COVID-19 Crisis – Why and How to Move to DTC Sales?
We have written about why manufacturers should move to direct sales previously, covering the following topics:
- What are direct sales?
- What do you lose by not selling directly?
- What can you learn from purely D2C brands?
- What is channel conflict?
- How do manufacturers move to direct sales? Examples
In this blog post, we will highlight the main retail and e-commerce changes seen on the market in March 2020. We will focus on why, in the current economic environment affected by coronavirus, manufacturers should consider starting direct-to-consumer online sales. We will cover the strategies to adopt if you are planning to go DTC (or you are already selling DTC but you are new to it) that would help you with bringing traffic to your e-commerce site and lower the cost of acquisition, without starting a price war. We will explain how to adopt these strategies and build effective promotions step-by-step.
Table of contents:
- The economic environment in light of Coronavirus crisis – March-April 2020 overview
- Retailers are moving to direct, online sales
- Why should manufacturers open DTC sales?
- Strategies to successfully move to DTC
The economic environment in light of the coronavirus crisis
April 2020 – five months since the coronavirus (COVID-19) outbreak in China, almost 2 months since the outbreak in Europe and the USA. Global cases (registered) have already reached 1.5 million. The pandemic has a tremendous effect on the global economy. Bloomberg predicts that Coronavirus could cost the global economy $2.7 trillion. As per their predictions, in the worst-case scenario, the GDP globally would drop by 3% this year.
“Goldman Sachs expects a global contraction in the first half of the year.”
“A 2006 paper by the World Bank put the potential cost of a severe flu pandemic at 4.8% of global GDP—a tailspin that would rival that seen in 2009 after the financial crisis.”
Travel restrictions and social distancing requirements are growing:
Countries are locking down their citizens, venues (shops, gyms, restaurants, factories, offices). One-third of the world is under a complete or partial lockdown, sitting at home, not spending money on traveling, going out, moving around and relaxing, causing billions $ of losses. Unemployment is slowly reaching the levels from 2008. Tourism-based businesses and the travel industry are getting the biggest hit. A lot of retail stores had to close down (in the first 10 days since the Coronavirus outbreak in the USA, 47000 retail stores have closed) due to the governmental regulations. The ones that stayed open, are experiencing lower customer traffic. Governments recommend limiting the shopping excursions to once-per-week per household. Limitations in the number of people in the shops or distance between each customer in the line are not encouraging potential customers. Long queues, often outside, fear, in some cases the obligation of wearing masks and gloves during shopping is destroying the customer experience. Those, who go to supermarkets in person, are purchasing a lot of basic goods. They are usually prepared to optimize their shopping – they have a shopping list, they do not want to spend too much time in the shop due to the unfavorable atmosphere and fear, so they do not stroll around. They do not notice the promotions brick and mortar establishments offer, they do not shop around for more high-end goods. They stick to their rice and pasta. They also try to shop more online to avoid leaving the house, if not necessary. Coronavirus is eating the retail industry, especially brick and mortar.
There are two main trends in customer behavior due to COVID-19 pandemic, that manufacturers and retailers can use to survive the crisis:
1) More people are shopping online:
Transactions done online are peaking as more and more people are buying online. In the first quarter of 2019, online sales increased 11.9% year over year, according to the U.S. Department of Commerce. In France, Germany and the UK, the share of consumers that do more than half of their total purchases online has increased between 25 and 80 percent since the outbreak of COVID-19 (Kantar). Starting with food and health items, moving on to home office and fitness equipment, now the consumers are resuming their normal shopping habits, just online. Even the older age groups state they expect to maintain their new online shopping behavior after the epidemic (Kantar). As of March 2020, 17% of shoppers say they plan to increase online shopping by a moderate extent over the next 90 days and 11% plan to increase it to a large extent.
“During lockdown, focus is on the main essentials, but this report indicates that all the major e-commerce categories will bounce back to even higher levels when the epidemic has passed. And when they do it’s essential that brand owners have the bare essentials in place to meet the demand. ‘Are my products visible when consumers search for them at online retailers’, is a question all brands should ask themselves right now,” – Joakim Gavelin, Detail Online founder.
