Why Direct-to-Consumer is a Big Opportunity — Europe Edition
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Direct-to-Consumer brands present one of the biggest opportunities in consumer tech to date. While this is not exactly a new trend (Everlane and Warby Parker were both founded in 2010), but at the latest since Dollar Shave Club was acquired by Unilever for $1 billion it is now more obvious than ever that direct-to-consumer (DTC) is a business model to keep an eye on. As a result of internalizing producer margins and disintermediating wholesalers and merchants, these businesses can be very attractive from a unit economics perspective. However, the underlying paradigm why DTC companies are able to become so valuable, even in seemingly saturated markets, does not purely lie in favorable economics.
There is another force at play as to why new entrants in the world of consumer goods are disrupting offline incumbents — this is that in comparison to their offline counterparts, DTC companies are able to build up defendable moats through a digital-first approach. These moats are largely built up in three areas: (1) Engagement, (2) Brand and (3) User Experience. Traditional players might be able to build up some of these aspects themselves, but offliners are often lacking at least one, mostly two. For long term defensibility against direct competition and upstream threats from distribution channels (hello Amazon!) a company will have to excel in all three of these areas.
Here is how and why these three aspects create value by building moats around a consumer product:
Engagement
Online-first companies not only have a headstart in online customer acquisition, but also in engaging and retaining customers across their life cycle. DTC brands are by definition online-first and their teams have the know-how to identify and acquire their customers efficiently. Most offline brands have traditionally worked with distribution partners, which not only impacts gross margins, but also does not allow them to build up functional expertise in customer acquisition, as well as in fulfillment, logistics or CRM. This superior knowledge also translates into a natural understanding and adoption of what offline brands and retailers currently consider the holy grail — an omnichannel strategy. DTC players know how to engage their customers across multiple channels (online and offline) and the whole customer life cycle. One example of a company that does this well is Ace&Tate. The Amsterdam based company sells prescription glasses and sunglasses online and through their own flagship stores. Their customer journey starts either online or alternatively offline in one of their many flagship stores. A customer might for instance experience the brand initially online, convert offline to be then retained online for subsequent purchases. Ace&Tate’s CRM setup allows them to track and engage their customers end-to-end across channels and stages in the customer life cycle. This is lightyears ahead from what an offline, retail-focused brand like Ray Ban can do. The things you can do when know your own customers…
Brand
In comparison to brick & mortar, building an aspirational brand in an online-first world is usually less costly, but also more complex, with different variables. This all makes it hard to emulate for incumbents. Data driven companies hold a key advantage for building a category leader and gaining market leadership over offline peers. These businesses know how to optimize in fast learning cycles, and can quickly find, target, address, and then acquire their desired audiences. Traditional brands do tend to have significant experience when it comes to branding. While most are still currently struggling to translate their brand campaigns into the digital world, the gap is closing and online-only entrants will not always have this first-mover advantage. The most important aspect of building up a brand therefore rather lies in its inherent power towards merchants and marketplaces (also read: distribution partners), and less in its defensibility against other brands. Traditional multi-brand retailers (Walmart, Tesco, Harrod’s), but even more so online retailers like Amazon or Zalando hold economies of scale in marketing (and quite often comparably larger CLVs because they can move a customer through multiple product categories), sourcing, fulfillment and logistics. A brand will cut through the noise in a world of abundant choice and will allow to defend margins under increased competition.
User Experience
The most powerful moat that a DTC brand can create around their business is a superior (digital) user experience. A digitally enabled service on each step of the customer journey, from purchasing to fulfillment and customer service, will naturally differentiate a DTC from the incumbents and allow the brand to engage and retain customers much closer than through their physical products alone. This means completely embedding the customer in a digital product, end-to-end, that unlocks additional utility for them. At its core, this is a tech challenge and one that is again hard incumbents or distributors to emulate. Some good examples of this are DTC brands in categories that show a high frequency of repeat purchase patterns or are ‘consumables’, where a subscription model is the obvious weapon of choice. Subscriptions bring convenience into the ordering and servicing part of the user journey. Crucially they also break down psychological friction since users only have to make a purchase decision once and afterwards only make calibrations on frequency and product selection. There is a direct correlation between the complexity of ordering frequency and product offerings, and how defendable they are.
Of course there are many other ways of extending physical products, for instance through sensorics and analytics capabilities or communities that connect the customer base, recommendation algorithms and various other forms of content. Successful DTC companies constantly try to increase engagement and create value for their customers. For businesses operating in different verticals, the best practices for accomplishing this will look very different.
Together with the product, which is the foundation of any great direct-to-consumer brand, as well as the underlying unit economics of the business (a factor of product design, sourcing, production excellence and fulfillment), the aforementioned three areas comprise the segments that we at Global Founders Capital look at closely when evaluating the long term defensibility of a company in the space. We believe these are key properties through which an online-first company can build up a differentiating advantage over traditional players and materialize significant shareholder value. For this reason we remain excited about online-first DTC brands. GFC have backed a number of winners and (fingers crossed) future winners in the space and will continue to do so.
The European DTC Landscape
Teddy Citrin from Greycroft recently published this great resource on direct-to-consumer verticals, including a list of existing DTC businesses from the US and a evaluation matrix that is very helpful from both an investors’ and entrepreneurs’ perspective.
We have expanded verticals a bit and built a list of DTC brands in the European markets (click here or below). It is interesting to see that there are already a number of successful companies from the continent, despite the significant disadvantage of not having a single large market to operate in, like their US peers. Some of them could even be considered DTC pioneers like Mymuesli, perhaps the most German startup ever founded, selling custom muesli mixes to consumers since 2007; HappySocks, founded in 2008 in Sweden and sold to Palamon Capital Partners or other successful companies like HelloFresh, Zoeva and Daniel Wellington.
A quick note: If you want us to add a company to the list we forgot or want to pitch us your DTC company please fill out our Typeform here or contact us through other means.
