Planning for the future isn’t a new concept; but planning during today’s day and age has become significantly more complex.
In the face of the current healthcare crisis, new governmental policies, economic uncertainty, and rapidly changing consumer behaviors, DTC brands need to follow a more robust methodology when it comes to making short- and long-term decisions.
To make this methodology easier to implement, we wrote this white paper with today’s DTC challenges in mind so that you’ll have a starting point when planning for the future.
In this article, we'll get:
- An overview of the commerce industry, including economic predictions on the future of retail and DTC brands
- Challenges DTC brands need to plan for, based on our conversations with BVA prospects and clients
- A how-to guide for creating your own strategic crisis-action plan using the McKinsey & Company 5 Frame Model
The Impact Of The Crisis On The Commerce Industry
Economic Fallout & The Future Of Retail
As the number of daily COVID-19 cases decreases in the world's largest economies (the US, China, and Europe), countries have started to come out of confinement and reopen businesses in the hope of easing out of the economic fallout. However, it is now certain that we will experience some level of economic recession whether or not the virus surges again.
McKinsey & Company, an American management consulting firm, recently spoke at Virtual Commerce, a digital conference organized by BVA, about the two key economic scenarios that may result from COVID-19: a virus recurrence and muted economic recovery, or a virus containment with a return to economic growth (read more about our takeaways from McKinsey’s analysis here).
Additionally, a recent UBS report showed that COVID-19 will only accelerate retailers’ decline, predicting that 100,000 retail stores will close by 2025. This decline has already started with major US retailers like JCPenney, JCrew, and The Schurman Retail Group (owners of Papyrus stores) filing for bankruptcy since the beginning of the year (2020).
But for some retailers, COVID-19 was a wakeup call that accelerated a long-awaited digital transformation. For example, major brands like Lindt and Heinz built their online eCommerce stores from scratch in a matter of days, leveraging Shopify Plus.
The State Of DTC Brands
When physical retail was forced to close temporarily and people struggled to find household items at their local grocery stores, select verticals grew in response to the spike in consumer demand, such as household supplies, food and beverage, and personal care products (as shown in the graph below). This chain of events presented an opportunity for DTC brands with products in those growing categories.
However, for brands selling products in categories where demand had dried up, such as skincare and makeup, companies had to pivot and adapt fast. We’ve seen it with companies like Rothys who started creating masks, medical gowns, and other “crisis” essentials, Glossier, who created a new line of hand cream and donated it to front line responders before it even hit the market, and Haus, who spun up an entire new line of aperitifs and donated the profit to support local restaurants. You can read our interview with Haus co-founder and co-CEO here.
The reactivity, creativity, and generosity demonstrated by these brands is not only good for karma, but it’s also good for business. Many consumers are noticing brands stepping up and supporting the community, and even if those brands don’t see an immediate ROI, they are hoping to see one in the future.
For DTC brands that are not yet profitable and/or depending heavily on outside investment, they may not have had the cash on hand to react while having to cope with minimal revenue coming in.
"Online spending at ThirdLove during the week of March 16 fell 39% week over week, while Poshmark fell 30% and StitchFix fell 9% during that same period. As a whole, direct-to-consumer brand week-over-week spending fell 7% on average between March 2 and March 22."-Fastcompany.com
In the last few months, DTC brands have had to face many challenges. We will explore some of these in more depth in the following section to help you identify the most important issues you need to address and take into account when planning for the future.
New Challenges DTC Brand Face
At BVA, we are lucky to work with one of the largest and most versatile client rosters in the industry. Our experience working and learning with them during the crisis has helped us identify key challenges for which DTC brands need to plan.
We have created a list of key challenges that DTC brands are facing, as well as the consequences those challenges have caused to operations of businesses and their ability to plan for the future.
1. Limited Access to Cash Flow:
Brands that weren’t profitable before COVID-19, and those whose sales have been heavily impacted by the crisis, have had no option but to furlough or lay off employees to keep their businesses afloat. As a consequence, it may have been hard for them to pivot and find time to plan for the future while putting out fires.
2. Primary Channel Has Dried Up:
Brands that had once relied too heavily on one source of revenue and have seen that channel dry up have had to make important decisions very quickly. For example, last year most of your revenue and focus was on Amazon and you had to cope with restrictions on non-essential products from the month of March to May 2020. As a consequence, you’ve probably explored new channels to sell from (a new Shopify site perhaps?) with a rushed timeline.
