No. 317: The DTC Playbook is a Trap

Harry’s delivered a sizable outcome in their recent $1.37 billion exit. The men’s grooming company should be viewed as somewhat of a wake up call to DNVB leaders. Yes, Harry’s sold a simple product but it also disrupted the DTC playbook on its way to an exit. The company wrote and followed its own playbook, why don’t more digital-natives do the same? It has been reported that just 20% of Harry’s sales volume came by way of direct to consumer revenue. Everything about Harry’s ascension opposed the presumed operating instructions of the DTC era.

Yes, Target and J. Crew accounted for nearly 80% of Harry’s overall sales. But that isn’t only what sets Harry’s apart from the tendencies of other digital-natives. By all reports, Harry’s is a well-run business: the logistics operation is flawless, the company is reportedly profitable, and they’ve essentially retooled manufacturing for the demands of the DTC era. Simply put, Andy Katz-Mayfield and Jeff Raider have been extraordinary leaders.

Harry’s accomplished a great deal in six years. The razor manufacturer was an early omni-channel pioneer: partnerships with Target and J. Crew were pivotal in their ensuing mainstream success. Collaborations with digital publishers like Uncrate reminded consumers that Harry’s was an elevated brand, something more than their competitors. Harry’s was one of the first to launch pop-up activations. Each of these decisions countered conventional wisdom at the time.


From a 2014 interview with CNBC: Warby Parker takes on Gillette

Raider and Katz-Mayfield believe the key to Harry’s growth lies in this vertical integration, or what they like to call v-commerce. Simply put, the company now owns the entire process—from R&D to manufacturing to selling direct to the consumer. “It creates this virtuous cycle that makes for really happy customers, and then they become our best advocates,” says Katz-Mayfield.


When Harry’s acquired their manufacturing partner, the company became one of the few truly vertical brands of the DTC era. This was also antithetical. But, it allowed them to iterate their core product quicker and streamline product iteration for their sourced products like skincare, soaps, and shaving additives. The result was a Target aisle that began to reflect that Harry’s was more than a product brand, they were a category leader. In this way, Harry’s began challenging Gillette in an asymmetrical fashion by becoming one of the first true DTC category brands. By designing appealing products in other product verticals, Harry’s gained an advantage. This leverage helped them to amass over 2.4% of the entire razor market. In short, Harry’s wasn’t just great at marketing and design – they disrupted their industry.

I’m bearish. It’s hard, only the disruptors will survive.

Anonymous Founder

Skepticism of the direct to consumer era of online retail isn’t new. General Partner of Great Oaks Ventures, Henry McNamara recently tweeted:

Henry McNamara on Twitter

DNVBs Valued @ $1B+ & Funding 👓Warby $1.75B- $290M raised (6x) 👟Allbirds $1.4B- $77M raised (18x) 🪒Harry’s $1.37B- $461M raised (3x)* 💄Glossier $1.2B- $187M raised (6.5x) 🛏️Casper $1.1B- $339M raised (3.5x) 🪒Dollar Shave $1B- $163M raised (6x)* 🧔Hims $1B- $197M raised (5x)

He later corrected his figure on Harry’s ($375 million in equity sold) but the point stands. Is investing in digital-natives worth it? Yes. But only if the brand is capable of disrupting prior growth tactics and brand positioning. Dollar Shave Club and Harry’s represent two of the most notable exits of the DTC era, both found ways to acquire customers and sell a growing catalogue of products to them. Both were valued between 4-6x the capital raised. These companies found innovative ways to market, distribute, and grow. In turn, they innovated their way to earned market share, at the expense of incumbents and other challengers.

THE DTC PLAYBOOK IS A TRAP

It goes without saying that I’m bearish on DNVBs as a whole. As a whole, the industry tends to rely upon left-brain operators with systems and definite plans. But, I’m bullish on the challenger brands who’ve figured out that winning is often a result of rewriting the playbook. For the brands looking to grow to (efficient) critical mass or even an exit, the DTC playbook is a trap. The journey from zero to one is not one backed by b-school theory. Brands won’t be able to project tomorrow’s viability by analyzing yesterday’s LTV:CAC ratio, alone. But DNVB growth isn’t an art, either. Digital-natives will have to be more than beautiful design and savvy copywriting. The proverbial DTC playbook must be rewritten each time. If the DTC playbook were to be written, it could be boiled down to this:

There is no playbook. DNVB growth must be a malleable and agile operation. Brands must find opportunities where there were none. They must seek to do what hasn’t yet been done.

