Direct to consumer or “DTC” brands have come into prominence in the last few years and experienced double-digit growth ever since. While they continue to mushroom, there are a couple of key challenges DTC brands should address to earn competitive advantage in the market. A report.
Direct to consumer or “DTC” is the type of consumer product sales organisation where a product is sold directly to the end consumer without a middleman such as third-party retailers or wholesalers. It connects, deals, and transacts with its customers directly through offline and online platforms.
DTC market has been experiencing double-digit growth in the past several years with another 20 per cent increase expected in 2021 despite the pandemic. A major advantage of being able to connect and influence its consumer’s attention and the decision is maximised when companies directly deal with their audience.
The top industries in the DTC arena are fashion and apparel at 77 per cent and beauty and cosmetics at 19 per cent as reported out by Invesp while more product groups are jumping on the DTC train fuelled by the pandemic impacted consumer behaviour.
There is no doubt that, as the technology platforms and logistics services integration continue to expand and the financial entry barrier gets lowered, more brands will start as DTC in the post-pandemic world.
However, while transacting and reaching out to customers enable a more laser-focused marketing and sales organisation (end) with a more effective cost of customer acquisition, brands should never discount the roles of the supply chain (middle), and product design (beginning), which help create the true value of a product, and therefore the value of a brand. While operating models and systems of each brand would differ on the value they are poised to create, basic challenges stay the same for most. For the sake of this paper’s argument, we will focus mostly on apparel and fashion in our supply chain and product design challenges with quotes from industry leaders since this product group counts as the dominant market share of DTC companies.
Let’s look at a couple of key challenges DTC brands may face but ultimately create competitive advantages for companies if they are met with vigilance.
Some of the DTC product design and supply chain challenges can be surmised as below:
Low Minimum Order Quantity (MOQ): DTC and digitally native vertical brands (DNVBs) usually start with bursts of small quantity sales to test the market and the reaction from their consumers. This by itself presents a major challenge of creating new and small batches of products in a swift manner. New companies need low MOQ production capabilities, and it is extremely challenging to find factories that would accept this. While some south China factories have initially been accommodating, they are now increasing the Freight On Board (FOB) prices for small quantities (25–100 units). Not meeting MOQ in fast fashion and apparel can cost you up to 20 per cent or more.
Design to Value (DTV): Section twenty-two speaks of DTV as “determining what product attributes your consumers care most about… understanding how your product compares to competition… and taking these insights and ideate possible solutions to optimise the value proposition.” Oftentimes, companies fall into the trap of over-designing and creating expensive products using materials that don’t match the customer value proposition. They overdesign (and sometimes under-design) features, trims, and materials that end up blowing the budget out of their customer’s reach, or worse, eat up their planned margins. Having a team of product engineers or a design team or partnering with a global studio can help select your basic or hero materials and build up your collections while staying between the cost parameters. I recommend partnering up with such teams if you are not looking to hire your own. You can save about 10-15 per cent from product cost if you design to value with the right materials.
Sustainability: It is becoming harder to track where the raw materials and products come from across all industries. Sub-contractors in production countries have little visibility to the public; companies may never truly know where their clothes are coming from. There are a number of certifications and accreditations now in the fashion world. From vegan leather certifications to GRS and Oeko-Tex, having a transparent supply chain and working with partners that promote the right accreditation for your product group will give you peace of mind. It’s our duty to the environment to work with and in organisations that give back to the environment, they take from and to help our consumers become more and more aware of every link in the supply chain.
From a financial and marketing perspective, we can also think about a three-pronged approach. While having the highest standards and traceability is a natural tendency of all brands, it comes as cost and lead-time, so you have to optimise your channels accordingly:
1. Industry and government sustainability requirements: The US is advanced when it comes to sustainability and ethical sourcing, so the bare minimum requirements for them will still be higher than most other countries these suppliers are producing products for.
2. Bare minimum sustainability requirements: What is a “must-have” for our customers? If we don’t have these, they will not shop with us.