3. Inventory, Fulfilment And Other Supply Chain Issues:
From getting raw materials to delivering your end product, every aspect of the supply chain has likely been disrupted by COVID-19. Companies have had to deal with closed manufacturers, limited access to raw materials, as well as figuring out what to do with unsold inventory. Thanks to a more simplified supply chain, DTC brands may have encountered fewer issues and have been able to be more flexible during these uncertain times. However, there are still challenges to overcome, especially for those brands that sell through a combination of online and offline.
4. Shifts In Consumer Behaviors
The pandemic and confinement measures that followed have caused a shift in consumer behavior. With people staying at home, the demand for some categories, like fashion and apparel, cosmetics, and electronics, has decreased substantially, while others, like online groceries and subscriptions, have taken off. It’s uncertain, yet, if consumer behavior will change permanently, but in the case of newly found convenience, it’s likely consumers will never look back. As a consequence, brands have had to adapt their offering and (sometimes) their entire business model to meet the new demand.
5. Seasonal Revenue Impacted
If your brand's busiest seasons include events like prom and weddings, COVID-19 has likely been a real detriment. Many brands’ bottom lines are made up of seasonal revenue, and, with rumors of Amazon Prime Day being postponed, most of 2020’s events cancelled, and holidays spent at home, brands are having to find new and creative ways to sell past collections and make up for missed revenue.
6. Marketing Budgets And Events Have Been Cancelled
Most brands have seen their marketing budget reduced and promotional events canceled. As a result, they have to find new ways to acquire customers, whether it’s by creating content or by giving back to the community by making masks, hand lotion, and sanitizer.
7. The Future Of DTC brands’ Physical Locations
Over the last few years, many DTC brands that started off as pure-play eCommerce businesses have moved into physical retail. Companies like Warby Parker, Bonobos, and Casper led the way in opening a new form of retail stores. Unlike traditional retail, DTC brands leveraged physical locations to educate customers and provide an on-brand experience.
This new way to connect with customers and nurture relationships appealed to many brands; in fact, a JLL study from 2018 found that digitally native brands were set to open 850 stores in the next few years. After seeing many retail stores close down this year, there is a new question on everyone’s mind; is this prediction still accurate or will DTC brands go back to their tried and true digital model?
In conclusion, do you recognize one or more of these challenges as something that has impacted your business? In the next section we will walk you through a step-by-step approach to creating a personalized crisis-action plan based on the challenge(s) affecting your brand.
Planning For The Future: Strategic Crisis Action Plan
During a crisis, speed is of the essence; you can’t let uncertainty bottleneck your decision making, which is why having a strategic framework can help eliminate rash decisions and guessing games.
Because every company is different, and there is not a one-size-fits-all solution, we decided to take a deep dive into the McKinsey & Co. Strategic Crisis-Action Plan model to help you create a tailored plan for your brand.
McKinsey & Company is one of the top (and first) management consulting firms in the world. Thanks to their knowledge of the market, economies, and years of experience, they have created a 5 Frame Strategic Crisis-Action Plan to guide companies during the crisis and help them plan across multiple time horizons.
The 5 Frame Strategic Crisis-Action Plan Explained:
1. Get A Realistic View Of Your Starting Position
The future may be uncertain, but you should have a clear picture of your past. Look at the last-known position of your organization and take stock of three main areas:
- Your financial assumptions
- Your ongoing initiatives
- Your big strategic choices
Next, look at plans you had in place for one year, two years, or three years out and catalogue the assumptions you had made. Since you will need to adjust those plans, sort any assumptions and big initiatives into three buckets: those that still seem right, those that are wrong, and those about which you are unsure. When going through this exercise, keep in mind what drives the financial performance of your company.
During this stage, our VP of Strategy, Doug Hollinger, recommends looking at five areas in particular: trends in sales, supply chain, consumer studies, government policies, and strategic initiatives:
- Look at your month-over-month and year-over-year sales trends by channels; this will give you insight into the health of your channels and it will become obvious very quickly if one of them has dried up
- Look for any drops or increases in sales to identify shifts in consumer behavior
- Take a look at the overall health of your supply chain
- Try to find consumer sentiment studies conducted by trustworthy sources like McKinsey & Company
- If you can buy consumer studies, they are often tailored by industry and will give you more detailed insights
- Stay up-to-date on state and regional policy changes related to COVID-19 and confinement measures, as well as government stimulus for small businesses and individuals
- Last but not least, reevaluate each of the strategic initiatives you had planned this year; were you planning to open a physical location or launch a new product line?
After completing this first step, you should have a realistic picture of your business and which initiatives you still want to explore.
2. Develop Scenarios For Multiple Versions Of Your Future
For many companies, planning for the future often includes two scenarios: best and worst case. However, considering the unprecedented times we are facing, you are going to need more detailed and tailored scenarios.
