No. 331 Part One: As Seen on TV


In a private New York City dining room sat a few dozen executives across digital media and retail. Of them included companies like The Chernin Group, Cameo, Instagram, Barstool Sports, Stripe, Digiday, Seat Geek, theSkimm, Andie Swim, 2PM, and Zola. These companies ranged from venture-backed DTC brands to digital media companies that are valued well into the nine figures. Everyone had a particular problem to solve. We discussed industry-wide concerns to include: advertising efficacy, margins, scale, and sustainable growth.

On this night, Instagram wasn’t the center of the universe. At least not at first. A rarity given the social media giant’s surroundings. The moment that quieted the room wasn’t one devoted to the foretelling of a new marketing technologies, innovations, or hacks. Rather, it was an anecdote about traditional marketing channels.

Andy Khubani is the CEO of Ideavillage, a holdings company that pumps out well-researched, highly marketable “power brands.” Flawless, a hair removal system for women, was the brand name of his latest success.  A power brand tends to be asset-light, high growth, with high margins, manufacturing leverage, logistics prowess, and a sustainable competitive advantage. 

In 2018, he sold Flawless to Church & Dwight for $450 million (or 2.5 times revenues). In year two, his company grossed $180 million with a 30% EBITDA margin, according to a March 2019 press release. 

To scale the company, he used a traditional style of advertising and promotion. 

Backed by print advertising, ads on New York City taxis and blogging campaigns— to go with the full-scale DRTV campaign— Flawless has quickly become a top-selling retail beauty product in As Seen On TV sections and in-line beauty and shaver departments. [1]

In a room full of digital advertisers, platforms, and merchants – everyone was likely asking themselves the same question: how did he reach critical mass so quickly? With no outside capital raised and no performance marketing spend alloted, Khubani built a brand worth nearly half of a billion dollars in just two years. Absolutely no one in DTC is doing that. The most recent acquisition was of Oars & Alps for $20 million. They raised nearly $7 million. This week, Tristan Walker recorded his episode of “How I Built This.” He sold his company to P&G for less than $40 million. Greats Brand sold to Steve Madden for less than $30 million. I could go on.

Khubani’s magnitude of exit is incredibly rare in the DTC space. Since 2007, fewer than seven DTC brands have exited for a price as high as $450 million. Flawless’ early profitability contrasts most in an industry where LTV:CAC optimization is a law akin to the Old Testament. The widely held consensus is to spend heavily now, despite a lack of profits, to earn a customer for a lifetime. This method extends the horizon and heightens the capital requirement but it also absolves executives of the near term pressure to achieve scale early. The LTV:CAC optimization theory is one that I have found to be disingenuous at best. Markets change, competition arises, technology improves, and consumer sentiments shift with the gusts of pop culture and the zeitgeist.

From No. 310: The DTC Playbook is a Trap

As long as DTC brands attempt to follow what’s been done before them, you too should be skeptical of the industry. Many investors seem to look for a DTC Playbook to hand their portfolio companies. As if to say, “Here is how it’s done. Now execute the game plan!” But it’s likely that it will never be that way. As digital-natives begin competing in traditional retail’s territory, heritage brands should serve as a reminder. They had unique paths to critical mass, very few encountered the predictability that the DTC era seeks.

There seems to be two considerations for challenger brands of today. Either optimize for the early exit or settle into growth over a 15+ year horizon. Venture capital doesn’t typically compel either outcome. It is the pursuit of the uncomfortable “in between,” the 5-10 year horizon, that may be a root of DTC’s liquidity problem. For many companies in that space, there is a lot to learn from power brands. The ones that scale fast and exit. Flawless is but one of many.

As Seen On TV / As Seen In Stores

Over the past weeks, several data points suggested that the days of DTC playbook are long past. As traditional brands adopt the technologies and the web-first approaches to growth, many of them have widened their advantages between their own companies and the challenger products vying for the same shelf space.

eCommerce is a tremendously challenging, frequently unprofitable business. It also doesn’t take into account how much consumers still want to be in person with brands and products and people.

