Direct to Retail (D2R)
Direct to Retail (D2R) has emerged as a game changer in recent times, churning up the entire retailing landscape. A win-win model for both retailers and brand owners, it helps to enhance and maintain consumer satisfaction at optimal levels.
What is D2R Model
Direct to retail definition: D2R is essentially a direct relationship or agreement between the licensor (franchise owner)/manufacturer and the retailer. In such a deal, the retailer effectively becomes both the licensee and the seller of the product, i.e. the licensed merchandise. In a direct to retail model, the retailer takes charge of product development and the overall manufacturing process for the products agreed upon under the license agreement, also having the rights to sell them through his stores. In return, the retailer pays a royalty to the franchise like other licensees.
Examples of direct to retail licensing are Marks & Spencer boasting of an agreement with Thomas and Friends, and Disney Consumer Products Apparel division’s first deal with H&M in 2000, both of which continue till the present day. Moreover, Disney and Nickelodeon are giant global licensors who sell their own licensed products in their own exclusive stores. This is a specific example where licensors are retailers as well.
A direct retail pharmacy / community pharmacy/ drugstore / chemist on the hand is a pharmacy where prescription-based and OTC (Over-the-counter) drugs are sold directly to patients, unlike a hospital pharmacy. They can operate independently, or as a supermarket pharmacy, a chain pharmacy or a mass merchandiser pharmacy, which has an authorized government license to provide medicines to the general public at retail prices. Few examples of direct omnichannel retail pharmacy chains include MedPlus, Apollo, MedLife, CVS Health, Rite Aid Pharmacy and Walgreen.
Need for D2R
Helps to boost margins: With retail price wars and cut-throat competition becoming commonplace, margins are being continuously squeezed. To quickly boost up these margins to acceptable levels and increase profitability, retailers are slipping into the shoes of the licensees themselves by eliminating middle men and distributors who used to be licensees earlier.
Outsmarting competition through cheaper products: The manufacturer direct to retail store framework helps both channels in edging out potential competition. Margins can be suitably increased in the form of cheaper products, resulting in gains for all.
Lower turnaround time for deliveries: With the middle channel and distributors out of the picture, a direct to retail model can have lower turnaround times with respect to product deliveries. Prominent D2R retailers like Primark, Matalan and H&M all boast of super-fast lead times, helping them to remain up-to-date with the latest consumer trends, while providing really cheap items.
Advantage to Manufacturers/Businesses
Getting licensing programs off the ground: Direct to retail format businesses have been increasing over the years due to increased margins. Licensors are wary of the fact that some licensees might not be committed. They choose the direct retailer format just to get their licensing programs off the ground and start functioning.
More brands, limited shelf space and retail consolidation: Direct to retail has become the preferred go-to-market strategy for many manufacturers and licensors now, enabling them to display their merchandise on physical shelves. This is because of various reasons, i.e. numerous brands in the licensing fray, limited shelf space and consolidation in the retail business.
Long-term relationships a reality: A direct to retail distribution strategy allows the manufacturer or seller to take the licensing deep and build a long, fruitful partnership with retail associates. This is the key to D2R success in the long run. The retailer or licensee is conscious of the fact that their products won’t be in-store one minute and out the next. The manufacturer and retailer can share a close connect, and can together try out new products and concept strategies.
If a D2R brand is underperforming, a retailer will generally try to arrest this by fine tuning the product specifications (example: its design and packaging) before finally taking it off the shelf. Even if he forced to remove it, the “Other Products” mindset will make him look out for other potential products from the same partner.
One-at-a-time approach helps to address current gaps: Since manufacturing and licensing is only one part of the retail supply chain, a licensor will often be given limited time by a retailer, who has lot of other things to take care of. Instead of the manufacturer presenting his whole product strategy to the retailer, a more efficient approach is to spot current gaps and address them mutually. Thus, a one-a-time plan of action would help in addressing issues more efficiently.
Advantage to Retailer
Increased profits & product mix differentiation: A direct to retail framework enables retailers to offer high quality premium products with maximum margins, at prices that go easy on the pocket. Additionally, exclusive distribution reduces price competition, minimizing the impact of the discount offer-driven market. By selling exclusive licensed merchandise in their stores, they can differentiate their product mix from competitors.
