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direct to consumer strategy

Ecommerce has completely disrupted not only how people shop, anywhere anyhow, but also the supply chain and distribution of goods. Brands and businesses are empowered in a way never before possible, most noticeably by cutting the middle men and selling directly to consumers. By adopting a direct to consumer strategy, businesses gain a stronger presence in both online and offline markets.

The Apple example

Dive into Apple’s branding strategies in the past and you’ll recognize the importance of a direct to consumer approach for success. Long before its growth streak, Apple’s sales were driven by big box electronic retailers. After launching an online store in 1997, the company turned around and aggressively expanding its own retail stores internationally. Since then, Apple has grown to become the number one tech company in the world.

But Apple isn’t the only success story. Nike, Puma, L’Oréal, Kiehl’s, and Dell have expanded their distribution channels and sold directly sell to customers by increasing their ecommerce distribution channels, specifically brand.com websites and mobile apps, and by establishing brick-and-mortar stores worldwide.

So why should other brands shift from a traditional distribution process through retailers to a direct to consumer model? How has this shift triggered such a phenomenal growth for these brands? Let’s dive in.

1. Direct to consumer is the best way for brands to build a strong relationship with customers

Directly selling to consumers gives brands a chance to gain complete control over their brand presentation. Whether through a brand.com website and/or a brick-and-mortar store, they’re able to portray a story that conveys the purpose and meaning behind their products and add a distinct personality to their brand so their products can shine.

Southeast Asian consumers are predicted to drive the ecommerce boom in the future as they are among the world’s fastest and strongest adopters of mobile and social media in online and in-store purchasing activities. According to Bain80% of digital consumers use social media or messaging apps to research products and connect with sellers. With online stores, the style of the images, the way the site looks, and even how the items are packaged when shipped, all add to a brand’s customer’s experience.

Take for example Kiehl’s, the global luxury skincare brand is currently expanding a full scale ecommerce strategy in Thailand by adopting an unconventional O2O campaign in order to create an omnichannel experience and in turn drive customer conversions as well as brand awareness. Figure 1 and 2 show the comparison between how products are presented to customers with its own branded website and brand presence on an e-marketplace. 

brands direct to consumer strategy in Southeast Asia

Figure 1: Kiehl’s beauty products displayed on its own website

brands direct to consumer strategy in Southeast Asia

Figure 2: Kiehl’s beauty products displayed on the website of its retailer partner

“The advantage of having a brand.com is control. You can create your in store experience and highlight the products you choose. It’s not the same as selling through other retailers because you can’t create your own story.” – Tiffany Schmitt-Chretien, Senior Brand Commerce Manager at aCommerce.

Southeast Asian consumers tend to use physical stores as a platform to gain more knowledge of a wide range of products, touch and feel are very important. As opposed to selling through retail intermediaries, brands with a physical presence have the advantage of enhancing the whole shopping experience by providing in-person interactions. This can be something as simple as in-store music and lighting to set the mood, to themed decor pieces that reinforce brand identity. Sales assistants can also dress the part to create an immersive experience. Stores like Dior and Chanel often spray their signature scents in the air to play into all the senses – a unique element that intermediaries would overlook. Warby Parker, also moved from ‘click to brick’ back in 2013 to provide a special experience that could contribute towards building relationships with its customers. 

brands direct to consumer strategy in Southeast Asia

Example: A Kiehl’s Store with their trademark industrial lab style visual merchandising

Physical brick-and-mortar stores also allow brands to offer special events and in-store promotions exclusive for members only, which provides the opportunity to strengthen a customer’s return. This becomes a significant advantage for brands wanting to target the Southeast Asian market as consumers in this region hold unique views on special events. According to PWC’s report, consumers in Singapore, Malaysia, and particularly in Thailand place a significantly higher level of value on member-only events than global consumers – they value exclusivity. 

From marketing to customer experience, brands are also able to better connect with their customers through direct channels, and in turn gain their trust. In 2013, L’Oréal, boosted its ecommerce efforts with new business models to support their digital marketing strategy, one of which involved launching the “L’Oréal Paris Make-Up” application. This platform allowed users to test products virtually and create a “brick-and-mortar” type of experience. L’Oréal was able to drive traffic through their application, which effectively strengthened its brand loyalty and contributed towards its significant growth of 29% of online sales in 2013.