3. Brand value adds sustainability requirements: These initiatives drive customers to pay “premium” prices or switch their shopping habits to our brand. Become the sustainable brand of choice.
Logistics: Direct to consumer sales have also propelled directly to consumer logistics demand recently. You can now have factories and drop shipments directly sent to your consumer’s door. However, this is costly, and brands should optimise the logistics routes according to their sales and geographical sales channels. Brands should work with suppliers who can offer an optimised factory to end-customer logistics and distribution channel, providing options for the lowest landed cost. Factory direct shipment versus holding inventory in the home country where your sales speed is 4x-6x inventory turnover can make a significant cost difference. Furthermore, rather than looking at it from ex-factory or FOB price, by doing a fully landed cost analysis, and improving the cost base accordingly, you can save up to 30 per cent of end-to-end logistics costs. Make sure your team can entertain multiple logistics and distribution scenarios when creating new supply lanes.
Innovation: DTC brands are ultra-connected to the online and offline world. Traditional seasons do not exist anymore, and fast and new are the keys to success. DTC brands need to keep close with their suppliers on new, raw material developments through yarn producers and fabric mills that offer the most innovative materials to give competitive edge for their product innovation. Raw material and fabric technology are also advancing at lightning speed. The R&D departments are at full speed, so it is always beneficial to be in close contact with your suppliers to find out what they are working on.
Category agility: Most brands start with one core product that is dear to their heart — one that represents a certain type of customer and their needs. However, as the brands get bigger, so does the customer base and opportunity for higher revenue through larger basket size. If you are stuck with a single type of product, you would be limited to the revenue with that specific category. Swiftly adding a new category that matches the overall brand image and lifestyle category improves your revenue portfolio. Imagine a swimwear or beachwear company adding a sarong to their product category. Customers will most likely pair their purchases with it, and that opens up a new revenue channel. However, the challenge arises from not the concept of the product but the development, raw material sourcing, and production of it with new partners. A swimwear manufacturer may not be able to produce a sarong as well. Development costs and operational team investments should be minimised while the new product activation should be very fast to enable a quick sales increase. Oberlo reports customers to increase their basket value and contribute to 35 per cent additional revenues when they buy additional products on the same visit.
Quality assurance: Roadie reports, only in the US, returns amounted to 351 billion USD in lost sales last year. This staggering amount comes from a host of reasons ranging from size issues to material quality. The earlier you can detect production issues and work with your suppliers, the longer your quality improvements will last, and you’ll be able to respond to challenges faster. By reducing e-commerce returns due to quality issues, you can gain back 20 per cent of the lost revenue. However, you would need best-in-class tools and teams to improve product quality and tie the front end of customer issues all the way up the supply chain to manufacturers and all supply chain nodes along the way.
Speed: You don’t have to be fast, but you have to be fast enough. Inventory turns are a company’s lifeline to revenue, and it can range from weekly drops to 1–2 turns a year, from ultra-fast fashion companies to high fashion houses, respectively. Your marketing strategy, manufacturing capacity, payment terms, and logistics all have to fit into this equation, and it’s a sophisticated and an integrated one! Knowing your customer’s buying habits will determine the speed of your style drops and your development timeline and raw material sourcing lead times. As raw material can take 80 per cent of your lead time in garment production, keeping a virtual stock of “hero fabrics or raw materials” would enable you to react much faster to changing demands and have more flexibility in your development and speed to market schedules.
Co-founder of the trendsetting athleisure company, Carbon38, Caroline Gogolak is a fashion guru who knows the importance of the supply chain’s role in making a brand successful. Her most recent company is St Art, a DTC company launching in summer 2021, which will take fast fashion and sustainability concepts head-on. I met Caroline a couple of months ago and was immediately blown away by how much she focused on making the “backend” of St Art successful and transparent. We will conclude the article with what she had to say in her recent interview Glossy.co:
“The biggest risk to starting any fashion brand is inventory. For me, it took a year to figure out the supply chain, find the right factories and get everything ready. Building a brand today is really about building an efficient supply chain.”
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