Inside the Middle East’s rising D2C revolution

Direct-to-Consumer (D2C), Digitally Native Vertical Brands (DNVB), and brand.com serve as different variations of a similar concept that has blown up in the past few years fueled by factors ranging from a surge in online shopping, stay-at-home restrictions, costs and a general shift in consumer behaviour.

D2C sales were forecasted to account for $17.75 billion of total e-commerce sales in 2020, up 24.3% from the previous year. While the Middle East might have been late in joining the party but the key players from across the board including brands that sold the traditional way via wholesalers and retailers or those that use online marketplaces such as Amazon and Noon, and the new brands entering this nascent market today are all realizing the potentials of communicating with and selling to customers directly.

The Middle East has one of the highest youth population in the world with more than 28% of the residents aged between 14 and 29. This means that a great chunk of the population are inherently digital natives, who grew up with smartphones. These young tech-savvy consumers are more informed, are massively influenced by social media for their purchases, and are more value and purpose driven compared to the older generations, as a result of which are open to experimenting with newer brands that align with their ideas and ideologies.

This presents an opportunity for both traditional retailers as well as young brands to tap into their e-commerce potential and tailor their offerings to this new cohort of customers leveraging data to understand their individual needs by connecting and engaging with them. And the best way to “pivot” to the ever-evolving demands would be by adopting the D2C approach.

Recently, L’Oreal Middle East announced an uptick of up to 750% across e-commerce sales since 2018, driven by an innovative direct-to-consumer e-commerce and e-distribution facilitated by the development and optimization of websites, inventory management, marketplace negotiation, stock planning and warehousing, and delivery logistics. It also partnered with CNNB, a D2C enabler that has seen a 500% growth in the last 12 months. The strategy has paid off, with L’Oréal Middle East also recording an increase in average order value of 12%, a 17.5% improvement in delivery rate and a 235% increase in customer lifetime value (CLV), across the selected brands since the start of the partnership.

“We are always looking for new ways to innovate and serve our consumers in the most efficient way. With growing demand for convenient online shopping, CNNB Solutions has streamlined our approach across the GCC region, putting the consumer experience at the forefront of our strategy. The results have been hugely successful in terms of sales growth and consumer satisfaction, delivering a win-win for our business and stakeholders,” said Mehdi Moutaoukil, Chief Marketing Officer at L’Oréal Middle East.

However, it is not just brands that are realizing the many benefits of going D2C, including complete access to data, building direct connections with customers, increasing margins by cutting costs, and enabling the expansion of its presence. Many multi-brand retailers and wholesalers are diversifying their business models to include an element of D2C within it.

Omnichannel retailer eyewa, which has a presence in the UAE, KSA, Kuwait, Qatar, Oman and Bahrain, stock and sell contact lenses and eyewear from all the major brands and also build in-house brands,  which fulfil untapped wants and needs of the local market. eyewa has designed and developed three unique ranges spanning different price points, specifically created for the modern Middle Eastern consumer.

It’s difficult to not draw parallels between eyewa and Warby Parker’s D2C approach. US-based Warby Parker became successful because they solved an issue that no one else had solved before. Instead of becoming yet another brand of eyeglasses sold at an in-person retailer, they put themselves in their consumers shoes to come up with an innovative solution. It capitalized on technology, data, and strived to bring a solution to the market. It stepped into an industry that was criticized for being expensive, entered a market that was skeptical of purchasing online and turned the whole situation around by going D2C. They designed their own frames and sourced their own raw materials, drastically bringing down the costs that would have been passed on to end consumers. They introduced virtual try-ons that delivered accurate results turning customers into loyal consumers. And today, after six separate rounds of fundraising, the company is reportedly set to launch an Initial Public Offering this year.

“If you look at the market today, it’s quite homogenous with most optical shops selling more or less the same stuff. We tried to understand the styles that customers are going for and introduced those styles within our own brands at a much more affordable price point, which then drew customers in. By being D2C we were able to source products directly, so the cost is much lower as opposed to going through all the middlemen and therefore you can give a very good quality product at a much lower price point,” said Elias Tsikhlakis, COO at eyewa.

“The second thing is about being dynamic. Many of the big brands are slowly tailoring things to cater to customers of the region, but you see it very rarely. We are able to tailor our products to our audience as we are a relatively small team, and hence are dynamic. So we can launch products that suit the customers’ expectation relatively quickly. For example, when the lockdowns hit the region, with people spending more time on their screens, we saw a massive uptick in the demand for blue light protection glasses. Within a couple of weeks, we were able to launch big lines of those items on our website. This is something that a bigger brand wouldn’t be able to do,” he added.

