The D2C imperative in the wake of the pandemic

Authors: Varun Madan, Raghav Ranjan, and Vishal Garga

Contributor: Bryan Gardiner

The far-reaching implications of COVID-19 are leading many companies to undertake comprehensive portfolio reviews and redefine their path to sustainable growth. While there was a preexisting shift toward consumer empowerment in recent years, this has been significantly accelerated due to COVID-19 forcing companies to transform their business models and pursue “future-proofing.”

One increasingly prominent theme is a need for a stronger direct-to-consumer (D2C) presence, even in industries that have traditionally relied on business-to-business (B2B) and intermediary channels. COVID-19 has accelerated D2C adoption, making it necessary for Fortune 500 companies to directly interface with customers. For example, Nike reported sales from its D2C channel in 2020 at 35%, which it expects to grow to 50% within the next five years.¹

Additionally, there is a need for companies to take an omnichannel approach to consumer access, with digital channels expected to play a bigger role in redefined go-to-market models. This trend toward digital adoption among consumers has also been accelerated by COVID-19. In the United States, consumer retail spending grew significantly after stay-at-home orders were instituted in March 2020, and this level of spending through digital channels has continued despite the reopening of physical stores.

D2C trends across industries

The shift toward more D2C channels as a result of the COVID-19 pandemic is evidenced across industries:

• Consumer and retail: Online spending in 2020 grew significantly across the consumer and retail subsectors. Most notably, YoY growth rates in online spending for groceries, off-price goods, and home improvement subsectors were 235%, 80%, and 78%, respectively.²  This high level of online consumer spending has persisted throughout the pandemic.
• Life sciences and health care (LSHC): The propelled shift to a D2C model in LSHC is evidenced through a widespread adoption of telehealth services.³  By adopting a D2C strategy, companies can differentiate themselves by providing a more personalized process or service to interact with patients more directly, helping to create value for patients and other stakeholders not reachable through the conventional health care model.
  
• Media and entertainment: Media and entertainment companies are already in the late stages of this transformation and compete directly for consumers with standard broadcasting or content providers. Almost a decade after technology companies found success with D2C streaming models, nearly every major US TV studio and network has set up a stand-alone D2C streaming business.⁴  Recovery from the pandemic’s disruption will likely dominate operational strategy in the near term, and by enhancing their D2C platforms, organizations own and control their distribution channels, thereby ensuring customers can always enjoy their content dedicatedly.
  
• Automotive: Due to the rapid digitization of consumer behavior in many industries, customer demand for an omnichannel interaction when purchasing automobiles will grow faster. As a result, major original equipment manufacturers (OEMs) are attempting to bolster their online sales presence through new consumer engagement programs and associated sales targets. Some have provided platforms to tailor and customize vehicles per customer preferences prior to purchase and delivery.
  
• Financial services: The financial services industry has seen a strong trend toward the use of digital platforms. From March to October 2020, roughly one in three consumers was engaging with their preferred financial institution multiple times a week through digital channels,⁵  highlighting the need for strong digital capabilities to match accelerated consumer preferences. Virtual agents (similar to Amazon Alexa and Google Assistant) and AI-based web chatbots have seen rapid adoption by various leading financial services institutions.

M&A as a driver for augmenting D2C presence

Establishing a direct-to-consumer channel can be a daunting concept for some company executives. Considerations such as technological capabilities, operations, and costs are some possible reasons why an organization might be concerned about the D2C channel’s economics. Within this context, strategic M&A can be a lever for companies to access capabilities that may seem alien:

• Traditional acquisitions: Traditional acquisitions can allow organizations to capture a specific product, an established D2C channel, or a strategic capability that may already exist. This lever can benefit companies who are looking to access specialized D2C capabilities relatively quickly. Several recent examples bring this growth pathway to life:

o Nestle USA acquired Freshly, a leading technology-based fresh-prepared meal delivery services company, to strengthen its direct-to-consumer capabilities through access to Freshly’s specialized consumer analytics platform and distribution network.

o Manna Pro Products, a manufacturer of pet care and nutrition backed by the Carlyle Group, acquired Bullymake, a direct-to-consumer subscription box company, to gain market share and growth in online platforms.⁶

o Exact Sciences, a leading molecular diagnostics company, acquired Thrive Earlier Detection, a health care company focused on incorporating early cancer detection into standard medical care, to enhance its patient engagement platform and provide multispecialty cancer screening solutions to patients in a faster and more efficient manner.⁷

o CleanSpark, a software company for microgrids and distributed energy resource management systems, made its move into direct-to-consumer via acquisition of Solar Watt, a robust residential energy storage solutions provider. Following the transaction CleanSpark is now directly engaged with consumers in the California residential microgrid market.⁸