2. A key opportunity to collect relevant customer data to drive sales

There’s a clear difference in quality of the data collected directly from a brand’s own channels and the data accessed by third parties. The customer analytics generated from direct channels are more specific to a company’s customers, whereas buying customer data from retailers may be too generic or irrelevant for customer segmentation purposes.

In owning a brand.com site, data is easily collected through techniques such as spotting trends with user’s clicks, identifying the most lucrative search terms and analyzing customer behavior on social media sites. In doing so, brands are able to assess a consumer’s decision-making process and analyze their purchasing behaviors to personalize future campaigns for its existing customers. This is done in the following ways:

  • Customise promotions and special offers to different audiences
  • Improve and/or create new products from product feedback
  • Find the most useful visuals and messaging approaches to boost the effectiveness of marketing campaigns
  • Provide better customer service by tailoring interaction with customers

And we can draw back on brands in the past which have been able to succeed through analyzing the data from consumer purchases. In 2013, Puma’s efforts to gather and analyze data on consumer interests had significantly improved their brand marketing and engagement strategies. Apple’s use of big data over the years has allowed them to analyze their user’s behavior, build new products and determine what new features should be added to their existing products.

Ecommerce fills a gap when it comes to understanding consumer’s interests. – Tom Davis, Global Head of Ecommerce for Puma

In owning a branded retail store, brands can also obtain indirect information from its customers – a phenomenon known as ‘in-store analytics’. The ability for brands to analyze in-store performance is vital to understanding consumer behavior and manage in-store marketing campaigns, as both factors facilitate shoppers deeper into stores for maximum exposure. In recent years, Topshop was able to install a WiFi-based analytics system and fitting call bells to analyze conversion rates, which provided better insight on how to refine store layouts and position in-store advertising messages more effectively.

Customer analytics therefore enable brands to discover the hidden preferences of their consumers and better understand their needs and demands. According to a 2014 Infosys survey, 78% of consumers claim to more likely purchase from a retailer again if they accurately provided offers targeted to their interest, wants or needs. It is crucial brands maintain strong control over customer data to better understand their customers, and in turn drive sales up.

3. A direct to consumer strategy allows brands to control their pricing structures

Pricing is a factor that significantly influences the overall competitiveness of a brand’s products and affects the generated sales revenue. By selling direct, brands are able to formulate their own pricing strategies to improve sales margins, rather than being influenced by the varying pricing structures set by retail partners. Nike for example, has taken advantage of pricing adjustments by commanding higher prices for its products: a factor which has significantly contributed to its phenomenal gross margins.

Brands also no longer face intermediary costs that once consumed a percentage of its sales so there is no need for brands to negotiate pricing with retailers and brands nor outspend the competition for better in-store position and promotions. SaleStock Indonesia, a fast-fashion startup based in Jakarta, recently took a proprietary merchandise strategy with efforts to eliminate all intermediaries. By vertically integrating their design, manufacturing and supply chain processes, they are able to provide on-trend clothing at a fraction of the general retail cost in midst of the increasing competition of other e-retailers such as Lazada and Tmall.

Costs & risks to consider

In light of all the benefits of the direct to consumer model, there are associated costs. In shifting to a direct to consumer strategy, brands need to take on all the responsibilities that were once in the hands of traditional retail intermediaries. From channel to cross-border management, and from tech-development to fulfillment and delivery, maintaining operations and logistics become a significant upfront cost. On top of that, more emphasis needs to be placed on marketing your brand and its distribution channels.

Read also: How Chatbots Are About to Disrupt Social Commerce in Southeast Asia

For well-established brands such an investment is not an issue but it may be a problem for brands with a smaller consumer base. In midst of the intense competition among brands in the ecommerce and the retail market, it becomes a challenge for start up brands to establish their share in the market place. One of the major difficulties faced by the clients of aCommerce is driving traffic to their newly launched online website, particularly those who lack a strong presence on social media platforms.