Impact of the Coronavirus on digital traffic since the beginning of the outbreak:
Impact of the Coronavirus on digital transactions since the beginning of the outbreak:
The biggest growth category for online shopping is groceries. 31% of U.S. households have used an online grocery delivery or pickup service in March 2020, 26% of them have used the online grocery service for the first time. “Buy online pick up in-store” orders have increased 62% in March 2020, year over year. (Adobe Analytics)
2) People spend a lot of time online
According to the data collected by Statista, in March 2020, we saw the following increase of time spent online, worldwide:
- 36% on reading/watching the news.
- 27% on streaming services (Netflix, Amazon Prime Video, etc.).
- 21% on social media.
- 22% on messaging services (WhatsApp, Messenger, Viber, etc.).
Retailers are moving to direct online sales
"There's no reason to be opening stores that people can't go to." – Seth Basham, Analyst, Wedbush
"Right now, there’s a huge potential for brand owners to increase online sales in 2020. (...) the change in consumer behavior that many expected to take three to four years is instead happening in a few months.” - Joakim Gavelin, Detail Online founder.
The Corona pandemic has hit traditional European retailers hard. Social distancing, lockdowns and other measures to control the spread have hampered or sometimes eliminated the possibility to shop in stores or supermarkets. Customers are forced to shop online. Shopify says the number of new online stores across the globe on its platform increased 20% week over week for each of the last two weeks of March. Considering that the pandemic might last months or even years, even if the shops will be allowed to re-open, customers will prefer to shop online. This shift in behavior might have long-lasting effects and your business should be prepared for it. If you do not have an established online store, it is high time to build it.
Since the Coronavirus outbreak, the retailers who did not have an online channel in place have been working on launching one. It is not a fast shift, to start selling online you need to establish an e-commerce infrastructure, processes, logistics. It usually requires a lot of IT resources, project management and time. However, considering that the fast shift towards online sales is said to have long-lasting effects, the earlier you start, the bigger chances of survival you have.
An example of a fast shift to online is the success of Polish Biedronka (owned by Jeronimo Martins, a Portuguese giant) supermarket. They have opened sales online for now only in 10 major Polish cities. They manage the delivery with Glovo – a delivery service, thanks to which they could enter the market faster (no need to develop their own delivery services, logistics – Glovo drivers pick up the merchandise directly at the store).
Some businesses who went online before, are now picking the fruits of their strategy. A good example is the wine subscription business. Online wine marketplace Vivino and online retailers Wine.com Inc. and Benchmark Wine Group report fast growth of sales in their primary market – US. At Wine.com the sales more than doubled in March compared with last year. Overall, online alcohol sales for the week ending March 21 were up 243% compared with the same period of a year ago, in the US (Nielsen).
Small, local producers of fruit and vegetables are starting to offer their products online, as local markets and establishments have been shut down. Comptoirs et Saveurs, a small French distributor of vegetables and fruit, usually delivered produce to offices and schools without any prior e-commerce experience. Now, they quickly have shifted their business model to deliver goods directly to private customers, by launching an online order form and re-organizing their logistics.
Why should manufacturers open DTC sales?
If retailers are working hard on moving their sales online, why should manufacturers enter the DTC (direct-to-customer) sales model right now? Why not just sit back, relax, and let the retailers struggle to sell your products?
As we have mentioned in our previous article about moving to DTC sales, the main benefits of moving DTC and skipping the retailers (or keeping both sales channels, direct and through a retailer) are:
- Direct access to the data about your customers.
- Higher retention rate.
- Consistent customer experience, which you can control in 100%.
- Ability to A/B test to improve your pricing and promotional strategy.
- It might be cheaper than selling through retailers.