As a starting point, we recommend using the McKinsey global COVID-19 scenarios, as they include the two biggest uncertainties associated with the crisis (the virus spread and the economic fallout) combined with potential macroeconomic outcomes.
Your team should develop at least four scenarios and test your company’s performance and strategy against each. Identifying where your business is most at risk and where it is most resilient will help you decide which strategic initiative should go as planned, accelerate, or stop.
During this stage, Hollinger recommends running financial modeling for each of your scenarios and including eCommerce no matter which case scenario you are planning.
3. Establish Your Posture And Broad Direction Of Travel
Determining the best response to an evolving situation isn’t about creating a detailed plan, but rather figuring out your broad direction of travel from which you can form a strategic response.
While some companies will need to restructure to match a much leaner environment others will have less severe demand shocks, but will instead face radical changes in customer behaviors- thus having to shift their business models.
Finally, companies that have had to face high business model disruption and intense industry demand disruption, will have to shape entirely new businesses.
During this stage, Hollinger says:
“If your industry or product type benefited from the crisis, it’s time to be as aggressive as possible. Double down on your initiatives as much as possible to make the most out of the increase in demand.”
However, if your industry or product type has been more severely disrupted, you will have to look towards innovative business models. Think of potential collaborations you could facilitate with other brands.
As an example, Allbirds and Adidas recently announced their partnership to create a zero-carbon footprint shoe, allying Allbirds’ eco-friendly patented shoe and Adidas’ manufacturing abilities.
Remember, this is about finding the right broad direction for your business, so it doesn’t have to be perfect. The most important objective is to move forward and learn.
You may have heard that Pepsi launched two DTC websites in a matter of weeks: PantryShop.com and Snacks.com. As you look at their websites, you may feel the offerings are not optimal. However, what is significant about these actions, is that Pepsi chose to move in a direction. Their sites may not be perfect today, but they are live, people can make purchases, and with time, Pepsi will gather insights that will allow them to optimize design and UX, make the offering more competitive and compelling, and more directly engage with the market.
4. Determine Actions And Strategic Moves That Are Robust Across Scenarios
Work through one scenario at a time and define an optimal set of moves you would make if you knew for sure this scenario would pan out, keeping in mind that not every move needs to be a winner by itself.
Start your list with the initiatives you have decided to keep or accelerate. Some initiatives will make sense across all scenarios, while others will have to be adapted depending on the opportunities and threats you have identified.
If possible, try to break down your initiatives into smaller pieces. Investing in one phase at a time will help you reduce the risk associated with large, one-off investments and allow room for flexibility and changes.
The outcome of this phase should be the creation of several dozen strategic moves across different time horizons. Make sure that each plan has been reviewed and approved by key stakeholders (inside and outside your organization) so you can make decisions quickly when the time comes.
During this stage Hollinger recommends:
It’s important to break larger initiatives (and investments) into small pieces as this will allow for more flexibility and opportunities to learn and optimize your plans as you go. Treat every aspect of your plan as an experiment. Not all of them will work out, but you will learn something new regardless of the outcome.
As you break down initiatives into smaller pieces, however, don’t lose sight of what you are ultimately trying to achieve. Having a clear picture of your destination will help as your tactics have to shift and adapt.
5. Set Trigger Points That Drive Your Organization To Act At The Right Time
This last step requires the direct involvement of whomever your company’s ultimate decision-maker is in validating the plans you’ve laid out and setting them in motion once the trigger points (KPIs linked to each of your scenarios) have been identified.
During this stage, Hollinger recommends taking two things into consideration: first, make sure the data you are getting is as accurate as possible when looking at the competitive landscape, and second, have the right resources to execute on those plans. Make sure employees’ bandwidth has been taken into account and clearly communicate what and who will be needed to execute on the plans once they have been set in motion.
Over the last few months, most brands have been overwhelmed by the number of decisions they had to make in the wake of a global crisis. As an agency, we are privy to a lot of valuable information through working with numerous brands and partners in the space. Even though we have seen and celebrated a lot of wins during this time, we are still encountering merchants facing hardship. Many are continuously having to make difficult decisions and lay out alternative plans for the future.
The 5 Frame Strategic Crisis-Action Plan model will give you the tools to assess your current situation and more accurately plan for the future of your business.
Though we tried to be as exhaustive as possible on the key challenges DTC brands face and the different ways you can use the McKinsey & Company’s model to create a tailored solution, you might still have unanswered questions. If you do, feel free to reach out and we will be more than happy to discuss and provide guidance.