Memo: The Rise of the Holding Companies

One side has the advantage of distribution, the other side has the advantage of brand equity. I believe that the holding company trend will favor brand equity in the long run.

As the rumor persists that Thrasio is nearing a public offering, its competitors are growing in force, with Branded Group, Elevate Brands, Unybrands, Technology Commerce Management, Boosted Commerce, Heyday, and Win Brands Group among them. While technology may play a role in quantifying each investment’s viability and potential upside, none rely solely on an algorithm to determine a brand’s fate. That is, until recently.

OpenStore has raised $30 million to grow its business rolling up Shopify sellers, Axios reported this week. The emergence of a cottage industry of merchant holding companies on Shopify, also a thriving business for Amazon sellers, is telling: Shopify has built an eCommerce universe with gravitational pull. Here is how OpenStore works:

  • retailers hand over login credentials
  • OpenStore verifies sales and other inventory data
  • bots determine the acquisition offer by the next business day

OpenStore is now valued at $250 million and has already launched its automated acquisition tool targeting thousands of brands. While Shopify merchants sell on their own sites with no centralized selling platform, OpenStore can benefit from the richer nature of these sellers, who have direct relationships with their customers, unlike Amazon sellers. OpenStore is targeting sellers that are struggling to stand out in a vast sea of eCommerce players – a smart tactic as customer acquisition, marketing and brand awareness are among the most expensive parts of building a merchant business, and Shopify lacks the promotional algorithm and search functions of Amazon (though that’s beginning to change with Shop).

Amazon is the queen of discoverability.

According to Bloomberg, Shopify is leaning into the roll-up functionality, having built its own exchange for storefronts. The offer process will soon become part of the Shopify platform: any merchant can log in and, using OpenStore’s bots, receive a bid for selling their entire business. Shopify’s roll-up business has room for scale but is still far off from Amazon’s, and that’s for good reason. While Amazon sellers tend to have more scale than the traditional small business merchant, Shopify sellers tend to score higher on a measure of brand equity and net promoter score. For Amazon sellers, few own the relationship to the customer. It requires a bit of sophisticated advertising and sales funnel development to target Amazon customers, driving them over to the brand’s native cart. Shopify brand acquirers see one less step. For companies like Win Brands Group, a backend system of operational excellence is used to improve operations, grow margins, and trim duplicity. Time will tell whether or not OpenStore has a similar strategy in the works.

Amazon’s advantage remains product discoverability. The roll-up companies devoted to that format usually acquire FBA brands with less short-term risk but higher long-term risk. This is the key question:

Are nascent Amazon brands capable of the same successes if sold through Shopify, BigCommerce, or another commerce provider?

OpenStore competitors like Perch, Thrasio and Elevate Brands are focused on nascent businesses. This makes sense for them. It takes much less work for Amazon retailers to exceed $5 million or higher in run rate. For Shopify merchants to accomplish the same, it requires a better sales funnel, a stronger operational team, and a brand that consumers are drawn to. To lower risk of failure, Win Brands Group acquires brands earning eight figures or greater in annual revenue. When assessed through traditional methods, this seems to be the best method. But OpenStore can revolutionize the Shopify side of the brand acquisition spree if it can identify strong businesses as well as Win Brands Group can, but much earlier in their growth trajectory. Can OpenStore detect these types of brands algorithmically? And when they acquire them, can they streamline operations in a way that is conducive to proper retail brand development?

Right now, the business of Amazon brand acquisition is the prefered channel. Consider this recent commentary about the state of digitally-native brands. In one of those contributor posts for Forbes by Chris Shipferling, the Managing Partner at Global Wired Advisors, provided a bull case for Amazon brand acquisitions:

I believe that campaigns prioritizing keyword rankings, earning reviews and driving conversions will all but replace traditional branding strategy within the next three to five years. And as many of these practices are already ubiquitous in the marketplace, the definition of what comprises a premium brand will evolve to reflect best practices for e-commerce.

There has never been a more incorrect assessment of retail brand psychology. While these quantifiable metrics will continue to serve a role in how a consumer assesses their purchasing options, brand has likely never been more important as algorithms shift, third-party data diminishes, and platforms cultivate their own private labels. Brand is important. And this is where OpenStore can succeed in a model that more resembles an Amazon acquisition (quantitative) than a Shopify buy (qualitative).

Retailers want one-to-one contact with their customers. They want their brands to have a message, a purpose and a point of view. More of these exist on Shopify.com than (natively) on Amazon.com. now, and this may lead a defection away from Amazon-hosted brands. See below for a relevant example. As the industry shifts toward the roll up of Shopify brands, fewer non-VC backed brands will need to wait to maturity before interest from investment vehicles like Win Brands Group. OpenStore is in good position to scale the Shopify strategy if its proprietary technologies can select brands as well as the digitally-native brand veterans at Win Brands Group and their Shopify-focused contemporaries.

By Web Smith

Note: this memo is an expansion of the short analysis from Friday’s member brief. That version had a few grammatical errors. This version has been improved and is worth your time. To all who emailed in, I apologize for the errors.

Memo: Supply and Demand

Today, it is hard to buy: lumber, stone, a sectional sofa, a dress shirt, yoga pants, basketball shoes, or luggage. Even the most sophisticated retailers are struggling, now imagine the nascent brands. The current struggle is an opportunity to reinforce our back office supply chain and logistics strategies.

