Direct-to-Consumer Increasingly Critical for Brands

December 22, 2022

Direct-to-consumer grew during the pandemic.

Why Forecasts are Wrong Header Image 1

The channel remains shopper favorite after Covid.

Key Takeaways

  • COVID rapidly changed consumer behaviors
  • 56% of businesses mention D2C positively impacts their organization’s current objectives
  • 76% of consumers say free shipping is important
  • 55% say the same about fast shipping

Direct-to-consumer (D2C) fulfillment grew during the pandemic. As a result, more consumer brands utilize D2C as a viable digital sales channel.

While it provides numerous benefits, companies need to consider D2C’s supply chain hurdles before implementation. Otherwise, the channel can erode margins and reduce profitability.

The best direct-to-consumer brands optimize supply chains to control costs and improve customer experiences.

Why consumer goods brands use D2C #

D2C fulfillment removes retail dependencies and cuts restocking fees and fines. Brands utilizing D2C don’t rely on retail purchase orders and aren’t subject to cancellations.

The channel creates one-to-one consumer experiences and allows brands to build loyalty and learn more about their customers.

Sixty-seven percent of organizations surveyed in the 2021 Gartner Business Model Impacts Due to the Shift to Direct-to-Consumer (D2C) and End-User Survey stated that D2C enables a differentiated value proposition from their competitors.

Over half (56%) of these same survey respondents mention D2C positively impacts their organization’s objectives. The survey results suggest this positive impact will expand to 76% of organizations over the next five years.


Direct-to-consumer challenges #

The fulfillment channel has numerous benefits. But comes with several logistics hurdles brands must clear to use it effectively.

D2C logistics requirements #

Leading D2C brands optimize supply chains to serve demand centers. They build fulfillment centers located in critical markets and reduce transportation costs.

Reducing mileage is critical since 63% of logistics costs come from transportation. And freight rates are generally higher than in 2021 despite looser capacity.

By optimizing node placement, it cuts last-mile transit times, which speeds delivery and reduces cost.

Last-mile transportation represents more than half of the total cost of shipping in a D2C business, with packaging optimization being the most common cost reduction opportunity cited by supply chain leaders.

Seventy-six percent of consumers say free shipping is important, and 55% say the same about fast shipping.

Inventory holding costs erode margins #

This year inventory holding costs soared and capacity dwindled. Businesses overbought as a result of the pandemic’s demand explosion. Just as they began stocking up, inflation rose and consumption dwindled. That meant businesses had too many goods that weren’t moving as fast as they were in 2020 and 2021.

Because shippers were forced to store low-velocity goods the industrial vacancy rate hit 2.9%—a record low and prices jumped to $9.40 per square foot.

Brands seek scarce warehouse capacity and pay record prices. Companies need to sell and move goods quickly, keeping inventory levels as low as possible. Excess inventory eats into brands’ profit margins more quickly than ever before.

CPG forecasts strained by uncertainty #

Forecasting is hard and always has been. But in the post-pandemic era, it’s only become more difficult.

Before the pandemic, the average forecast error was 50%. Even with the most sophisticated data processing and forecasting systems, companies were wrong half the time.

However, as Covid increased volatility, businesses unsurprisingly got worse at predicting what came next. In 2020, the average forecast error rose to 54%—ten times the rate of change of the prior year.

One of the world’s largest retailers recently canceled billions of orders to compensate for bloated inventories that resulted from incorrect forecasts.

D2C requires the right inventory at the right place and time to maintain critical delivery promises. Leading companies maximize supply chain flexibility to meet demand changes. This flexibility allows them to pivot from incorrect forecasts that are commonplace in the industry.

Common D2C solutions #

To effectively offer D2C, companies reassess their distribution networks, adding nodes for fast-moving inventory closer to consumers.

Twenty-two percent of organizations “use optimizing warehouse locations as one of their top three strategies to control D2C costs.” This number will only grow as D2C becomes more utilized.

Brands protect margins and offer free/fast shipping through optimized D2C fulfillment networks. Those that do can expect D2C benefits without sacrificing costs.