Member Brief: Quantifying the DTC Market

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History has an interesting way of influencing the future. With enough historical context and data, observers can forecast outcomes. But for product manufacturers and retailers, the ability to anticipate outcomes is tantamount to success or failure. It was King C. Gillette who once wrote:

For the capitalist, fortunate will he be who reads the writing on the wall and takes head before the tide begins to turn.

If you peer closely enough, you’ll find the ebbs and flows of opportunity. In the proverbial arms race of major product conglomerates and holding companies, DTC brands are essentially outsourced research and development. In a recent article by DTC skeptic Robin Kaiser-Schatzlein writes: 

Corporations––who today plow record-breaking sums into stock-buybacks instead of research and development––have outsourced innovation to the wealthy or wealthy-adjacent who have the time and resources to get the ideas off the ground on their own: a squad of elite MBAs who come up with the ideas, and the venture capitalists who choose which of these ideas get funded. [1

While I disagree with the skepticism, she makes a salient point. The influx of venture capital influenced the pace of “outsourced R&D.” And many of the top brands are captained by elite school MBAs. But where Ms. Kaiser-Schatzlein sees a flaw in the system, I see exit opportunities.

In 2005, Gillette Co. was acquired by Procter and Gamble (P&G), combining the two consumer conglomerates in a $57 billion transaction. Founded in 1901 by King C. Gillette, the safety razor patent would provide an early advantage that would rank his company in the top twenty of the Fortune 500 by 1991. In 2005, in a mega-deal described by Warren Buffett as a “dream,” the two companies built a consumer goods platform rivaled by few. Of those few, is Unilever – the company that would go on to acquire another razor company of note: Dollar Shave Club.

Like its long time corporate foe, Unilever would grow into a multi-national company that would incubate hundreds of brands, each representing useful patents and / or market advantages. As an edge case became popular, the product conglomerate would bring that case into its fold – expanding that business’ marketing and distribution capabilities.

A 2005 announcement likened the acquisition to an arms race between Gillette and Unilever. “The fight for shelf space is ongoing, it’s one of the main things that a large consumer product company like Gillette is looking at, and a combination with Procter & Gamble makes a lot of sense,” an executive wrote. “It’ll enable both Gillette and Procter & Gamble to get better shelf space and to distribute their products more cheaply.”

One could argue that exit viability of a consumer goods company relies on few variables: public markets, time, acquisition arbitrage, sales velocity, and the founders holistic view of the industry’s competitive landscape. Companies are often acquired when they present edge cases, possessing each of these attributes but over-indexing in one or more. 

In fact, almost every single brand sells itself to a gigantic globe-swaddling corporation over the course of the book. A few examples: Kellogg’s paid $600 million for Rxbar; Procter and Gamble bought Native deodorant for $100 million; Amazon bought Ring for $1 billion; Edgewell Personal Care, owner of Schick, bought Harry’s for $1.37 billion; Bonobos sold to Walmart for $310 million; Target paid $550 million for Shipt; etc. [1]

One hundred years apart, two brand founders identified the arbitrage opportunities of their eras. Both King Gillette and Michael Dubin relied on a deep, generalist understanding of American markets, pulling their ideas across the proverbial finish by deploying every tool at their disposal.

Both story arcs are emblematic of their eras. Gillette was a salesman by trade. He’d rely on market advantages in advertising and a pricing strategy. Dubin was a marketer by trade. Before Dollar Shave Club, Dubin created content for advertisers like Nintendo, Gatorade, Ford, Nike, and – in a fit of irony – Gillette. 

Like King Gillette, himself, Dubin took advantage of market advantages and pricing strategies to sell his company for over one billion dollars. Gillette’s product proposition was premium innovation at scale. In a way, Dubin’s proposition was a direct response to Gillette’s proposition: some consumers are okay with good enough for cheap. He was right.

Exit: King Gillette and Gillette Co.

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In 1901, Gillette went into business with William Nickerson, an MIT educated machinist. He’d rely on Nickerson to develop a production protocol for the idea. It was common for men to use the same razor, dulling or rusting over time – and often injuring the customer. In 1903, production began on the renamed Gillette Safety Razor Company, a disposable shaving product that relied on a solid state razor and thin, safety blades that provided sharpness without risk. Gillette began advertising the product in October of that year with the first ad appearing in Systems Magazine (left).