Faster time to market: Retailers working with their own set of suppliers can turn around products faster. As soon as a particular business franchise becomes a big hit, retailers can quickly initiate the entire process and bring in associated merchandise to retail shelves in no time. Some licensees specifically work with local manufacturers to cater to demand deadlines.
Reduced product development time and cost: Strong brand quality for established names provides retailers the ready-made advantage of predefined attributes, in-built positioning and pricing. This simplifies product development and streamlines strategic planning goals, reducing overall costs and time for the same.
Private label push: Direct to retail helps retailers to push their own private labels, while being in constant sync with current needs and demand. These retailer-backed deals help licensors cater to a niche audience. A retailer knows his business and consumers in and out and better than others, developing and designing products that are exclusively available in their stores. He can source products from existing partners accustomed to supplying private-label brands, helping them to gain margins as well.
Advantage to Consumers
Good quality, premium, reasonably priced products are readily available: Consumers are greatly benefitted from the direct to retail model too. Quality, premium products of good variety are available at a reasonable price 365 days in a year. Faster turnaround times mean that customers can get what they want and fast, especially bestselling items which quickly disappear off store shelves.
Unique customer shopping experience: Exclusively available licensed brands in D2R stores create a unique shopping experience for consumers. Any customer requirement can be quickly met, as brand portfolio is suitably widened, with products exhaustively displayed under one roof. This ensures that customer gratification levels are achieved.
D2C v/s D2R (Direct to Consumer v/s Direct to Retail)
Direct to consumer retail is a business model wherein manufacturers market, distribute and sell products directly to consumers without depending on traditional stores and other middlemen. Examples of D2C brands are Beardo, Mama Earth, Ustra in Personal Care, Lenskart, Wrong, FabAlley, One Plus and Boat.
Direct to consumer vs retail: In contrast to its retail counterparts, Direct to Consumer businesses can constantly experiment and innovate, from shipping directly to consumers to partnerships with physical retailers. They are known as DNVBs or Digitally Native Vertical Brands since their sales channel is online, mainly through their own webstore or mobile app. Sometimes, they also go omnichannel by opening offline stores or pop-ups to complete the overall brand experience.
D2C models can sell products at lower costs compared to traditional consumer brands, and can maintain end-to-end control over the manufacturing, marketing, and distribution of products. They don’t have to depend on traditional multi-brand retailers for exposure, unlike D2R models, where manufacturers and licensors partner and co-exist with retailers and licensees. In both D2C and D2R, middlemen are effectively eliminated.
In the new normal post COVID scenario, health & safety measures assume prime importance. Large and medium-sized brands are adopting a D2C online model, boosted by high internet penetration levels and digital shoppers. Many of the earliest and most popular D2C brands gained success online, like Casper, Bonobos, and Dollar Shave Club. Other benefits of D2C include the creation of a good brand relationship with customers leading to increased trust, loyalty and repeat purchases.
Why D2R is the future?
D2R Ecosystem – A winning formula: Under a stable direct to retail ecosystem, there is a greater probability of quickly achieving good volumes and success with well entrenched fast-moving brands.
Reduced marketing costs: Established brands sold under D2R offer the unique advantage of built-in brand equity and consumer loyalty. This minimizes the need for extensive marketing and promotional investments.
Focused brand owner and retail partner relationship: D2R licensing enables brand owners or licensors to effectively scale up their market presence and mind share and drive incremental revenues, in tie-ups with focused retail partners. On the other side, retailers can get licensed products on shelves in a jiffy. They are always in a position to remain agile and rapidly adapt to consumer feedback, thereby maximizing profitability both ways.
To ensure its continued success, retailers will need to invest in product design & development, sourcing and brand management. From the brand owner’s perspective, dedicated ground level management will automatically facilitate sound business knowledge and a thorough understanding of the local market (an absolute must in Indian conditions).
To learn more about D2R Business Model, get in touch with YRC experts and explore the opportunity to adopt this model for your products.
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