The future of CPG is Direct to Consumer

CPG brands will have more and more rewards from going direct to consumer

Consumer Packaged Goods (CPG) companies traditionally relied on three core pillars to do business: Marketing, Distributors, and Retailers. Corporation in the space retained their market leadership for almost a century as the three core pillars were essential to accessing consumers.

Market leaders would invest vast sums of money into Marketing campaigns that leveraged incumbent media such as news, radio, and television. With this model, new market entrants would have no way to afford mass media campaigns, and often lacked the media buying power and connections required to get the best ROI.

Even if a new entrant could crack the high costs of Marketing, the next pillar would be the next barrier to entry. New market entrants would have to pitch and convince distributors to carry their inventory, often lacking the connections to enable wide availability.

Once a new entrant cracked Marketing and Distribution, retailers would have to stock their products, and display on prominent locations within stores. This stage would prove to provide the highest barrier to entry, as traditional retailers would protect existing market leaders through several contractual incentives.

Then came technologies that enabled Direct to Consumer.

The Internet enabled the perfect storm of new technologies to converge and unlock a new channel to serve customers on a direct basis. Unlike before, brands could make products available to the general population, at a small cost.

Search Engine Marketing and Social Advertising changed the face of marketing, enabling small brands to market directly to consumer. Campaigns could be put together with very little cost, and optimized based on conversion rates. Not only digital marketing enabled lower advertising costs, it enabled tracking and optimization that other mediums could not provide. Consumers also connected more with lower production value ads that replicated content generated by their friends.

Direct marketing also turned distributors into nothing more than a cost adding middle-man. Any distributors or middle-man that would be part of the supply chain added costs that made traditional distribution networks uncompetitive price-wise. The dynamics of perfect competition indicate that distributors will be pushed out of a large proportion of consumer industries over the coming decade.

Direct to Consumer websites also enabled brands to create connections with consumers. DTC websites enable brands to collect vast amounts of data on consumer behaviors, product demand, feedback, and identify future trends for product development. Ecommerce technologies combined with third party logistics enabled products to reach consumers in major economies in less than a day.

The future of Direct to Consumer is Online First

Covid-19 created a drastic shift in consumer behavior. Consumers now expect to purchase products online, and receive products on the same or next day.

This shift in behavior created a new class of companies that can be described as Online First. The core strategy for an online first company is to derive the majority of its revenue from online sales, most often Direct to Consumer.

A large proportion of industry incumbents will be unable to switch to an online first strategy. Such market leaders are unable to adopt Direct to Consumer models due to the risk of upsetting existing distributors and retailers - quite often having distribution clauses that disable their ability to undercut retailers price-wise.

As more and more Venture Capital funds invest in Direct to Consumer ventures, industry incumbents will have to either adapt, or invest heavily into M&A activity to maintain market-share. Industry leaders can also partner with a Corporate Venture Builder like Outroll to spin-out new brands and open new markets.

For the Online First startups this provides a great opportunity to disrupt whole industries, gain market-share, and subsequently get acquired by large industry players.