2020 Data Insights: What D2C Upstart Brands Offer Large CPG Buyers
Satta Sarmah-Hightower | May 26, 2020
The number of channels consumers use to purchase from consumer packaged goods (CPG) brands seems endless. There are big-box retailers, warehouse clubs, local supermarkets, and discount dollar stores. Not to mention subscription programs and online giants like Amazon.
As the COVID-19 outbreak continues to accelerate adoption of online shopping habits, CPG brands are continuing to turn to a new channel to connect with customers: direct-to-consumer (D2C).
A recent consumer survey from ecommerce marketing platform Yotpo revealed that 65% of shoppers using Amazon said they couldn’t get everything (32.75%) or anything (32.25%) they really needed from the retailer. Moreover, if an item is out of stock, 40.55% of those consumers will turn to a less familiar brand to find the product they need.
This is an excellent opportunity for established brands to consider how a D2C model could support customer acquisition and retention.
With brands like Honest Company, Harry's, and even 154-year-old companies like Nestle selling directly to consumers, an increasing number of well-established CPG brands have adopted another strategy: buying smaller D2C brands. These D2C brands offer several benefits for larger companies, including agility and increased opportunities for experimentation and innovation.
The 2020 "VC Investment in CPGs: How D2C Brands Are Transforming CPGs" report from The Digital Shelf Institute indicates that D2C is shifting the CPG industry.
These D2C CPG brands are using three key strategies to gain market share, engage customers, and drive revenue: They've optimized product experiences, developed brand communities, and have streamlined their product development and distribution processes. Here's a look at how these strategies are helping D2C CPG brands achieve success.
The CPG Landscape Today
Well-established CPG brands now face more competition thanks to upstart brands and changing consumer behavior. Though online sales now account for 40% of the growth in CPG sales, according to Boston Consulting Group, many CPG brands rely on retailers to drive this growth.
Upstart brands like Dollar Shave Club, which Unilever purchased in 2016, have also grown in market share. At one point before its acquisition, Dollar Shave Club's online sales had surpassed Gillette's.
Consumers also are turning online for all their needs. According to the Food Marketing Institute, 49% of consumers shop for consumer packaged goods online. All these trends have led to a shifting balance of power within the CPG industry. The industry is now ripe for innovation, and we're now seeing this in the form of increased venture capital (VC) investment in CPGs and the increase in CPG giants acquiring smaller brands.
VC investment in new CPG brands quadrupled from 2016 to 2018, increasing from $500 million to $2.1 billion. D2C brands dominate three of the top five investment categories, including prepared foods, beverages, household, and personal care. These categories also made up 45% of all money invested in the CPG industry from 2015 to 2019.
At the same time, larger CPG companies are losing revenue to newer, more innovative brands. Since 2013, $17 billion in sales has shifted from larger CPG brands to smaller CPG brands — many of which are in the D2C space.
What's clear is that in this shifting landscape, large CPG brands can learn from these D2C upstarts to make themselves stand out on the digital shelf. They can start by looking at how these brands deliver best-in-class product experiences.
Optimizing Product Experiences for Shoppers
D2C brands are winning when it comes to product experiences for several reasons. First, they choose a clear founding mission deeply rooted in their target audience's core values. They also launch one product or product category at a time to solve their audience's needs, rather than employing a spray-and-pray approach or flooding the market in a way that fragments their customer base.
Next, they distribute their product to maximize convenience for shoppers, which also creates another competitive advantage for these brands: access to first-party data. The fourth part of their strategy involves cultivating meaningful conversations with consumers and the larger marketplace using every touchpoint at their disposal — from their brand site to social media channels. Finally, they gather feedback from direct sales, reviews, and social media channels to improve their product experience.
The beauty brand Kopari relies on several of these strategies. The company uses first-party customer data to A/B test different customer experiences, personalizing, and ensuring its messaging is on-brand for its target audience. For example, a call-to-action that says, "Get in My Bag," rather than "Add to Cart."
Kopari has also made its blog shoppable by adding a "Shop the Post" option that allows customers to purchase the products mentioned in each blog post. Kopari illustrates how D2C brands are discovering innovative ways to improve the customer journey and streamline their path to purchase.
Developing Brand Communities
Hippeas, which sells organic chickpea puffs, focuses on developing a community around its brand. The company, which has raised $22 million since 2017, uses its social channels to connect with consumers and to foster authentic conversations with them.
The brand has 75,000 Instagram followers — outpacing some of its key competitors. Hippeas has achieved this by sharing stories, rather than selling products and by creating engaging content with posts like this: "A fist pump of pepper and a sprinkle of sea salt. Down with the man, power to the peas."
Livio Bisterzo, the company's founder, says it's all part of keeping customers engaged. "For us, we were very focused on building community online, and that means we keep working with influencers and social," Bisterzo says.
Streamlining Product Development and Distribution Processes
Califia Farms, which manufactures plant-based milk products, uses first-party data from its ecommerce site to optimize the launch of new products. Thanks to its D2C channel, Califia Farms has gathered a wealth of data on its customers' preferences and can use these insights to tailor its offerings, packaging design, and messaging, aligning its product development and product experience with the needs of its core audience.
Grove Collaborative, a delivery service for eco-friendly household and personal care items, has launched its own private label brand and sells products through a subscription program on its D2C channel. The brand relies on an algorithm to customize its product experience, using these insights to move to bi-monthly shipping for its subscription program. Grove also has opened a flagship store in Venice Beach, CA, which gives the brand multiple ways to engage with and sell directly to consumers.
The Future of CPG
Larger CPG brands need to become more innovative. D2C CPG companies offer several lessons for larger brands. Delivering the best product experience, using first-party data to improve customer interactions, harnessing social to develop brand communities, and streamlining product development and distribution have allowed CPG newcomers to drive growth and build a loyal customer base.
Many well-established CPG brands have been around for more than 100 years. If they want to succeed for another century and compete on the digital shelf, they must start by embracing disruption and adopt some of these same strategies — or risk getting left behind.