Andy Dunn

In an interesting breakdown by Yotpo VP Raj Nijjer, the retail executive presented a few surprising metrics [2]: Sealy Mattress’ direct to consumer sales surpassed Casper’s total revenue in 2018 despite Casper taking the mindshare of online retail advertising and consumer chatter. He also noted that Madewell: a brand that is primarily driven by physical real estate, traditional advertising, and traditional brochures – will do $534 million through online retail channels.

[Dunn] said that, in the case of Bonobos, the brand’s “most profitable business” today is its partnership with Nordstrom. Bonobos now also boasts 66 brick-and-mortar stores known as “guides shops.” [3]

When Khubani detailed how he built Flawless into a relative powerhouse, he made it clear that part of the problem with the DTC era is the inability to truly compel purchases. In short, few DTC executives know how to actually sell. Many are dependent on the superficiality of the impression as a metric rather than the depth found when executives target more than a consumer’s eye balls.

I don’t really like digitally native vertical brands. What gets me excited are brands that are really strong and direct-to-consumer, but also have got omni.

Andy Dunn

He believes that he has it down to a science. And it’s hard to argue that he’s wrong. When the typical DTC brand or digital media operator considers the word “targeting”, it instills a sense of modernity. “Television ads are inferior to the quantitative capabilities found with Facebook and Instagram,” a refrain that you will hear from the typical media agency founder. Khubani suggested that brand managers should reconsider the definition of “targeting.” While television advertising espouses a broader approach to reach, it targets a different part of the consumer.

Screen Shot 2019-09-16 at 3.32.01 PMThe consistent approach to an Instagram or Facebook ad is to engage the eyes. We visit the app to mindlessly consume images. Rarely do we stongly recall what we’ve seen after we’ve left the app. We don’t tweet about it; we rarely talk about it. That collection of targeted, inline advertisements are calculated impressions. They are visuals that spark a mental consideration by capturing a consumer’s eyes – if only for a second. It’s why you see scrolling .gifs of coupon codes, diagrams with price incentives, or photos of marked with fabric qualities. On social, brand advertising is often a science and not an art. Brand managers are working to compel the sale through the logic of price and comparison. Television is different. It inspires the heart. When we consume our favorite show, we talk about and we spread the joy of consumption through social channels.

On this night, Instagram wasn’t the center of the universe. At least not at first.

Just as a physical billboard that is uploaded to Instagram or Twitter becomes a social ad; a consumer good that we discover on television accelerates the growth curve through social and distributive channels. Those crude “As Seen” advertisements have been known to compel purchases so well that stores devote aisles to the category of products. But in this era, the benefit is even greater for brands like Flawless. Early traction, often fueled by television can equate to wider physical and online distribution. This perpetuates affiliate deals, social influencer participation, and earned media. These are all key performance indicators of DTC marketing traction for many brands.

The Two Andy’s: Dunn and Khubani

It’s been rumored that for that $180 million in 2018 sales, Flawless paid for less than $2 million in traditional advertising. With a $450 million exit + incentives, the return on advertising was clearly remarkable in size and in velocity. But surprisingly, that wasn’t the key takeaway.

As DTC brands improve their ability to sell, they will advertise more like the original direct brands, ones that intrigued consumers through their televisions. These brands compelled the sale via phone, computer, or that distinct shopping aisle in Walmart or Target.

The report, which synthesizes information from 125 top DTC brands representing 52 different categories, found that DTC brands included in the study spent 60% more on television ads in 2018 than they did in 2017, totaling $3.8 billion in television ad spend last year.  [4]

Consumers are due to see more television ads from brands like Away.  But for some categories of products, the production style will shift away from brand statement and towards the longform style of selling that you’ll only find on TV. This new era of retailer will be slow to use television in the longform manner that marketing executives have mastered. The traditional television demographic may not be suitable for many new brands or their products.

But, for certain categories, marketing and distribution strategies will continue to evolve in that direction. These will include many of the cues found in those hard-selling infomercials.  There are new tools available to brands that are looking to adopt more of the merchant’s DNA. As television, billboard, and QVC-like platforms feature more DTC brands, these selling strategies will make their way to digital-first platforms.