In the first year, the company sold 51 razor sets for $5 per unit and then another additional 168 blades. These were priced at $1 per 20 units. This model would shift over time, as many of you know. With the increasing cost of razors, new competitors would emerged. But in the first quarter century of the 1900s, Gillette was practically untouchable. In 1904, the patented safety razor (re-popularized by brands like Bevel and Supply), sold 90,884 razors and nearly 124,00 blades.  In the year that followed, Gillette would purchase a new headquarters in South Boston, building a timely foundation for blitz scaling. 

On November 15, 1904, patent #775,134 was granted to King C. Gillette for a safety razor.

Like many American brands of its time, Gillette would establish a global brand presence thanks to the needs of World War I. The US Government ordered 3.5 million razors and 36 million blades for its deploying troops. The economics of war provided an unparalleled opportunity for reach. The surviving war veterans would come home Gillette loyalists, an advantage that carried the brand to new heights over decades of changing leadership.

As Gillette Corporation’s patent for the disposable razor expired, the company would employ a new strategy. The razor and blade company invented the sales tactic that is still invoked in business school case studies. By selling a base product at low prices, consumers are hooked into a higher lifetime value. Retailers that use the “razor and blade strategy” then sell a related product at a premium price to offset the cost of investment (and eventually achieve profitability). Nearly 100 years later, another upstart razor retailer would turn this idea on its head. 

Exit: Michael Dubin and Dollar Shave Club

Successful CPG companies take the shape of their eras.The data suggests that we are in somewhat of a transitional period, a reversion back to the olden days of slower and cheaper brand development. During Gillette’s “startup phase,” quality-at-scale was the arbitrage opportunity. For Dubin, there was potential in undercutting Gillette’s strategy. It was Amazon’s Jeff Bezos who once quipped, “Your margin is my opportunity.”

Between 2009 and 2019, hundreds of direct-to-consumer brands marketed products aimed at getting to the consumer cheaper and faster. Fueled by Facebook advertising arbitrage, the value proposition was simple: DTC removes the “middle man” from the equation. Few understand just how integral Facebook marketing was to the improbable story of Dollar Shave Club. Jesse Pujji is one of the founders of a Facebook marketing agency called Ampush.

And on Jesse’s 26th birthday they made $100k in revenue and $30k in profit that month. 14 months later, they were making $2M in revenue and $800k in profit per month, with 10 employees. Soon after, Ampush became the first company to figure out advertising on Facebook and went on to spend over 300 million on the platform for its clients. [3]

By 2011, the marketing agency was so familiar with Facebook’s newsfeed algorithms that the Menlo Park company provided Ampush cofounder Jesse Pujji’s with unparalleled access to and influence over advertising products. When another Ampush founder stumbled upon Dollar Shave Club’s viral Youtube video, Pujji’s team would push to earn Dollar Shave Club’s business. The result was revenue improved 16x in just three years. With the help of Ampush’s marketing advantages, Dollar Shave Club grew revenues from $4 million in year one to $65 million in revenue in year three. The improvement in DSC’s reach was the virtual equivalent of Gillette’s government contract with the Department of War.

For customers of Dollar Shave Club, Dubin was the middle man and Facebook was the vehicle that amplified a viral video launch [4] that has yet to be topped. For Dubin, the product mattered far less than the manner in which it was marketed. Like Warby Parker’s early success, DSC’s marketing arbitrage (a combination of savvy Facebook and Google) was accomplished before its supply chain could meet demand – a reversal of the circumstances surrounding Gillette’s early fortunes. 

Page 233, The Billion Dollar Brand Club:

“With Google, you can go find a thousand people who might be searching for a master’s in teaching today,” he explains. “But on Facebook you can find tens of thousands of people who identify themselves in their profiles as substitute teachers who might be thinking about getting an advanced degree but haven’t searched yet. That was the insight. You can target the right people, catch their eye, and sign them up.”

