The growth of Direct To Consumer, Shopify – and developing multiple channels

One of the most talked about developments for both ecommerce and general retail in recent years has been the rise of “Direct To Consumer” (DTC), whereby brands are bypassing traditional retail outlets/websites and selling direct to customers.

2020’s unfortunate events have led to a well documented large increase in home deliveries, including DTC brands generating record sales across sectors as diverse as food kits, mattresses and sportswear.

The rise in marketplace sites (especially Amazon and eBay) has certainly played a part in increasing DTC sales, and Clear Digital recently explored this in the deep dive “The UK marketplace sector – and the role of community”.   However, DTC websites are also rapidly expanding, particularly on the Shopify ecommerce platform.

This blog explores further the size and dynamics of the UK DTC sector, as well as examining Shopify (and similar ecommerce solutions) in order to understand more about DTC winners and their growth drivers, including expanding onto other channels...

• Please note that this blog is a summary of the accompanying deeper dive on “The growth of Direct To Consumer, Shopify – and developing multiple channels” which is available to download here

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• Also, a one page summary PDF download is available to download here

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THE UK DIRECT TO CONSUMER (DTC) MARKET
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• Total UK online sales for 2019 stood at £76bn, while 2020 has already seen significant growth in online shopping due to Covid19 , with the ONS reporting that online sales accounted for a peak of 32.8% of all sales in May 2020, up from 18.8% in May 2019.
• Barclays have calculated that 8% of total UK online sales are DTC, meaning that DTC online sales within the UK are in the region of £6bn, of which subscription sales are just under £1bn.  Standard online retail websites remain the key player with a 57.5% share of total online sales, followed by marketplaces with 34.5%, as the table below demonstrates…

• We can split Direct To Consumer operators into 3 distinct categories: subscription box services, DTC pure and DTC hybrid.

 

• Subscription box revenue was estimated by Royal Mail at £700m in 2017 and is likely to surpass the £1bn mark this year.  Such services are especially popular with a younger and more urban demographic.
• Male grooming has been forecast as the largest growing subscription category to 2022, and some originally DTC only brands such as Harrys are now available through more traditional outlets such as Boots and Sainsburys.

• In 2018, it was reported that more people were purchasing a mattress online than in store, with DTC brands driving this growth, accounting for 11% of the overall market in 2018, up from just 4% in 2015.
• And this growth looks poised to accelerate in 2020: Emma Mattress reported UK H1 growth of 120%.  There have however been casualties in this competitive market, with US brands Casper and Leesa both exiting the UK this year in order to focus on their home country.

• Clothing is the most popular category purchased online in 2019, with 60% of UK consumers purchasing an item online at least once – and this is another area with a large DTC presence, especially for sportswear.

• 30% of Nike’s sales are now digital DTC, over £4bn of global sales last year.  Nike chief executive John Donahoe said the shift to online sales could be a permanent trend: "We know that digital is the new normal. The consumer today is digitally grounded and simply will not revert back”.
• One of the fastest growing sportswear brands is Gymshark, the 2012 founded UK start-up which was valued at over £1bn after receiving private equity funding in August 2020 to facilitate further growth and international expansion.
• Gymshark is a pure DTC brand in that it has generally sold only through its website with customers in 131 countries.  However, it did open its first pop-up shop in Covent Garden earlier this year, just before lockdown.

• Neither Nike nor Gymshark sell directly on Amazon, with Nike having pulled its two year pilot doing so in late 2019. 

SHOPIFY, AMAZON AND DEVELOPING MULTIPLE CHANNELS

• Brands are increasingly apprehensive about Amazon monopolising all elements of the customer experience (from purchasing experience to data), a concern that ecommerce platform Shopify is specifically targeting as it aggressively grows its retail (and DTC) base.
• Shopify was originally built to launch its 3 Canadian founders’ Snowdevil snowboarding equipment website in 2004, and was then launched for use as a general entry level ecommerce platform in 2006.

• Key to Shopify’s recent growth has been the launch of its Shopify Plus premium enterprise solution in 2014, which allowed companies to remain with Shopify as they grew in scale rather than switching to competitors such as Magento or Demandware (now Salesforce Commerce Cloud).  Over 7000 brands now use Shopify Plus.
• By the end of 2019, Shopify had over 1m businesses globally using its platform, generating total gross sales of $61bn, a 49% increase over 2018.  By way of comparison, eBay’s annual global sales in 2019 were $85bn, but this represented a fall of 5%.
• Shopify particularly targets DTC customers, with a client base ranging from small one man bands to global brands such as Nestle, Heinz and Lindt.
• And for further growth, Shopify is on the offensive particularly against both Amazon and other ecommerce platforms, especially Magento.

• Actually first released to the market after Shopify (in 2006), Magento was originally launched in 2008 by Varien Inc, a US based private company.   Magento did initially grow faster than Shopify, especially after eBay purchased Magento in June 2011. 
• However, Magento was then sold by eBay in November 2015 and purchased by the private equity Permira fund.  A subsequent sale in May 2018 saw Adobe purchase Magento for $1.7bn with a view to integrating it into Adobe Experience Cloud, its Enterprise CMS platform.

• With 4 different owners over the past decade, Magento has also developed its offering significantly in that time, and currently offers 2 different main solutions:

1. Magento Open Source.  Previously known as Magento Community Edition, this basic ecommerce system reflects Magento’s open source origins.
2. Magento Commerce.  Previously Magento Enterprise, this enterprise solution offers two options: Commerce Cloud (where Adobe provide hosting) or On-Premise (where the retailer will purchase separate hosting).  Magento released a new version of Magento Enterprise/Commerce in beta in 2015, strongly encouraged all retailers to upgrade to Magento 2.0 and recently ended support for Magento 1.0.

• Magento sites still generate more revenue than Shopify sites: $155bn last year, well ahead of Shopify’s $61bn.  However, there are significantly more retail websites using Shopify, with 250K+ on Magento, compared to Shopify’s +1m retailers. 
  
• This demonstrates how Shopify is particularly strong with smaller retailers, averaging approx $61K annual sales per retailer – compared to $620K for Magento, who have a higher penetration of omni-channel retailers compared to Shopify’s DTC focus.

CLOSING THOUGHTS
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• Despite selling products with hugely different price points and purchase frequency (multiple times per year vs once every 5-10 years), Harrys and Emma Mattress have actually followed similar distribution routes – building on initial DTC success into multiple purchase channels, now available via many mainstream retailers and websites.  
• Whereas looking at the sportswear sector, established brand Nike is unsurprisingly available across all channels – while Gymshark is still pretty much exclusively DTC through their website.  However, with recent external investment plus pop-up shop trials, will Gymshark expand their channel reach, as Emma and Harry’s have done before them?

• We can therefore see that brands’ DTC models can shift over time, as they pivot from both pure subscription (e.g. Harrys) or pure DTC website (e.g. Emma) into a DTC hybrid model, with products also available to buy via other retail websites and in some case stores…

• It does therefore appear that although DTC does offer a sometimes lower cost and more efficient way to enter certain markets, moving towards a true multi-channel approach is usually required to gain further market penetration.

Please note that this blog is a summary of the accompanying deeper dive on "The growth of Direct To Consumer, Shopify – and developing multiple channels", which is available to download here.