What retail can learn from D2C

In retail, creating a house or private brand (also known as a private label) is nothing new.

But these past years, a trend upward followed by a drop in direct-to-consumer (D2C or DTC) brands has taught us a lot about the way to build brands. Beyond the ups and downs of their business model, they’ve shone a spotlight on the strategies that all retailers can draw inspiration from and use to take advantage of opportunities.

The ups and downs of D2C

The strengths of direct-to-consumer

By selling directly to consumers, without an intermediary, D2C brands offer a stronger relationship with clientele, greater control over brand experience, and generate, in principle, more interesting margins.

The model has demonstrated that young brands can quickly become very visible and compete with established players thanks to their engaged communities and strong customer experience (CX). And indeed, their offering can quickly seem convincing.

But the recipe isn’t synonymous with easy success.

The challenges of the DTC model

The direct-to-consumer model is a double-edged sword. D2C brands control their messaging, customer experience, and margins. But they also take on a large share of the responsibility, alone, that is normally carried by retailers, with all of the challenges that implies.

• Promoting a completely new brand
• Attracting a clientele that is always getting larger... and further away
• Maintaining customer engagement despite their limited catalogue
• Growing with limited resources, even while collecting margins normally left to retailers

And the true test begins when scaling up.

Brands such as Casper or Warby Parker at Target have ended up inside the stores of well-known retailers (in short, they’re no longer pure DTCs, operating more like a manufacturer brand).

Others have transitioned into the hands of holders of many brands, as did Allbirds with American Exchange Group, and now Everlane bought by Shein. And for some, like Glossier, their growth is in peril.

An operations manager at a D2C brand plans inventory.

Theoretically profitable, hard to sustain

So design a good product, create a strong brand, and sell directly to the consumer (often online): By removing the intermediaries, you control messaging and can have both a better price and a better margin, while paying more to acquire customers... the model seems to work, until it doesn’t anymore.

While the D2C approach performs well when growth first starts and attracts super-fans and early adopters, it seems to find it hard going once the law of diminishing returns joins the game.

What happens when it needs to:

• convince customers who are less passionate?
• pay more to acquire less qualified customers?
• deliver at greater distance?
• move stock by lowering prices even more?

Customer acquisition can be efficient at the start, but it rarely becomes more affordable as the business scales up.

Add to this investors who expect ever higher returns and who, ironically, can weaken the very essence of the D2C model. What makes the business attractive for consumers ends up getting diluted.

From D2C experience to traditional shelving

Under pressure to achieve growth, the D2C brand tries to improve its margins while a more mass-market clientele demands more discounts. To broaden its reach, it multiplies its distribution channels and ends up finding itself... at the same intermediaries the D2C model tried to eliminate. It therefore ends up wedged in on the same shelves as all the other brands.

A more complicated offering... produces a more complicated brand

To grow, the small D2C brand, once agile and dynamic, has to broaden its catalogue. Basically, it’s hard to talk about “acquired” or “loyal” customers when your offering doesn’t allow for repeat purchases or cross-selling. The D2C brand also finds it has to complicate its operations, to say no where it used to say yes... and sometimes say yes when it used to prefer to say no. Little by little, it becomes a brand like any other.

But this evolution isn’t necessarily an inevitability. The brand could also become a solid retail sales machine, capable of acquiring customers, satisfying them, cultivating a relationship, and earning their loyalty. In other words, it ends up mastering what retailers have always done.

A consumer searches for a private label in-store.

How retail can learn from D2C

The recent and very visible difficulties in direct-to-consumer could be perceived as a recognition of failure... or as an opportunity for retailers. After all, their business model already responds to many of the limitations of D2C: distribution, customer base, credibility, and operations.

Retailers should therefore recover the best elements of the D2C model, without starting again from zero. Two possibilities seem to stand out:

1. Establish partnerships with D2C brands looking for support to scale up
2. Develop your own exclusive brands

It’s this second option that interests us here, because it shows what retailers can actually take away from the D2C model.

Create exclusive brands that are just as attractive as D2C brands

An exclusive brand isn’t necessarily a low-priced house brand.

And even when it’s offered at an accessible price point, it needs to have its own personality. And yet many retailers still forget this. Without a clear positioning, a house brand risks diluting the image of the retailer instead of strengthening it.

This is the point that many D2C brands understood: Customers are looking for value that goes beyond the product.

Gone is the era when a house brand was limited to sticking its logo on generic items imported at low cost or imitating other popular products. Especially when these high-volume, low-cost products are easily accessible to the general public on sites like AliExpress.

Today a brand has to create its own power of attraction. It has to contribute to making a retail business a true destination.

For a retailer, creating a house brand should never be limited to an exercise in increasing gross margin or introducing a product at entry-level pricing: The exclusive brand must create incremental value and, at minimum, contribute to the positioning of the retailer.

It’s also an excellent moment for accelerating the market entry of products that fulfill the unique needs of clientele, particularly by controlling logistics, packaging, the launch date, etc. It could be that the operational aspect of the retailer lends an even more unique value to the exclusive product.

The winning formula is creating innovative brands, aligned with the values and operational potential of the retailer, while offering a better gross margin.

Exploit the advantages that D2C doesn’t have

Retailers have everything they need to build strong D2C-inspired brands. They can create products that fulfill the specific needs of their clientele, then accelerate their market entry using levers they already control: logistics, packaging, launch schedule, distribution, etc.

The big takeaway from D2C for retail

Ironically, D2C brands have highlighted what consumers increasingly expect: a unique identity, a cohesive experience, a direct relationship, and value that goes beyond mere price—things many retailers have taken for granted by delivering private brand products that don’t really stand out.

Retailers can find inspiration in direct-to-consumer to build stronger brands or establish attractive partnerships while betting on their operational strengths.

In the end, a good private brand looks a bit like a homemade D2C brand (and here the word “homemade” is not at all pejorative). On the other hand, D2C brands sooner or later end up tackling the same challenges as retailers. Deep down, they’re a lot more alike than they think.

Adviso helps you transform opportunities into specific actions. For over 20 years, our business strategy consultants have been supporting companies in their growth. Let’s take a look at how we can accelerate yours.

The article What Retail Can Learn from D2C first appeared on adviso.ca.