In this way, Andy Khubani’s thoughts were prescient. The direct-to-consumer industry commonly appeals to consumers through two styles of media: (1) the lofty brand statement or (2) the coupon code value proposition. The style of advertising that drove Flawless from $0 to $180 million was a combination of both styles, designed to carry the potential customer from discovery, to intrigue, to conversion, to evangelist. As Andy Dunn noted, digitally natives brands will continue to struggle without an omnichannel approach to growth.

Brands are using traditional retail sensibilities to achieve half billion dollar exits by year three. Nearly $534 million in DTC revenue by Madewell, a J. Crew-owned private label headed towards IPO. Walmart building their own brands rather than acquiring digitally natives. And the godfather of the term “DNVB” noting that being a digitally native is now a disadvantage.

In the coming months, DTC brands will build around the aforementioned style of television advertising. They will test it on platforms like Instagram, ads will playfully mimic the cadence and tone. They’ll build the processes out on newer platforms tailor-made to achieve efficiently scalable levels of reach and engagement. The two Andy’s seemed to be advocating for similar best practices. By 2018, the cloud-based technologies commonly used by online-first brands had been widely adopted by legacy retailers. For challenger brands to regain their competitive advantages, they should look to the proven advertising and distribution strategies of the old guard. And then, they should make them their own.

Read the No. 331 curation here.

Report by Web Smith |About 2PM

No. 330: Gen Z Arbitrage

For those with Android-based smartphones in 2010, you may recall a fear of missing out. For iPhone owners who had access to a fledgling startup called Instagram, they made sure to remind you that your phone was incapable of using the software. Nothing matched the aesthetic or network effects of the photo-sharing platform for the rich kids. The fear of missing out moved many to leave Android for iOS. For those who couldn’t, Apple’s products lived – rent free – in their minds until they too had the opportunity to own their very own iPhone. This was Apple’s strategy and there’s a chance that it wouldn’t have been executed without John Doerr’s vision for Steve Jobs and his app store.

In 2008, Kleiner Perkins Chairman and partner John Doerr recognized the transformative influence that the iPhone’s launch would provide for the mobile software industry. As the story would go, Steve Jobs privately discussed the prospects of the iPhone’s fledgling app store with Doerr. Jobs originally viewed the marketplace as a private entity, one that would remain under the complete control of Apple’s management. Doerr had different plans. He believed that by outsourcing the development and marketing of apps to third party teams of software engineers, Apple would build an effective moat around their mobile operating system.

Eventually, Jobs obliged. He agreed with the ecosystem lock-in potential of tens of thousands of software engineers building products for Apple’s new mobile operating system. Managed by Kleiner’s Matt Murphy (now with Menlo ventures), the $100 million iFund launched in 2008 and was later doubled to $200 million. Kleiner’s commitment to the burgeoning mobile software industry directly and indirectly impacted consumerism forever. Numerous venture firms identified the massive opportunities that mobile applications would provide and billions in venture capital followed suit.

Leading iPhone apps in the Apple App Store in the United States | Source: Priori Data

Just as Kleiner’s pioneering iFund once inspired an arbitrage that even Steve Jobs couldn’t have anticipated, the iPhone is once again at the center of an equally critical opportunity. As of March of 2019, the iPhone had an installed base of around 193 million in America. An astounding number given that the United States population is estimated to be around 372 million. By 2021, 45.4% all Americans are projected iPhone users.

China already is outpacing the U.S. and much of the developed world in mobile payments, and a new digital currency that authorities say would be like cash and accepted everywhere would put China miles ahead in the currency space. [1]

Apple’s app store helped to solidify the iPhone as perhaps the most pivotal consumer product of the early 21st century. One that powered transportation, communication, advertising, and global commerce. But nearly 12 years later, America’s commerce adoption still lags behind other global powers. Consider China, a country that achieved 73.6% digital shopper penetration in 2018. Mobile payments continue to drive the vast majority of online retail activity in the Asian country.

