Direct to Consumer- The trend of

the future
Author: Lakshmi Narshimman
https://blog.locus.sh/author/lakshmilocussh/ www.Locus.sh
03 Overview

04 What is a D2C E-commerce Business Model?

Table of
Contents
08 Various Direct-to-Consumer Fulfillment options

16 Factors that determine D2C Fulfillment process

20 Impact of D2C E-commerce on Manufacturers (brands)

23 What’s required for the success of D2C E-commerce Model?

25 Changes involved in Direct-to-Consumer E-commerce for the future

31 Direct-to-Consumer: A new beginning

 3

Overview
Shopping online has become a necessity rather than a con-
venience due to the COVID-19 pandemic. This change has
pushed many brands to go the D2C route.
Direct-to-Consumer or D2C is a model where a brand pro-
motes its products directly to consumers without the need
for any intermediaries. Brands using the D2C model manu-
facture, sell, promote, and ship its own products.

Today, brands are leveraging many online channels to reach

out to their customers. But the decision to go D2C is one
that needs careful consideration. This E-book will cover:

D2C Fulfillment Options

Factors that determine D2C Fulfillment options

Impact of D2C E-commerce on manufacturers (brands)

The future of D2C

 4

What is a D2C E-commerce Business Model?

87% of US Consumers say that they will purchase directly from a brand online if they could. - 2018 Consumer Prefer-
ences Survey, Brandshop.

59 percent of respondents preferred to do research directly on brand sites and 55 percent want to buy from brands
directly. -Astound Commerce Consumer Survey of 1000 US Adults, 2017.
 5

Direct-to-Consumer is a model incorporated by brands that sell products directly to consumers eliminating
the use of distributors, retailers, wholesalers, or other channels.

There are different types of E-commerce business models like:

B2C- Business to Consumer B2B- Business to Business C2C- Consumer to Consumer

C2B- Consumer to Business Dropshipping Wholesaling

A large number of businesses are now moving towards D2C as it cuts out middlemen. It allows brands to
manage every aspect of their product like marketing, distribution, and fulfillment.
 6

Why do brands prefer D2C E-commerce Business Model?

Obtain a good understanding of the target market and audience

Easy to introduce an innovative product on a smaller scale without any delays

Allows brands to take complete control over their reputation and customer experience

Provides a platform for brands to easily create an omnichannel buying experience

There is obviously a concern if the D2C business model damages brand-retailer relationships. But brands
would rather want to look at retailers as their channel partners. They redirect their D2C customers to
their retail partners for order fulfillment.

Almost half of manufacturers said direct to consumer sales increased brand awareness and have boosted leads
and sales for their channel partners. - Forrester Study.

D2C E-commerce provides greater control over brands, higher profit margins, and greater innovation. It
is a win-win for both brands and retail channel partners.
 7

Here’s how the D2C E-commerce model has outplayed a traditional retail model.
(Source: Deloitte)

Dimension Traditional Digital (D2C)

Reach Limited Unlimited

Personization Massmarket Hyper-personalized

Loyalty Basic Advanced

Periodic or limited Comprehensive

Access to customer

Pricing Partial control Complete control

Speed to market Slow Quick

Merchandising Limited control Complete control

Assortment Limited Full

Capital expenditure High Low

High Low
Overhead costs
Various Direct-to-Consumer Fulfillment Options
8 88

There are three ways to build your D2C

logistics framework. They are:

In-house Fulfillment
Fulfillment by E-commerce
marketplace provider (External provider)
Fulfillment through 3PL provider
 9

D2C Fulfillment Options

Fulfillment by E-commerce
In-House Fulfillment 3PL Providers
marketplace

Managing in-house fulfillment Companies selling their items Outsourcing the entire fulfill-
without help of 3PL provider through Amazon/any other ment process to the third-party
marketplace. Amazon under- logistics provider
takes fulfillment activities

Level of control: High Level of control: Low Level of control: Medium

Scalability: Low Scalability: High Scalability: High

Affordability: Low Affordability: Low Affordability: Medium

Best suited for starter D2C busi- Best suited for smaller or emerg- Best suited for large and growing
nesses or small E-commerce stores ing brands e-commerce stores.

