How Direct Brands Steal The Show From Established Brands … And Also Growth (part 2)

Think about the following scenario: You are a manager of a leading German car manufacturer. On a daily basis questions arise why you are not as “fresh” and not as “digital” as Tesla. You would probably lose patience at some point and point out that you are an established company and a traditional brand which cannot change so quickly. In fact, new mobility and digitization definitely need some time here in Germany …

However, today’s consumers don’t really care where innovative ideas come from, so they get excited about purchasing the new Tesla Model Y and drive into the future. Targeted by Tesla’s D2C distribution strategy, which provides for personalized and direct online sales, the end consumer gets in touch with their innovative products twofold Both digitally and physically, e.g. visiting showrooms in respective cities.

Now, Tesla is not the only player to target its customers in this way. Other car brands such as Polestar use or as in the cases of Fisker, Lucid and Sono Motors also will soon use direct sales models. More and more (and mostly quite unknown) direct brands are attracting the interest of consumers. It seems as if the brands reach them intuitively through their preferred communication channels and convince them with innovative, but above all meaningful and sustainable products. And here the bandwidth is enormous – more than 60 industries, and counting, are already registered on the portal www.direct-brands.de.

Focused innovation instead of complex transformation 

Direct brands start as digital-natives and direct-to-consumers. Unlike established brands, they do not need to transform themselves. They are a new species of manufacturers that, in addition to strong personalization, also radically take advantage of the benefits of focus: They usually concentrate on one product group or even just a single product (e.g. the wallet from iClip, the mowing robot from Toadi or the digital rosary eRosary). At the same time, they build and expand efficient, direct sales channels through their own stores, marketplaces or social commerce. The most important concept is that they follow their own mechanisms without being subject to industry restrictions (e.g. start of the season for sports, change of collection in the textile industry, leading trade fairs for consumer electronics). 

Direct brands disrupt and change their industries 

A direct brand can certainly benefit from acting in a targeted counter-cyclical manner. Or if it simply brings constant innovations to the market (for example, in cosmetics). Or if it launches new products when the last product edition is sold out (for example, watches). Or if innovations are introduced to the market via crowdfunding platforms long before the official launch date. 

Especially in medium-sized businesses, one often hears that these brands are rule-breakers, act purely selfishly and thus ruin entire industries. What is often overlooked in the discussion is that even small and medium-sized businesses would have even better opportunities with their own resources than direct brands – but looking at most of the corporate cases it will be necessary to establish new brands instead of getting bogged down with the old brands.

If the current trend continues, it is very likely that we will see fewer traditional brands with large assortments in the future, but significantly more new D2C brands with small assortments. 

A new type of digital brand

The speed at which new brands are emerging in the digital arena is impressive, also when looking at how fast they are taking market shares from established companies. Often these brands are usually not perceived as relevant competitors at first, and fall through the ranks as “start-ups”. Further, it is often unclear which definition is suitable: Are they brands that purely sell D2C? Do they cooperate with retailers in an innovative way? D2C brands are in fact different from previous brands: they rather sell a small assortment in a targeted and direct way, and are therefore highly successful. Do we consequently have to question the validity of existing brand and marketing rules?

The answer to this is a clear “yes” and “no”. Of course, the well-known mechanics in the consumer goods industry are still valid and omnichannel marketing is getting established. But with targeting and social commerce being available, a completely different approach is now at hand: namely to communicate a brand or product to potential customers in a targeted manner. Ideally, this will then realize the most important conversion – i.e. the purchase – immediately. 

A self-reinforcing mechanism works in the background

Let’s summarize the current findings: A wide range of new brands are to be expected in almost all industries. They often focus on a single product group, while taking advantage of the zeitgeist, currently infused by sustainability, meaningfulness and authenticity. At the same time they are agile, master digitization and have no friction losses due to transformation. Their marketing approaches are extremely focused and effectiveness can be measured consistently. The chosen infrastructure is based on modular building blocks, functioning blueprints and SaaS. 

A self-reinforcing mechanism is then essential: After the first contact or purchase, the consumer will automatically find similar direct brands with identical principles – due to the mechanisms of the social platforms – a self-reinforcing mechanism. That said, it will get quite easy for marketing managers to target those who prefer direct over traditional brands.

How established manufacturers react

The advantages of D2C distribution strategies don’t need to be questioned. Instead of doing this, established manufacturers have to find a solution on how to react: Should they open additional D2C distribution channels for their traditional brand(s) – with regard to a high complexity and a conflict potential that should not be underestimated? Or should they rather concentrate on building up new D2C brands that correspond to the zeitgeist of the digitally affine target groups? 

This is apparently the momentum where a serious problem arises. Can an established manufacturer, whose strategy was characterized for decades by strong brands, large product ranges, multi-level sales concepts, top-down planning and target group thinking, suddenly switch over? How does a growth-oriented global player become a sustainable local player? How does the previous corporate culture fit in with a start-up approach? Can the IT department suddenly switch from SAP or Salesforce to Shopify or WooCommerce?  There are many questions that may also explain why P&G, Unilever, Henkel and Beiersdorf currently prefer to buy new brands rather than to develop them themselves.  

Direct brands and stationary retail – an interesting combination

Surprisingly, some brands can also be found in stationary retail stores – after a successful launch online. In shops, they again operate from a position of strength, as retailers often need them to reach younger target groups or to set impulses for their own products and thus boosting their own brand. However, many retailers are still extremely skeptical about who they are going to get on the scene, especially when it comes to influencer and celebrity brands that may no longer be hip tomorrow.

A recent example of a renowned sports retailer shows that reserving 2-3% of its purchasing volume for young and fresh D2C brands can be profitable in most of the cases, because these brands have already built up a loyal customer base online. Formerly a knockout criterion for listing is now an indication that many things need to be rethought. There are exciting times ahead of us.

About the author Stefan Hövel

Over the last 20 years Stefan has accompanied several international companies in the development of digital strategies, innovations and ecosystems. In addition, he has been involved in the digital transformation of direct sales companies, the development of direct brands and the D2C strategies of manufacturers as managing director, manager and consultant. As a founder he has also accompanied several start-ups and NGOs. His conviction is that direct brands will not only enrich the brand spectrum, but also create completely new markets and business models.

If you have questions, don’t hesitat to contact Stefan via LinkedIn. He is looking forward to your message.