The direct-to-customer edge: Increasing shareholder value through business building

With business leaders looking to build economic resiliency for their companies, new-business building offers significant promise. Our research suggests that new-business building helped companies weather pandemic disruptions: 34 percent of companies that prioritized new-business building kept their revenues from shrinking during the pandemic, compared with 26 percent of companies that prioritized other organic-growth strategies.¹Shaun Collins, Ralf Dreischmeier, Ari Libarikian, and Upasana Unni, “Why business building is the new priority for growth,” McKinsey Quarterly, December 10, 2020.

One effective option is launching a direct-to-customer (D2C) business (see sidebar, “Understanding D2C and value drivers”). But we find that business leaders often deprioritize or discount this avenue because the benefits remain unclear. This is a mistake. Our latest research shows that the benefits go beyond important but hard-to-quantify aspects such as closer customer interaction and less dependence on intermediaries.²We analyzed, for the ten years from 2012–22, a cross-industry data set of more than 200 public and private companies, across geographies, with an average revenue of around $38 billion in 2022.

D2C for both B2C and B2B companies, in fact, can have a big impact on shareholder value. Our cross-industry analysis reveals that companies with an existing D2C business increased shareholder value more in the ten years from 2012–22 than those without any D2C offering. Companies with D2C offerings and capabilities show 30 percent higher year-over-year (YoY) share-price growth across industries, compared to non-D2C businesses, and demonstrate a 7 percent higher YoY growth in price-earnings multiples.

What are the benefits of building a D2C business?

D2C businesses can help companies generate shareholder value in three ways: direct customer interaction, commercial flexibility, and cost efficiency.

Direct customer interaction

Staying close to the customer has always been important, but the increasing digitization of the customer experience and the strategic value of data have made customer centricity a crucial source of value. Direct connections to customers allow companies to test ideas, learn, and adapt much more quickly and effectively.

Take the example of HALLOSONNE, an Austrian company installing photovoltaic systems on residential homes. HALLOSONNE was built as a rent-only model, but direct customer interactions revealed demand for purchasing photovoltaic systems. Based on customer feedback, HALLOSONNE integrated a purchase offering, which generated additional revenue and shareholder value. The company also recognized a growing customer demand for consulting on Austria’s various subsidies for photovoltaics. Educating customers about subsidies reinforced customer perceptions of HALLOSONNE’s expertise, and the consultancy became a default component of the company’s service offering.

Furthermore, D2C enables companies to unlock cross-selling opportunities due to the elimination of intermediaries. When the private-equity-owned retailer Flying Tiger opened its own online shop based on consumer and competitive insights, it tripled its customers’ basket size compared to that in physical stores. It focused on modern and scalable e-commerce capabilities, including the technology stack, operations processes, and marketing tools.

Commercial flexibility

The D2C approach can provide more commercial flexibility and independence to find better customer-facing solutions and offers. Ultimately, this can increase end-customer value through, for example, the release of new products and more agile operations, allowing a company to react faster to trends or customer demands. These product and value enhancements can then be put to market through both D2C and retail channels.

Lenovo, for example, is scaling its D2C business globally and using it to accelerate such strategic priorities as an aspirational shift to services (for example, insurance and software). The D2C channel allows the company to quickly test new, service-oriented products and solutions and to adjust its offers as well as the customer journey based on customer uptake and feedback. This direct customer access and ability to own the full suite of offers has allowed Lenovo to grow the attach rate for its services two to three times in 24 months within D2C, as well as gain more insight into the right products to offer in the retail channel.

Cost efficiency

With no intermediary taking a portion of the revenue, the D2C business stands to earn higher margins. This is one reason that Tesla’s cost of sales measured as a percentage of gross revenue is significantly lower than that of other incumbent OEMs. Potential channel conflicts and initial investment cost can be reduced, if they are managed early and well. Banking those margin gains, however, will take time, and initial investments must be sufficient to cover development, increased customer acquisition costs, fulfillment, and building technical capabilities. Breakeven is usually between 24 and 36 months, depending on the complexity of the business.

One critical element to consider is that capturing the benefits of D2C requires upgrades to the entire value chain (Exhibit 1).³For more on D2C economics, see “DTC e-commerce: How consumer brands can get it right,” McKinsey, November 30, 2020. Launching a website is all well and good, but improvements to customer service, R&D, logistics, and so on are also necessary.

