DTC startups disrupting traditional brands

Direct-To-Consumer, or DTC in short,  are products or services that are financed, designed, produced, marketed, distributed and sold by the same company. They bypass the middleman and connect directly to consumers. Others call them Digitally-Native Vertically-Integrated brands (DNVB).

Selection of the top DTC brands in the US – Source: IAB

The appeal is simple – by avoiding the retail markup enables DTC startups to offer a combination of better design, qual­ity, service, and lower prices. Examples are plenty, but perhaps the most iconic ones are DTC eyeglass company Warby Parker, Dollar Shave Club or Casper mattresses. Many of them call themselves the “Uber of X” or the “Warby Parker for Y”. From fashion to food, new DTC startups are popping up on a daily basis.

While VCs invested over $3 billion into DTC startups since 2012, In a recent Economist article Kirsten Green of Forerunner Ventures, an early investor in companies like Bonobos summarised the challenge for upstarts DTC brands:

“The challenge is rising above the noise”

It’s never been easier to start…

Compared to a few years ago, it’s never been easier to start a direct to consumer company. Consider these factors:

  1. Reach – Google, Facebook and Instagram enable any brand to reach customers at scale and relatively low costs
  2. Infrastructure – so much has been said about the ability to scale with cloud platforms like AWS or Google Cloud, but the infrastructure improvements go beyond just servers and computing – think about Stripe for simple payments, Shopify as a one-stop-shop for running an e-commerce business, etc.
  3. Rapid prototyping – technology and active commercial channels with China enable entrepreneurs in the west to source and prototype their products early
  4. Crowdfunding – Indiegogo or Kickstarter provide the launch platforms to generate early demand

These advantages are there for every upstart and incumbent, and the success of the few has attracted many wannabes to the DTC space.

Strategies for Direct to Consumer Brands

In an excellent piece, CB Insights did a deep dive on some of top strategies for DTC brands. As DTC brands struggle to compete solely on price, they have to innovate in the whole experience of shopping. It’s worth reading the whole piece, but here are some takeaways:

  • Design– Simple, back to basics design. While the big brands over design, DTC brands celebrate simplicity -“Allbirds built its brand around the design of the shoe itself and its nonbranding. The centerpiece of the product is the shape, look, and feel of the shoe”
  • How they launch– Social media first companies that know how to successfully leverage video. Chances are, you’ve seen the Dollar Shave Club video when it went viral. Focus is on authenticity – of the brand, of the people.
  • Customer experience – DTC brands “cater to the desire to avoid choosing, and the desire for something that is just fine”. In the case of Casper mattresses, many customer reviews show that the mattress is ‘ok’ but the experience of buying and receiving it is much better than the alternative
  • How they market themselves –  have a crystal-clear brand positioning that resonates with consumers. Most of the D2C companies focus on selling only a handful of different products, and many started out with just one. Less is more.

The Retailer Perspective

Traditional retailers have branded the DTC products as ‘Piranhas’. As consulting company AT Kearney describes them:

Smaller companies that are growing rapidly in large categories by taking small bites out of the market share of leading consumer goods firms.

One reason why direct to consumer brands are on the rise is that we are at a global low point of consumer confidence in large corporates.

“In the past, niche brands that started from scratch and were not owned by large corporations succeeded either because they were much cheaper (for example, private labels) or because they were competing in a space where consumers valued exclusivity and scarcity, such as luxury items. Today, piranhas are succeeding in mass markets across geographies and categories as they are winning on consumer confidence.”

In its analysis, “Swimming with the Piranhas and Reinventing the Mass Consumer Model”, AT Kearney breaks down the playbook of DTC brands:

  • On average, they spend two to four years creating and fine-tuning their business model and brand positioning
  • then gradually rolling out their business model through a carefully orchestrated set of activities (see figure 2). Instead of pursuing broad distribution, they focus on limited or controlled distribution channels such as their own boutiques or website, and they often use temporary point-of-sale venues such as pop-up shops or in-store counters.
  • Once the product positioning is proven and the brand established, piranhas accelerate the rollout in their domestic markets, usually over the course of two to three years. They establish larger points of sale in more visible cities, strike national and often exclusive distribution deals, and progressively expand their scope while remaining within the boundaries of their sharp brand positioning
  • Then, after about six to seven years of development, the successful piranhas have an established brand, loyal customers, and strong enough fundamentals to expand internationally even though they are short on cash.