Another area of concern brands need to consider is the risk of channel conflict with its retailer partners. Retailers may view brands going direct as a threat, as brands draw more sales data for themselves. Back in 2007, Dell’s shift towards selling directly to end users and abandoning its reseller partner channels caused a negative reaction in their traditional sales channels. Also, Apple’s change in focus of its whole channel towards a direct selling model forced 55% of its partners to go toe-to-toe in competition, with 14%, 33% and 46% of these partners rating the channel conflict as high, medium and low, respectively.

The power of bargaining is definitely something to look out for.

In Southeast Asia, the chances of conflict are even greater. According to Praponsak Kumpolpun, Senior Brand Ecommerce Manager of aCommerce, ‘there aren’t many strict laws and regulations where you have to follow pricing guidelines – so the power of bargaining is definitely something to look out for’. For example, let’s take a look at the big intermediary players of Thailand such as Tesco and Lazada. In holding dominant market share, such retailers force brands to maintain pricing integrity. Brands which go against these retailers and adopt an aggressive pricing strategy will jeopardize their long term relationships with them.

However, there are also opportunities to generate sales and product awareness through cross-promotion. Multiple channels can be used to stimulate interest and encourage purchases. There are several ways in which brands may do this, some of which are listed below:

  • Offer a store finder on their website so consumers can discover its retailers
  • Give retail partners advertising space to market their unique bundle promotions
  • Promote in-person store events
  • Reward high-performance retailers with prominent listings on your site

 

brands direct to consumer strategy in Southeast Asia

Figure 3: Chanel’s store finder which includes both its own retail stores and its retailer partners

Many brands nowadays incorporate “Online Channel teams” in their operations to structure a trade plan within their company. By doing so, they have the ability to adjust the slot of promotions across channels without a conflict of interest between channels. Such promotions may include bundle sets unique to each specific retailer. This strategy prevents price comparison across each channel. Alternatively, many brands sell and promote brand exclusive products. Figures 4, 5 & 6 below show the varying promotions of SK-II products unique to the SK-II brand and its retail partners.

 

brands direct to consumer strategy in Southeast Asia

Figure 4: SK-II exclusive offers on the official website

 

brands direct to consumer strategy in Southeast Asia

Figure 5: Unique SK-II product bundles from Sephora

 

brands direct to consumer strategy in Southeast Asia

Figure 6: Unique SK-II product bundle from Lazada

Previous studies do not find strong evidence of cannibalization from direct brand to consumer channels. In fact, according to a study commissioned by Digital river Inc and completed by Forrester Research Inc., more than half of the manufacturers are reported to have seen a positive effect on relationships with other sales channels from its direct to consumer strategy.

What’s next for brands in Southeast Asia

 

Ultimately, the best approach for brands is to reach their consumers through both traditional and direct channels by adopting an omnichannel retail strategy. By doing so, they are able to benefit from selling directly to consumers and can use channel conflict to their advantage. The benefits of direct to consumer outweigh the costs and risks. 

BY ALEXANDRE HENRY & YOOREE WOO

Tweet your feedback to @ecomIQ

Service image of Gotcha!Mall Source: Trans-cosmos.co.jp

Service image of Gotcha!Mall Source: Trans-cosmos.co.jp

Transcosmos, the Japanese retail solutions provider for ASEAN apparently brought Japan’s Gotcha!mall to Thailand. Gotcha!Mall is an omni-channel web-based app that encourages consumers to purchase items at brick-and-mortar stores using coupons on their smartphones. The platform covers major retail stores and restaurants for everyday living, such as convenience stores, supermarkets, drug stores and fast food chain restaurants, according to its press release on May 22, 2016.

Transcosmos, together with a major conglomerate and Transcosmos strategic partner, SAHA GROUP, the largest consumer goods retailer in Thailand has a goal to win 40 million users and a special focus on Thailand, the core market within the region.

Gotcha!Mall launched in 2014 in Japan and now with a specific focus on mobile driven Thailand.Yet updates from the omnichannel platform in Thailand remains scarce.

Its  Thailand Facebook page has daily active posts but has only approximately 530 followers at the time of writing. In regards to news, there hasn’t been media coverage since its press release launch in May 2016. How significant or aggressive this player will be in the mobile commerce landscape of Thailand and Southeast Asia is largely yet to be seen and not worth ignoring.

