Can Direct-to-Consumer commerce take off in Southeast Asia?


The Rise and Fall of Direct-to-Consumer Commerce in the United States


Direct-to-Consumer (D2C) sales is not a new concept. For instance, since 1996, Dell used its website to sell computers directly to consumers. While D2C brands might be fairly new in Southeast Asia (SEA) region, successful D2C companies have existed in the US for a decade. Some of these companies have become top of mind in their respective industries, for example: Warby Parker for glasses, Dollar Shave Club for razors, and Allbirds for comfortable shoes. The D2C startups’ rise was made possible due to the huge influx of venture capital, low competition, and most importantly, the use of under-priced social media platforms to get an advertising arbitrage. The success of D2C sales in the U.S. was enabled by the developed e-commerce infrastructure, mature payment mechanisms, and positive cultural attitude towards online shopping. D2C offers a lot of benefits to both the sellers and the shoppers. First and foremost, it minimizes costs. The premium brands are able to reduce their rental costs by and pass on a part of the savings to customers.


However, many of the famous D2C businesses are looking less viable today than they once were. Casper’s IPO was a good example and it showed how a unicorn to private investors was only about one-third in value to the public markets. The macro landscape has changed drastically from a decade ago. Following the early success of a few D2C brands, competitors flooded in and it drove up the price of social media advertisements, increasing the customer acquisition cost (CAC). “Ninety-eight percent of D2C brands are out of business, they just don’t know it yet,” said Gary Vaynerchuk, founder and CEO of VaynerMedia. “They don’t have the fundamentals to continue to acquire customers at a value that’s right, and the [venture] money will eventually dry out.”


How does D2C matter?

The D2C model helps companies to build a sustainable business model by offering control over four key factors:


  • Stakeholder relationships: By deliberately staying away from the wholesale model, the D2C brands have gained absolute control over the complete customer journey – from design to discovery and transaction. Since the brands ‘own’ this relationship they can continue to nurture it even further post-sale, by providing the customers a more customised experience. Customer relationships are not limited to the sale of the product but extend to the rest of the value chain as well. In the process of working closely with all stakeholders, the D2C brands end up building a long-term rapport which is mutually beneficial to all the parties involved.


  • Data: In today’s world, data is king. Consumer data has become an increasingly valuable commodity and its importance is ever-growing. Since D2C brands literally own the relationship with their customers, they have access to user-specific data points. The whole model of D2C brands is in reality built on the collection and interpretation of this useful information. With advancement in artificial intelligence, the value of data is bound to increase and companies with the best data libraries will be able to “seamlessly embed themselves into their customers’ lives by selling to them in the best way.


  • Potential High(er) Margins: D2C brands have relatively low Capital Expenditure (CAPEX) since they are able to remove fixed costs of owning the shops and fancy stores. The reduced friction along the value chain and wise pricing strategies in place, allow D2C companies the flexibility to experiment with their revenue and cost models. Although D2C companies constantly struggle with the issue of high CAC, the potential margins due to the above-cited reasons can turn out to be high enough to make business sense.


  • Community building: As can be seen globally, today’s consumers have less brand loyalty than ever before. It takes more than just a great product to build a loyal following of customers. It can be done in a more structured way with a targeted community-building strategy. D2C brands have an edge in this aspect as they are known to be masters at giving power back to the consumer.

We are now witnessing a shift in the way D2C brands used to operate. After gathering a lot of relevant data points around their customers, these brands are now making a shift toward opening physical stores. They have started to recognise the importance of physical experiences and the critical impact that human-centric, experiential and immersive spaces can establish long-lasting relationships with their customers. With the help of retail spaces like Casper’s nap room and Loaf’s ‘slowrooms’, these D2C brands are enhancing their digital channels by blending offline and online customer-centric experiences. In essence, this is not only to boost sales but also to give the customers a chance to know the brand better and get a real feel of the product beforehand.


Is Southeast Asia Ready for D2C?


One of the biggest changes happening in e-commerce trends in the SEA region is the D2C shift. It has been further accelerated by the Covid-19 crisis that has witnessed consumers in the region moving online rapidly. A D2C business model approach should fundamentally control the full value chain from design, manufacturing, marketing to distribution. The market size of e-commerce in SEA is estimated to reach $53 billion by 2023, from $19 billion in 2018. There is no doubt in the fact that the existing online consumer base is already primed and ready to hop on to the D2C train.


