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What DTC Disruptors Can Teach Legacy Brands About Leveraging First-Party Data

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With tracking cookies departing and consumer data privacy concerns rising, first-party data — information that companies collect directly from their customers — represents a much-needed gold mine for retailers and brands. But Interactive Advertising Bureau (IAB) Executive Chairman Randall Rothenberg believes that many of the biggest legacy brands are barely scratching the surface, while nimbler newcomers are using sharp pickaxes to find the most valuable nuggets.

Direct-to-consumer (DTC) brands, along with some of the savviest big-name marketers (like Starbucks, Nike and adidas), purposefully focus on their first-party relationships and the data that flows from them. In contrast, the legacy brands manufactured by the biggest CPG companies only use first-party data in limited ways — that is, if they collect it at all.

The enormity of this missed opportunity is one of the key messages of the IAB Brand Disruption 2022 report. Rothenberg explained the dangers legacy brands face if they continue to ignore the power of first-party data.

Retail TouchPoints (RTP): One of the key insights from the report is that first-party data deployment remains “largely unsophisticated.” What are the implications of this lack of sophistication?

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Randall Rothenberg: This was from an IAB survey of 300 brands, and we were surprised by the findings around it — we thought they would be more advanced. One big shock is that only about 30% of the companies that were investing in first-party data were gathering transaction data. And overwhelmingly, most brands are using data as a way to better understand their traditional ad spend, such as overall reach and frequency-related media choices.

They’re not using data, especially first-party data, to understand what consumers want. [That includes not only] what they’re actually buying but also when they don’t buy, and why they don’t. Also, why do they buy when they do? And how does that extend to product assortments and offers, line extensions, mergers and acquisitions, all those kinds of things?

Our next areas of research at IAB dive more deeply into these questions, because there’s obviously a crying need for this. There’s opportunity to upscale and use data in a better way, so we want to know what the best practices are around this upscaling. So if, for example, you can only get 2 million names among 100 million consumers, how do you use the data from those 2 million to understand the other 98 million?

RTP: What are the key big-picture challenges that legacy brands face today?

Rothenberg: The analogy I use about what brands are facing is the way Hollywood movie studios faced the advent of television in the 1950s, which was a massive, apocalyptic change in entertainment. In 1946, 60% of the U.S. population went to the movies at least once a week; by 1968, that figure had dropped to 10%.

There’s been a similar situation in terms of the distribution of all manner of consumer goods. In 1995, 97% of all retail sales in the U.S. took place in brick-and-mortar stores. Now, about 25 years later, it’s at about 70% to 75%. That’s a dramatic shift in the way people are acquiring consumer goods. To draw the parallel with the movie industry, we’re at about 1956, by which time 30% of the moviegoing population had disappeared into the black hole called “TV.” And remember that movie studios adapted to these changes [in how people consume entertainment] in a lot of different ways, and it didn’t happen overnight; it’s a decades-long adaptation and it’s still occurring.

In the retail-CPG industry, we went from a very big chunk of the population that pretty much had no choice but to go to brick-and-mortar stores to acquire consumer goods, to now having lots and lots of other choices. Whereas shelf space used to be physically delimited by, among other things, the store’s physical capacity, shelf space is now unlimited. It’s a pure mathematical fact: when you move from limited access to unlimited access, more people are going to be making more diverse choices.

RTP: The report also states that “when consumers go digital, disruptor brands benefit the most.” Why is that?

Rothenberg: When you think of the contest between disruptor brands and the large incumbent brands that have dominated most categories for decades, the key point is this: the disruptor brands don’t have to win in order for the incumbent brands to lose.

If you look at the number-one brands in 20 categories in 1923 and compare them to 1983, 18 of the 20 brands remained the same for 60 years. Simply owning or controlling the classic supply chain functions of sourcing, production, logistics, distribution — and also relationships with wholesalers and retailers — created extraordinary defenses against competition. Now, those “classic” functions are no longer differentiating.

Take the toothpaste category as an example. Crest and Colgate dominated for years and years, but now, if you do a search on DTC toothpastes, you’ll probably find 40 to 50 brands. With segmentation that profound, no one of those disruptors has to grow beyond a quarter or even an eighth of a share point to succeed; they don’t have to become the next P&G. And if you get 40 disruptor toothpastes eking out a quarter of a share point each, you’ve taken 10 share points from leaders who operate with narrow margins — and that can destroy those giant companies.

In razors, there’s a whole bunch of disruptors shaping things. No one of them is anywhere near as large as Gillette, but they’re still taking bites out of Gillette’s ass. And if any one of those smaller brands falls by the wayside, the means to start a new razor brand are out there for anyone to access. All these dominant brands are facing this never-ending competition from an ever-replenishing battalion of army ants.

Additionally, these new brands don’t have to be stocked on [big retailers’] shelves to be seen and acquired by American consumers, and the companies don’t have to afford expensive national prime-time TV advertising, because there are multiple other alternatives.

RTP: Speaking of alternative marketing and sales channels, the IAB report predicts that direct sales on social networks will double to $80 billion by 2025. What are the implications of this kind of rapid growth?

Rothenberg: To go back to the movie studio/TV analogy, what the studios learned, and with great difficulty, was to create new products and distribute them in very different ways. Along the way they also learned that there were different ways of financing and monetizing those products, all of it built around the core of what they did — making filmed entertainment.

That’s a valuable way of thinking about what’s happening now. Just as this new-fangled TV set was an “alternative distribution vehicle,” we see the social network as an alternative form of a store, or really a bunch of alternative stores called Facebook, Twitter and Snapchat. And each one of those “stores” is different from each other. So any brand or retailer will have to make determinations about which channel will be valuable and which one won’t, since you can’t do everything. Just as you couldn’t advertise on every TV show, you can’t have a retail plan that is used in every type of B2C store; you have to make choices.

Brands have to think about creating unique product assortments for these unique stores, and also how to manage their own requirements for first-party relationships and data. This type of complex channel planning analysis just doesn’t have an antecedent, because the categories of channels are exploding — and the differences among the channels within those categories are very profound.

RTP: What are the implications for brick-and-mortar retail?

Rothenberg: Brands will have to have special products and experiences, especially in brick-and-mortar environments, because there will be a consumer reversion to the mean, which in this case means Amazon or Walmart — the “everything” stores. Standing out within those everything stores requires higher degrees of specialness, in products, experiences and the relationships that you manage with your consumers.

RTP: How do you see first-party data’s role in all this?

Rothenberg: First-party relationships provide you with the raw informational materials that you need to continually refresh product assortments as well as to extend into new categories. They help brands find new ways to sell, and new communities to which they can sell. That’s where differentiation comes from now; your ability to gather and intelligently use data.

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