So yes, I am bearish on many of today’s DNVBs. Brands are merely following the paths of the brands before them and I believe that it hinders more than helps. Their path to their early-stage milestones are often unproven anecdotes written by investors who’ve likely never sold a physical product.

In a recent thread by Ryan Caldbeck on this same topic, the founder and CEO of Circle Up expressed his similar skepticisms with the following points:

    • I’m not that convinced that DTC is going to kill a lot of incumbents. If we look at share loss for Pepsi, Unilever, etc- much of that is not DTC, it is products/brands that meet unique needs of today’s fragmenting consumers.
    • I’m deeply skeptical that the DTC startups have nailed online marketing. Almost all of them are burning cash at levels unprecedented in CPG (most of $ for marketing). Does that mean they are good at marketing, or just that they have convinced venture capitalist to to give them money?
    • A question might be: can they sustain the innovation? I haven’t seen a lot of startups come out with more than a small handful of products. Most of the DTC companies are not using DTC for what I think it’s great at – which is iterating on product development.

YOU SHOULD BE BEARISH

In a recent Member Brief, I wrote on the asymmetrical warfare that Caldbeck summarizes so eloquently, “A dynamic brand enables more than product success, it enables category success. As brands known for one thing enter the categories of other competitors, the companies with the most brand equity and marketing sophistication seem to be best positioned to make the leap from product company to category brand.”[1] But brand equity is just one component; Harry’s operational superiority and omnichannel sophistication has been on display over its six years as an independent company. It should be a message to younger companies that achieving an exit will take more than a beautifully-crafted facade that hides operational chaos (as is often the case).

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.

Rather than determining speculative best practices with few data points, DNVBs should review the small number of successes from the DTC era. There have been but a few unicorns minted and even fewer exits earned. Each company earned a place atop the market by responding to forces, maintaining agility, promoting executive autonomy, and thinking a few steps ahead of the curve. Not one company on McNamara’s shortlist got there by following a playbook. That should be the only guidance that earlier-stage founders need.

Read the No. 317 curation here.

By Web Smith | About 2PM

 

No. 316: The Rise of “O2O”

In a recent report in the Minnesota Star-Tribune, Jackie Crosby details Target’s latest plan with their recently rebranded media company – Roundel.

Target Corp. does more than just sell merchandise to shoppers. Since 2016, it also has operated a separate, in-house media company that creates digital advertising for a host of major brands and businesses, not all of whom sell products at Target stores.

According to the recently-named president of Roundel, Kristi Argyilan believes that the in-house agency “represents a different way of thinking.” Target serves as a bridge between its customers and nearly 1,000 business partners in a novel way: “We infuse math — the insights and analytics that make our media company successful, with magic — the great, guest-focused design and shopping experiences that differentiate Target.” Roundel develops ad campaigns for Target.com and about 150 digital platforms like Pinterest and Instagram.

Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

The Star-Tribune report noted that the retailer isn’t the only company reconsidering the strength of an in-house media business. Walmart debuted an overhaul to Walmart Media Group in recent months. In addition, Amazon generated $10 billion in advertising in 2018 per the report. With Target, the report indicated, a new advertising identity would show to potential new clients that offerings extend beyond Target.com display ads. For Roundel – data and advertising design aren’t the differentiators, the physical stores are. The agency’s hope is to pioneer the analytics to correctly determine online-to-offline sales efficacy.

Target gets you every time

Most of us underestimate the potential at the intersection of performance marketing and physical retailers like Target. Outside of Foursquare’s private data, there isn’t yet a sufficient means of quantifying the marketing influence that the internet has on the traditional DTC-era consumer who also shops in physical environments. I’ll try to explain with my recent, one-off anecdote.