Not suitable for bigger and grow- Not suited for big brands as there Not suitable for small and starter
ing companies. are possibilities of cloning. D2C businesses
 10

In-house fulfillment

In-house fulfillment is also called self-fulfillment. The D2C owner handles fulfillment without any help from
third-party providers. It involves five basic steps:

Inventory storage Order processing

Returns processing Shipping Receiving

In this fulfillment method, the D2C owner handles the picking, packing, or shipping of an item and the returns
processing. Every step in this fulfillment process has its nuances, right from routing to managing inventory.
 11

Pros Cons

Comprehensive control over order As business grows bigger and complex,

fulfillment process cost and time burdens arise.

Better quality control Needs more staff and technology

spends increase

Helps offer personalized customer With more business, logistics handling

service thereby improving customer becomes complex
satisfaction

Who uses in-house D2C fulfillment?

The D2C brand itself undertakes the fulfillment. Brands outsource logistics operations to third-party providers
once their business grows.

Fulfillment by E-commerce marketplace

External E-commerce marketplace providers like Amazon have become a storehouse of business opportuni-
ties. They provide exposure to companies who want to reach a wider audience base. They also help brands to
save costs on infrastructure like warehouse, labor, vans, and so on.

There are two types of D2C fulfillment by external providers.

 12

Two types of D2C fulfillment by external providers

Outsourcing the entire fulfill- Using external providers for only

ment operations to external inventory management (prod-
providers like Amazon (products ucts listed only on brands own
listed only on external providers website)
website i.e Amazon)

Outsourcing the entire fulfilment operations to external providers

In this method, the retailer sells items on online platforms such as Amazon marketplace, and Amazon
fulfills their orders. Instead of brands selling their products online through their website or online
marketplace and fulfilling orders to customers themselves, they send it to the nearest Amazon fulfill-
ment center.

External providers like Amazon store the products in the warehouse and sell them in the Amazon
marketplace. As a customer buys an item, the external provider is in charge of picking, packing, and
shipping items.
 13

Using External providers for only inventory management

In this method, brands don’t list their products on E-commerce marketplaces like Amazon. They,
instead, use these E-commerce marketplaces as their fulfillment partners. They do their product
listings on their own website.

The marketplaces are only responsible for picking, packing, and shipping the orders and processing
the returns.

Pros Cons

Frees up working hours and lets Quite expensive compared to high-quality

businesses focus on other crucial aspects fulfillment providers

Receive benefits of two-day or overnight Confidential data on brands’ products can

shipping be misused or duplicated when a product
becomes a bestseller.

Sellers gain a competitive advantage to Quality control and control over customer
access the best logistics services data lies with Amazon
 14

Fulfillment through 3PL Provider

Outsourcing D2C activities to a 3PL provider means handing over the entire fulfillment process to
them. These processes include:

Receiving inventory from manufacturing

Picking

Packing

Shipping

Restocking returned products

Quality control

Customer service

3PL providers offer high-quality services, flexibility, diversity, and optimal price for deliveries.
 15

Pros

Enables brands to focus on brand strategy and growth

High volume of shipments means better discounts and hence cost efficiency
High-quality fulfillment experience
Provides cost advantages for regulated items and goods like electronic products
Extensive experience in scaling logistics process thereby making it a long-term fulfillment option

Cons

Losing complete control of fulfillment and quality control is reduced

Who uses the 3PL providers as a fulfillment partner?

Both emerging and established brands depend on 3PL partners for their fulfillment needs, thanks to their
extensive experience in scaling logistics processes.
 16

Factors that Determine D2C Fulfillment Process

Here are the necessary elements required for

emerging businesses to establish a timely and
efficient D2C fulfillment process.
Direct-to-Consumer businesses are
experimenting with new ways to provide excellent
customer service at the lowest possible costs.
 17 17

Fulfillment costs per order

The outbound shipping costs (costs involved in goods going out of the factory) and employee
benefits vary between companies. The costs include:

Indirect labor costs- Employees in all departments (receiving, quality, replenishment, pick, pack,
ship and put away)
Direct labor costs- Managers and supervisors
Occupancy costs- Utilities and space
Shipping supplies costs- Cartons, Dunnage, Envelopes, etc.

The cost of outbound shipping is higher than fulfillment center costs for most of the businesses.
For businesses handling items like electronics, the outbound shipping costs are enormous.
Hence, it is crucial to assess fulfillment costs for each quarter.
 18

Personnel

The hourly wage rates for personnel completely depends on market and labor availability. Therefore,
until sales volume reach sustainably higher levels, businesses must use a temporary staff.

