Mike Beckham

Mike Beckham

19-08-2022

03:09

Why is DTC so difficult? Why is the physical retail landscape dominated by a few massive companies? I think the reason is a dynamic I've coined "the milk problem." If you into a Target or a Walmart the milk is in the back of the store. Why?

The reason is that a huge % of the people who come to the store need to buy milk. The store knows that people have high intention to buy milk, so they place it where you have to walk by lots of other merchandise first.

Who among us hasn't gone to checkout and wondered how a trip to pick up two grocery items led to a cart of 10 items? The list of things that we have a high intention of buying is pretty small, but there are many products we are open to buying if they are suggestively sold to us.

The most successful retailers offer a broad selection. They attract foot traffic with essential items and then convince shoppers to add other items to their cart. This leads to larger cart sizes and more profitable visits. Items like milk are the ultimate marketing tool.

What if you don't have milk to attract customers? This is the problem that most pure DTC businesses face. The only answer is that you have to constantly spend effort and money to persuade customers to return to your store. It's a marketing treadmill.

Most of Facebook's value as a company is a result of its ability to identify people who have a high intent to buy the product that you are marketing. But Facebook can't solve the "milk problem."

If you sell candles, FB can show your store's candles to people that its algorithm has identified as likely to buy a candle soon. But successful retailers need profitable repeat customers, and if you have to pay to convince your customers to come back it's hard to make money.

Over the last 10 years, there was a sense that DTC was the future of commerce. Many of the DTC darlings have gone public, and it is not going well for most of them. Many of the most "successful" DTC brands cannot turn a profit.

This dynamic leads to another reality that exacerbates the problem. Because DTC companies have to spend so much money on marketing (both customer acquisition and remarketing to existing customers) they price their products with very high gross margins.

The higher your gross margins, the more money you are going to need to spend convincing people to buy your product at those prices. Because of the "milk problem" most DTC prices are not competitive compared to physical retail. This ensures the perpetual marketing treadmill.

The "milk problem" dynamic is also why the most successful retailers offer everything under the sun. They price the high intent items at or below breakeven. That's a big pillar of their marketing budget. Then they sell all of the higher margin items through suggestive selling.

This is the reason that Walmart and Target have successfully taken out many grocery stores with their supercenters. They have the benefit of high intention items, but their massive selection allows them to monetize customers more effectively. Then they can offer cheaper milk.


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