SINGAPORE (Feb 21): When Prince Harry and Meghan Markle landed back in Vancouver last week from a short trip to Los Angeles, the tabloid press focused on Rothy’s shoes that Meaghan was wearing and Away Luggage carry-on that Harry was wheeling on the tarmac.
Rothy’s which makes shoes from 100% recycled plastic water bottles and Away Luggage, which is famous for its sleek polycarbonate suitcases, are part of a bunch of direct-to-consumer (D2C) unicorns, including eyeglass maker Warby Parker, razor makers Harry’s and Dollar Shave Club, recently-listed mattress disruptor Casper Sleep, online menswear retailer Bonobos (now owned by Walmart), cult-like make-up and skincare firm Glossier, actress Jessica Alba’s ethical household product outfit The Honest Company, online bra firm ThirdLove, contact lens maker Hubble, and bedsheet retailer Brooklinen who have forever changed the consumer business by building brands on Internet and selling directly to end-customers.
The upstarts that are essentially personalized connect-to-consumers firms have mustered enough bravado to take on “Goliaths” such as L’Oréal and Estée Lauder in cosmetics, Victoria’s Secret in bras, Tempur-Sealy International in mattresses, LensCrafters (part of Luxxotica Group) in eyeglasses, Samsonite in luggage and Proctor & Gamble and Edgewell Personal Care in razor blades — and chalked up big wins.
Last year, I wrote about how Canadian cloud-based e-commerce software firm Shopify helped reality TV star Kylie Jenner, the youngest of the Kadashian-Jenner brood, become a billionaire in her own right. Shopify helps build online stores and businesses, handles payments, billings, shipping and logistics to sell goods on the internet. Add in a manufacturer in China, and you have a business model even long-standing consumer goods brand giants might struggle to beat. (Coty International bought a 51% stake in Jenner’s Kylie Cosmetics last November for US$600 million.)
Disruptive D2C unicorns were born, and indeed prospered, on internet platforms such as Amazon.com, Facebook, Google and Instagram. Lean and mean D2C firms generally outsource most of their manufacturing but market and sell their products themselves, bypassing traditional stores or other middlemen. That allows them to sell their products at cost, which is far lower than that of traditional consumer brands, and to maintain endto-end control over the making, marketing and distribution of their products. Moreover, notes a recent report from New York-based venture capital research firm CB Insights, “unlike their traditional retail competitors, direct-to-consumer brands can experiment with distribution models, from shipping directly to consumers, to partnerships with physical retailers, to opening pop-up stores in unused parts of the malls.They don’t need to rely on traditional retail stores for exposure”.
Internet demolishes entry barriers
So, what is behind this D2C phenomenon? For one thing, technology has levelled the playing field, making it easier to market products and build and grow a business online. Barriers to entry in what were once impenetrable businesses have fallen precipitously. Another key has been the rise and rise of manufacturing outsourcing and the emergence of China as the factory to the world. Chinese contract manufacturers are now so sophisticated, cheap and scalable that you can take the concept of any product to China and find a manufacturer willing to design, build and start shipping it for you within weeks. As you grow your business, your manufacturing partner in China is able to scale up quickly, which, in turn, enables you to further reduce costs and pass on those savings to your customers, with lower mark-ups.
It is not just making things. Selling stuff is easier as well. Ten years ago, if you were an upstart firm trying to sell razors, you would have had to go to a chain like Walmart, which routinely refuses to talk to new or small suppliers, and literally beg for some shelf space right beside razors made by Gillette. Clearly, there is little upside for a giant retailer such as Walmart to take the risk of selling goods made by an upstart luggage maker or cosmetics or razors or bras that do not have a wellknown label on them and have never sold in volumes before. Indeed, the likes of Walmart have long benefited from big suppliers such as P&G and Unilever, which pay them to get premium shelf space for things like razors or cosmetics.That incentivises retailers to stock only the most popular items and remove underperforming ones.
Thanks to the internet, the world of retailing has fundamentally changed over the past decade. If Walmart or Target will not buy your cosmetics, bras or razors, or demand that you pay big bucks for premium shelf space, alongside Unilever, P&G or Victoria’s Secret products, you can always sell it on the internet.
