Enabling Direct-to-Consumer Growth for Brands

2Source: A.T. Kearney

TRANSACT

FOLLOWUP BROWSESTIMULUS

EVALUATE

Frictionless Consumer Journey

4

5

21

3

Digital stores and pop-ups

Curated, free home trials

One click buy on social media

Amazon dash button

Click & Collect

Locker Pickup

Time Definite Delivery

Real time promotions

Digital augmented dressing rooms

Mobile, alternative payment

Online dressing room

24/7 customer care

Endless aisle marketplace

Automated stores

Crowd sourced same day delivery

Chat-bots and shopping assistant

Smart device replenishment

Digital redefining How, What and When consumers buy

3

Expectations are rising

50% all consumers and >60% of Gen Z already shop cross channel

Consumers facing a negative fulfillment experience are 3X more likely to switch to a competitor for the next purchase under omnichannel

Gen Z is 3X as likely to select delivery speed as the most important fulfillment metric vs. older generations

same / next day delivery is 5X more important for Gen Z

Source: A.T. Kearney

4

0%

5%

10%

15%

20%

25%

30%

35%

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Luxury Leather Goods

Fine Wines/Champagne and Spirits

Luxury Jewellery

Luxury Eyewear

Super Premium Beauty and Personal Care

Designer Apparel and Footwear (Ready-to-Wear)

Luxury Goods

Fragrances

Diapers

Offline Growth

Online Growth

Hair Care

Footwear

OTCOral Care

Color Cosmetics

Sportswear

Men’s Grooming

Dishwashing

Apparel

Skin Care

Baby & Child Personal Care

VitaminsBath & Shower

Laundry Care

Surface Care

Online vs. Offline Growth by Category(Retail Value, 2013-2015 CAGR)

Size of bubble indicates online penetration, ranging from 0% to 15% for categories shown

Baby Care Luxury GoodsApparel & FootwearHome CareConsumer HealthBeauty and Personal Care

1. Diapers online growth based on estimate for online baby products growthSource: Euromonitor; Morgan Stanley, IBISWorld, Nielsen, Internet Retailer, A.T. Kearney analysis

In many categories, online is the only “growth story in town”

5

Depth of Offering

Omni-Channel Value Chain Integration Curve

Level 1 Level 2 Level 3 Level 4 Level 5

Research

Shop

Service / Omni

• Online/mobile product search

• Side by side feature comparisons

• Online memberships

• High resolution specs/photos (3D)

• Product narration

• User feedbacks and reviews

• Smart recommend

• User communities

• Buy online for

direct delivery

• 1-click and/or

mobile-

payment

• Store pick-up

• Global shipping

• Store fulfill with

last mile deliveryBuy / Fulfill

• Subscriptions

• Segmented assortment by channel

• Product sampling for VIP customers

• Online customization

• Retail location recommend

• Customized order management

• No hassle

returns

• One click live

customer service

• Omni-channel

integration

Brands are increasingly pursuing direct to consumer

Source: A.T. Kearney

6

DTC rapidly becoming a top C-suite agenda

7

Companies pursuing Direct-to-Consumer often neglect supply chain and fulfillment capabilities

Dig

ital

/ F

ron

t-E

nd

Su

pp

ly C

hain

Shop anywhere

Order and fulfill from anywhere

Smart Phone / Social Media

Customer Service

WebsiteDigital Stores

CRM

Digital Wall

Retailer / eRetail

Ecom fulfillment centers

DSD / Drop Ship

Right Inventory @ Right Location

B&M stores

Ship from store / store pick-up

Home Delivery

8

Effectively fulfilling consumer promise is much more critical in Direct-to-Consumer vs. traditional brick & mortar

DTC Has Direct Impact on Top Line

Long lead time = increased likelihood of Out of Stock, which may impact consumer conversion

Delayed fulfillment for an online order leads directly to an unhappy customer experience

Brick & Mortar

DTC

DTC Efficiency Has Higher Impact on Profit

Source: A.T. Kearney; GfK FutureBuy

Consumers More Willing to Switch under DTC

9

We see several priorities of focus

Define a clear,

segmented

fulfillment promise

Evolve the right

supply chain

partnerships

Redefine the role

of the store

(owned or retail

partners)