As you already know, in the current economic environment, starting online sales is key. Many of the retailers need to build an online presence from scratch. If your retailers do not have an online sales channel at the moment, you are losing revenue. Yes, you can wait until they will start their e-shop, but you will never be sure when they will be ready with it and whether they will be successfully promoting their store online. Even if they manage to launch their e-shop fast and get a lot of customer traffic, your products will disappear in the mass of their offering and you will need to spend money on incentives to promote your products. Online, it is even easier for the customers to compare two products (and their prices) than in a brick and mortar store and your products might not make it to the shopping carts.
If your retailers still need to build the capability to sell online, you are strategically better off if you start building it yourself. In the long run, you would probably go that way anyway, due to lower costs of distribution. The faster you open your own e-shop, the earlier you will start owning your customers. The faster you launch your website, the earlier it will start ranking in Google (especially as older domains are favored by Google algorithm). If you do your SEO right, your website will outrank the retailers’ sites when it comes to the branded search. In the case of non-branded search terms, the retailers will be probably ranking higher, but you can diversify your strategy by selling the products online directly and through the biggest online retailers, not to lose these placements. You can even run your own Amazon store.
Should all industries start online sales? For some (example: pharmaceutical products) it might be difficult to sell online due to the regulations/processes. Such businesses are, in most cases, allowed to open the physical establishments, despite the pandemic. In every other case, it is worth considering to open online sales, as one of your sales channels. Even if your product traditionally was sold only in brick and mortar establishments. Even before the pandemic, we could observe that more and more products are sold online. Look at Tesla’s online car sales – 82 percent of customers bought their Model 3 without ever having taken a test drive. You do not need your brand’s physical presence in brick and mortar stores to bring customers’ attention and sell the product. What you need is a strategy.
Strategies to successfully move to DTC:
1) Keep your customers well-informed
Make sure your terms and conditions are clear and understandable for your customers. In the current situation, it is important to add to your website information about health and safety procedures your company has adapted to prevent the virus from spreading. Make sure you inform the customers about potential shipping delays to manage their expectations.
2) Use turnkey software solutions
Building your own e-commerce platform can take months or even years to accomplish and will add extra burden of maintenance on your IT developers. If you set up your e-commerce on a readily available e-commerce solution (example: Moltin), you can launch your e-shop within days. If the e-commerce platform is API-first, you can easily integrate a lot of different software solutions with it, to make a full-blown e-commerce store. Distribution channels, CRM platforms, data analytics, promotion engines, payment gateways – almost everything can be integrated within a couple of days. It is worth considering time-to-market and price ratio when deciding whether to build or buy, but in the current situation it might be a good idea to first buy and start selling online fast and then start thinking about building, if you think it is worth the effort.
3) Remember about collecting the data
As we said before, data gives you power. It helps to make business decisions, starting from the products you offer, the pricing, to small details like the copy or creatives you use to market the product. It helps to understand the customer better and offer a more personalized approach. It helps to find business opportunities you would otherwise miss. Think about setting up website analytics and a personalization engine, as well as a CRM system to collect the data. Do not forget about the importance of e-mail marketing and start building your e-mail lists from the very beginning. Make sure you collect the right consents and you are compliant with all local regulations regarding customer data collection, handling and use.
The fight for the customer can be done on various platforms – in search engines, on different websites (display ads), social media (ads), by remarketing, via e-mail communication. Do not underestimate the importance of Search Engine Optimization as it will serve you a long way. Even if you are not planning to invest too much in SEM, start with a well-optimized website and relevant content created, to rank high if your potential customers are looking for your (or similar) products.
5) Promote your e-shop
Often just SEO is not enough to sell as much as you would like to, at the beginning. It might take time (and a lot of content) to get to the first page of Google. Plan your advertising strategy to bring traffic to your website. Initially, more traffic coming to your website from paid sources can help you to rank organically as well.
As people spend >20% more time on social media these days, due to the lockdown, consider investing in social media ads as well as in influencer and nano-influencer marketing. You might also consider affiliate marketing run on blogs. To make your new e-shop launch go viral, consider creating a virtual event or offer a giveaway campaign.