On a recent visit to Target, I was searching for place mats when I walked past the Quip display along the main corridor. On a mission to spend no more than $30, I felt pulled to the display like a tractor beam. Without the physical display, a Quip purchase would have remained a long-term “maybe.” As such, I disregarded my $30 commitment and picked up a Quip box. But this funnel began long before that walk past the display of battery-powered toothbrushes.


Observations:

  • Awareness of the product: I’d read about it in tech media and retail publications (top funnel), I’d seen the product in searches (middle funnel), and I’ve passively noticed a few retargeting advertisements over the past several months. None of this visibility moved me closer to the sale.
  • The packaging design: structurally unique when compared to the incumbent brands like Oral-B, Philips Sonicare. The box, itself, was taller. Target stockists have no choice but to place the product on the top shelf – prioritizing the Quip over the likes of traditional devices.
  • Branding: The colors popped and the design was superior, because the incumbent devices all possessed some variation of blue and white packaging.
  • Value: The price was 30-60% cheaper than the conventional, powered toothbrush.

Familiarity, appeal, and price were factors in my decision to purchase. But Target isn’t the only retailer that is competing to develop an O2O-capable, in-house media business. Walmart has overhauled its team – with the anticipation of a long period of growth. And Amazon generated $10 billion in advertising in 2018. Display advertising through Target, Walmart, and Amazon has been used to offset the rising costs of traditional advertising services like Facebook and Google. We expect this to grow. Digiday+ recently surveyed 71 media buying executives in March 2019. Nearly 80% anticipated increased spend on Amazon.com, 20% of the executives were planning to spend more on Walmart.com, and 14% were scheduled to spend more on Target.com through their reinvented advertising house.

Web Smith on Twitter

Target is a retail marvel, you walk in for one $20 item and you leave $140 poorer. There isn’t a brick and mortar retailer that is better for certain DTCs. It’s the ultimate retargeting ad.

Fostering DTC brand relationships has been a strategic advantage for the Minnesota retailer; no marketplace retailer has more of them. There are few companies with DTC recruitment initiatives to match Target’s recent partnership speed. The retailer selects rising brands, markets them with prime real estate, and presents great products within an environment known for soliciting impulsive purchases. Even so, the largest DTC brands have taken the digital-to-physical sales funnel into their own hands.

The online-to-offline Sales Funnel

In No. 272: A Path Forward, I discussed the positives of DTC brands operating within existing retail developments, improved sales potential, foot traffic KPIs, and the decline of Tier B and C malls.

There are 1,100+ malls in America and approximately 320 are graded Tier A. We have an oversupply of malls but that does not mean that traditional, anchored shopping centers no longer have a place in modern consumerism. Tier A malls have yet to see their best years. We expect their footfall traffic KPIs to grow, while B and C tiered malls continue a drift toward repurposed real estate.

O2O or “online-to-offline” commerce is a strategy that develops consumer affinity through digital channels and then brings consumers into physical settings to purchase in-store. The brand treats online and offline channels as complimentary offerings. The advantage of this model is three-fold: these retailers can assess consumer behaviors, share payment information between online and offline channels, and targeted consumers can be served at the top of the digital funnel for eventual offline purchase (or vice versa). Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

We compiled a list of 14 brands that have publicly reported revenues in the Top 1000 and one retailer who has yet to publicly report revenue. The following DTC brands have almost exclusively avoided marketplace wholesale deals in exchange for focusing on direct sales through physical locations.