Creating a Winning Direct-to-Consumer Supply Chain

31 2

Set up the right enabling systems

10

Brands must define a clear consumer promise based on their brand and basket dynamics

Premium

Mass

Sm

all

Ba

ske

t S

ize

La

rge

Ba

ske

t S

ize

Customer Promise: Beauty Industry Example Illustrative – Beauty Brands

Commitment to providing a large

range of SKUs at an affordable price

Typically operate through an

integrator/retailer

Commitment to providing quick, easy access to multi-brand

products

Choice drives large basket size

Commitment to high quality products and

customer service

Increasing “need now” expectations

driving need for creative supply chain

solutions

Commitment to provide reliable

access to quality products

Catered to “loyalist” customers, access to right products is key

differentiator

Consumer Promise1

11

We see a clear differentiation in consumer promise across omnichannel leaders

ChoiceAssortment

Order Modification

Order Personalization

ConvenienceDelivery / Pickup

Delivery Cost

Returns

CapabilityService

Order Tracking

Interaction Quality

CRM / CCC Personalized service

OMS

Cross Selling

ReliabilityOn Time in Full (OTIF)

First Contact Resolution

Speed

Order to Delivery

Speed to Answer

Supply Chain Promise variables

Customer Care Promise variables

Hours of Operation

IVR

Fulfillment Focus

• Broad assortment and

exclusive SKUs

• Customer centric

service experience

• Free shipping and

returns

• Customer care &

convenient tracking

• Delivery speed

• Replenishment model

• Endless aisle

assortment

• Leverages large store

footprint for customer

convenience

• Marketplace allows

larger assortment

• Free shipping and

returns (700+ stores)

• Efficient customer

service

Subscription Model

One package

Source: A.T. Kearney benchmarking

Consumer Promise for Omnichannel Leaders

Illustrative

Consumer Promise1

12

A clear consumer promise informs future supply chain design

Fill Rate

Key Dimensions of Consumer Promise (eaches supply chain)

Order to Delivery Time

Partner Store Pick-up

Assortment / Product Range

Home Delivery Time Window

…

Informs Supply Chain(s) Design

• Product Cube Profile

• Peak Profile

• SKU Count

Warehouse

• Item volume

• Service / SLA

Network / Flow

• SKU Velocity

• SKU Cycle

• Assortment

Inventory

• Size/format

• INV level / breadth

• Fulfillment roles (Ship, pick-up) volume

Store

…

Key Dimensions of Customer Promise(case supply chain)

Prepaid %

Lead Time

Order Frequency

OTIF

Inventory Days

…

Illustrative

Consumer Promise

Segments

Product categories

Sales Channel

StoreOnlineMail

Direct to Consumer

GeographyUrban Metro

SuburbSmall City

Rural

1

13

Getting the right balance of future store capabilities will be key

Consumer Experience Hub Local Fulfillment Hub

Product TrialAllow shoppers to touch and

feel products

Treasure HuntIncubate exclusive or little known brands exclusively

MerchantainmentProvide an exciting environment to engage consumers in-store

Personalized ServiceEnhanced level of personalized

service

Click and Collect

Dark Store Pick and Ship

On-Shelf Pick and Ship

Returns

Getting the right balance will be key for retailers

Role of Stores2

14

Brands are aggressively testing different store solutions

Emerging Omnichannel Store Concepts

Customer Experience

Focus

High

Low

Supply Chain and Fulfillment FocusHighLow

Experience Hub

• Sales $ per square foot

• Customer experience

• Digital capabilities

• Location

• Square footage• Cost• Proximity to demand

• Pick and pack capabilities in-store

Enhanced Hybrid

Traditional Store Fulfillment HubSome beauty and vertical specialty

retailers are pushing towards enhanced hybrid

concept

Hybrid of Experience and Fulfillment Hub

+

Store as Fulfillment Hub

Role of Stores2

15

Brands also need to consider leveraging their retailer partner store networks

Example of Joint Value Creation Opportunities

Role of Stores

Manufacturer / Brand

Retailer

Levi’s studiescustomer location

and partner inventories to offer delivery or in-store pickup from nearby Macy’s fulfillment

hubs

Customer orders on Levi’s.com or at

Levi’s experience hub

Levi’s and Macy’s joint systems

track inventory levels

Customer picks up order and pays at

Macy’s, Macy’s system updates

Levi’s and completes transaction

Customer opts to pickup at a

Macy’s store

A true omni-channel supply chain will require the creation of seamless integration of brand and retailer supply chains