The rise of mobile payments in China

As a result, over 35% of all retail sales in China are done through online retail channels. In the United States, online retail adoption hovers at 12%. Mobile payments are commonplace throughout China across age, geography, and economic status. The ability to buy and sell goods online is so commonplace that Generation Z is the leading market for online luxury shopping in China. This has been bolstered by explosive growth in mobile payments over the past five years, a transaction volume that reached $45.1 trillion in 2018. According to the People’s Bank of China, this figure grew 28x in five years. It was largely driven by a cultural shift that saw China’s youth (Generation Z) empowered to transact for goods and services across China’s online retail and media ecosystem. According to Chinese media, proximity payment platforms Alipay and WeChat account for nearly 90% of the transactions. In America, there are 61.9 million proximity payment users, transacting just 113.79 billion in retail sales according to Statista’s 2019 data.

The Retail Arbitrage Ahead

Generation Z is the largest, youngest, most ethnically-diverse generation in American history. With over 82 million members, this cohort comprises over 27% of the US population.

While China’s Generation Z is more active in the purchase of consumer goods than their American counterparts, a snapshot of Gen Z’s current buying power would likely surprise you. TransUnion studied the credit market for buyers between the ages of 18 and 23 between Q2 2018 – Q2 2019. In that year, this consumer cohort accounted for 319,000 mortgages, 746,000 personal loans, 7.75 million credit cards, and 4.37 million auto loans.

Penetration rate of online luxury shopping in China | OC&C

Nearly 27% of Americans (and growing) fall within the birth years of Generation Z, a demographic that is of critical importance to legacy retailers and DTC brands, alike. In China, a country often measured as a leading indicator for American commerce trends, Generation Z leads in luxury retail adoption. In America, Generation Z is awaiting the opportunity to buy with the frequency of Millennials and Generation X. The data suggests that their consumer activity will trump that of previous generations. While Millennials prefer DTC brands by a margin of just 4% over traditional retailers, Generation Z prefers these online-born brands to their legacy counterparts by over 40-45%.

Gen Z, the group born between the mid-1990s and 2010, is already known for its financial literacy. More mature and pragmatic than its older millennial forbearers, the cohort is savvy with both finances and technology, survival skills that members gained after watching siblings and parents suffer through the 2008 recession. [2]

These are the brands that they’ve grown up with on social channels used over their iPhones: Snapchat, TikTok, WhatsApp, Instagram and others. The DTC arbitrage in 2020 and beyond will be closely tied to mobile payments. The growing adoption of CashApp, Venmo, and teenage banking programs like Current may begin to help Americans close the gap between the US v. China mobile payment adoption rates. At the center of this activity is Apple Pay, the tool with the most potential to influence Gen Z’s retail habits.

Web Smith on Twitter

Online retail / DTC arbitrage: 2008: Shopify over custom builds 2012: Warby’s PR playbook 2014: Facebook advertising 2016: Key affiliate partnerships 2018: Selling the first $3-5M w/o ads

Generation Z is as technologically independent as Generation X was physically independent. Whereas all day bicycle excursions and unannounced sleepovers were a fixture in the 70’s and 80’s, that is much less so today. The meeting places and opportunities are increasingly presented in the form of digital layers. In that way, millennial parents have had to come to terms with moderating a new era of independence. Fewer drivers licenses and cars, more subscriptions and teen banking accounts.

Alexis is a middle school-aged girl in the American Midwest. An A student, athlete, and all-around great kid, she tends to earn extra privileges from time to time. Equipped with her Apple Pay-enabled iPhone, her love of TikTok and Instagram, her fascination with Glossier and Athleta, and a bit of granted independence – she’s transacted $113.41 with Glossier and Athleta’s cart in the first three quarters of 2019. The limiting factor has been her access to funds, a constraint that Apple will likely account for by offering a peer-to-peer subscription product. Apple Pay provides an independence that Americans are still dueling with. But that’s evolving. Parents are trusting of their children maintaining cash balances on their mobile phones, especially if they can easily monitor spend and availability.

