Manufacturers Shift to Direct-to-Consumer Model
Ian Alberts, CPA
5.18.22 | Industry Insights
As the COVID-19 pandemic surged throughout the United States, companies were left without their traditional retail outlets or third-party vendors to distribute their products as the majority were shut down for prolonged periods of time. With many manufacturing companies deemed essential, it seemed that most would survive the pandemic as they could continue to operate. However, a major challenge companies faced over the past two years was that many physical sales channels failed, which has resulted in a significant number of manufacturers accelerating their shift to a Direct-to-Consumer (DTC) distribution model.
Advantages of Going Direct-to-Consumer
Adopting a DTC model allows companies to establish new and innovative ways to connect directly to the consumer. Manufacturers that had established a DTC channel pre-pandemic found themselves in a much better position than those solely relying on retail stores and warehouses as their main lines of distribution.
The pandemic has not only enhanced awareness of the business opportunity that DTC presents, but it also exposed the likelihood that this method will be necessary to remain competitive going forward. The last year of digital evolution saw approximately a decade’s worth of transition and innovation compared to previous years. Online sales continue to surge, leaving local brick and mortar stores and even grocery stores in the dust, as consumers continue to shift their purchasing behavior to be primarily e-commerce based. According to Digital Commerce 360, the pandemic greatly accelerated e-commerce growth, increasing by 14.2% in 2021 as consumers spent $870.78 billion online with U.S. merchants. Additionally, in 2022 eMarketer estimates 103.4 million U.S. consumers will buy from a DTC e-commerce, which is only expected to increase.
Given this shift, it is clear that manufacturing companies need to establish an online presence and implement a DTC model to efficiently manage costs and remain competitive in today’s market.
Making the Investment
Implementing a DTC approach involves an investment of both time and money. The investment can be significant for organizations that, pre-pandemic, focused exclusively on the traditional model of distributing their product(s) via external wholesale and retail distributors. Some of the more significant costs of adopting a DTC model for the first time are associated with:
- Developing a multifaceted supply chain
- Implementing a proper DTC sales infrastructure, including:
- Storing/warehousing and shipping of product(s)
- Marketing and customer engagement
- Establishing operational and internal support functions and processes
- Creating and launching an interactive e-commerce website with online purchasing options
- Implementing a customer relationship management and consumer data protection strategy
- Hiring and training staff to implement and manage this approach
- Working with your accounting and other providers to ensure tax and regulatory compliance, including state and local income and sales tax compliance, which requires:
- Identifying which sales are taxable and which are exempt
- Calculating and collecting sales tax in multiple states
- Remitting the right amount of sales tax in a timely manner to every required state taxing authority
A DTC approach does not end after the product is sent to the distributor. Manufacturers must be responsible for the entire lifecycle of the product—from concept and development to customer delivery and service, including issues that may arise during or after delivery. As such, while implementing the DTC approach is becoming important for survival, it does require a deep understanding of each process involved with the product lifecycle and should be implemented with proper planning.
Additionally, to help offset the cost of adopting a DTC approach, businesses may consider closing physical retail locations to reduce rent and additional overhead costs. Closing locations may help in the short term as the business invests funds in moving to an online presence, however, it is essential to ensure that implementing this strategy aligns with the company’s long-term objectives as well.
Developing an Omnichannel Buying Experience
With traditional wholesale and retail distribution methods continuing to become part of an integrated sales approach, companies that are unable to adapt quickly enough to efficiently meet the changing demands of the market are at risk of becoming obsolete. This pivotal issue is evidenced by the various product manufacturers that did not survive the pandemic.
The alarming failure rate makes developing an omnichannel approach, which consists of establishing multiple channels to create a single end-user experience, one that all manufacturers should strongly consider implementing immediately. The omnichannel method drives success by finding and attracting consumers across the various channels they consume—from e-commerce sites and social media to traditional retail stores. For example, companies have created rewards programs and payment options that allow their customers the flexibility to benefit across all channels—creating a seamless buying experience. According to CM Commerce, “businesses that adopt an omnichannel strategy achieve a 91% year-over-year customer retention rate compared to those that don’t.” In an era where consumers have many different options to purchase goods, it is critical for organizations to establish multiple channels that all come together, helping provide a sense of community and build a stable client base.
The success of a DTC strategy, especially when utilizing the omnichannel method, is contingent on an organization’s ability to offer and sustain premier customer service. Creating seamless processes across all channels often enhances the consumer’s overall experience with the brand—increasing the probability of customer retention and loyalty going forward.
Additionally, these companies must embrace all aspects of the digital and social platforms that engage and nurture consumers. For instance, it is essential to establish processes to interact with consumers on social media and leverage these platforms to obtain and act on feedback provided by customers. Taking advantage of today’s technology will assist in addressing the current purchase behavior of customers and help companies continue to adapt and adjust their product development and distribution approach as market dynamics and demand change going forward.
While the benefits of the DTC method were always evident, it took a global pandemic for many manufacturers to recognize the importance of taking the painstaking steps to implement the model into their short- and long-term strategies. Before moving forward, companies should consult with their external advisors to ensure they are well-positioned and prepared to implement and sustain a flexible and successful DTC distribution model.
Berdon LLP New York Accountants