1

2

3

4

5

Illustrative

2

Next day

delivery

Source: A.T. Kearney

16

The right fulfillment partnerships is critical for enabling flexibility and capabilities

Design & Manufacturing

Ware-housing

Delivery Customer Care

Capabilities Needed to Build Omnichannel Supply Chain

Case picking

Store operations

Direct to Consumer

Website Management

Last Mile Delivery

Mobile AppIntegrated CRM

Facility management

Raw Material Inventory

Manufacturing lines

Distribution Center Mgmt.

Finished Goods Inventory

Facility Management

Store-as-a-warehouse

Retailer Delivery

Ex

itin

g

Cap

ab

ilit

ies

Ne

w

Cap

ab

ilit

ies

Value added services

Cross-docking

Eaches pickingReturns

management

Analytics

Brands need to leverage external partnerships to quickly build these capabilities

Partnerships3

Sales

Chat/Video Chat Call Center

Traditional CRM

Phone Call Center

17

Best of Breed Market-places

…

Partnerships

There is a rapidly developing, segmented supply market for fulfillment

End to End Omnichannel Vendors

Best of Breed DC Vendors

…

…

Best of Breed CCC Vendors

…

Best of Breed Last Mile Delivery

…

Segmentation of End-to-End vs. Best of Breed Fulfillment Vendors (US)

Warehousing Delivery Customer Care

3

Sales

End to End Marketplace…

Non-exhaustive

18

Partnerships

Brands need to systematically design and evolve fulfillment partnerships as they grow

Strategic Focus on

Fulfillment

Volume – Online Sales

$50-300MM $300M - $700M >700M

‒ Fulfillment / Customer Care is key source of differentiation?

‒ Need to optimize a multi-DC network?

‒ Limited uncertainty?

‒ Strong legacy in fulfillment / CCC / IT?

Higher

Lower

End to End Outsourced Best of Breed Outsourced Mostly In-House

Omnichannel Fulfillment Partnerships Evolution

3

Source: A.T. Kearney

19

Amazon and other marketplace also needs to be part of the solution

51% of US e-commerce growth in 2015 (and 24% of total retail growth)

Top US E-Commerce Companies(2015 US internet retail sales, USD million)

3,437

3,719

3,849

4,407

4,516

5,565

8,244

Home Depot

Sears

Best Buy

LibertyInteractive

13,456

Macy’s

26,486

84,300Amazon

Wal-Mart

Valve

Apple

eBay

Amazon Case Study

Maximize profitability

Develop platform-unique assortment

Collaborate on new product innovations

Advertise and launch new products through platform

• Increase volume to drive profitable sales while accounting for dynamic pricing

• Tailor product assortment to different business models (e.g. large sizes for Amazon’s Subscribe & Save)

• First movers enjoy high market share on Amazon’s Dash button sales

• Launching new products on Amazon provides a quick path to market with valuable consumer insight (e.g. Pepsi’s launch of True)

Partnerships3

Brands need to manage Amazon as a platform, channel and customer

20

Please reach out to continue the dialog

Michael Hu

michael.hu@atkearney.com

www.linkedin.com/in/mhuspace

@mhu_snowcrash

Andrea Szasz

andrea.szasz@atkearney.com

21

Check out the companion article

Creating an Omnichannel Supply Chain for Branded Manufacturers – The Untapped Potential for Growth

In today’s omnichannel world, the distinction

between brands and retailers is of little interest to

consumers. They will buy from whoever is best

able to “deliver the goods.” Branded

manufacturers can take advantage of this

unprecedented opportunity to get closer to the

consumer, if they manage to acquire the

requisite fulfillment and supply chain capabilities

Read full article here

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