• Alliances and joint ventures (JV): Organizations that are looking for a lower economic exposure while tapping into capabilities of a competitor or value chain partner may consider forming strategic alliance(s) or joint venture(s). By entering into a venture with another company, organizations can quickly capture developed D2C channels, expand market coverage and penetration, and optimize costs. A deal in the telecom industry provides a telling example:

o AT&T and a private equity firm signed an agreement to establish a new company, DIRECTV, to own and operate AT&T’s satellite television business. The new partnership will position the company to focus on strategic business priorities, including operations of a competitive video service offering, while enhancing content, connectivity, and its direct-to-consumer HBO Max streaming platform.⁹

• Early-stage disruptors and portfolios of venture bets: The most effective strategic M&A actions often consist of acquiring a mix of small and large assets (e.g., bolt-on acquisitions) to achieve strategic goals. For companies looking to make impactful future investments or bets in the D2C space, it is prudent to look at how early-stage companies can provide their core business with such capabilities in the future. By acquiring early-stage disruptors, companies can fortify their platforms, accessing new technology and data or hosting accelerator programs for smaller players. 

o A private equity–backed beauty sampling service acquired BoxyCharm, a provider of beauty product subscriptions. BoxyCharm will operate alongside both IPSY and its brand incubator, Madeby Collective, under a newly formed umbrella organization, Beauty for All Industries (BFAI). With the addition of BoxyCharm, BFAI will focus on delivering a highly personalized user experience, while Madeby Collective will continue to be a vehicle for accelerating new brands.¹⁰

o Target has made several acquisitions in the delivery ecosystem in the past several years, across a range of target sizes and maturities. In 2017, the company acquired Shipt for $550 million, greatly enhancing its same-day delivery capabilities and establishing a platform for further growth.¹¹  More recently, Target completed a smaller deal for the assets of Deliv, further strengthening its presence in delivery through proprietary technology to batch and route orders efficiently.¹²

How Deloitte can help

As firms navigate the complex journey toward a D2C business model, numerous operational, technological, and financial challenges emerge frequently. Thereby, a trusted adviser is an imperative to overcome such challenges and enhance returns on a substantial and transformational investment.

Having guided numerous global companies through similar journeys, Deloitte is well-equipped to provide guidance on the transformation to a D2C model, including inorganic growth pathways such as mergers and acquisitions, joint ventures, and partnerships. Deloitte’s capabilities span the entire deal life cycle, from M&A strategy formulation, diligence, and modeling to deal execution and postclose optimization.

Throughout the transformation journey, Deloitte’s Total M&A Solution provides cognitive enablers and accelerators to bring the power of automation, analytics, and machine learning to large-scale transformations. This integrated set of innovative technologies offers solutions that can be tailored to each client’s direct-to-consumer journey—and helps map the journey ahead. As a result, teams can provide access to deeper insights, anticipate what’s around the corner next, and effectively prepare for change.

Deloitte provides a range of resources connected to our Future of M&A framework, helping companies as they transition to futuristic consumer-facing enterprises. We invite you to reach out to learn more and connect with our leaders.

1. PYMNTS.com, “Just Do It: Brands Can Take D2C Page From Nike,” March 1, 2021.

2. Deloitte InSightIQ Analysis, “2020 Retail Retrospective,” February 2021.

3. Lisa M. Koonin, Brooke Hoots, Clarisse A. Tsang, et al., “Trends in the Use of Telehealth During the Emergence of the COVID-19 Pandemic — United States, January–March 2020,” Morbidity and Mortality Weekly Report 69, no. 43 (2020): pp. 1595–1599.

4. Iain Bamford, Mic Locker, Danny Ledger, et al., “Standing out from the crowd: How media and entertainment companies can use M&A to secure the content, customers and capabilities they need to differentiate,” Deloitte Insights, August 26, 2020.

5. GlobeNewswire, “COVID-19 Pandemic Accelerates Shift to Digital within Financial Services,” October 8, 2020.

6. MergerMarket, “Manna Pro (Carlyle) acquires Bullymake,” December 30, 2020.

7. MergerMarket, “Exact Sciences to buy Thrive Earlier Detection and Base Genomics,” October 27, 2020.

8. PRNewswire, “CleanSpark Completes Strategic Acquisition of Solar Watt Solutions,” February 24, 2021.

9. AT&T, “AT&T & TPG to Form New Entity to Operate AT&T’s U.S. Video Unit,” February 25, 2020.

10. MergerMarket, “BoxyCharm to be acquired by IPSY (TPG Growth),” October 30, 2020.

11. Target, “Target to Acquire Same-Day Delivery Platform Shipt, Inc. to Bolster Fulfillment Capabilities,” December 13, 2017.

12. Target, “This New Tech is Helping Target Explore Faster and More Efficient Delivery,” May 7, 2020.