No. 295: Asymmetrical Warfare


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.

No. 290: On DtC brand defensibility

Screen Shot 2018-10-09 at 8.19.20 AM

If you’ve seen a battle scene from a movie about knights, soldiers, and castles, you may understand the concept of an economic moat. If you watched an old war film lately, a moat is often depicted as a water-filled ditch. It typically helps to defend a fort, village, or castle. In that film, you may have seen projectiles fly toward the castle and cannons fire from atop, in return. Enemy combatants rush the castle only to encounter a deep and wide area of water, poison, hot tar, and sharp spears. As the castle faces fire on all sides, the offensive is often ineffective. The moat helped the castle defend its position. 

People don’t know what they want until you show it to them.

Steve Jobs

In traditional tech, there are moats all around us. Apple builds moats into many of their hardware devices. Your Macbook prefers its Safari browser (until you otherwise designate Chrome), Apple Car Play exclusively defaulted to Apple Maps until iOS 12, and your Airpods defaulted to Apple Music unless you specified Spotify. For physical goods, there are brand moats as well. The best example happens to be at Nike.

Nike works with youth leagues to outfit elite teams, providing young players (and their parents) incentives to purchase all of their wears from the brand. The sportswear manufacturing giant outfits the NFL, the NBA, and the vast majority of NCAA sports. When fans purchase licensed apparel, consumer psychology tips in favor of Nike.

Amazon Prime has become a funnel for the retailer’s private label brands and their high margin devices. Walmart has operated at such a low cost-basis, that their most loyal consumers have little to no market substitute. Shopify attract new merchants with little revenue and fosters them along their path to $20 million per year, introducing a suite of products to keep them from replatforming.

And then there’s Whole Foods Market, who – prior to acquisition – competed in a red ocean. They succeeded for a long time by building an economic moat around their brand and user experience. For decades, Whole Foods’ economic moat was a collection of subtle advantages: nicer fixtures, a wider assortment of organic foods, great lighting, and a knowledgeable floor staff. There was little to nothing technical about the retailer’s growth, but the collection of these advantages locked customers in. An economic moat can be built by more than a company’s technological advantages.

How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

Warren Buffett

The internet didn’t destroy the moat, it changed the definition. The smaller the niche, the less the competition. For products in a small niche, there’s less of a need for brand defensibility. But for product manufacturers in a red ocean, defensibility is the difference between stalling out and taking flight. Yet, brand defensibility is often deprioritized. In some cases, brands will focus on customer acquisition (at all costs), often at the expense of building a lasting economic moats.

Old consumer economy. Initially, there were three influences to consider when launching a product in this new consumer economy: brand, product, distribution, the hive, and acquisition model. Prior to the rise of direct to consumer retail, a brand’s moat consisted of these:

  • brand: the impression made upon consumers. The perception created around a physical good mattered most. This impression helped brands remain top of mind between their visits to their shopping centers or the occasional television advertisement.
  • product: the quality of the goods. The value created by the manufacturer influenced brand perception, customer satisfaction, and even word of mouth influence.
  • old distribution: where it is sold. The better the product, the more likely that a consumer could find it anywhere. This signaled that there was consensus around the quality and durability of what is being sold.

With this model, a brand’s trajectory and defensibility was mostly predictable. This was pre-internet: before the rise of the internet and digitally native vertical brands. With the proliferation of direct to consumer brands, influences have changed.

New consumer economy. With the internet, any retailer can market, sell, and deliver physical goods. Brick and mortar distribution is no longer defensible against upstart brands. The web democratized the ability to build product-based brands. In the new consumer economy, a brand’s moat is not only its features, price, and availability. It’s a consideration of product experience, technical advantages, and brand evangelism.

If you don’t land the first and loyal 100, your brand is less likely to earn the early adopters who look like the first 100. Without early adopters, you will not achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

No. 277: The Power of the 100

In the new brand economy, maintaining defensibility has become more complicated. In physical retailers, traditional luxury brands know their buyers’ preferences. Today, the savviest DNVBs are in direct contact with many consumers by way of customer service, email, and private messaging. They are using these channels, pricing strategies, branding to influence outcomes. Brands have optimized around, beautiful packaging (see: Lumi) fast shipping (See: ShipBob), and easy returns (See: Loop). And with these technological and brand advantages, they are siphoning the loyalty away from incumbent brands like Gillette, who are still operating under the rules of the old consumer economy.

Here are the revised influences:

  • brand: the reputation of the product manufacturer. The collective sentiment of the brand’s consumers.
  • product: the value created by the product. But also, the value created by the ease of purchase, the fulfillment process, and the customer follow-up  upon purchase.
  • new distribution: how is it sold? The better the product, the more likely that a consumer has a 1:1 relationship with the brand.
  • acquisition model: how does the brand achieve meaningful foot traffic? And what is the right combination of paid and organic growth? Is organic growth sustainable?
  • the hive: who is the product’s first 100? Has the brand experienced organic growth on the foundation of this digital community? Will the “100” defend the brand when skeptics criticize it?

