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

Member Brief: A Neighborhood of Goods

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If you asked anyone around the table at last night’s Executive Member Roundtable in Soho, one of the issues facing the maturing DtC industrial complex was an obvious one. There is a lagging effort in commercial real estate to attract these emerging brands – a growth trigger that could potentially revitalize stuttering malls by attracting a new cohort to Tier B malls. The irony of the conversations around physical retail weren’t lost upon any of the industry leaders at the table. We were in the heart of Soho, Manhattan. If you walked a tenth of the mile in any direction, you’d see the physical manifestation of nearly every top 30 DNVB in the market: Casper, Glossier, Warby Parker, Bonobos, M. Gemi, Rowing Blazers, Aesop, Aether, Birchbox, Harry’s, Theory, and the list goes on.

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No. 295: Asymmetrical Warfare

assy

The truth is somewhere in the middle. It involves nuance and an unbiased view at the industry as whole to understand what’s occurring, as things change with light speed. The recent article in The Economist paints a pretty picture of a DTC industry. The industry, as a whole, is a lot more difficult than newly-minted retail entrepreneurs would like to think. Two things can be true: (1) stodgy old brands are run by career executives that don’t understand agility or innovation (2) most DTC brands will fail because they are run by former management consultants or recent MBA grads who do not value the powers of brand, relationships, and community.


Asymmetrical warfare:  warfare involving surprise attacks by small, simply armed groups on a nation armed with modern high-tech weaponry.


Direct to consumer brands are difficult to scale. The assumption often made is that you can spend on design, manufacturing, packaging, and then acquisition. Spend, spend, spend, spend. Thus, the endless VC raises of $30 million or $50 million or even $100 million. The problem is that while able entrepreneurs can outsource design, manufacturing, packaging, and even acquisition – incumbent brands were built on relationships, consistency, value, and trust. Traditional DtC acquisition channels cannot immediately facilitate trust or value. That part takes an insane amount of work and consistency. It also takes offline interaction, a phenomenon that we’re watching in real time as “nearly 850 stores are due to open in the next five years.” [Forbes]

Industry giants took time to begin worrying about the arrival of game-changing newcomers; barriers to entry in their business are high. But by now the incumbents are stagnating. According to Nielsen, a consultancy, the biggest 25 food-and-beverage companies, for example, generated 45% of sales in the category in America but drove only 3% of the total growth in the industry between 2011 and 2015 (see chart). A long tail of 20,000 companies below the top 100 produced half of all growth.

Economist: Growth of Microbrands Threatens CPG Giants

If you ask Publicis Groupe’s EVP of Innovation Tom Goodwin about direct to consumer (DtC) brands, he will give you an earful. To be fair, defending Procter & Gamble is one of his chief functions. P&G is so important to his employer that they just announced a Cincinnati office to support P&G’s advertising strategies. In a October 22nd article that he wrote, he includes this hearty passage:

DNVBs may be a flash in the pan, they don’t have moats, they have fickle brands, they can die as soon as they fade and we can’t keep talking to the 1/100 companies that make it as anything other than survivorship bias.

Marketing Week

He’s not entirely wrong. Just a few days earlier, I’d published an article on DTC brand defensibility where I wrote on how surviving brands established the moats necessary to be more than a flash in the pan. This era of the consumer web is defined by two groups jarring over you: the affluent, intelligent, busy, and principled consumer. We are communicating many of the same elements while landing on two distinct conclusions: he believes that DNVBs cannot last and I believe that they can. Our professional experience shades our opinions here. Five years ago: Jeff Blee, the former VP of buying and planning for Brooks Brothers, commented on an early stage DtC shirt maker:

Unperturbed by the newcomer, there would always be a market for shirts he described as “newer.” And, “any competition was good news.”

New York Times

The iconic menswear brand has since adopted a Joseph A. Bank discount strategy (four shirts for $200) and Mr. Blee now runs a DtC apparel startup. This war between old and new is not limited to consumer packaged goods, or luggage, or dress shirts, or wooly shoes. It’s everywhere. In a recent article by someone at Business of Fashion (no byline), they discuss the woes of L Brands’ Victoria’s Secret and how “it can save itself.

And yet, Victoria’s Secret still feels as though it’s stuck in a time capsule: an era when it was okay, even expected, to openly project the male gaze on women’s bodies, when uncomfortable push-up bras with air pumps were viewed as innovative, when people still shopped at the mall. This season’s show felt like an homage to itself. Between set changes, archival footage played in the background.

Their article builds on an earlier report by 2PM, where we laid out the increasing competition faced by the legendary intimates incumbent. What we’re seeing here is an onslaught by new, cheaper-to-run brands that are appealing to the senses and wallets of communities primed to look elsewhere. Not only are companies like L Brands (Victoria’s Secret parent company) and P&G (Gillette’s parent company) and Brooks Brothers competing on a shifting grounds of price, ease, and selection; they are competing on culture (size inclusivity, the “pink tax”, and shifts in where / how we work).

Look no further than the pushback facing the Victoria’s Secret CMO, 70-year-old Ed Razek, who was quoted to have said, “we attempted to do a television special for plus-sizes [in 2000]. No one had any interest in it, still don’t.” Fighting a battle on multiple fronts takes sensible leaders within an organization built for agility. These leaders must also be empathetic to consumers and progress. Needless to say, Razek’s comments were tone deaf and aloof. Currently, several top brands are competing against the L Brands subsidiary by designing and marketing more inclusive products. In No. 271, I wrote that Victoria’s Secret needed an update:

In addition to intimates brands expanding into VS’ territory, there are adjacent pressures from the athleisure market, an evolving beauty market, and the rejection of lingerie by consumers looking for comfort, function, and individuality. Rather than continue competing against the likes of Adore Me (21), THINX, Inc. (31), and Third Love (51), or Savage x Fenty, Victoria’s Secret could re-invest in the brand, messaging, and end-to-end processes by following Wal-Mart’s lead.

The news around Victoria’s Secret’s latest fashion show was, by all accounts, a fiasco. But the solutions are right before them. They should observe the legacy CPG industry. There, innovation often involves: youth, acquisition, and agility. Procter and Gamble is doing just that. The CPG conglomerate recently restructured to form smaller, agile teams and the Cincinnati company is open to acquisitions.

The evolution of the DTC era has more and more brands competing in physical retailers, adjacent to the CPG, apparel, and shoe companies who’ve existed for decades. There are dozens of brands, in each market segment, looking to compete for your dollars.  Tom Goodwin is correct in his assessment of many of the brands who have raised exorbitant amounts of capital to acquire customers via paid media.

But that’s not the characteristic of the entire DtC industry. As media buying becomes more difficult for challenger brands, more direct-to-consumer brands will shutter. And competition will become more symmetrical and predictable as the hundreds of new brands narrow down to the sturdier dozen. P&G will shake off much of the newfound competition by adopting many of challengers’ practices (and brand IP via acquisition), as many begin to compete on familiar territory. But there will always be room for the independent challenger brands that get it right.

Read the No. 295 curation here.

Report by Web Smith | About 2PM Executive Membership

Continued reading: CircleUp CEO Ryan Caldbeck’s latest thread on the aforementioned Economist article.