You see, internet has unlimited shelf space, and you do not have to pay an arm and a leg for it. In the past, to create a brand in North America such as Kylie Cosmetics, Away Luggage, Dollar Shave Club or Casper Sleep, you would have to spend tens of millions of US dollars. A global brand could set you back several times that much in advertising and promotion. You need marketing gurus, ad agencies, media buying strategy and pay millions to TV slots and magazine inserts. Even then, you would be like a blind person throwing darts. It would be a hit or a wild miss.These days, with a bunch of Instagram posts, target- ed ads on Facebook and Google, a few homemade YouTube videos and some influencers, you can run a fairly effective campaign for a fraction of the cost — bypassing the traditional media.
Taking on the giants
Michael Dubin, an out-of-work internet marketing executive who founded the Dollar Shave Club, took on Gillette which had more than 70% of the razor market for decades. It was such a stable and lucrative high-dividend-paying franchise that it attracted billionaire Warren Buffett’s Berkshire Hathaway as an investor. In 2005, in what he described as “a dream deal” Buffett sold his 9% stake in Gillette to Proctor & Gamble for US$4.9 billion, or a profit of US$4.4 billion. Dubin knew razors cost a lot of money, and Gillette had huge margins giving them away virtually for free but charging a ton of money for the blades. Buying a blade is not convenient. In supermarkets or convenience stores, blades are often locked behind the counter or stored in a glass case and you have to ask for them.
When he started out selling razors on the internet, Dubin knew he could easily undercut Gillette and just make it convenient for anyone to buy them online. So, Dubin, who taken acting classes, set out making a hilarious video with himself as the star. He posted the video which touted “our blades are f***ing great,” on YouTube. “Shave Time. Shave Money” video became the key to Dollar Shave Club’s viral marketing.
A key differentiating factor aside from price and convenience of buying online was Dollar Shave Club’s subscription model. Most men shave every day and know how many blades they need. Buy a monthly subscription, and you will get an even bigger discount and blades mailed to you every month. Recurring revenue subscription bundles cut customer acquisition and retention costs for DTC brands. Dubin sold his business to Unilever for more than US$1 billion in 2016. Dollar Shave Club now has 10% share of the market, while Gillette’s market share has fallen to just 55%. And, oh, Gillette has had to cut prices and sell blades on the internet as well.
Eyeglass maker Warby Parker was born out of a Wharton MBA class project. If you wear glasses, you are probably aware that a good pair can cost a lot of money. No wonder, margins in the eyeglass business are huge. Warby Parker came up with its own subscription model, where they mail you five pairs of prescription glasses or sunglasses to choose from for just US$95. It gets its glasses made in China and shipped to your home anywhere in the world within a week. Glossier started as a blog by a young journalist intern, Emily Weiss, a decade ago. Weiss wanted to write about celebrities and their make-up rituals.It became so popular that she quit her day job as a journalist at Vogue and launched makeup products.
So, what is the secret sauce in D2C’s success story? These businesses have thrived because, by nature, they are close to their end-customer. Take razors as an example. Gillette’s actual customers were the likes of Walmart. It unloaded its blades on supermarkets not knowing who the end-customers were or what the users of razors wanted. D2C businesses, on the other hand, focus on selling directly to customers constantly, using data as well as any feedback to deliver better products. Dramatically improved customer experience was another key. Casper delivers mattress in a box, allows you to sleep on it for 30 days, and if you are not happy you can always send the mattress back and get a full refund. All of the D2C disruptors saw a problem and went about fixing it. Legacy brands such as P&G, Unilever and Victoria’s Secret just became too complacent and began abusing their market dominance which made them easy targets for disruptors.
Not all D2C firms are going gangbusters and growing at warp speed, though. Last week, Brandless, a fledgling no-label personal care and packaged goods firm pulled down its shutters and laid off 70 staffers, two years after Japan’s SoftBank Group’s Vision Fund announced it would invest US$240 million in the start-up. Days before Brandless went belly up, Caspar Sleep’s initial public offering bombed. The online mattress retailer, which was last valued at just under US$1.2 billion in a private funding round last year, has seen its stock plummet 35% in part because too many imitators like Purple, Saatva, Leesa and Nectar are trying to copy its business model. A week after its IPO, its market capitalisation is now just over US$400 million, or a third of its last private valuation. Just because a company sells directly to consumers does not mean it deserves an outlandish valuation. But subscription-based direct-to-consumer brands that have a to-die-for business model are here to stay as giants like P&G, Unilever and Nestle begin imitating the winning formula.
Assif Shameen is a technology writer based in North America