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The Double Edge Sword of Direct to Consumer Sales

Guest post by Ed Carino co-founder ProofNoMore.com

Shipping
Source: UPS

The economics of the NA industry


For many new brands or retailers that are coming onto the Non Alcoholic sector, a common route to market is by doing Direct to Consumer (DTC) sales as this is often the easiest and fastest way for a nascent brand or retailer to move product. However, doing DTC sales is often a “double edge sword” as the more successful you are at it e.g. you are fulfilling more orders, the more difficult it actually is to make a profit especially if you factor your time in pick/packing orders when you can use this time for more strategic/high level business duties. This dichotomy is mainly due to two factors, shipping & handling costs and Customer Acquisition Costs (CAC).

As a business that does both Non Alcoholic (NA) distribution in the New York City area and online DTC sales via our web-shop at Proof No More, DTC is a very tough channel to actually make money in, with a relatively low value to weight product with added costs like boxes, pack materials, tape, pick/pack labor costs, breakage/damage, customer service, and then the killer part shipping.

This is opposite of selling a relatively high value & easy to ship product like clothing or even high end wine with a value of $700-900+ and shipping costs of $45-55. The value proposition in doing DTC sales for say $50 worth of NA beer and the shipping cost is $35 shipping to Zone 5 or about 70% of the value of the beer becomes hard for most consumers to swallow. Due to this low “value to weight”, almost all companies selling NA online subsidize the shipping and handling costs, not charging the customer the true cost of these expenses which eats into margins as very few customers would be willing to pay actual shipping costs. Also, when a new company is starting out DTC, their shipping rate discount off list price isn’t that much until you start shipping say 400+ orders per month do you start to see significant shipping discounts from FedEx/UPS.


Scaling is surviving

DTC selling is all about economies of scale and finding that transition point of doing it yourself out of your home to when you out source it or move to a dedicated facility and hire full time employees to pick/pack/ship is the question and varies from business to business.




While its “nice and cute” to see some social media posts of founders with stacks of boxes and orders piling up in their living room the reality is much less glamorous in converting your living room, dining room, garage etc… into a mini warehouse and pick/pack/ship operation. Not to mention the disruption to your family life with all these “new friends” occupying your space and work/life balance where your work is literally in your face 24/7 and you can’t find your child’s favorite toy as its buried behind a dozen boxes.

In my opinion once DTC sales are more than 15-20 orders a day, one really needs to look at out-sourcing or moving to a dedicated space to do their DTC operations. Then add automating various processes like invoicing, ship label generation, inventory management and this gets more complicated the more Stock Keeping Units (SKU) you have. If you are a NA brand with 2-4 SKUs not so much of a problem to monitor your inventory. However if you are a DTC retailer like us at ProofNoMore.com, we have over 130 SKUs & growing.


Trying to find space for even say two cases each of 130 SKUs in your house and to organize it properly is basically impossible unless you are blessed with a 1500 sq ft basement or able to clear out your closets, dining room, living room, etc… —we are in Brooklyn so not going to happen. The logistics if you are receiving a full pallet of product and how you are going to off load it from the truck without hand unloading 60-100 cases into your home. Then to get economies of scale with boxes, pack materials, tape etc.., you can’t be buying a couple boxes from Staples as a basic box to fit 24 beer cans/bottles will cost you about $4-6.00. We alone have about 4-5 pallet spots just for shipping boxes where you have to buy in bulk to get any economies of scale.


Playing with the "big kids"

The other headache in DTC is managing damages, lost packages, just unhappy customers and then having the expected 24/7 customer service time commitments, where customer expectations are not realistic for most NA brands which are under 4-5 people so already understaffed. If a company uses a 3rd party company to do their DTC logistics and/or customer service, similarly adds to their cost structure.

In general, customers don't care about these business issues and care about getting their order as quickly as possible for a certain price and now it's very difficult to pass these costs on to consumers due the "Amazonification" of online sales so everyone’s buying expectations are based on their experience with Amazon, Target, Walmart etc.., but obviously very few companies have the scale of these companies to execute this.


Then needing the know how to market yourself online, which is also very costly with Customer Acquisition Cost (CAC), probably at $30+ now and rising so you don't even make a profit unless a customer orders from you a 2nd or 3rd time depending on a variety of factors. This is why you see many DTC sites push subscriptions as they want you coming back to re-order as they more than likely lost money on your initial order. CAC is simplistically calculated say you spent $1000 on social media/online advertising like Pay Per Click, AdWords & various other tactical initiatives to increase your Ad Rank & Quality Score and based on this ad spend, your campaign netted 30 orders so a CAC of $33.33 ($1000/30).


It's all about marketing


If you happen to come from a digital marketing background then great as you can save costs versus hiring an outside agency or hiring a full or part-time digital marketing person to manage your campaign. Even if you do it yourself, it's time consuming so again if you factor the time you are spending it adds up and has a real value even if you are not paying yourself. Also, its becoming more and more crowded as every week there are new NA brands and DTC retailers popping up and everyone is fighting for the same key ad words which is only driving up the cost per click (CPC) price.

There is a good reason why many of the new NA brands out there that at least one or all of the founders/owners comes from a Digital/Social Media Marketing background as getting the word out is very important for a fledgling brand and those that are experienced in doing this will have an advantage in keeping their CAC as low as possible.



Even for some medium sized companies in the NA space they are closing their DTC operations like Big Drop & Hairless Dog as in the end they realized its not worth the time/money for where their brand is at now as they have more retailers & distributors they are working with so not fully dependent on DTC sales like when they started out. Its more efficient albeit less gross profit selling to say 60-80 distributors each buying 3+ pallet orders vs shipping DTC to 10,000 customers buying say 1 or 2 cases of beer or 2-6 bottles of wine/spirts. As a brand matures, you will probably see more NA brands de-emphasize their DTC operations as they gain more distribution with the exception of the largest NA brands like Athletic that have the economies of scale to still continue DTC sales and make a profit. Thus, I'm not surprised that Hairless Dog and Big Drop earlier this year stopped doing DTC themselves and focus on distribution which mind you has its own set of challenges.

While DTC early on is a great way to kick start your brand and get “liquid to lips”, it becomes very costly the more you ship out and in some cases you can actually lose money especially if you factor your time. I know of several other NA brands similarly looking to refocus efforts to distribution versus DTC, so expect this trend to continue as brands mature.


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