A practical example of competition

In this recent post by Harry’s, their team addresses Gillette head on:

In the face of competition from companies like Harry’s, Gillette has lowered its prices for certain razor models. Yet, Harry’s may still be the best value if you’re looking for a 5-blade razor with a flexible head, lubrication strip, and trimmer blade—the key features many guys consider to be most important for a great shave.

How long have you been overpaying for your razors?

At Target stores, Harry’s maintains the majority of the mindshare in the men’s skincare aisles. Often in spite of Gillette’s legacy of long-term performance. And today, Procter & Gamble disclosed that the company is downsizing it’s valuable Gillette real estate in Massachusetts. Presumably, the P&G label is preparing to more efficiently compete with online-first brands that are eating into their market share.

A moat for DtC brands is the competitive advantage earned by focusing on brand, product, distribution, acquisition, and the hive – the brand’s most visible customers and product activations. This competitive advantage fuels incremental growth in established industries.

I’ve compiled two distinct lists of the DNVBs that have emerged in industries that are highly competitive: luggage, skincare, supplements, digital media, and athleisure. These brands aren’t notable because of their lack of competition; rather, they are notable because they rise above tremendous competition. Paul Munford, founder of Lean Luxe, reports on direct-to-consumer brands. He made the following selections:

  1. Away
  2. Rapha
  3. Soylent
  4. Outlier
  5. Wone
  6. Bevel
  7. Hodinkee
  8. Monocle
  9. Casper
  10. Rxbar

And here is 2PM’s list (more at our DNVB Power List):

  1. Away  | revenue leader in the carry-on travel DNVB industry
  2. Casper | revenue leader in the DTC mattress space, distributorship through Target
  3. Harry’s | leader in the men’s shaving, effectively growing into other verticals.
  4. Chubbies | top performer in the men’s casual space
  5. Glossier | leader in makeup, a substantial amount of traffic driven organically
  6. Hodinkee | there isn’t a more credible community of watch journalists
  7. Four Sigmatic | the leader in alternative coffee sales
  8. Mizzen + Main |combines DtC commerce with a targeted physical retail presence
  9. Serena & Lily | leader in DTC furniture, organically driven by quarterly brochures
  10. Wone | redefined ultra-premium in athleisure by selling out of $320 leggings.

One similarity that our lists seem to share: brands’ focus on its customers. And not just traditional customer service but the incorporation of customer feedback in many of their decisions. Above and beyond price and product, a brand’s hive can influence its defensibility.

A common mistake made throughout the consumer economy is the belief that customers are won and lost on features and price – alone. It’s a product manufacturer’s responsibility to build 1:1 relationships with consumers who are power users. In our recent report on Nike’s physical retail efforts, we began with this:

I walked into the Melrose store and I didn’t think that it was for me at all. I’m not the millennial luxury consumer. And that’s who Nike’s after. The Los Angeles retail fixture is very specific to the area, in aesthetic and in offering. Every square foot of the store is built for Instagram. And for a moment, I realized that though I am a millennial, I am not the millennial that Nike pines for. This store is for them.

No. 289: Nike and hyperlocalization

A defensible product becomes consumer’s first choice. Building a community around this is very difficult but this is what separates defensible brands from the brands without it.

A common misconception is that a brand with a strong economic moat has no competition. Quite the opposite, brands with the strongest means of defensibility often have numerous competitors vying for increased sales and brand equity. What sets the one apart from the many? A focus on relationships, value, and retention – not acquisition, alone. The conversation begins when the purchase is made.

As more brands focus on DtC commerce, an economic moat does more than protect the product manufacturer from growing competition. Without an economic moat, existing customers may depart for alternative options based on price, merit, and availability. In this context for brands, defense can be the best offense.

New to 2PM? Read the latest subscriber curation here.

By Web Smith | About 2PM

Member Brief: Checkout is acquisition

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The lead article of Member Brief No. 40 is by Micah Rosenbloom, a talented and proven venture capitalist at Founder Collective in Cambridge, Massachusetts. In his most recent Tech Crunch article, there’s a great passage:

What strikes me as most unusual and unpredictable is that most of these companies were founded by entrepreneurs with analytical, business training. They’re strong on finance, marketing, and customer acquisition. It’s not what you would have expected in categories noted more for an ineffable “cool” factor than feature lists. Creative design helps a brand stand out, but accounting acumen is what keeps it alive and on its way to becoming a unicorn.

He’s mostly right. But let’s not forget the left brain skill set of appealing to a consumer’s psychology. It’s an amalgam of art and science that the lasting brands master and the trendy brands ignore.

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