Direct-to-consumer upstarts like Dollar Shave Club and Kylie Cosmetics sold stakes in their businesses to Unilever and Coty, respectively, but most DTC brands are not seeking billion-dollar valuations or quick flips to bigger incumbents, new research from the Interactive Advertising Bureau found.
According to the research from the IAB, digital advertising’s biggest trade group, an overwhelming majority of DTC disruptors (90%) report they are profitable, are looking to expand globally, and using a range of media channels to grow.
The findings come from two studies that the IAB is set to release at its Direct Brand Summit in New York November 20 and build on earlier research by the IAB, which has expanded its membership to include direct brands as well as incumbents. They would seem to counter skeptics who say most DTC companies are still tiny and unprofitable and on their own, don’t pose a significant threat to packages goods powerhouses like P&G.
“Disruptor Brands: Founders Benchmark Study” is based on inputs from more than 200 DTC founders and leadership teams on their strategies, capabilities, and goals; and “Direct Brands: Media & Customer Acquisition” digs into DTC brands’ media and customer acquisition strategies based on a survey of 330 media buyers.
“We all went into this with the assumption that similar to ad tech or digital publishing, DTC founders are using easy access to capital and functional supply chains to launch companies and try to get to them to a position where they can easily flip them,” said Randall Rothenberg, CEO of the Interactive Advertising Bureau. “That is not the case.”
DTC brands are building viable long-term businesses
Instead, the Founders Benchmark Study suggests that the vast majority of DTC brands aim to build long-term businesses and are prioritizing profitability and customer satisfaction ahead of market share, said Rothenberg.
Among the key findings:
- Only 15% of respondents cited acquisition as a long-term goal.
- DTC brands are also eyeing global expansion, with more than a third of the respondents (34%) saying that global expansion is a top priority.
- Other priorities include establishing a new category (31%) and opening brick-and-mortar locations (30%).
- 77% of direct brands take less than 6 months to launch a new product.
The report found that the average annual sales revenue for respondents is estimated to grow 85% between 2018 and 2020, outpacing established brands in their categories. While US personal care and beauty product sales grew only 4.5% in 2018, for example, online personal care and beauty sales grew 24%, according to the IAB.
The biggest takeaway from the reports is that incumbent brands will have to take a page out of the DTC playbook and build two-way relationships with their consumers using data, as the IAB has also warned previously, Rothenberg said.
“They all need to embrace the fact that they’re not in the CPG, makeup or luggage business, but in the content, experience, service, data and, relationship business as well,” he said.
Amazon continues to be a frenemy
DTC companies see e-commerce giants like Amazon and Wayfair and other DTC companies, not incumbents, as their biggest competitors, according to the Founders Benchmark Study.
Fully 55% of respondents said they don’t actively sell on Amazon, with 26% saying they were testing or planning to test the platform, and 29% saying they didn’t plan to use it at all, not even for testing.
DTC brands are also diversifying their media channels
IAB research confirmed this shift, with buyers saying that after getting their start on social channels (62%), direct brands were growing across channels like search (67%) and display (65%) advertising, ahead of social media (64%). With the streaming wars starting, expect more media dollars to go toward the streaming platforms in the near future, said Rothenberg.
Buyers also reported that direct brands also were spending on offline channels like direct mail (63%), print (62%) and television (58%). Further, the Media & Customer Acquisition report found that:
- Brick-and-mortar stores are on the rise, with two in five DTC brands owning at least one physical store.
- DTC brands’ reliance on paid media is also decreasing, with 72% respondents saying they think they can go dark on paid at least for some time.
- More than a quarter (27%) of surveyed brands said they had brought ad buying in-house.
- DTC brands are expected to increase programmatic ad spending to 50% of their media buying in 2020 from 47% in 2019.
- Of the nearly two-thirds of buyers (64%) that reported using attribution models for direct brands, more than half said (56%) they relied on first-touch models, suggesting room for improvement in this area.
“An interesting finding was that customer satisfaction eclipsed customer acquisition in terms of what’s driving media buys for advertisers, which is the opposite of what you’d expect,” said Sue Hogan, SVP of research and analytics at IAB. “It boils down to their biggest strength: That one-on-one understanding of how to build a customer relationship.”
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