But some macro factors such as low average internet penetration of approximately 63% with only 43% of the overall population online need to be addressed before we see huge success in the D2C model in SEA. At least for consumers to be willing to make expensive or premium purchases using the D2C model, SEA has some distance to cover. The fact that electronic payment infrastructure in SEA is far behind the west also cannot be ignored. This implies that D2C isn’t yet a threat to incumbents in SEA but things can change fairly quickly in the coming few years. The D2C model has already started seeing success in India and SEA isn’t far behind. For founders and brands looking to make the most out of this possibly emerging trend, they need to lay out the foundation for success now.


Can the D2C model survive in Southeast Asia?

As discussed above, the D2C model in SEA is yet to become a growing trend. There are some great companies that have emerged in the D2C space in the past couple of years but it's too early to say anything. It’s important to keep in mind the following two situations while making a successful D2C brand:

  • Customer Acquisition Paradox: Historically, traditional companies would use brick and mortar stores to sell products to customers. One of the main advantages that D2C offered was reducing the fixed costs as the products are being sold online directly without any physical showrooms. However, the D2C brands have been spending millions of dollars as CAC, which has become almost equivalent to rent.


  • Spend to earn, earn to spend dilemma: The success of a D2C model business depends on the relationship between Customer Lifetime Value (CLV) and CAC. A simple equation of CLV > CAC is preached by every startup textbook. Judging by this equation, the D2C model needs to have a strong retention rate to keep the unit economics viable. To achieve this, they would have to spend more on marketing, eventually driving up the CAC.


The good thing is that upcoming D2C brands can learn from the last decade and make some fundamental changes in the existing D2C playbook going forward. The specific shifts could involve the following principles:


  • Omnichannel being a necessity: The D2C brands should explore offline retail as a channel, helping them to achieve more growth through cheaper offline means, while simultaneously establishing long term relationships with their customers.


  • Differentiating through community-building: The upcoming D2C brands should explore ways to build a community and have even deeper one-to-one relationships with their consumers by capturing valuable data and scaling these relationships.


  • Increase margins via vertical integration: Utilizing and depending on third party contractors for supply chain and logistics in the starting might sound like a feasible idea but as the D2C brand grows, it should explore the possibility of vertical integration to keep the margins high.

Success model


Carefully analysing the above points, we can boil down the success of D2C brands to a few core characteristics - amazing branding and marketing, high-quality products, convenience for the consumer and low CAC with a high retention rate.


It’s interesting to note that despite the lack of venture funding, D2C brands in the SEA region such as Oxwhite have been able to develop a foothold with slight tweaks in the D2C model as we know it. They have adopted a pre-order model, with the delivery taking months sometimes and they also take advance cash payments. This way the companies can keep their CAC low and the strong sales volumes result in a profitable business, unlike their American counterparts. The success of the pre-order model in SEA is unique and can work in the region keeping the demographics in mind. Consumers in this region are more price-sensitive, and therefore willing to trade delivery time for affordability.


One of Plug and Play APAC’s portfolio company, Norm (formerly known as Elio Care), in the D2C space in Indonesia has been successful in gaining investors’ confidence and raising funds recently in June 2020. Norm is a digital health platform for men, connects patients with medical experts and treatment providers for general health issues. Norm’s products are clinically proven, recommended by doctors, specific for men, covering lifestyle issues, such as hair loss, acne, sexual health, and more.


Conclusion


The Covid-19 crisis has accelerated the new digital reality. Merchants realise that online presence is now critical and have started to spend efforts building D2C companies. Social media platforms like Instagram are again becoming essential to get the early adopters and SEA is ready for D2C. Direct access to customers’ data has allowed D2C businesses to provide instant feedback and manufacture exactly what the customers want without incurring more costs in research and development. Simultaneously, the D2C brands have been able to cut other layers of costs from middlemen and distribution and provide cheaper high-quality products to consumers. Broadly speaking, the outlook for the D2C landscape in SEA appears to be positive, however, the D2C companies planning to go big in the region will have to put more emphasis on sustainable growth, profitability and avoid the primary pitfall of their American counterparts, who spent millions of dollars in customer acquisition costs.

ARTICLE WRITTEN BY: KARTIK JAIN

Kartik Jain is our former Ventures Analyst Intern at Plug and Play APAC.

He has developed a good understanding of start-up sourcing, portfolio management, deal flow and due diligence. A Venture Capital enthusiast, he wishes to draw upon his multi-disciplinary experience and contribute to the growth of the start-up ecosystem.

References

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