Direct to Consumer (“DTC”) Opportunities and the Changing Legal Landscape

A friend recently told me about a new book, Billion Dollar Brand Club, by Lawrence Ingrassia. The book is about so-called industry "disruptors," who are finding success through Direct to Consumer (DTC) sales, rather than traditional distribution channels.

DTC is working well in a wide variety of industries -- shaving (ex: Harry’s); fashion (ex: Stitch Fix); toothbrushes (ex: Quip); luggage (ex: Away); mattresses (ex: Casper); and eyeglasses (ex: Warby Parker). Fundamentally, a DTC offering bridges a gap between online shopping and brick-and-mortar stores because it develops a closer connection and (in theory) greater brand loyalty between the manufacturer and the consumer.

Many of my clients may be looking at changing their distribution model, as well. (In particular, the furniture industry is experiencing a DTC revolution. Brands like Dims, Medley, The Inside, Coddle, and Hay are fast-movers in acquiring market share with a unique angle focused on cultivating loyal, repeat customers. Take Hay, for example: founded by the team that brough Design Within Reach, Hay leverages a mid-century approach focusing on products designed to fit in any home. As the DTC market continues to proliferate, so too will its challenges as competition increases and the regulatory environment evolves.)

Here are some legal challenges we foresee in the DTC marketplace:

How to manage customer data, including payment information.

Typically, the burden of privacy and security has been borne by the retailer. Now, that burden is being borne by the manufacturer. In the midst of shouldering a new burden, DTC businesses are faced with a rapidly-evolving data and privacy regulatory framework. Following the lead of the Euroepean Union providing greater protection for people who want to “be forgotten,” California’s Consumer Privacy Act grants greater protection to consumers who want to see all the information a company has saved on them. The law went into effect January 1, 2020, and it (likely) won’t be long for other states (or the federal government) to follow suit. Being aware of California’s regulatory requirements will be beneficial because it will better prepare a DTC business for complying with anticipated regulatory changes. Such compliance could take the form of a newly developed system or process for saving, securing, and managing customer data, which is held in trust for the consumer’s benefit.

How to handle your supply-chain differently since delivery-differentiation can be the key to winning the e-commerce battle.

Perhaps it goes without saying, however, a consumer’s expectation of deliver timing differs dramatically from the expectations of a retailer. Where a retailer may benefit from bulk purchasing, the end user expects to receive the purchased item on the projected date (if not sooner). A DTC business’s “secret sauce” often is their supply chain management process, so it’s important to understand the value of that intellectual property so it can be appropriately protected.

How, if at all, developing a DTC model will impact existing retail partners.

In a crowded marketplace, many manufacturers overlook (or do not directly address) the impact a DTC strategy will have on its existing retail partners. In failing to address the impact, a manufacturer can create a competitor from what had been a partner. There are ways to avoid this unintended consequence and it begins first with evaluating your current engagement with the retail partner. Then, where possible, developing strategies through contracts, joint ventures, and other legal mechanisms, to co-opt the retail partner in a new DTC strategy.

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