Elias believes that the future for D2C is bright in the region, which has been inundated with many big global brands setting shop here, and few homegrown players. With customers demanding more personalization, quicker turnarounds when it comes to adapting to their individual needs, homegrown brands have a massive opportunity.

“Traditionally you have a principle brand, a distributor for the region and joint venture or franchisee partners that are operating your retail stores on the ground. However, they might not necessarily be in tune with what the customers of this region need. However, we are seeing a shift towards homegrown ideas and brands. We talk to our customers, we know what they like and we make it for them. We are seeing a lot of traction in that,” he said.

A recent report by Global Data revealed that sportswear brand Under Armour had posted over 2,300 jobs in Q2 – a 151% increase when compared to Q1 owing to the fact it is placing more emphasis on direct-to-consumer sales, which necessitates additional roles. Under Amour looks to be focusing on consumer experiences and creating brand desirability, as shown by its advertisement for a ‘Director, Consumer Experiences’. The ‘Director, Program Management’ role also shows plans for a global DTC roadmap through software and technology development, while the ‘Global Omni-Channel Marketing’ incumbent would develop integrated plans for customer relationship management globally.

Another sportswear giant, Nike, serves as a prime example of how its D2C strategy has been hugely successful. Over the last decade, Nike’s D2C sales have grown from 16% of the brand’s total revenue to 35% or $12.4 billion by the end of fiscal 2020. Undoubtedly, Nike’s e-commerce focus has been strong, but what they have also mastered is its digitally integrated concept stores that have taken in-store experience to the next level. Moreover, going the D2C way has given the brand more flexibility to build on its voice and purpose, which is reflected across all of its channels and touchpoints. As a result, Nike has been able to grow its presence in existing markets, and establish the brand in new markets by widening its e-commerce penetration and opening stores that helps build communities and serve as marketing fronts instead of merely being points of sale.

For true customer-centricity, as well as for maximal profitability, organizations are looking toward more flexible or hybrid business models and direct-to-consumer (D2C) e-commerce. Wholesalers, for instance, are recognizing the benefits of cutting the middlemen to increase profitability. Kibsons International, the market leaders in fruits and vegetables in the UAE for over three decades, also diversified into D2C e-commerce, after having realised that it was time to have more control over costs, profitability, and customer relations.

“Supermarkets began to have annual contracts with us (wholesalers), which would include listing fee and store opening fee. This made sense with a certain level of turnover every year. When the turnover shrank every year as they (retailers) started using us only to fill in the gaps, the economics didn’t work out at all. For example, Union Coop would have a weekly promotion deal with us, where we would have to give promotions on certain items. This is fine, but the fact they would pick the products and also decide the quantity, became a problem for us. It meant that just those products (under promotion) would wipe out everything that we were doing in those weeks and you couldn’t really budget that,” said Halima Jumani, Director at Kibsons.

“The sheer power of that segment of the industry became stronger and it started getting noticed across the board. I review my financials every week, because if you only do it every month then you’ve lost four weeks’ worth of data to action something going forward. And I realised we didn’t need to see these forecasts of losses for something we didn’t deserve. We have the knowledge and experience and also relations with farmers that were built over 20 years. To have that getting washed away in the name of these distributors was so unfair,” she explained.

Apart from the costs and lack of control, Halima also started noticing the high prices the customers would pay to supermarkets retailing Kibsons products. As a result, she started circulating an excel spreadsheet to family and friends, who could directly buy the fruits and vegetables from her for much lower prices. In no time, the excel spreadsheet had more names than she had ever anticipated, which eventually resulted in the setting up of the Kibsons website and app.

“When we started, we were about 10% retail and 90% wholesale. Over the years, our wholesale trade shrunk due to the geopolitical situations in the GCC. I am actually grateful for that shrink because we became more qualitative. Now we are almost 50% retail and 50% wholesale,” she said.

They are now one of the biggest e-commerce players in the fresh produce market, with Kibsons home delivery being one of the fastest growing segments of the business.

The opportunities of D2C are ample stemming from a direct and authentic connection with customers, helping brands, wholesalers and retailers understand their audience better. How the region rides this revolution is something time will tell.