Inventory Management

When it comes to outsourcing inventory management, selecting the right fulfillment partners is
crucial. The role of a fulfillment partner is to keep a close check on product availability and deliver
orders to customers quickly. Fulfillment partners should have a clear understanding of forecasting,
planning and purchasing inventory.
 19 19

Software-as-a-Service (SaaS)

Since SaaS solutions are hosted on the Cloud, it can be accessed from any device with an internet
connection. It only attracts a subscription-based payment that is highly customizable.

With SaaS, there is no need for monitoring, maintaining, or upgrading the software. Beyond cost
savings, SaaS provides in-depth analytics that helps brands make effective decisions.

The new ground reality demands companies to be prepared for different scenarios and challenges in
business. SaaS tools enable businesses to come up with optimal game plans that can tackle these
challenges efficiently. Being an affordable, secure, and scalable option, investment in SaaS has become
essential today.
 20

Impact
of D2C A study conducted by Forrester Research found that 82% of manufacturers

E-commerce surveyed said selling directly to consumers improved their customer rela-
tionships, and 76% reported that it improved customer experience. In that

on Manufacturers
same study, 54% of manufacturers said their channel partners, who sell
their brands, saw growth in sales, too.

(brands) 14% said they see a benefit in letting the manufacturer test the success of
new products before passing them along to retailers.

Brands in a wide variety of segments are jumping into the

direct-to-consumer bandwagon through E-commerce methods. They
are directly distributing and selling goods to consumers bypassing
middlemen like traditional retail and wholesale channels.

Many manufacturers are now reserving their hottest new products not for
their retail partners, but for their own direct-to-consumer channels. Global
Consumer Insights Survey, 2018 (New Business Models in E-commerce era)
 21

Advantages of D2C for manufacturers (brands)

The D2C format enables control over customer experience and helps generate better profits.
There are key competitive advantages that brands can exploit if they take the D2C route.

Brand clarity and control

D2C enables brands to control their entire branding experience like packaging without competition
for shelf space.

Speed to market
D2C benefits brands to market their products faster without seasonal delays, retail interruptions, or
third-party channel coordination. Also, it enables them to make quick product changes.

Business Intelligence
D2C helps brands gain crucial insights, thanks to close customer interactions. These valuable
customer insights, like regional preferences, product positioning, and buying trends, help them
build strategies to better reach their target market.
 22

D2C Lifecycle report by LCP Consulting and The Center for Supply
Chain Management at Cranfield University, 2017

23% 15% 31% 17%

No activity- No plans Too early- D2C is Developing- Investing Mature- Developed
on developing D2C crucial, but the journey in new D2C capabilities D2C Presence and
activities at this stage has not yet begun capability

These statistics show that 48% of manufacturers (brands) are already investing in D2C channels. Brands
expect D2C to grow by 5% CAGR over the next five years. The growth from retail is expected to be 6.5% CAGR
over the next five years.
 23

What’s required for the success of D2C

E-commerce Model?

Companies engaged in D2C

E-commerce can achieve success
with specific features. Getting
these features right enables
efficient, effective, and
consumer-centric logistics.
 24

New Delivery options

Customers desire numerous delivery options beyond free and fast delivery, like 24-hour
delivery, same-day delivery, or even during specific time frames. These evolving
consumer demands have increased the need for technology that can streamline
packaging, picking, and shipping processes.

Transparency
Transparency in E-commerce means the ability to track the package. Companies involved
in D2C business should enable their customers to monitor the status of their orders in
real-time. Also, they should implement proper communication channels to enable easy
resolution of any issues.

Accuracy and Consistency

A brand’s technology environment should support the D2C approach.

Example: A stock in the warehouse should match the actual stock in the website.
Capabilities like omnichannel order fulfillment and real-time inventory management help
suppliers avoid delivery mishaps for customers.

Automation technologies provide a competitive advantage to order fulfillment. They

make sorting parcels, routing, etc. cost-efficient, and transparent.
 25

Changes Involved in Direct-to-Consumer

E-commerce for the Future
How much do US Internet users expect to purchase from Direct-to-Consumer (D2C) companies in the next 5 years?
(based on the percentage of respondents)
(Source: 2018 Direct-to-Consumer Purchase Intent Index, Emarketer)

5.0%
80%-100% of purchases

13.0%
60%-79% of purchases
36.0%

40%-59% of purchases

22.0%
20%-39% of purchases

1%-19% of purchases
24.0%

There is a massive transformation in the way consumers are shopping. Especially after COVID-19, there are changes
in order fulfillment. In the recent decade, many companies have started to deliver products through social media
and online forums in addition to conventional service channels.

