The threat of direct-to-consumer disruption is seriously overblown

The current cause célèbre for American marketers is the threat posed by new direct-to-consumer (DTC) startup brands that aim to wrestle customers away from traditional companies. They’re using direct channels to win and then retain customers from the traditional 20th century behemoths like Procter & Gamble (P&G) and Unilever.

That old guard built their businesses from a tried and tested low-involvement buying model, in which huge ad spend drove share of mind while significant sales force investments delivered equally massive share of shelf. With the brands built and the budgets brimming with cash, anyone then trying to muscle in the action was outspent and sent packing.

In relatively low-innovation, low-involvement markets the ability to achieve top-of-mind awareness and constant availability for repurchase, multiplied by the scale to defend those twin towers of superiority, made the big brands invulnerable for decades. The top two or three brands in most FMCG categories in 1980 look remarkably similar to those that now dominate today.

But the theory of disruption in the digital age posits that all of this is about to change. An army of start-ups are poised to break from the traditional FMCG approach with a new DTC model.

READ MORE: How direct-to-consumer brands are reshaping marketing

Brands such as Harry’s, Hubble and Goby aren’t household names yet. But they aim to be. And rather than get there with a focus on the standard TOFU (top-of-funnel) approach of TV advertising and the typical awareness objectives, these new brands target consumers via digital media and then, having acquired a customer, focus on the BOFU (bottom-of-funnel) opportunities of locking them into to repeat ordering and home delivery.

That approach negates the need for wholesalers or any retail penetration and opens the door to an exclusive post-purchase relationship, in which digital media takes centre stage, competitors are non-existent and profitability is maximised. The prize prototype for this DTC approach is, of course, Dollar Shave Club, which managed to take a significant share from P&G’s formerly impregnable Gillette fortress over the last five years.

You almost certainly know the story. A digital ad mocking the over-engineered and over-priced Gillette offering, featuring the company’s co-founder Michael Dubin, was seen by millions online. The exposure resulted in a sudden and very lucrative surge of interest and then sales for the Dollar Shave Club, which sold direct to consumers via its website and then delivered their razors in regular installments via the mail.

The focus on digital media and DTC delivery exhibited by Dollar Shave Club and now copied by many others has meant these new entrants are also dispensing with the traditional agency relationships that built the brands of P&G and Unilever. Instead they aim to do everything in-house. Internal teams deliver content marketing, influencer marketing and social media and the all-important direct point of contact for orders and service queries.

Consumer proximity means these new brands can control their relationship directly with customers rather than working through all-powerful retail giants, and that direct exposure to consumers also means they get to keep the mountains of precious consumer data generated. The mouth-watering prospect of cutting back on advertising costs and all the margin-hungry distributors that line the value chain is also a big attraction.

The direct-to-consumer appeal

Unilever may have purchased Dollar Shave Club, but the billion-dollar price tag has encouraged private equity firms to start sniffing around the DTC sector in the hope of spotting other potential unicorns in the making.

The combination of a new hot business model, the scent of disruption and the presence of private equity is quickly propelling DTC entrants to the top of the marketing bullshit league table. It’s highly unlikely you will not survive until Christmas without someone (probably the bloke that bought bitcoin) boring you with the reasons why DTC is about to change everything about marketing, forever.

You can see why the new DTC disruptive meme is so attractive. It involves the arrival of hot new startups and their destruction of old incumbent firms. It involves taking marketing in-house – another current buzz topic. The proposed tactical toolkit that these DTC brands depend on consists of content marketing, social media and endorser marketing and claims not to require ‘traditional’ media.

Perhaps best of all, these brands apparently do not need a retail presence, which links in with another popular apocalyptic prediction that retail is dying. You could not invent a more alluring combination of disruptive marketing myths than DTC if you tried to. And probably for that reason, more than any other, prepare for several kilos of bullshit to start flying about these new brands any time soon.

