16 Apr The rise of the web-only brands: The new Face of Successful Retail
An analysis of the growth of vertically integrated brands born online and how they rise while disrupting e-commerce and retail
What is a DNVB? A Digitally native, vertically integrated company controls its own distribution and sells its own products directly to consumers via the web with a strong focus on customer experience. If a DNVB starts online, it often deploys then a brick-and-mortar strategy. The term was made popular by Andy Dunn, founder of a famous online-first brand, Bonobos.
DNVB have been shaping a new Retail landscape in the United States for the past years, building competitive advantages and differentiators enabling them to compete with long-lasting and well established brick-and-mortar companies, as well as leading and flourishing e-commerce businesses.
The market for direct-to-consumer brands has been growing from $5.6 billions in 2016 to $8.0 billions in 2017 (+45%), growing nearly 3 times as fast as US e-commerce as a whole.
Winners of the race in 2017 were: HelloFresh, Blue Apron Inc., Anker, JamesAllen.com, The Honest Company Inc., Casper, Dollar Shave Club, Warby Parker, Home Chef, Harry’s Inc.
Let’s deep dive into the successful growth strategies of web-only brands.
- Amazon-proof businesses
The ultra-domination of Amazon in e-commerce – 44% of all e-commerce sales in 2017 – still leaves space for dedicated niche retailers to make an impact by reaching consumers in a more experiential and personal way. The more engaged consumers are, the easier it is for a retailer to turn them into loyal customers.
While many startups rely on selling on big marketplaces to scale, more than two-third of the top 75 DNVBs in the US are not even available on Amazon.
The challenge is to not rely on built-in traffic offered by leading marketplaces, but being able to engage effectively with your own base. The question is: « can you acquire customers cost-effectively online? » A pain point for many brands. But if the asnwer is « yes », you might be on track for the next ten years.
Another benefit from focusing on direct-to-consumers is freedom: you can present your products as per wanted, offering extensive product details qualities, transparency (Everlane), valuable content to educate and inform consumers (Thinx). While never loosing control of Data – the new oil! – along the purchase experience.
- Personalization: Custom products provide an edge
Offering products that are truly unique to each buyer while capturing details on buyers’ needs: e.g. Warby Parker collects buyer’s prescriptions to provide eyeglasses, custom clothing retailers like gather customer information like size-related data, e.g. Proper Cloth and its styling quiz or Revelry which disrupts the world of bridemaid’s apparel.
Indeed, customized products require more details and a different supply chain than Amazon is geared for. Providing your brand an edge within a fierce ecosystem.
- Celebrity cachet
It is not given to anyone to be famous and to present one human, public face to consumers, as Jessica Alba does with The Honest Company, a brand of eco-friendly household products, or even Witherspoon – a Southern star born in New Orleans who founded a country-chic brand of clothing. However, not every brand needs a star to attract attention. One of the most disruptive DNVB, Dollar Shave Club, turned viral when the CEO Michael Dubin appeared in an unconventional entertaining video (4.75 million views on Youtube in only 3 months). A success disrupting the traditional razor industry the company surfed in before it was eventually sold in July 2016 for $1 billion.
- Vertical integration
A brand that sells direct to consumers combines multiple benefits: lower cost of online sales, better control of the whole value chain from manufacturing through distribution, plus you do not have to discount your goods to retailers that then mark them up.
A champion of vertical integration and radical transparency is Everlane, an initially web-only clothing brand ($135 millions in revenues in 2017), which compares its own pricing to the one of traditional retail and is able to share with customers its cost break down as they know their supply chain.
- Building in recurring revenue
Memberships have been flourishing for the past years in the US and worldwide. So do mealkits, boxset models, DIY website development business models relying on monthly plans (wix, squarespace…). And this is not a hazard while cashflow is often key for a business to survive. Top 12 subscription services accounted for more than 35% of revenues of all DNVBs in 2017. 9 of those are food subscriptions, including Blue Apron and HelloFresh. Among the winners, 2 shaving subscriptions: Dollar Shave Club and Harry’s.
However, keeping subscribers on board and maintaining growth remains a real challenge. Thus, turning your loyal customers into a key asset is crucial. Either by increasing their purchase frequency or by increasing their average shopping cart, as well as selling new subscription services that tap out their market.
- Online as a jumping off point
The world is still a place where you sometimes need to touch and feel brands in-store to trust them. It is especially true for some products or industries.
While DNVB start selling and gaining traction online, many of them then branch out into brick-and-mortar retail: Whether they are called flagships, showrooms or guideshops, those locations offer the convenience of offering the in-store experience without necessarily implying the costs a traditional brick-and-mortar business would endure (such as physical stocks & inventory on site) as sales associates, « beauty assistant », « personal shoppers » or « guides » offer to place the orders on the behalf of customers. Then items are shipped to their home (Bonobos, Warby Parker).
Physical expansion main functions refer to showrooms and marketing boosters as well as sales booster. In this perspective, a new revenue stream can be generated while partnering with larger retailers and selling through stores you do not own. Thus, mattress maker Casper and shaving subscription Harry’s have products available at Target, enabling them to reach new and larger audiences.
- Tech roots
DNVBs are often more like tech startups than retailers, building their own software and pioneering retail technology to sell better. It enables them to track customer interactions, manage inventory, solicit feedbacks (using those feedbacks to improve product curation), offer store credit or coupon, et caetera.
This user- and data-centric approach of Retail emphasizes all the steps of the user journey, from the pre- to the post-purchase experience. Helping your company to meet customer’s expectations and generate loyalty while offering them a highly personalized experience depending from where they come from, their behavior, orders history…
Last but not least, while all the Retail tycoons and brains turn to new ways to innovate nowadays, a factor that web-only brands deeply rely on to scale and which is often under-estimated by traditional retail organizations is the Culture factor (HBR Jan-Feb 2018) and the ability to attract and retain Talents.
Besides the emphasis on data, web-only brands are, just like startups, well funded: they raised more than $2.6 billion altogether (not including acquisitions, having become frequent targets). Using those investments as a welcome boost to hire a new gen of workers: CTOs, VP of Engineering, Data scientists.
The sector consolidation shows web-only brands have become frequent acquisition targets, not only because of goods they sell, but because of talent and technology they bring to traditional Retail structures. Leading to oustanding deals like Unilever’s one-billion-dollar for Dollar Shave Club.
Another strategy of Retailers that want to avoid the downsides of an acquisition is to take part in the funding of startups of web-only brands (e.g. Target and 170-million-dollar series C led by Casper).
While the competitive scenery has never been as fierce as today, led by three mercyless giants whose firepower seems limitless (Walmart, Amazon & Alibaba) and while technological acceleration has never been so quick, the consolidation of the Retail sector keeps on intensifying.
Among all the market stakeholders, a new category of players rises, playing cards right, disrupting the game, and threatening the fragile balance of the Retail industry… Welcome to the era of web-only brands (DNVBs)!
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