6) Set the right pricing
If you are still selling through retailers (and a lot of manufacturers will, because opening brick and mortar stores is a hassle, so they still need to rely on them), do not start a price war by offering too low prices. Start with your RRPs (recommended retail prices) or not much below them. You can then launch some promotions on top of it, to incentivize the customers to shop directly from your website.
7) Offer the right promotions, to the right people
In the current environment, with customers shifting to online shopping rapidly, there are 2 main offers you should focus on to stay competitive:
- Fast (and free) shipping.
- More favorable return policy.
Giants like Amazon or Zalando are winning the customers’ hearts with fast and free delivery, long return times and free return shipping. If you want customers to come back to your store, instead of going to pure online players (like Amazon), your service has to be at the same level.
Other manufacturers and retailers are already adopting this strategy, see the example of Sephora, who usually offers free standard shipping with a $50 minimum purchase, but was offering free shipping through April 3, 2020. It has also changed its return policy to reflect the changing times: “For product purchases made in-store in the last 30 days as of… March 16th, we will accept in-store returns, with receipt, within 30 days of store reopening,” the cosmetics retailer wrote on its site. “To ease returns for online orders, we have adjusted our current 30-day return policy and increased it to 60 days to be returned to the original method of payment.”
There are various promotional strategies you can use, to make your offer more appealing to the customer, without dropping below the RRP (recommended retail price):
Promote the right products to the right customers by setting targeted promotions for certain customer segments or based on custom events. Make your promotional strategy fine-grained, not to lose money on offering unnecessary discounts.
Consider offering a loyalty program, to keep your customers coming back to your website for more. As you are competing for traffic with other manufacturers and retailers, cost of acquisition might be high. Loyal customers decrease your costs and bring a steady revenue to your company. Consider offering both: monetary and non-monetary benefits.
Once you have loyal customers standing behind your brand, think about how to monetize their advocacy. Starting a referral program might be a good strategy to bring in more customers and possibly lower acquisition cost.
Finally, make sure that whichever promotional campaigns you are running, you are protecting your discounts from fraud.
8) Offer subscription-based purchasing
If you want to keep high retention rates, it might be a good idea to offer some of your products available as a subscription. It saves your customers time and effort, which proves really valuable in these times. You can also afford giving them some discount vs the standard product prices, as it is a steady source of revenue. Win-win!
9) A/B test
A/B test your pricing, your content and even more thoroughly – your promotions. If you want to make sure your budget is well-spent and your ROI high enough, try out different promotion strategies and settings. Build an A/B testing infrastructure and make sure you optimize your spendings.
10) Offer pay-over-time schemes
The pandemic is affecting the worldwide economy. A lot of people are losing jobs, getting salary reductions or ending up on partial unemployment. Those who don’t, might be still scared that it will affect them as well. Customers might not be able or willing to spend bigger amounts of money at once. By offering pay-over-time schemes you can sell your goods to otherwise unwilling to spend customers.
Due to the coronavirus pandemic, customers are doing more of their shopping online. It is predicted to have long-lasting effects on customer behaviour, also post-pandemic and across all age groups. The digital transformation which was predicted to happen within the next 5 years, is happening now, within a couple of months. Due to government regulations and customer preferences, brick and mortar stores are closing or experiencing drastically lower revenue.
Building e-commerce capabilities became crucial for both retailers and manufacturers. Manufacturers who do not have pure online retailers in their portfolio should strongly consider starting DTC sales. Those, who sell through online retailers, should consider it as well, due to the advantages of selling directly and to build a competitive advantage for the future.
There are various strategies to help you to move to DTC sales as a manufacturer faster and with better results. Wherever you are with your transformation to omnichannel or to direct sales specifically, make sure you harness your customers’ loyalty, use the power of referral, and make sure you optimize your promotions. Even if you are afraid of a channel conflict or cannibalizing your own sales, there are strategies you can implement to avoid this.
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