The narrative is certainly already picking up steam. At last month’s ANA conference in Orlando the topic was widely discussed. Terence Kawaja, the chief executive of investment firm LUMA, is the poster boy for DTC, and his reports on the rise of these new challengers and their likely catastrophic impact on big incumbents are generating a lot of attention. His chart of all the emerging DTC brands, shown above, is an accurate summary of the activity going on in that space at the moment.

According to Kawaja the reason big incumbent firms are stumbling is because “marketers and their tactics are old”. In contrast, he thinks DTC marketers are “digitally native” and as result they “take a completely different approach to advertising”, moving from the “spray and pray” approach of traditional advertisers to one with a focus on data, performance marketing and digital media.

The FMCG brands’ resistance

As the incumbent’s incumbent and with dozens of heritage brands in play, it is no surprise that P&G is top of the list of companies that are apparently about to be disrupted by DTC entrants. Kawaja had a slide at his ANA session showing the 45 P&G brands under threat from the new phalanx of DTC players. But the presence of P&G’s chief brand officer Marc Pritchard and the general sense that he knows what he is doing are certainly providing a stabilising rejoinder to all the DTC aggression.

“I’ve lived that slide,” was his cooling retort to Kawaja’s P&G diagram. “It’s not like he’s surprising me.”

Pritchard went out of his way at the ANA conference to point out that P&G is not the old fuddy-duddy that so many seemed to want to portray in their lazy mischaracterisations of old and new. The company has encouraged its teams to create brands, to experiment with direct to consumer channels, to take some marketing in-house and to move significant parts of its tactical spend to new digital channels.

READ MORE: Colin Lewis: The secret of direct-to-consumer success is owning the whole experience

And it all seems, at least for now, to be working. P&G has just posted its best quarterly revenue growth in five years while spending significantly less on marketing. This is the P&G that handled the private-label revolution by the way. The P&G that lead the transition to more transparency in digital media. The company is used to change and it seems to know what it is doing. Especially with Pritchard running the show.

The spanner in the works of this convincing P&G defence is core competence. The much-loved strategic theory that companies are good at some stuff and, as result, not good at other stuff could come back to bite P&G. The fact the company has used a structured model of above-the-line advertising, indirect distribution and retail for almost a century might make it unable to respond and react in the same way as nimble, digital, direct-distribution DTC brands.

Gillette continues to take around two-thirds of the total razor market and its own online razor club is currently outgrowing everyone.

It’s certainly an argument that Kawaja was keen to promote during the ANA. “You think you can be cool and launch your own DTC brands?” he asked marketers during his presentation. “Think about a middle-aged white man trying to dance.” He then showed a GIF of former New Jersey Governor Chris Christie dancing (badly), to make his point that old guys like P&G simply can’t do what the DTC brands are doing and about to do.

But I still side with Pritchard. Too many digital boys have cried about a disruptive wolf only for all of us to wake in the morning and find our chickens safe and plenty of eggs available. That might sound like over-confidence and traditional legacy thinking, but there are only so many times you can worry about the death of TV, traditional advertising, retailers, brands and marketing before you start to see this talk as the sensationalist posturing that it surely is, rather than an accurate prediction of a world that is just around the corner. Maybe it is, but that corner sure is taking its time to arrive.

The disposable razor market – the first to feel the wrath of the DTC revolution with Dollar Shave Club – provides an ideal vantage point to survey the disruption and the actual vulnerabilities of the big incumbents.

Five years after the arrival of Dollar Shave Club the DTC story does appear attractive. From a standing start seven years ago the brand now generates around $200m in the US alone and was the subject of a $1bn acquisition. But dig a little deeper and it’s less persuasive. While Dollar Shave Club enjoys a 50% share of online razor sales in America, Gillette continues to take around two thirds of the total razor market and its own online razor club is currently outgrowing everyone.

If we have learned anything from the last decade in marketing it’s that disruption is rarely as disruptive as conference speakers would have us believe, and incumbents are not quite as secure as they might want us to think. Gillette remains the incredibly dominant global razor brand. Dollar Shave Club and the others that follow it are small, very interesting alternatives. But the idea that DTC brands are about to unseat the undisputed category champs should be treated with the scepticism it deserves.