BrandNumber of StoresDNVB Ranking May '19
Sold in Target StoresTop Retail City

Flagship Address
Warby Parker8612
Not YetNew York121 Greene St, New York, NY 10012
Casper21
8YesNew York627 Broadway, New York, NY 10012
Away551Not YetNew York10 Bond St, New York, NY 10012
Parachute576Not YetNew York129 Grand St, New York, NY 10013
Adore Me433Not YetNew York2655 Richmond Ave, Staten Island, NY 10314
Allbirds346Not YetNew York73 Spring St, New York, NY 10012
Rad Power Bikes3
84Not YetSeattle1128 NW 52nd St, Seattle, WA 98107
Everlane222Not YetNew York28 Prince St, New York, NY 10012
Glossier 234Not YetNew York123 Lafayette St, New York, NY 10013
Helix Sleep127Not YetNew York1123 Broadway #613, New York, NY 10010
Boll & Branch145Not YetNew Jersey1200 Morris Turnpike #D135, Short Hills, NJ 07078
MeUndies147Not YetLos Angeles3650 Holdrege Ave, Los Angeles, CA 90016
Kuiu154Not YetDixon 1920 N Lincoln St #101, Dixon, CA 95620
Shinesty 159Not YetBoulder1990 N 57th Ct A, Boulder, CO 80301
Rogue16Not YetColumbus1011 Cleveland Ave, Columbus, OH 43201

Whether through advertising agencies like Roundel or through their own channels, these brands have benefited from a growing means of commerce: online-to-offline. With the exception of Casper, which is partially owned by Target, these top digital natives have insourced all brick and mortar sales to their direct channels. As the ability to attribute sales improves, we anticipate an increased use of O2O for customer acquisition. For performance marketers who are judged by conversion rates and return on ad spend (ROAS), O2O is a welcomed opportunity to develop new methodologies for sales attribution and new advertising models to increase targeted foot traffic for retailers straddling the digital and the physical.

Read the latest curation here.

Report by Web Smith | About 2PM

No. 308: Legacy Brands Can Redefine DTC

On Procter & Gamble and why they should further invest in physical retail. If 2019’s Las Vegas’ Shoptalk convention is any indication, the brand representation may mark a shift away from self-sustaining, direct-to-consumer (DTC) brands. Legacy competition for consumer packaged goods (CPG) looks to regain the momentum that the DTC era has hindered. Prominent DTC brands are fewer and far between, this year. At Shoptalk, Bonobos is traditionally present but the brand is now owned by Walmart. Dollar Shave Club, another mainstay, is now owned by Unilever. And Trunk Club is now owned by Nordstrom. This is symbolic, in and of itself. Like many brands in the DTC space, they are increasingly dependent on traditional retail channels to achieve critical mass.

Of this year’s Shoptalk attendees, fewer are there to represent top 100 or so DTC brands. Here is a short list of the digitally vertical brands in attendance: Allbirds, Brandless, Boxed, Dirty Lemon, Everlane, Frank + Oak, Glossier, Harry’s, Mack Weldon, Mizzen + Main, Native Deodorant (Procter & Gamble), and Tuft & Needle. Of these, few have shunned wholesale retail and even fewer have shied away from physical retail development. While these companies have moved upon the traditional landscape with major retail partnerships, acquisitions, or physical retail growth, traditional powers have been slow to account for the resulting changes.

In the most recent Member Brief, we published The Target Report:

Target, Walmart, and Amazon (TWA) are each facing the commoditization of online grocery sales as new challengers continue to hinder TWA’s market cap growth. To address these challenges, each retailer is adopting product marketers and DTC brands are sources of new business and loyal customers. In each case, TWA are positioning themselves as practical homes to fashion, beauty, electronics, and lifestyle brands. Amazon is aggregating. Target is curating. And Walmart is acquiring. 

While the grandeur of DTC brands may be dwindling, legacy brands like Unilever and Procter & Gamble (P&G) are reinvesting into DTC era solutions. Between 2010 and 2019, CPG challenger brands established a momentum that traditional companies have had to counter. As of yet, traditional companies have yet to mount a true offensive against challengers and the retailers that have courted them. According to Happi Magazine, P&G is responsible for 18% of Walmart’s in-store sales. This number is up from 15% in 2016. This number has grown, thus far, despite Walmart’s heavy investment into DTC operations, exclusive CPG partnerships, and private label development.