By Anutra Chatikavanij

 

 

The 2016 A.T. Kearney Achieving Excellence in Retail Operations (AERO) study explores the pros and cons of store operations in the digital era, as retailers focus on Omnichannel strategy with a move towards ‘Bricks and Clicks’.  In an age where retailers are are revolutionizing themselves to meet more fragmented consumer demands, integration with technology becomes investment priority. However, this does not mean that the human aspect of the retail industry should be left behind…

Here are the key findings:

at

Figure one: Consumer feedback on social media impact and social media usage

Fulfillment

  • 24% of people are happy with three-day shipping for ecommerce
  • 42% of people consider ‘delivery made during promised window’ more important than fast shipping

Technology

  • 60% of retailers admit that their companies struggle with executing and measuring their ROI.
  • 78% of retailers are focusing on inventory management. With 33% aiming to invest ‘ in inventory management technology soon’.

Social Media

  •  Over 60% of retailers say they are focusing on social media to create value. But two-thirds of consumers are not engaging at all.
  • Those that do engage with retailers on social media are mainly using it to obtain discounts.

Store Associates: The Unsung Heroes

The AERO findings show that despite investments being directed towards technology and social media engagement, consumers state that experience and service have the most impact on store productivity. However, retailers put too little investment focus on store associates. 70% of retailers expect spans of control to widen in the near future, and almost all express concern about the workforce adapting to omnichannel demands. This shows that retailers need to focus on properly supporting in-store staff, especially in customer service operations.

Bottom Line: Despite the focus on ‘bricks and clicks’ , retail is still a ‘people’ business. People are still a key ingredient to success.

To access the full report, click here

While there is plenty of buzz around brands building their own webstores instead of a strategy focused on distribution through e-tailers such as Amazon, Tmall, or Lazada, Southeast Asian brands are still undecided on whether to move online at all. This is despite ecommerce growth projected at 25%, tantamount only to China’s growth (AT Kearney 2015) but there are trailblazers – brands ahead of the curve who have decided to invest in their brand.com stores in Southeast Asia such as HP, Maybelline, Kiehl’s and Nescafe in Thailand.

In the US, brand.com accounts for only a small portion of online sales. For example, Estée Lauder’s brand sites generate 5.56% of all online sales – around $10.79B. In Southeast Asia, the number is even smaller primarily because of how early stage ecommerce is compared to Western counterparts. Yet as seen with SME Mabeza in the February Newsletter, businesses of all sizes are starting to mark their own online territory. Figure 1 shows that for enterprise level brands, there is indeed optimism in the channel. *These brands were chosen specifically because they use end-to-end services with aCommerce, decreasing the variables.

Aggregating internal data from 2015 revealed that webstores experienced 15% month-on-month GMV growth from Jan 2015 to Dec 2015 and averaged over 300% growth in the same year. The brand that grew the fastest was Maybelline then HP, Kiehl’s and lastly NESCAFÉ Dolce Gusto

Cost breakdown of a webstore strategy & ecommerce

The investment into a full brand.com strategy for a globally recognized business, which includes site development, store management, merchandising, logistics, fulfillment for one year is not black and white. There are many variables such as industry, product category, order size, volume of orders, packaging and more. To illustrate, here is a very rough breakdown of the process, but again, it does vary depending on the client and their needs.

Site development & backend.

To develop a fully integrated ecommerce store with Magento can cost anywhere between $20,000-80,000 USD. This price doesn’t include hiring a webmaster, someone technical who maintains and fixes the site issues and bugs, who can charge almost $3,000 USD monthly maintenance fee. Webhosting and bandwidth usage can also range anywhere between $2,000-10,000 USD per month, depending on the size of the business. How developed and fast the site is will directly and indirectly impact conversion rates, Google SEO rankings, average order values (AOVs), and repeat purchase rates.

Storefront.

Your team will also require a Store and Merchandising Manager. This process covers merchandising, inventory, promotions on site, updating images and more across the brand.com site as well as other channels such as Lazada, starting at $4,000 USD per month. This is not a low-level operational role; Store and Merchandising Managers for ecommerce sites make scientific, data-driven decisions to optimize product and promotional placements across the site. Good and average store managers often mean the difference between 1x and 3x your monthly average order values.

