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What makes the direct to consumer model successful and attractive to investors?

13 July, 2021

Tom Copeland

Partner, Corporate Finance, PwC United Kingdom

+44 (0)7968 479411

Email

Direct-to-Consumer (DTC) brands have been inundated with a surge in new customers over the last 18 months. This success has been swift and the investment community has understandably taken notice. But with lockdown restrictions now lifting, investors and brand owners alike are faced with the difficult task of predicting where consumer behaviour will go next. And a key question many have been asking is: what next for DTC brands? 

To do justice to the question,  investors should first understand how and why the DTC model works so well.

Selling directly to consumers is nothing new. But we would argue that today’s DTC brands do far more than this. A defining quality of many best in-class digitally native DTC brands is that they champion a purpose driven approach to authentically create a community. While undoubtedly the closure of bricks and mortar retail drove some consumers online during lockdown, we would contend it was the pull of these communities that underpinned growth for the best DTC brands. 

 

Purpose led DTC brands who have created strong communities through their social and experience led engagement will continue to enjoy high growth and strong interest from investors.

But it doesn’t stop there.  From our experience working with DTC brands across the Deals space, these are number of core traits that make a successful DTC brand: 

Brand purpose and authenticity help many successful DTC brands create distinct personalities with an authentic and cohesive voice (often disrupting a segment of the market).  This results in better customer connection and retention leading to high advocacy.  Brand values alignment and knowing what is important to your customers is key. Purpose is particularly important to Gen Z consumers who make purchasing decisions based on a company’s values and wider contribution to society. Emerging high growth brands have been able to develop this from inception with real authenticity while the journey is a lot more complex for well established global brands.  

Data driven insights provide the powerful ability to collect key consumer data throughout the customer journey and lifecycle. This allows DTC companies to better understand their customers’ interests, improve targeting effectiveness and develop closer relationships for high customer satisfaction and retention. Highly effective digital marketing strategies based on data driven insight will ultimately lead to higher retention rates and a lower cost of customer acquisition.   

Focus on customer proposition with more control over the customer journey, to deliver best in class service.  This includes all aspects of the customer experience from the website UX through to delivery proposition, sustainable packaging and customer service.  

Strong appeal to a digital native audience - lifestyle brands with strong reach and awareness drive web sessions and offer products which naturally lend themselves to influencer and digital marketing.

Strong unit economics - there are many factors which play into this complex value equation but business models which contain some of the following attributes are most likely to succeed; high average order values, strong gross margins, high replenishment or repeat rates (including subscription models), and light goods which have lower fulfilment costs.  The end goal is for unit economics to support a business model which is either profitable on first purchase or drives strong lifetime value through the repeating dynamic of its customer base.  The stronger the repeating dynamics and lifetime value the greater confidence a brand can have in investing heavily to acquire new customers.  

Overcoming the misconceptions that surround DTC businesses will help investors tap into this fast growing market. In turn, DTC brands seeking external capital need to prepare for more focus around not just traditional financial and commercial due diligence, but also cyber, data, and ESG. We’ll explore this in future blogs.

 

Tom Copeland

Partner, Corporate Finance, PwC United Kingdom

+44 (0)7968 479411

Email

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