The traditional value chain boundaries separating manufacturers and retailers are starting to blur under a digital, omnichannel setting. Manufacturers are increasingly playing an active role in the consumer Research – Shop – Buy cycle that has traditionally been the domain of retailers. We see this “direct to consumer” as a pervasive and on-going trend across numerous industry sectors albeit at different pace and levels of maturity (see Figure below).
Fashion and apparel manufacturers/wholesalers are leading the pack in securing capabilities (either in-house or through outsourced partnerships) across the entire shopping cycle from building web communities to inform & educate consumers to orchestrating actual order fulfillment and delivery. The emergence of 3rd party order management and fulfillment platforms such as Radial (formerly eBay enterprise), Flexe and Yoox Services are further enabling forward integration for brand manufacturers.
Manufacturers who successfully climb the value chain integration curve will have an unprecedented ability to directly engage consumers for brand consistency, agile product innovation as well as provide a seamless shopping experience. These will not only confer differentiated growth vs. competitors but also allow companies to re-position their value capture dynamics vis-a-vis their retailer partners. For example, Ralph Lauren experienced >30% CAGR through its “direct to consumer” channel in 2011-13, nearly doubling its store sales growth. Lululemon has successfully build its online consumer community and .com order fulfillment capabilities in 4 years (2009-13) to where direct to consumer accounts for 20% of its sales.
Forward value chain integration is and should be a strategic imperative for manufacturers. The key question is not when but how. Manufacturers need to have a clear answer to the following strategic questions in order to get ahead of the curve:
– How fast and what is the nature of omni-channel adoption (i.e. what will be the critical points of consumer engagement across the Research-Shop-Buy journey in the next 5 years? how will this shape your forward value chain integration strategy)?
– What is the potential size of prize vs. the total cost to serve economics for securing and deploying the required value chain capabilities?
– How will the manufacturer manage channel conflicts with key retail partners? (in particular what are the required segmentation strategies to minimize pricing and cannibalization conflicts)?