The consumer packaged goods (CPG) industry is an intensely competitive landscape, and new brands often face a myriad of challenges in their quest to gain a foothold in the market. One crucial decision every emerging CPG brand must make is whether to start with direct-to-consumer (DTC) e-commerce websites or to try getting into retailers directly. In this article, we will explore the advantages of beginning with DTC e-commerce, highlighting the financial benefits and increased control over sales and marketing, and how this approach can shift leverage in favor of the manufacturer during future retailer negotiations.
The Pitfalls of Jumping Straight into Retail
Retailers hold the leverage in fee negotiations: When a CPG brand cannot demonstrate a proven sales record, retailers tend to have the upper hand in fee negotiations. This often results in higher costs for the brand, which can cut into profit margins and hinder growth.
Low average profit margin for new CPG brands in retail: According to industry data, the average profit margin for a new CPG brand in retail is between 5% and 10%. This slim margin can make it difficult for new entrants to compete with established brands and achieve sustainable growth.
High fees: In addition to lower profit margins, new CPG brands face a plethora of fees in retail, including listing fees, slotting fees, and promotional fees. These costs can pile up quickly, making it challenging for a fledgling brand to break even, let alone turn a profit.
Broker and distribution fees: Working with retailers often requires the involvement of brokers and distributors, adding another layer of fees that can further eat into profit margins.
The Benefits of Starting with Direct to Consumer E-commerce
Control over the sales funnel: Selling your products directly on your website that you own gives you complete control over the sales funnel, from customer acquisition to order fulfillment to remarketing. When you own the process, you not only can keep more profits, but you also get key information about your customers. With proper analytics and event tracking setup, you can learn what products are viewed the most, or purchased together, where they live, gender, and other key demographics. As well as personal information to remarketing to them after they have purchased. This helps to increase the lifetime value of each of your customers.
Higher profit margins: By cutting out the middlemen and avoiding the high fees associated with retail and Amazon, DTC e-commerce platforms typically provide higher profit margins for CPG brands. This additional revenue can be reinvested into product development, marketing, and other growth initiatives.
Enhanced brand experience: Owning the e-commerce platform allows brands to create a unique and personalized customer experience, fostering a loyal customer base and generating valuable word-of-mouth marketing. Again, with the right analytic tracking in place, you can find where there are bottlenecks in your funnel and can optimize them to get higher checkout rates and cart totals.
Case Study: Logan Paul’s PRIME Energy Drink
An excellent example of the advantages of a DTC e-commerce approach can be seen in the success of Logan Paul and his sports & energy drinks, PRIME. By focusing on selling the product exclusively through their online platform, PRIME was able to build a multi-million-dollar business without any retail sales.
A little background for those not familiar with this product, Logan Paul is a well-known internet personality and entrepreneur. In January of last year, they launched their product solely selling through their website. They sold out within hours of launching. They also launched in 24 Ralph’s locations where Ralph’s cited that this was the most successful launch of any drink they have had.
Now let’s keep in mind that Logan Paul already had a huge following and social media presence that he leveraged to have such immediate success. But he also used content marketing and influencer partnerships to get the word out and create buzz around the product.
By March 2022, they announced on Twitter that they had sold over 10 million bottles and were heading into Target. By selling exclusively through its website, PRIME was able to maintain complete control over its sales funnel and keep costs low. This approach allowed them to achieve higher profit margins and grow the business rapidly, ultimately becoming a $40 million brand without setting foot in retail.
Because of the impressive sales numbers and brand following that PRIME had generated through their DTC efforts, Target approached Logan Paul with an interest in carrying his energy drink in their stores. This is a prime example of how a strong DTC presence can lead to more attractive retail partnerships, as the retailer seeks out the brand rather than the brand having to hunt down retail buyers.
While specific figures regarding the contract between Target and PRIME are not publicly available, it is reasonable to assume that PRIME’s proven success and existing customer base put them in a favorable position during negotiations. This likely led to better terms and a more advantageous partnership with Target than if they had attempted to enter retail without first establishing their DTC presence.
Their success in the DTC space led to a partnership with Target, Walmart, Kroger, and other retailers, demonstrating the potential for an established online presence to shift the leverage in all of the manufacturer-retailer negotiations.
Shifting the Leverage in Manufacturer-Retailer Negotiations
By proving sales and brand following through a DTC e-commerce website, CPG brands can enter retailer negotiations with a stronger bargaining position. Demonstrating a proven sales record and established customer base can help secure better terms with retailers, including lower fees and more favorable shelf placement.
In addition, a successful DTC e-commerce presence can attract the attention of retailers, who may become more interested in partnering with a brand that has already demonstrated its ability to resonate with consumers.
We recently spoke with one of the industry’s leading brokers and he said that the biggest mistake that manufacturers make is rushing into trying to get on shelves overselling on their website first.
Wrapping up
For emerging CPG brands, starting with a direct-to-consumer e-commerce platform offers numerous advantages, including higher profit margins, increased control over the sales funnel, and a stronger bargaining position in future retailer negotiations. By proving sales and brand following before entering the retail space, manufacturers can shift the leverage in their favor and set themselves up for long-term success in the competitive CPG industry.