Fulfillment.

Fulfillment and delivery can range between $1-5 USD per order depending on location and weight of order, customer service requirements, etc. Based on your company’s volume, the cost of logistics will vary greatly. Due to low credit card penetration and inexperience with online shopping, last mile in Southeast Asia requires options such as cash-on-delivery and reverse logistics to appeal to customers trying ecommerce for the first time. 

Marketing.

Kevin Costner’s famous line in Field of Dreams, “if you build it, they will come,” does not apply to ecommerce shops. A brand webstore needs online marketing campaigns that include Google Adwords, Facebook marketing, dynamic re-targeting , email newsletters, and more. There is too much competition that exists online meaning sites will not sell unless they pay for the attention of the consumer. Even the most popular of brands have large marketing budgets.

Brands are expected to spend between 20-30% of sales revenue on marketing and advertising. For offline brands and retailers, the cost of sales (CoS) metric is typically a single digit percentage. However, for ecommerce, this number is higher, especially during the first two years of operations, when the main focus should be on building the brand, acquiring customers, and increasing the subscriber database. Once the number of repeat customers increases, revenues go up and CoS will go down. Multi-channel brands and retailers often struggle to build a case for ecommerce because the entrenched mindset still expects single digit CoS but to succeed online, brands need to look at the long-term benefits and set expectations for CoS accordingly.

Overall, businesses are looking to at least $100,000 USD investment over a one year period and this does not factor in the variable factors: logistics or marketing.

Why businesses are investing in brand.com stores in Southeast Asia

Brand.com stores in Southeast Asia are an important channel. As Fig. 2 in Graph 1 indicates, this channel was the largest driver of gross margins in 2015 with over 45% MoM. Beyond sales, there are three critical reasons why brands are building out their webstores: 

  1. Owning customer data – This is important because applying this data can increase customer lifetime value in the long run via targeted, personalized marketing, particularly O2O opportunities & loyalty reward programs.
  2. Total control of branding – For high-end businesses, brand identity is as important as the product itself. Owning your own webstore allows you to fully showcase and build a solid brand that your customers can identify with. You have complete freedom on how you wish to market your shop. 
  3. Higher margins – By selling on your own domain, there will be no expensive commission or payment processing fees. 

So is it worth it?

Yes, but the answer is not that simple even for enterprise level brands. These are some factors to consider beforehand:

  • How many SKUs does your brand have? If you are an FMCG brand who only sells toothpaste, consumers will not buy it online as it is a product that can be easily purchased offline amongst a larger selection (eg. grocery store). To drive traffic to your site, you can offer an immensely beneficial reason for shopping on your webstore. Take the Dollar Shave Club for example, an ecommerce business that generated a mass volume of orders from a small range of products ($1 razors). The secret? A subscription model. On the other hand, in the case when a major brand, like P&G for example, has a wide range such of toothpaste, shampoo, dog food and everything for the home, it may be worth creating a branded store.
  • What is the average order volume and average order value? Low-priced items do not make the investment into brand.com worth it unless coupled with other strategies such as order bundling, subscription models or charging delivery fees. 
  • How loyal are your customers to the brand? When fake items are rampant in Southeast Asia, customers are loyal to an outlet they can trust and a brand.com store guarantees that. People who buy high-end goods are also not necessarily bargain hunters and are looking for a site they can trust coupled with convenience.

As more entrants tackle Southeast Asia, like imminent Alibaba and Amazon, this may change over time, but our data shows that Lazada remains the most powerful marketplace for non-fashion and luxury brands at 36% of GMV. Other channels such as mobile, online pop-shops and other marketplaces play an important role as well.

The key take away from brand.com stores in Southeast Asia and channel data in figure 1 and 2 is that businesses should be taking a multi-channel approach.

“What our 2015 data shows is that it is important to realize that brand.com strategy is a complement and not a replacement of a wider distribution strategy,” said Raphaël Gaillot, Director of Merchandising at aCommerce.

And as ecommerce in Southeast Asia matures and more brands take the plunge, it is equally important for brands to be creative in ecommerce strategies because there is not a one-size fits all model.