If you ask the founders of Warby Parker how the team scaled so quickly, they may mention the low costs of Facebook and Instagram ads at the time. They may cite the savvy public relations work that led to that magnanimous GQ article. This moment was responsible for the  initial sell-through of their first run of prescription glasses.

70% of Gen Z has made in-app mobile payments in the last year. More than any other generation. [3]

From time to time, there are technological and economic advantages that lift the brands that are prepared for the moment. For direct to consumer brands, a category of brands that Gen Z prefers over traditional retail, there is an opportunity to shorten the marketing funnel by appealing to a generation of consumers that have been written off by the incumbents in retail. Traditional brands are marketing to the parents of America’s youth rather than directly communicating to a demographic that could benefit them. The data suggests that as Apple Pay’s adoption rates continue to improve, Gen Z will become the primary consumers of the goods that have, so far, been marketed to Millennials and Gen X members.

Year 2020

We underestimate the significance of the Apple card being used as a function of the Family Share, a program that allows Apple users to share access to digital products and assets with their families. The moment that ‘Gen Z’ is capable of spending (while accountable to their parents) is the moment that 27% of American consumers, with a preference for DTC brands, floods the market. This is the potential arbitrage that awaits for this era of retail.

And in this way, this small shift in corporate strategy resembles the magnitude of moment that John Doerr was responsible for. Either Apple will build a native function that allows guardians to ‘subscribe’ and account for potential monthly allotments to their dependents. Or a third-party solution will be engineered by an outside developer. Of all the mobile payment solutions available to consumers, it is Apple that sits at the trusted intersection of family and finance.

The Apple card is a platform that few have recognized. It’s also another lock-in opportunity, perhaps the first of the Tim Cook era. With few exits, low multiples, and increasing customer acquisition costs – the weakening viability of the DTC ecosystem has been difficult for operators and investors alike. By accelerating Gen Z’s path to becoming independent consumers, Apple stands to benefit during a time where the Cupertino-designed hardware is as commoditized as ever.

And like Silicon Valley benefited from Apple’s democratization of the app store in 2008, this era of consumer brands will stand to benefit from democratization of consumerism within the home. Our Gen Z daughters want Balm Dotcom.

Read the No. 330 curation here.

Research and Report by Web Smith | Edited by Tracey Wallace | About 2PM 

No. 329: The MLM-ification of DTC

On Mavely and the unspoken opportunity ahead for the DTC industry. When Greats Brand was reportedly acquired by Steve Madden after their most recent year that saw $13 million in earnings, it was a shock to many in the industry. Revenues seemed lower than what many expected but inline with the realties of buildng an omnichannel brand with an often-costly means of customer acquisition. It’s likely that profitability was an issue. This begs the question, how would things have been different if Greats’ customer acquisition model was one built on profitability and value? The venture-dependent, high growth model may elevate a select few brands in the ecosystem but it seems to be depressing the exit optionality of the majority of them.

Percentage of ad spend is a fine tool for aligning incentives. The problem is not with tested and vetted agencies. It’s with bad ones using it to pad income before providing value.

Marco Marandiz

Founded by Ryan Babenzien, Greats was considered a well-respected, independent shoe company with great propects to become a brand as promising as Allbirds. Babenzien’s marketing team had command over several types of outreach. Greats employed several methods to include performance marketing, direct mail, strategic partnerships, and even text-based promotion. But in the end, the brand never achieved profitability. It was a stark reminder that we may be turning a corner in the DTC space; there seems to be an added weight to the importance of earning profits. A rebuke of the SaaS multiple model that many tech companies can adopt to grow in value. At the intersection of growth and profitability, its the street named ‘Profitability’ that DTC brands should run along.

Greats, which still sells most of its shoes through its eCommerce site, opened a 500-square-foot location on Crosby Street last year. The brand also inked a wholesale partnership with Nordstrom and unveiled a buzzy collaboration with men’s fashion authority Nick Wooster.[1]

The company seems to have done everything right and yet, Greats reportedly sold for no more than two times the previous year’s revenues (June 30, 2018 – June 30, 2019). Greats raised $13 million in funding and sold for around a reported $26 million. It became abundantly clear that an absent path to profitability became the issue that drove the wedge. Steve Madden’s supply chain and organization will be a great fit for this reason, the company drove north of $410 million in the previous year. And they did so while maintaining profitability.