It was their “aha” moment. Facebook in 2010 was like Google a decade earlier, its power as an advertising platform not fully understood or appreciated. “We wanted to be the ‘it’ company for social media marketing,” Jesse Pujji says.

Gillette Corporation achieved scale thanks to newspaper advertising, a burgeoning industrial complex, and key government contracts. Dollar Shave Club owed the company’s rise to a supply chain agreement, an overzealous investor named Peter Pham, a Youtube advertisement, and Facebook arbitrage.

With a critical eye, you can observe the past’s influence on the present and future of direct brands. The common points between the two illustrates the similarities between the consumer brands that are fortunate enough to achieve an exit. There are contrasts, of course, to reflect the technologies of the time. 

The Predictability of Human Behavior

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To access: 2pml.com/dnvb

 

What can you glean from the past? What can you analyze from the present? Millennial and Generation Z consumers are unabashed about their loyalty to the brands that fill their Instagram feeds with retargeted advertising. They shave with Harry’s or Billie’s. They wear environmentally friendly wool shoes and carry the same color way of carry-on luggage on their work trips. But while a rush of modern brands have influenced new generations of buyers, the perception has remained that the exit opportunities for this asset class are scant. I’d contend differently.

Of the 360+ brand and marketplaces tracked within the DTC Power List, 35 have exited. Another fifteen companies are on the designated “Exit Watch” category and an additional 10 are on the bubble. And this is where the study of the past comes in handy; it’s a useful reminder of the predictability of human behavior. Consider the shifts in manufacturing practices or sourcing, over the previous one hundred years. An even better exercise is to study the changes in advertising arbitrage over time. 

  • 1880-1920: newspaper revenue rose from $200m to $3b in this time period.
  • 1920-1945: by 1931, radio had overtaken the top ten newspapers earning $78m
  • 1941-1994: between 1948-1951, TV spend grew from $12.5m to $128m
  • 1994: internet advertising grossed $300m, this number would reach $107b by 2018

Like the successful companies before it, Dollar Shave Club’s early velocity was less about the product and more about the channels available to advertise and distribute them. This mirrors DSC’s century-old predecessor. By the time that the United States government ended its involvement in World War I, Gillette’s patents no longer protected King Gillette’s innovations. It was his company’s style of pricing (“razor and blade strategy”) and a distribution advantage that would keep the company afloat. 

When Robin Kaiser-Schatzlein wrote on venture capital’s impact on the early stage retail asset class, she affirmed an interpretation that I’ve long held. Venture capital influenced early stage retail, for better and for worse. In doing so, they injected life into a category that was often low-yield. However, VC also increased the pool of interested entrepreneurs – often deviating away from the core skill sets required to grow a retailer with proper unit economics.  What happens when early stage brands revert back to pre-venture formats? Historically, they scale slowly and inexpensively in their formative years, appealing more to private equity models than traditional venture capital. This format presents its advantages. For instance, Dollar Shave Club’s key innovation arose thanks to a capital shortage. The now-famed video was a $5,000 investment that yielded $4 million in business.

Like cycles in other industries, investors’ future decisions will mirror the cycles of the industry’s distant past. In this way, there are six key areas to bolster our quantification efforts:

  • interpreting the cycles of retail history and best practices in finance, manufacturing, sourcing, and advertising 
  • growing our featured data set (2pml.com/dnvb)
  • incorporating our automated public markets data to assess industry needs of potential acquirers or publicly traded partners
  • recruiting additional resources devoted to the automation of the DTC Power List
  • introducing live tracking of social and public relations data to the scoring system
  • developing measures to combine and assess new data in novel ways

This will allow observers to gain new advantages. The output of the DTC Power List will improve in relevance as more data sources are identified and compiled in the database. By measuring the exit viability of early stage retail brands, users will be able to determine which of them is best positioned to achieve sustainable growth (at scale) or even liquidity. 

As online retail adoption increases, so will the role of internet-first retailers. Of course, major retailers will launch their own direct brands. But if history has its way: the growing number of acquisitions in the digitally native space will be the rule, not the exception. There won’t be a perceived shortage of DTC exits for long. 

Research and Report by Web Smith | About 2PM

Editor’s Note: this Member Brief is open to all. To support the Executive Membership, join at /members

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