February 27, 2019 • Volume 31
Gone native? Dissecting the threat of the rise of digital native brands
Lately, it seems, everyone wants to be a DTC brand, and they all want to start online. For those unfamiliar with the industry jargon, a digital native DTC [Direct-to-Consumer] brand is a brand [one that makes, or contracts others to make, their own products] that:
- Was born online [although it may subsequently open stores]
- Sells principally [although not necessarily exclusively] online
- Sells directly to consumers [as opposed as through retailer partners].
This includes a mind-boggling array of brands, many of which were recently captured in one of the awesome LUMAscape industry maps that one can stare at for hours. Digital native DTCs span every retail category, and many are highly successful. We have digital native DTCs that have been sold to big CPG brands [Dollar Shave Club/Unilever], to big retailers [Bonobos/Walmart], and to threatened brands [Tuft & Needle/Serta Simmons]. Many others seem happy enough to continue on their own disruptive path [Warby Parker, Casper, Everlane]. And some are beginning to pursue wholesale relationships with retailers [Harry’s/Target and Walmart].
Digital shovels for virtual miners
What’s caught my attention lately is the proliferation of companies that don’t want to be DTCs, but that want to make platform plays in support of them. You know, selling shovels to the miners.
Tim Armstrong [formerly of Google and AOL fame] has started a venture capital firm called ‘the dtx company’ to provide capital to digital native DTCs. Another Internet star, Imran Khan, has started Verishop, which aims to be a sort of portal to them. This is in addition to the myriad other fulfillment players [Amazon, FedEx, UPS], online-shop-in-a-box players [Shopify], and venture capital firms [Circle Up] that have been in the business of selling virtual shovels to the digital native DTCs, who grind through the not-always-glamorous process of panning for digital gold.
A recipe for disruption
What I love about these digital native DTCs is that they are entirely a function of our time. Virtually all of the DTCs that I can think of were founded after 2010, in the aftermath of the Great Recession. While big corporations were in a risk averse mode, happy to have survived, thousands of entrepreneurs were finding novel little holes in established markets. But an abundance of motivated entrepreneurs wasn’t enough.
The second key ingredient in the rise of the digital native DTCs was the fact that e-commerce had reached critical mass. By 2010, only about four percent of U.S. commerce [according to the U.S. Commerce Department] had moved online, but e-commerce had become a sizeable portion of many categories. Consumers weren’t afraid of buying online anymore.
The third, and most important, ingredient was the fact that the foundational elements needed to create a brand had been democratized in a way that we have not seen since the dawn of the Industrial Age. Need a storefront? Shopify.com. Need to securely store data and host a quickly growing customer base’s visits to your site? Amazon Web Services. Need to build a brand cheaply? Instagram, Facebook, and Pinterest have got you covered.
Even the manufacturing part has gotten dramatically easier than ever. As Scott Galloway puts it, China has become the world’s ‘digital printer.’ Need retailer distribution? That’s the one part that’s still uniquely accessible to the big brand holding companies, but these digital native DTCs don’t necessarily aspire to see their products on Walmart’s shelves. But that becomes an option once a brand has become successfully built online. Witness Harry’s availability in Walmart and Target stores.
The three dimensional chess of growth, exit, and distribution
The sticky part for digital native DTCs is what Jason Goldberg calls ‘exit velocity.’ He argues that the really hard part is maintaining historical growth rates once they’ve hit around $100 million in annual sales. Dollar Shave Club sold itself to Unilever. Harry’s sought brick and mortar retail distribution. Venture capital is helpful in getting to that first $100 million, but venture capitalists are generally looking for a lucrative sale to a threatened traditional brand at that point – ideally with a competitive bidding situation driving the price up. IPOs are pretty rare for this group.
And this brings us to the embattled traditional brands that have built giant, mature businesses in partnership with brick and mortar retailers over the course of a 100 plus years. Their investors have these brands in a sleeper hold that Hulk Hogan couldn’t fight his way out of, demanding stable, profitable earnings powered by cost cutting, while simultaneously complaining about cultures that don’t innovate quickly enough.
Increasingly, these traditional brands are being compelled to spend crazy amounts of money buying businesses that are growing quickly, but often not profitably. Many people argue that the high prices paid by traditional brands for digital native DTCs represent a failure on the part of big brands. But I don’t think that that’s the right way to think about it.
I think that we have developed a highly effective innovation ecosystem where products spawn from passionate, authentic founders using accessible, but industrial strength tools; nurtured by venture capitalists; harvested by big brands whose core competency isn’t innovation, but is instead the profitable scaling of these brands, which at their core, are still reflections of the entrepreneurs that imagined them. It’s a complex system that only capitalism could have created.
Case Study: An intimate look at what’s in store for the lingerie category
In the spirit of Valentine’s day, let’s take a timely[ish] look at a the women’s lingerie category, where Victoria’s Secret has been attacked by a swarm of digital native DTC brands.
If we looked back to the pre-digital native DTC era, Victoria’s Secret was where women went when they wanted to buy lingerie online. Subsequently, though, we’ve seen an explosion of new options, with MeUndies launching in 2011 with a subscription opportunity in mind, AdoreMe in 2012 [subscription, again], and Third Love in 2013, with a focus on improving fit, now offering 78 different bra sizes.
Women’s lingerie is growing at about the same rate as overall e-commerce. When we look back at data from the last three years, below, we can see that the digital native DTCs haven’t toppled Victoria’s Secret, but that they are collectively making quick headway. In 2016, these three upstart lingerie retailers accounted for 13 percent of sales, and that that number doubled to 26 percent in 2018.
Where is this all going? Adore Me has already talked about aggressive brick and mortar store plans. It is unclear to me whether this is truly something the company wants to do, or whether this is a gambit to frighten Victoria’s Secret [or a competitor] into making a costly acquisition. At the very least, all of these players will need to at least take a page out of Bonobos’ book and establish brick and mortar locations or open pop-up shops like True and Co has at Nordstrom, to allow women to determine their sizes. Some will undoubtedly try to sidestep this by developing in-home scanning techniques to ascertain the proper size, but I will continue to be dubious of this until I see any type of digital fit tool that actually works.
Measuring the impact of digital native brands
There are other important data points that come into play that we don’t have the space to go into today: Is the traditional brand bleeding customers to the DTC upstart? How sustainable is the growth of the digital native DTC? Is the digital native DTC driving incremental buyers in the category?
At Rakuten Intelligence, armed with the best e-commerce data in the world, we believe that our role amongst the shovel sellers is an important one. We track the development of these digital native DTCs as soon as that creative spark manifests itself in a product that consumers buy online. The visibility that we provide helps digital native DTCs benchmark their own progress against others like them and against traditional brands. And it helps traditional brands evaluate when they ought to make their move, if at all.
In the E-Commerce Observer, in the months to come, we’ll turn the spotlight on various digital native DTC brands and their competitive spaces in an effort to learn about some neat new products, showcase some interesting stories, and profile some amazing entrepreneurs. So stay tuned!
Ken Cassar is vice president, principal analyst at Rakuten Intelligence, where he looks at trends in the e-commerce industry armed with Rakuten Intelligence's robust set of online sales data.
Ken brings a rich online retail background to Rakuten Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet.
Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Rakuten Intelligence's profile. He also has the appropriate jacket for every occasion.