How can bing corporates compete with DTC brands

Retailers and traditional brands are not standing in the sidelines in face of declining market shares. They face a range of options:

  • Internal innovation – Rethink new product development and rollout – launch their own DTC brands
  • Invest
  • Acquire

Examples of this include Unilever’s acquisition of Dollar Shave Club, or Unilever Ventures.

Tidal Change

In “The Rise of the 21st Century Brand Economy“, IAB describes the current shift from traditional brands to DTC brands as a “tidal shift”

In the consumer economy, we are in the midst of a shift from a century old ‘indirect brand economy’ to a ‘direct brand economy’. Brands characterized by their direct connections to consumer are disrupting the business model of market-leading brands which is leading to a new way of doing business. These direct brands are digitally savvy and fuelled by data and will be the growth engine of the new economy.

You can’t talk about retail without mentioning Amazon, but in the case of DTC brands, Amazon can become a distribution channel, or a way to scale into new markets while staying ‘asset lean’. Amazon is also launching its own ‘secret brands’, 76 of them, see the full list here.

The AIB also published the IAB 250, a collection of the fastest growing DTC brands in the US across categories.  It is missing brands like Supreme, the skater fashion brands that millennials are going crazy for, but it was interesting to learn about the categories DTC brands choose to address:

  • Auto?
  • Baby Care/Parenting?
  • Business and consumer services
  • ?Consumer Electronics??
  • Food and beverages
  • Home & Appliance
  • Personal care
  • Pet care?
  • Retail
  • ?Sporting Goods?
  • Toys & Games?
  • Travel & Hospitality??
  • Wellness and fitness

Eventually, DTC brands will cover every single consumer category. Why? because consumer is a massive market, three times the size of the technology market.

Consumer is a massive market – about 3x the size of tech, as seen below.

The M&A in consumer and retail was over $300 billion in 2017 according to PWC, vs. $170b for tech (Source

In the “Direct to Consumer Landscape” Teddy Citrin of Greycroft Ventures shines a spotlight on what determines whether a category is appealing for DTC brands. For example, in the case of Hubble, the direct to consumer contact lenses business Greycroft has invested in:

  • Contact lenses represent a $12B global market, not enormous, but big enough to build a billion dollar business in an expanding category.
  • The barriers to entry are high because securing supply is difficult, manufacturing is complex, and it is a regulated industry.
  • Contacts lenses are a daily use product, so repeat purchase and frequency are high, which makes it good for subscription.
  • Average order value is in the medium range, but the high frequency/retention makes for a potentially strong customer lifetime value. Contact lenses are light, small, and thus inexpensive to ship.
  • A few large incumbents dominate the market, which means pricing could be inflated and traditionally there may be little incentive to provide excellent customer service. Incumbents primarily sell to doctors which impacts the brands they create.
  • The category has high gross margins.
  • There hasn’t been much product innovation in the category in the last couple of decades which means building a strong brand is the most important objective. Finally, there are many people with poor vision who have traditionally opted just to wear glasses because of cost/convenience and there are not many startups flooding the market, so there is plenty of greenfield.

The Direct to Consumer Landscape by Grecycroft Ventures (Source)

If you want to get smarter about DTC brands, read Max Niederhoffer’s blog post “The Meta of DTC – investing in the pickaxes of DNVBs“.

What about Israel?

As we cover primarily seed stage startups in Israel with Remagine Ventures, I was naturally curious to see what Israeli startups were active in the DTC market. Surprisingly very little. Here are the one’s mentioned by the VC community:

  • Lumen – Measure metabolism through the breath (consumer electronics/ wellness category)
  • Growee – A gardening device (consumer electronics category)
  • Foldimate – Folding laundry (consumer electronics category)
  • Upright – Back posture device (consumer electronics category)
  • Lifebeam – Fitness wearables (consumer electronics category)

If there’s anyone you think is missing, please leave me a comment or email me eze [at] remagineventures (dot) com.

Eze Vidra

Eze is managing partner of Remagine Ventures, a seed fund investing in ambitious founders at the intersection of tech, media, data and commerce. We are backed by some of the world's leading media companies. I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups. I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 8 schools and 31 libraries in the developing world.

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