Everyone knows the Dollar Shave Club story. A guy launches a business selling razor blades online for $1, their video goes viral, they profit and sell to Unilever for $1b.
“Are our blades any good? Nope. They’re f**king great”
People don't shop like they used to. New research shows that consumer goods transactions are increasingly happening on the internet. Retail is being radically reorganized from the 20th century’s automobile to the 21st century’s smartphone.
Despite the perception of American consumers being the most tech-savvy, Europe is leading the way with French (40%), UK (39%) and German (33%) shoppers exhibiting the greatest balance of multichannel shopping preference.
As a consequence, the consumer economy has been changing dramatically. In France, e-commerce grew 15% in 2016 reaching 72 billion euros. This represents only 8% of retail trade with strong disparities depending on the sector.
At the same time, Amazon has been gaining ground on traditional brands as well. Battling with Bezos' baby on a pure e-commerce play is the equivalent of teasing a drunk Connor McGregor – you only do it if you have a death wish.
Whilst Amazon will most probably remain the best place to make efficient purchases because they control the product and distribution, they have low added-value.
This means there is the opportunity for new, strong, inspiring brands to capture consumers who are making emotional and engaging purchases by controlling the entire supply chain, all the way to the brand.
Distribution -> Product -> Brand
This is where Digitally Native Vertical Brands, or DNVBs for short, enter the game. A Digitally Native Vertical Brand is a brand born online with a "maniacal" focus on the customer experience digitally and complete control over the supply chain, including their own distribution.
To qualify as a DNVB, you must (1) sell online, (2) directly to consumers (no third parties), and (3) control your product all the way from the warehouse to customers (no middlemen). Much in the same way that ‘fast fashion’ reinvented the mass clothing market in Europe, modern consumer product groups are reinventing the mass consumer market.
Zara is not just a retailer. It owns the supply chain and can respond to the market in days vs. traditional retailers that plan out seasons almost a year in advance.
DNVBs are not just e-commerce companies. They own and deliver value across the entire supply chain.
Typology, a new Paris-based startup that designs and sells directly to consumer quality skincare and cosmetics products announced a $10 million funding round from Alven Capital, Marc Simoncini, Xavier Niel and Firstminute Capital.
But Typology is far from the only player in the space. There’s a huge cohort of European DNVBs capturing consumer attention (and money).
- Foodspring, Feed, Nu3, and Huel are dominating the health space.
- Simris and Vitoo are opening up the supplements market.
- Barnerbrand sells high-quality computer eyewear.
- Paris-based Tediber is fighting it off with Casper to become the Mattress King.
- Madrid-based Loopas is killing it in the contact lenses space.
- Einhorn and Morning Glory play in the contraception and beauty categories.
- Bloom and Wild is conquering the flower market.
- Companies like Labote, Sezane, Dynamo, Organic Basics, and Horizn are battling the fashion giants.
And that's just the start. Why are DNVBs popping up left and right?
DNVBs are winning - but why?
DNVBs are capturing nearly 2% of the total $453 billion U.S. e-commerce market, and are growing nearly three times as fast as the average e-commerce retailer.
The top 75 DNVB retailers generated $8 billion total in 2017, which was 44 percent growth compared to the year before.
But why do DNVBs win?
The short answer: digital presence, unit economics, and a customer-centric brand.
Let's start with Digital. Justin Woolverton, the founder of HaloTop, puts it better than I ever could:
“With digital, you can really make your limited dollars work. [Before digital] you would have had to take out a newspaper ad or do a radio or TV ad — if I had started with $10m, we could have done something. Now if you have $100, you can target people who are going to be much more receptive.”
Now, on to Unit Economics. Margins can be upwards of double that of e-commerce. E-commerce runs teeny, tiny margins, while DNVBs have healthy margins. When you own the full supply chain (the “vertical (V)” of DNVB), you have more control over price and, therefore, margin.
Through a direct sourcing model, retailers can realize between a 2% and 4% average reduction in cost of goods sold, possibly netting millions of dollars in savings.
Here's Andy Dunn, founder and CEO of Bonobos:
“The product gross margins are at least double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4–5x higher (e.g. 40–50% versus 10%)...Vertical commerce can make money. E-commerce, not so much.”
On top of that, when you fully control the supply chain the way DNVBs do, you have the luxury of capturing customer data throughout the buying experience.
This is a huge competitive advantage. When marketers have data, they can do a better job. Better marketing = lower cost. Lower costs = higher margins.
Finally, let's dive into the Customer-Centric Brand side. Is the single biggest differentiator for DNVBs versus competitors. Competitors (read: Amazon) thrive because of their price. DNVBs thrive because their customers love the brand.
DNVBs’ products meticulously represent the brand identity and both their products, the experience and their packaging are designed to be consumed and shared on social media.
This improves the experience and value of what’s being sold and leads to customers loyalty. Take Glossier, for example.
The beauty brand launched its product line on Instagram as part of its core promotion strategy. Glossier CEO, Emily Weiss, estimates that Glossier owes 90% of its revenue to its fans on Instagram.“ It hasn’t been through paid or built marketing spend,” she said. “It’s been mostly word-of-mouth.”
Glossier consumers are not outliers, 74% of consumers identify word-of-mouth as a key influencer in their purchasing decision.
Why is this important for the European market
Big companies are losing.
According to Boston Consulting Group, $22bn in industry sales transferred from large to smaller companies in North America between 2011 and 2016 and there has been a similar trend in Europe.
For that same reason, there's a clear exit model: some large consumer groups try to reverse five years of weakening growth by purchasing DNVBs in their space.
Whilte the Dollar Shave Club acquisition is the most prominent example, there have been dozens of others to note. Walmart bought Bonobos for $310m in 2017. Japan’s Beam Suntory, the world’s third-largest distiller, swallowed (ahem) Sipsmith.
On top of that, I think there will be periodic consolidations where some DNVBs portfolio it up like Proctor & Gamble.
But it's not all roses
We are in the teenage years of DNVBs. Growth is slowing, capital is drying up and smaller brands must find more scalable growth models to establish themselves as a valuable player.
First, single-channel growth is dangerous. When you are a startup, you double down on what’s working. But DNVBs need to figure out how to expand from their grassroots communities and into new channels. Eventually, marketing channels will top out, become expensive or saturated. Even a change in Instagram's algorithm can kill a young DNVB.
Second, being in Europe means fragmentation when it comes to international expansion. The US is one single market that shares a common language, as opposed to Europe, where different country languages, culture and regulations make scaling more challenging, all the way from product development to marketing and shipping.
Finally, funding and exits. Because there isn’t a very liquid exit market when it comes to D2C brands in Europe (most of it is coming from the US), funding is scarce. This is a problem, particularly for early stage, unproven (but capital intensive) startups.
This seems to be changing though, with more and more top-tier European VCs starting to look at D2C brands – Heartcore, Otium, Eutopia, and Samaipata are just some examples.
And this is just the beginning...what categories have DNVBs not yet tapped into? 🤔
(Thanks @WorldHistorical for reading early drafts of this)