’t without reward. D2C is great for improving company margins, because organizations are so close to consumers’ experiences purchasing their products they’ll have a better idea of what the consumer wants and can meet those expectations. This enables manufacturers to sell their products at a premium because they aren’t paying for in-store advertisements or display space.
That said, when disruptions occur like natural disasters, global pandemics or even something as small as resolving a negative customer experience, it’s critical to have strategies and solutions in place to manage and control the impact of those upsets without inconveniencing the customer.
Frank Kenney is director of market strategy at Cleo.