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06 November 2019 5 min read

Nailing a Direct-to-Consumer business model - part 2

John Calder

John Calder
Partner, expert in supply chain transformation

Sofia Gkiafi

Sofia Gkiafi
Senior Manager | Supply chain and procurement | London

In our previous blog we explored five key learnings that some of the biggest Consumer Packaged Goods companies (CPGs) have taken as part of their Direct-to-Consumer (DtC) journey. In this blog we explore the supply chain challenges they have had to overcome in order to succeed in the space. 

By design, global CPGs are not geared up for DtC. Their core business model involves trading with retailers and wholesalers in pallets and truckloads, negotiating with them on range and shelf space and leaving them to collect and provide data on end consumers. CPGs who decide to embark on a DtC model need to overcome a number of supply chain challenges.

Demand planning is one of them: for established CPGs with a DtC offering “on the side” of their core business, DtC demand is likely to be perceived as “noise” from the demand planners, a product requirement that can be met without too much planning, just by the sheer size of the core business. This can be fine up to a point – the key to success is to recognise the turning point when DtC demand becomes material, so it can be brought into S&OP discussions and planned for appropriately. This becomes crucial sooner if DtC is offering niche/small volume products.

SKU proliferation is another challenge: established CPGs who have spent years investing with retailers and wholesalers in order to “own” premium shelf space may choose to offer a different product range through their DtC channel in order to manage customer relationships. An exclusive DtC range can excite customers and satisfy wholesalers and retailers as being a different, noncompeting channel, but it adds complexity to the supply chain, from demand-and-supply planning to manufacturing and warehousing.

Final-mile logistics is arguably one of the biggest concerns for global CPGs when it comes to DtC. Most of them have perfected their distribution of truckloads to retailers and wholesalers – but delivering parcels to end consumers is an entirely different business model. 

Warehousing and returns management is also a key issue. Where to have stocking locations, how many and – crucially for DtC – where to do product customisation can have a significant impact on product margins and delivery service. Equally, the returns management model needs to be designed – DtC parcel returns is a very different business to regular CPG returns, and an appropriate logistics, warehousing and disposal model is needed.

Sustainability is the last but in no way least of the supply chain management concerns when it comes to DtC. Today’s eco-friendly consumer is increasingly conscious about their carbon footprint, including packaging a company uses for their goods. Huge cardboard boxes that contain only a small item and items that are difficult to recycle will no longer cut it. Developing a solid sustainability strategy is at the top of every supply chain executive’s agenda.

Despite the added complexity a DtC offering might raise for CPGs, we believe it can be an exciting growth engine for many – but not all. The incredible advancements being made in the digital innovation space will help. In the not too distant future, we will become accustomed to drones and robots doing last-mile delivery; the Uberisation of freight will provide affordable and flexible logistics solutions for new and established players, as will flexible warehousing. Finally, demand-sensing capabilities that adjust forecasts based on social sentiment will provide that much-needed edge on demand-and-supply planning.

For companies endeavouring to enter or grow in the DtC space, we have three suggestions:  

  • understand the price point which is key to success,
  • explore partnerships, particularly in final-mile logistics, warehousing and returns, 
  • conduct careful network design, supported with proof-of-concept agile trials.

This approach should help manage the complexity of DtC, allowing CPGs to delight their customer and go head-to-head with Amazon in the battle for the consumer!

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