April 29, 2024
3 minute read
Why do four in five large consumer brands we benchmarked, including both CPG and non-CPG categories, tell us DTC is strategically important to their business?
There is, of course, 1P data and the promise of building direct relationships with consumers.
But brands, particularly large incumbent brands more familiar with wholesale retail relationships, have struggled to unlock the value of these elements. Amazon Marketing Cloud can help but the unique capabilities needed to efficiently acquire customers and fulfill orders for DTC can more than offset what at times feels like the theoretical benefit of 1P data.
There is a more practical answer though to why DTC is strategically important – the growth it is driving in the market.
In the following article, we highlight DTC’s outperformance and what makes it remarkable, all with the goal of helping you better understand the retail market and where growth tailwinds are strongest.
Examining DTC Growth
In our updated eTailer analysis research published two weeks ago, we shared that Shopify GMV ranked first among the 14 eTailers we track, on pace to grow 17% Y/Y in ’24 in the U.S. and 18.2% Y/Y globally. These rates are enormously fast considering the scale of Shopify, which is expected to deliver over $200 billion in GMV in just the U.S. market this year.
If we add in Big Commerce GMV, the other DTC platform in our index, to create a proxy for the DTC market, 16.2% Y/Y growth is expected this year in the U.S.1
For context, we project the U.S. retail market will grow 2.9% this year and the eCommerce market in the U.S. (as defined by the U.S. Census Bureau) to grow 8% Y/Y. As DTC outpaces the broader market by 5x, it’s telling us consumers are increasingly shifting their dollars to individual brand sites, and consumers are hungry for those direct brand relationships.
Remarkable Growth Considering General Merchandise Exposure
According to BuiltWith, the Fashion and Apparel category accounts for 22% of eCommerce sites running on Shopify. The other top nine categories out of the 90+ that BuiltWith tracks include all non-discretionary categories other than Groceries & Food.
In other words, unlike Walmart’s eCommerce business that has been boosted by value-focused consumers shifting more of their wallet towards grocery goods, DTC has been exposed to more challenging categories that are declining in most other parts of the retail economy.
For example, consider growth rates in the department store channel in 2023 and forecasts for 2024. These retailers, featuring many of the popular categories found in DTC have been down the last two years and 2024 is projected to see another decline.
Further, the home improvement channel which features a heavy mix of non-discretionary categories declined last year:
- Home Depot: -3% Y/Y in 2023 and +1.1% projected for 2024
- Lowe’s: -11% Y/Y in 2023 and -0.4% projected for 2024
In addition, even Walmart, which performed very well in ’23 and is leading from a digital omni perspective saw its discretionary categories down -5.8% last year.
DTC and Amazon’s Marketplace are Winning
The insight: Consumers are still buying these categories, but they’re shifting more of their purchasing to online channels, and pureplay online channels more specifically.
We say “online channels” rather than just DTC because it goes beyond DTC. As we’ve covered in our research on Amazon, it grew global GMV 12.7% in ’23 (translating to $83 billion in GMV growth) despite it having heavy exposure to non-discretionary categories.
Like on Amazon, merchants of all shapes, sizes, and value propositions are reaching consumers in the market for non-discretionary goods via DTC, presenting an opportunity for brands in these categories that are struggling to grow at traditional omnichannel retailers.
Placing bets where the growth tailwinds are strongest makes it easier on the team to meet their goals. DTC requires different capabilities and brings unique challenges compared to a wholesale model, but it’s worth the effort to get right for brands across many categories because consumers are increasingly shopping that way.
Three Questions to Consider
- Does the DTC model make sense for our assortment?
- Are we considering the sales volume opportunity available with DTC or only other benefits, like 1P data?
- What does the rapid outperformance of DTC sites mean for our brand equity? What about retailers’?
Footnote
(1) Shopify GMV or Shopify combined with Big Commerce GMV is not a perfect measure of DTC market growth. There are several limitations:
- Shopify is certainly gaining share from other DTC storefront alternatives that do not share GMV data, such as WooCommerce. Thus, a portion of Shopify and possibly Big Commerce’s GMV growth is driven by share gains versus pure consumer demand.
- Some brands on these platforms use them to sell through marketplaces, like Amazon. GMV is potentially captured by Shopify AND Amazon in this case, thereby double-counting GMV.
- Retailers use Shopify and Big Commerce platforms, such as Banana Republic Home and Aeropostale, for example. This isn’t what consumer brands typically think of as DTC, possibly over-inflating “DTC” GMV.
Yet we still feel comfortable analyzing Shopify and Big Commerce GMV as the best proxy for the DTC market because of the significant scale and ongoing reporting they provide. There isn’t a better alternative to our approach, and from a directional perspective we feel comfortable deriving conclusions on the overall importance of the DTC market relative to other channels and models.
In addition, other irregular datapoints that come out like what CommerceTools shared indicate they too are growing rapidly (+45%) which gives us further conviction that DTC is outpacing the broader market.
The double-counting issue also seems relatively immaterial. Data from Builtwith for example lists nearly 2.7 million sites using Shopify in the U.S. and a few thousand using Shopify’s integrations with Amazon multi-channel fulfillment capabilities.
Further, while Shopify and Big Commerce GMV may be boosted by share gains from other platforms (i.e., sellers joining their platform), this also occurs on other marketplaces, such as Amazon, Walmart and eBay. For example, 2,000 sellers join Amazon’s marketplace each day according to Marketplace Pulse. Some sellers drop out of course, but on average, Amazon’s seller pool is growing, positively impacting its results. Walmart has added thousands of sellers too, boosting its eCommerce figures. In other words, “comps” aren’t reported for eCommerce businesses like what we traditionally do for B&M retailers.