We evangelize the marketers and not the logistics and supply chain leaders. In the world of CPG and DTC, many assumed demand generation was the difficult assignment. But today, so many will fail to reach their potential because they have much less to sell. Or because they can no longer mitigate shipping costs. There’s simply no supply and each day sees rising demand.

The world’s supply chains were already in a precarious state before the pandemic. Now, after a period of extreme disruption, manufacturers can’t meet demand, resulting in a chain reaction of delays and out-of-stock products. While out-of-stock inventory can signal high demand and appeal for a brand, eventually the allure runs out when there’s no back supply.

And as customers in the US embark on revenge shopping that shows no signs of slowing down (back-to-school shopping is expected to amount to $33 billion, according to Deloitte), the supply chain will continue to be strained and products will continue to be unavailable. Take a recent article on The Strategist as proof of how pronounced this situation is: The machinations of the global supply chain, when operating right, should be invisible to the average end consumer. The Strategist, a consumer shopping title, published a piece last Friday guiding customers on how to shop right now despite a shortage of availability for high-demand products and incredibly long lead times. The world is reopening, people want to buy. Right now, supply isn’t meeting demand and logistics costs are eating into margins.

S&P Global published a report analyzing what’s happening in the global supply chain, finding that retailers are trying to fix this problem by increasing imports:

Retailers have certainly attempted to keep up with demand growth. U.S. seaborne imports of consumer discretionary goods in May increased 88.2% year over year and by 32.9% compared with 2019, led by shipments of home furnishings and household appliances.

Yet, the increased level of imports has not been enough to support sales on the basis of falling inventory-to-sales ratios. Materials are still in short supply like aluminum and lumber. An increase in imports means there’s a bottleneck, slowing and delaying shipments into the US. And as the New York Times reported in June about a long-standing supply chain solution known as “Just In Time manufacturing”, where manufacturers receive components, materials and other parts only as they need them in order to minimize costs of overhead. The practice started in automotive production and rippled to other categories including fashion and food. That short-term solution has led to a period of extreme underpreparedness:

Still, the shortages raise questions about whether some companies have been too aggressive in harvesting savings by slashing inventory, leaving them unprepared for whatever trouble inevitably emerges.

To get out of this, retail supply chains will need to find both short-term solutions as well as rethink dependency on complex supply chains. Brands will invest heavily in flexible processes that can account for moments when things don’t run as planned. For now, expect delays.

By Web Smith 

Memo: Understanding DTC Backlash

The New Yorker article was on the “illusion of the millennial aesthetic” and it appears that there is reckoning. According to industry operator and analyst Nate Poulin, venture capitalists have invested roughly $22 billion into DTC brands and the total liquidity, thus far, has been about $25 billion. Of that $22 billion invested, many were into brands that were meant to “disrupt the industry.” These were modern brands positioned for the upwardly mobile: beautifully designed, quietly sourced, and well-packaged. It was an aura of excess that propelled design houses to position DTC brands as products for H.E.N.R.Y. But what happens when the consumer falls on hard times? For much of America’s workforce, the past 15 months were just that. And many of life’s luxuries were traded for the steady, the essential, and the trusted. DTC brands, for the most part, are not that.

The question writer Kyle Chayka raises is around whether or not we actually need all this brand disruption, and if the new crop of millennial brands prioritized aesthetic and marketing over functionality. The DTC backlash has begun. I have an opinion as to why:

According to Chayka, Great Jones is one example of the dysfunction of DTC and how a crop of colorways that look good on Instagram can cover a much more troubled company behind the scenes. Other brands either don’t stand up to the quality test or are so overtly “millennial” that they impose: an unnamed brand selling bath towels failed to stand up to more reliable brands, while Away suitcases feel like an embarrassing relic, he writes. Away, however, is an example of a company that has returned to the forefront. Today, it resembles more “orange” than “green.” As the company near’s IPO, it moves towards the bottom of the hierarchy – even if the products remain elevated. Their most recent advertisement was well-received.

On whether or not the millennial brands will stick around, the problem is boiled down to functionality and reliability:

Perhaps it will fade out when customers learn that a compelling narrative is not the same thing as the integrity of a product or of the business selling it. We’ve seen many times before how the growth-at-all-costs startup mentality can backfire.

Reliability has been an incredibly important feature in what we buy over the past year-plus, which brought about anxiety and uncertainty. In more difficult times, legacy brands become the preferred purchase. There’s something to be said about consistency and quality in the middle of a pandemic. Despite spending a lot of time on our phones, being served Instagram ads for new brands and products, the standbys won out. The millennial DTC brands represent a certain amount of excess that falls out of fashion during a crisis. In times of recession or duress, customers flock to brands that feel like necessities. That has meant good news for the old guard, the standbys that might blend in on a Target shelf but are reliable in their quality.

For DTC brands, the next step of growth will be proving themselves as essentials, not just aesthetic excess for a specific cohort of customers that, when put up against a wall, may not prove so loyal. I believe that the faster they prove essential, the less likely these stories will dominate the narrative. And this year will see a number of brands that were once “nascent” become members of the old guard.

By Web Smith | Art: Christina Williams | Editor: Hilary Milnes