Here are the changes in D2C E-commerce that will impact its future.
 26

Mobile traffic = Foot Traffic

Mobile audience growth of five D2C brands from June 2017 to June 2019 (Source: Statista)

800%
649%
700%

600%
489%
500%
427%
400%
323%
300%

200%
146%

100%

0%
Everlane BarkBox Warby Casper Stitch Fix
Parker

The lines have blurred between online and offline shopping in recent years. Today, customers buy a product online,
pick it in-store, or purchase a product in-store, and ship it to their home.

Mobile-friendly site designs play a crucial role in bringing foot traffic to stores. Brands have started to integrate the
mobile experience into brick and mortar stores. Mobile apps of stores help customers be aware of prices, exclusive
promotions, discounts, and rewards.
 27

Virtual and Augmented reality

Customers visit stores to get an understanding of the product through demos. They conduct online
research before purchasing. But beyond all this, they want to feel the products and experience what the
product has to offer.

Immersive technologies like Virtual and Augmented Reality can help in this respect. They provide an immer-
sive experience and can help customers make decisions without ever setting their foot in a store.

Example: Ikea’s Place app enables customers to overlay company’s furniture in various settings. Its AR tech-
nology presents items in the real world using the phone camera. It helps customers see if a couch or bed
fits a space. Their brand strategy has digitized the buying process.

An innovative approach like this helps resolve logistical issues that come with the trial and demo of heavy
items like furniture.
 28

Inventory systems will be made public

Earlier, companies kept inventory systems confidential. Customers visiting a store had to ask an associate to
know if a product was available or not. They could not view stock availability information online. Even if the
details were available, they were not accurate.

Direct-to-Consumer shipping has changed this situation. Big brand retailers have an open inventory system
where customers can see the availability of all items carried in-store and online. If a product is not available
in the store, they can purchase it online through D2C shipping choices.

The blend of offline and online channels has enabled a hassle-free return option. Customers can purchase
products online, but can walk into a store and return the product.

D2C revolution will increasingly pass on to farms and factory products

US D2C Digital Buyers (2017-2021)

By 2022, the number of D2C ecommerce buyers will reach a milestone, at 103.4 million. - Emarketer, March 2020, US
D2C Digital Buyers (2017-2021)

A mix of new digital buyers are entering the D2C E-commerce segment resulting in spending increase per buyer.
2020 will see 87.3 million people of 14+ age making a purchase on D2C platform. D2C spending is expected to
grow 12.7% to $203 per buyer.
 29

95.4
87.3
79.1

67.1

55.9
46.3%
43.2%
40.2%
35.3%
30.4%

24.4%
20.0%
17.8%
10.3% 9.4%

2017 2018 2019 2020 2021

Total D2C Buyers Percentage change of Percentage of

14+ age (in millions) D2C buyers 14+ age total digital buyers

Direct-to-Consumer E-commerce has even changed the supply chain processes of farms and factories.
 30

Direct from farms:

Stores and restaurants that want unique varieties of local products use this method.

Direct from ranches:

Meat box companies sell meat directly to customers who want a higher quality of meat with specific animal
raising or feeding methods.

Direct from the winery:

Vineyards sell wine directly to customers who have personalized requests.

Direct-to-Store deliveries will increase

Brands have started to undertake Direct-to-Store deliveries (DSD). They deliver the products directly from their
warehouses to stores without relying on distributors like wholesalers. This model enables companies to be more
responsive to customer needs and stock demand from retail partners.

DSD model brings healthier profit margins, tighter ownership over the supply chain, and better customer
experience. Though this might not be suitable for all brands, it helps many of them who do not want to rely on
intermediaries.
Direct-to-Consumer: A New Beginning
31

34% of marketers were altering their ad creatives as a result of the coronavirus, and 19% of them
were starting to promote e-commerce offerings- Gartner Survey, Apr 2020

Gartner analyzed 162 retail outlets and D2C brands with brick and mortar footprint since
coronavirus. Their emails between March 1 to March 23 on additional fulfillment options
increased 4% from January and 8% from February.

The Coronavirus pandemic has made brands reassess their existing routes to market. It has
become the best way to cater to the countless demands of customers. Many brands are
using D2C fulfillment options to even connect with their hyperlocal customers.

Locus offers AI-driven logistics solutions to optimize logistics in D2C selling.

Get in touch with our experts now.
 30

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