We want to build a profitable business and we’re one of the few digitally-native brands that hasn’t raised an ungodly amount of money that makes it challenging to build a profitable business and exit where everybody wins. We weren’t trying to build the company that had the biggest valuation in round one. We’re trying to build the company that had the biggest valuation at the end. [2]

The news of this acquisition served as a wakeup call for many in the direct to consumer space. What else can be done to improve the viability of DTC brands? Is an early-stage path profitability that crucial? If there is one thing that’s clear, the days of optimizing for ‘at any cost’ growth may be over. As customer acquisition costs continue to skyrocket, retail media has begun reporting on several marketing alternatives. Of them is Mavely, a relatively new platform that launched with a unique approach to reducing CAC for these brands. Mavely’s big idea: turn these DTC brands into multi-level marketing companies.

Mavely is trying to put a new spin on the multilevel-marketing model, in which companies recruit people to sell for them but which has gotten a bad rap for leading a lot of people to actually lose money. Wray said Mavely has no cost to join, no inventory requirements that consumers must maintain, and no minimum follower count that users need to recommend products. [3]

Founded by Evan Wray, Peggy O’Flaherty, and Sean O’Brien, the Chicago-based company has raised $1 million and is reportedly profitable “on a per user basis.” The app-based service has 10,000 users and currently operates as a glorified, peer-to-peer affiliate model. But while it may eventually and significantly supplement organic and paid growth for brands, that timeline is likely to be longer than Mavely would care to admit. Critical mass for this type of service means that Mavely will have to earn tens of millions of users. It will be interesting to observe whether or not Wray’s company can remain committed to growing the way that they’re preaching to their DTC partners: cost-effectively, perhaps a bit slowly, and by one customer (down-line) at a time. In the meantime, the performance marketing industry may be due for an evolution of its own.

Web Smith on Twitter

I’m not sure that a lot of DTC brand owners realize that they’re building companies valued at 1 – 1.5x revenues.

In a recent conversation on the merits of percentage of ad spend as a profit center for media buying agencies, agency owner David Hermann provided his perspective on how business should be pursued between DTC brands and agency partners.

This is why we do percentage of revenue tied to ROAS that’s based on their margins and what the break even point is after costs associated with our fees and expenses. Trust is key, we lay everything out before we get started so they never are in dark on anything. [4]

It presented a worthwhile question. As institutional investors continue to pour more and more venture capital into the DTC space, the approach to marketing should evolve with the volume. CAC has risen as a result of an influx of capital spent on performance marketing. This cycle has led to an unintended result; larger but largely unprofitable businesses. Perhaps the math of success or failure should be reconsidered by investors and founders, alike. What Hermann suggests is correct, agencies should consider a new model for compensation – one that emphasizes healthy contribution margins for these retailers.

Hermann went on:

[My firm is] dealing with one client’s margins right now. [We’re] helping them find a better supply chain. They needed a 2.15x margin just to break even after fees and expenses, so I am now helping on their margin-side. As I always say, media buying is just one side of the job now.

There is an opportunity for a new style of performance marketing agency. Agencies equipped with brand-side, practical expertise could build acquisition strategies around healthy margins, paving the way for percentage of profits as the key performance indicator shared between DTC brands and their agency partners. This solves several problems. Of those concerns, this model accounts for: (1) sustainability, (2) efficient paths to profitability, (3) longer-term relationships between agencies and brands, and (4) decreased dependence on institutional capital. Rather than media buyers being compensated for what they spend, agencies should consider compensation on the profits that they earn for brands.

It’s acquisition vehicles like Mavely, BrandBox, DTX Company’s Unbox, and Showfields that may influence this shift in the agency business model by providing meaningful opportunities for CAC diversification. And if so, the DTC era may finally begin to solve its profitability problem. This could be the first step towards improving valuation multiples and exit optionality for an industry in need of another feather in its cap.

Report by Web Smith | About 2PM