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.
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:
- Away
- Rapha
- Soylent
- Outlier
- Wone
- Bevel
- Hodinkee
- Monocle
- Casper
- Rxbar
And here is 2PM’s list (more at our DNVB Power List):
- Away | revenue leader in the carry-on travel DNVB industry
- Casper | revenue leader in the DTC mattress space, distributorship through Target
- Harry’s | leader in the men’s shaving, effectively growing into other verticals.
- Chubbies | top performer in the men’s casual space
- Glossier | leader in makeup, a substantial amount of traffic driven organically
- Hodinkee | there isn’t a more credible community of watch journalists
- Four Sigmatic | the leader in alternative coffee sales
- Mizzen + Main |combines DtC commerce with a targeted physical retail presence
- Serena & Lily | leader in DTC furniture, organically driven by quarterly brochures
- 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.
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By Web Smith | About 2PM
