How Direct to Consumer or D2C brands are redefining the shopping experience – Part 1
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With large-scale supply chain disruptions caused due to the pandemic-triggered crisis and the rise in online shopping, many brands prudently opted for the D2C route – manufacture, marketing, sale, order fulfillment, and delivery of goods and merchandise directly to consumers, eliminating the need for a gamut of intermediaries such as retail outlets, distributors, third-party agents, wholesalers, and other middlemen. This trend has resulted in the emergence of some powerful D2C brands that have established a direct connection with customers and are disrupting the Indian retail space.
Simpl’s alliance with leading D2C brands
Simpl partners with leading D2C brands to offer Buy-Now-Pay-Later options towards strengthening their bonds of trust with their exclusive consumers and tangibly grow the brand power of D2C brands. Currently, 25% of Simpl’s transactions are attributable to D2C brands and with a growing preference for D2C brands, it is expected that this share would continue to grow.
D2C in spotlight
In 2020, with a dip in footfalls in brick-and-mortar stores, retailers saw online sales swell to historic records. Additionally, many customers opted for touchless home delivery, resulting in the firming up of omnichannel strategies across segments – consumer products (CPG), electronics, household products, clothing, lifestyle categories, and more.
D2C is an outcome of this changed consumer buying behavior. In 2020, it is believed that standalone branded websites saw an 88% order volume surge in comparison to 32% growth in the case of e-commerce marketplaces. The key characteristics of D2C brands that distinguish them from peers consist of the following:
- The major part of revenues derived or lion’s share of customer acquisition is carried out through D2C online medium OR
- Brands first ventured into the online distribution model prior to branching off into omnichannel modes
Recognizing the D2C opportunity, several established players in FMCG, cosmetics, and other product categories have forayed into D2C, launched dedicated portals, to further strengthen their portfolio.
The chart below highlights the sizeable D2C business opportunity in India:
Source: Avendus
D2C market snapshot:
An Avendus report estimates the D2C market in India to touch $ 100Bn by 2025, a trend that has picked up pace globally as well.
Source: Avendus
Note: YTD data: 2016 to 2020, Transactions refer to funding rounds, ARR denotes Annualised Run rate
Key factors propelling the D2C wave
Broadly, the key factors driving the success of the D2C route includes timely order fulfillment, a delightful customer shopping experience, prompt payment with the availability of Buy-Now-Pay-Later option, seamless web store with multiple product categories, personal ‘shopping’ touches including customer-specific offers, discounts, and free products, 24*7 customer support, interactive website, robust logistics delivery model and centralized inventory management to ensure availability of listed products.
1. Changed consumer purchase patterns
The pandemic accelerated the e-commerce boom with buyers opting for the online route to buy goods, including essentials and staples. D2C based on the digital mode has benefitted immensely from this digital buying trend. India has an internet base of 639 Mn, with a steep 24% y-oy jump in users.
In 2020, it was estimated that the average Indian spent over 1.5 hours each day on digital modes, with the activity levels expected to cross 3 hours per day in 2022. Further, online shoppers in India have ballooned by 80 Mn in the past 3 years to touch 130 Mn in 2020. An Avendus study estimates that online spending in India is expected to clock a 35%+ CAGR from $39 billion in 2020 to north of $200 billion by 2025. Factors fueling the digital economy are higher internet connectivity, cheap data costs, and the digital payments boom.
The below chart highlights the steep growth achieved by certain D2C brands across product categories in a shorter time span, compared to their traditional counterparts:
Source: Avendus
2. Targeted strategies for each consumer segment
Via monitoring of purchases with details of product categories, value, and volume and analysis of the consumer patterns and feedback analysis, companies can devise innovative strategies to grow market share or drive penetration levels in diverse consumer pools. For example, the approach to sell to a first-time consumer and sales to a loyal consumer would be different and customized.
Brands might offer first buy discounts to a first-time buyer and place a higher focus on reimbursement of loyalty points or offer Buy-Now-Pay Later options for their select, regular customers. In the case of Simpl, leading merchants and popular D2C brands recommend loyal, credit-worthy end-customers for whom they would prefer to offer Simpl as a payment option at the time of checkout.
3. Cost-efficient for enterprises
It is estimated that the adoption of D2C can result in a 15-25% profit spurt after factoring in the operating costs. D2C offers companies valuable insights into consumer preferences. The related data analytics can be used to boost marketing strategies. Further with the onus of fulfillment on the company itself and accurate tracking of orders, speed of end delivery is expedited, aiding in inventory management and faster sales cycle.
4. Higher customer engagement levels
In D2C, end-consumers interact directly with their favorite brands in a virtual manner and purchase as per their choices. Thus organizations can understand consumer preferences, evolving expectations, and product demand via constant engagement with consumers via email, chat sessions, apps, and social media forums.
5. Favourable Government policies
India’s e-commerce market is estimated to cross $200Bn by 2026, as per IBEF. Further, as per FDI rules, foreign brands are permitted to adopt the online route for up to 2 years prior to setting up a physical shop, giving a fillip to single-brand retail. This has contributed to the proliferation of D2C players in India – both foreign and indigenous who are keen to capture a share of this profitable sector.
Key performance metrics of D2C brands:
Since D2C brands are primarily digital-first, the performance metrics vary from traditional products available at physical stores. Besides markets size, broadly the following parameters can help gauge brand performance:
(i) Average order value
This would increase in case of premium-priced products bought by customers or high-volume of products or bigger basket size per transaction. As per an Avendus report, generally, brands that command a high average order value enjoy superior unit economics.
(ii) Repeat customers
This translates into frequent purchases by the customer indicative of a product fit with customer segments or availability of a ready market for a product.
(iii) Gross Margins
High-margin products indicate brand equity and the ability of the brands to allocate more towards marketing and further brand building. This also means cost efficiencies i.e. lower production cost and lower cost of last-mile delivery.
(iv) Brand equity
This is the bread and butter of all brands including D2C brands. A strong customer connect and constant engagement through social media, content strategy, and timely communications, with a robust feedback model, can further strengthen this metric.
The below chart summarizes the performance metrics based on key D2C categories:
Source: Avendus
A McKinsey study reveals that in the US, e-commerce in H1FY20 saw a jump equivalent to that of the last 10 years. Similarly, in Europe, digital purchases spiked from 81% to 95% during the pandemic. Additionally, 2/3rd consumers opined that they would continue to shop online. With digital shopping witnessing growing traction globally, D2C too is expected to see enhanced adoption rates in the coming days.
In the next article, we shall look at other key aspects that are making waves in the D2C space.
To be continued….