1

What is the value of D2C benefits?

Our research shows that D2C companies performed up to 55 percent better on factors influencing shareholder returns (such as ROIC) than non-D2C companies (Exhibit 2).

2

We validated the impact of D2C on the different drivers of shareholder value based on a cross-industry data set of more than 200 public and private companies, across geographies, with an average revenue of around $38 billion in 2022. In addition, we examined selected industries and companies in more detail to get a better understanding of specific drivers of shareholder value. The results include the following (Exhibit 3):

• Share price: Businesses with D2C offerings and capabilities show a 30 percent higher YoY growth in share price across industries than businesses without them. We see this, for instance, in the automotive sector, where D2C companies, including OEMs with only partial D2C implementation, outperformed non-D2C peers with, on average, six times higher YoY share-price growth. For companies that have started to announce D2C aspirations and have run pilots but not yet achieved scale, we did not observe significant overperformance.
• Expected revenue growth: End-to-end responsibility for the sales process (product offerings, customer satisfaction and loyalty, and cross-sales) leads to having about a 15 percent higher revenue CAGR for D2C players across industries over ten years compared to non-D2C peers.

• ROIC: D2C players outperform non-D2C players on ROIC, with a 55 percent higher YoY ROIC growth. These findings align with the results in public markets.
• Price-earnings multiple: D2C players also demonstrate a stronger YoY growth in price-earnings multiples, about 7 percent for cross-industry players, compared to non-D2C players. The main drivers of the price-earnings multiple are higher expected growth rates and an increased quality of earnings through D2C.
• EBIT: D2C can lead to EBIT improvements as cost efficiencies are generated: reduced transaction costs from the elimination of intermediaries improve a company’s margin. However, improvements only occur over time, due to higher initial costs for customer acquisition and building up an additional channel.
• Quality of earnings: Generating earnings independently from channel partners reduces risks in revenue generation. Building up a D2C stream can increase the security and likelihood of revenues generated in the future (thus improving their quality) while still taking advantage of the benefits channel partners provide. Additionally, increased flexibility to release new products can allow companies to generate revenues faster, which also contributes to an improved quality of earnings.

3

Takeaways for non-D2C companies

A typical fear related to D2C is that channel conflict can create risks, including customer confusion, turf wars over supply allocation, strained relationships between channels, and competition on price. Companies need to ask the following question before investing in D2C: What is the role of the D2C model in the channel strategy—additional sales, new insights, stabilized market share? The clarity will help define the channel focus and avoid customer confusion.

A practical guide to new-business building for incumbents

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Companies can mitigate risks by taking the following steps:

• Each channel should do what other channels can’t to establish exclusive territories and avoid strained relations. If items in a D2C online offering, for example, are not directly available, the referral to distributors can still strengthen the channel partners and network.
• Align on customer segments with a channel focus to determine which channels are best for each segment.
• Share customer insights with retailers, and ensure price parity between online and retail prices.
• Evaluate the option of creating distinct assortments or differentiated offers for retailers and D2C. For example, fashion brands such as Hugo Boss offer exclusive online collections to differentiate their e-commerce shops.

While it’s important to be aware of potential caveats, we typically see that captured benefits far outweigh the risks when executed well. Here are some tips to get started:

• Always start with the customer opportunity. Understand customer needs and pain points. Use that as a base for generating the D2C plan.
• Understand why some companies have been able to achieve success in D2C while others struggle to unlock its full potential. Appointing a responsible leader for building the D2C business can help to achieve the right mindset at higher levels. Building a sustainable D2C business model, which requires time, resources, and aligned expectations, is not the same as merely selling to customers.⁴To learn how to avoid common pitfalls at D2C companies, see “Five traps to avoid: The long game of DTC and e-commerce,” McKinsey, September 2, 2021.
• Monitor the implementation of the D2C offering closely, and actively build for scale.⁵To learn more on the six must-have actions to take, see “The six must-haves to achieve breakthrough growth in D2C e-commerce,” McKinsey, December 24, 2021. Key questions to guide those actions include: Is the quality of your customer insights high? What are your cross-selling opportunities? Is the customer experience being continuously improved? Have you mitigated the potential risk from channel partners, and can you react flexibly to changing trends and customer needs?