Nike & PepsiCo Entering DTC, What’s Next?
When COVID forced shoppers and merchants to change their purchasing and selling ways, brands like PepsiCo and Nike spent no time wasting on what the next move would be.
Truth be told, Nike had already planned on expanding its digital. Five years ago, it projected reaching $50B in revenue this year and that its direct-to-consumer operations would grow to $7B. But while the total sales goal for the year seems to be short of their projection, their DTC investment is undoubtedly paying off. In 2018, Nike Direct reported more than $10B in sales. And it is serious about capitalizing on its success; Nike’s acquisition of analytics company Zodiac as part of its strategy to improve consumer data capabilities was a move towards ensuring its marketing efforts hit the right note with its customer base. Such data capabilities are useful when Nike cut ties with Amazon and began integrating its app so that users could have products tailored to their tastes, request fitting rooms, and complete a checkout on the app itself without having to wait in line. Just a few months ago, Nike announced it would close down nine of its wholesale accounts to streamline its Digital approach and offer a more consistent experience to consumers across all of their stores. And now with the pandemic foraying into business for the foreseeable future, Nike’s digital foundation sets it up well to stand the disruption felt by competitors early on in the year and for time to come.
With PepsiCo, their fast dip into the direct-to-consumer strategy catalyzed as a direct result of the pandemic. While PepsiCo’s eCommerce capabilities were bare compared to what Nike had established over the last few years, the speed with which it moved to tap into the digital space set it up nicely to capture data as early as possible. Within 30 days, PepsiCo rolled out PantryShop.com and Snacks.com, their answers to meet the surge in consumer demand for PepsiCo and Frito Lay products.
Like Nike, PepsiCo’s entrance of the direct-to-consumer market will allow it to wean off retailers. But a big part of PepsiCo’s move was to own the channels and the data behind their consumer purchasing habits. With this data, PepsiCo can and will test to see what messaging is most effective and what products resonate most with consumers. By having unfettered access to this direct channel, PepsiCo can iterate its messaging and its offers much faster than they could by relying on third-party vendors.
But Fortune 500 brands are not the only companies stepping into the direct-to-consumer arena. With the abruptness of the shutting down of physical retail locations came the instantaneous move for brands to seriously consider focusing on selling more online even if they had no intention of doing so before.
Last month, I received an RFP from a home goods manufacturer who had gone twenty years plus selling at Target, Crate and Barrel, Williams-Sonoma, and the like without updating its website. Now, they’re looking to produce a new revenue stream through an online strategy given the big box retailers it sold its wares to have lower foot traffic than in previous years.
Before, there was no need to change their approach because doing so would have drastically altered their operations. But now, this home goods company is pivoting out of necessity, both to be able to better forecast demand and revenue through a channel it owns and to increase its brand awareness. Crisis creates opportunity, and in this case, it’s unlikely this company would have been persuaded to take the opportunity to develop its digital presence if it weren’t necessary.
Now, where does that leave the DTC brands we already knew about before large, established brands entered the foray?
For one, venture-backed capital injection into “disruptive brands” will not have the same impact as it did five years ago. There’s little a venture round can do compared to Nike’s long-term foundation building that positions it as a company bound to reap the rewards when ecommerce’s share of retail sales keep growing. PepsiCo’s late entry into the DTC space is of little concern since it enjoys both exceptional brand equity for its product lines and its capacity to invest in an ecommerce channel of their own. It will be increasingly difficult for any new company to make their investment case when a much larger company can utilize its vast resources to move quickly and build for the long run.
Any new company’s plea for capital and case for “disrupting” a market is negated, given the entire world has been disrupted because of the pandemic. Venture capital is also not getting any easier to raise; deals take longer, and valuations may suffer for some time. Venture rounds this year were down 44% from last year’s period equivalent and due diligence traditionally done in person not happening due to safety concerns opens up a Pandora’s box of risk for investors.
Second, the problems that persisted with existing direct-to-consumer brands haven’t gone away. If a company has a poor understanding of positioning its value to a consumer it wishes to target or cannot generate profit, it’s unlikely it’ll have much chance of succeeding or rallying investor support.
A breakthrough brand is nothing without having a customer base to support it. And when larger, more established players are entering the direct-to-consumer space with the resources needed to test, iterate, and improve their strategy, the DTC brands who fail to incentivize its target audience to purchase their products will be yesterday’s news. The assumption that DTC brands can grow their market share and subsequently pursue profitability is an outdated one. The key to staying in business as a direct-to-consumer player now is not to let profitability be an afterthought.
It’s not in my interest for these companies to fail. I’ve actually been fortunate to work with a number of direct-to-consumer brands and I’ve seen how passionate the founders and the backers are of these companies. But one has to be cognizant of the changing landscape.
While we’ve enjoyed watching the big names in DTC like Warby Parker disrupt Luxottica, Allbirds shake up the footwear world, and Hims/Hers change the telemedicine industry, we have to realize that the times are different and the approach must change with them. The DTC strategy must always be consumer-centric and figure a way to deliver a sought-after product or service through an unparalleled experience. But the winners of the direct-to-consumer approach will be those who can translate brand equity into profitability.
If you’d like to continue this conversation, I’m always happy to hear more insights. Shoot me an email at juan@g-co.agency