2PM Data: P&G CoNTEXT

Revenues of the leading beauty CPG manufacturers in billions (2016)
EBITDA forecast of Procter & Gamble Co in millions (2018-2020)
Brand equity of the leading personal care brands worldwide in millions (2018)
Procter & Gamble’s net sales worldwide by business segment in millions (2014-2018)

P&G is at a crossroads. The 182 year old consumer brand earned its highest revenue figure in 2012 and has yet to reach those heights since, though they have successfully cut expenses and bolstered profits. Even so, P&G’s 2018 net income figure was the second lowest in their last 13 years. This diminished position corresponds with the growth in DTC retail sector. This growth along with the continued development of well-marketed private label CPG brands at big box retailers has resulted in increased substitution for traditional products from marketers like P&G and Unilever.

Redefining Direct to Consumer

A rendering of their franchise opportunity

There is a remarkable opportunity for P&G to leverage their products in inventive, new ways. The Cincinnati-based company recently launched Tide Cleaners, a franchise retail experience and service center for dry cleaning. Franchisees gain access to the most recognizable brand in home goods and Tide gets a new retail channel to sell products, build affinity, grow top funnel advertising, and realize service-driven revenue streams.

Tide, one of P&G’s most recognizable brands, has been repurposed to present an on-demand laundry service. Tide Dry Cleaners allows customers to select their desired service in-app, pay, and then drop off their clothing at the storefronts to be picked up when push notified. Customers will return to find their clothes washed, dried, and folded. These dry cleaning storefronts now run in Cincinnati, Boston, Chicago, DC, Philadelphia, Denver, and Dallas. This new retail experience begs the question: why not expand into vertical retail with physical “Everyday” storefronts?

One example of Procter & Gamble’s existing DTC efforts

On “P&G Everyday” and defensibility. As of 2018, Harry’s and Dollar Shave Club (Unilever) won over 12% of Gillette’s market share thanks to their direct model and partnerships with retailers. Procter and Gamble would further benefit from the development of a DTC physical retail model. By owning their in-store “Everyday” experiences, P&G would be able to meet a few objectives that would be useful as Amazon, Walmart, and Target continue to develop competing home goods brands to address their own profitability concerns.

  • Physical stores could reduce dependency on Walmart and Target as primary sales channels while giving P&G more leverage to negotiate better terms and in-store marketing collateral at Target and Walmart or on Amazon (currently an advertising partner).
  • By going direct to consumer, these owned storefronts would cut P&G’s dependency on wholesale relationships, promoting higher margins per sale.
  • With owned storefronts, P&G would be capable of launching their own delivery services and last mile operation.

While “direct to consumer” is the buzz phrase of this era in retail, physical storefronts are once again becoming critical components in a healthy customer acquisition ecosystem. But brand manufacturers can no longer rely upon big box retailers to run the way that they did prior to this era. Digitally native brands are prioritizing physical retail to reduce customer acquisition costs and build long-term loyalty. As a result of this shift by internet-first retailers, big box retailers like Walmart and Target have prioritized partnerships and acquisitions with these brands to drive their customers to their stores.

Walmart Inc. hopes to boost profits by charging for in-store and online advertising by some of the retailer’s biggest suppliers, including Procter & Gamble Co.

Will P&G Pay to Advertise in stores?

The DTC era of retail has begun to place marketers like Unilever and P&G at a disadvantage. Just ten years ago, P&G owned the grooming and beauty aisles at stores like Target. In some stores, Harry’s and Flamingo installations are the most visible. In others, its Native’s deodorant or Casper’s pillows. As third-party retailers like Walmart reevaluated shelf space and in-store marketing, P&G began to lose control of their product presentation. But their commitment to direct-to-consumer business models is a sign that this disadvantage may be short lived.

In addition to the Tide Dry Cleaner franchise system, P&G is experimenting with digitally-native brands. In addition, the company continues to test new online retail formats with BigCommerce. But it’s the direct store format that could offer physical retail growth and brand defensibility amidst the continued evolution of retail. A P&G owned storefront wouldn’t just be a place to own relationships with old customers. It would serve as a space where P&G’s new digitally-native brands could test for and acquire new customers. Direct to consumer retail isn’t limited to online channels, DNVBs are innovating in this way. Marketers like Unilever and P&G can do the same.

Read the No. 308 curation here.

Report by Web Smith | About 2PM