Brand Strategy
The great DTC re-bundling
How brands will make money in the next phase of DTC
Direct to consumer (or ‘DTC’) branding sits at an inflection point. The model created a raft of household names from Allbirds to Warby Parker whose success opened the floodgates to thousands of new CPG, fashion, and home brands all vying for attention. According to Harvard Business Review, every product area with a sleepy TAM (total addressable market) has been innovated. Businessweek has called out the brand deluge, renaming DTC brands ‘blands’ due to their copycat visuals and laughably shallow mission statements.
Many of these brands are innovative — or at least they present a shift in taste to aesthetically pleasing packaging and sustainable production. But the ease of entry has increased the difficulty of profitability.
It’s easy to make money when you’re the only company shilling luxury pet-food on Instagram. But now, when you’re bidding for Facebook ads against Ollie, The Farmer’s Dog, NomNomNow, PetPlate, Butternut Box, Spot & Tango, Grocery Pup, Cali Raw, Lucky Dog… things get expensive.
Mattress brand Casper lost two thirds of its private valuation when it (and its unsustainable marketing expenses) went public. Advertising guru Gary Vee says that 98% of DTC brands will go out of business due to unsustainable acquisition costs.
One might suggest that brands need to stand out with better marketing that depends less on social media ads. Which is true. But something more interesting is happening on the backend. Investors are bundling brands to retake economies of scale.
The Rebundling, pt 1: Amazon Roll-ups
In the past year, over $1 billion in funding has gone to a series of startups aimed at acquiring companies behind top-selling products on Amazon, using economies of scale in marketing and supply chain to run these businesses more efficiently. The opportunity is a big one. It is estimated there are some 5 million smaller sellers on Amazon’s Marketplace, making up about half of Amazons’ sales.
The rebundlers:
- Thrasio — Raised $750M+, Feb 2021. Has acquired ‘nearly 100 businesses’ including Vybe Percussion deep tissue massage gun, Circadian Optics bright light therapy lamps, and skincare products from Sdara Skincare. According to the site, Thrasio offers ‘new listing optimizations, supply chain efficiencies, and growth marketing tactics (both on- and off-Amazon).’ Their name comes from ‘Thraso,’ literally, an ‘Amazon warrior.’
- Branded — Raised $150M, Feb 2021. Acquired 20+ brands, in categories like home, leisure and lifestyle across Europe, the United States and Asia. Branded will help with things like marketing, financing, operations expertise and provide technology and business analytics. Leadership includes Pierre Poignant, co-founder of Asian eCommerce marketplace Lazada, and Michael Ronen, former Managing Partner of the $100Bn Softbank Vision Fund.
- Berlin Brands Group — Raised $302M, Jan 2021; Instead of just Amazon, BBG uses some 100 channels, reflecting a more fragmented European market. And instead of just acquisitions, BBG has hatched and grown its own 14 brands, covering 2,500 items. BBG focuses on audio gear, fitness equipment and home appliances, including brands auna, Klarstein and Capital Sports. New acquisitions will include products in garden, home and living goods, sports, electronics and household appliances, with targets generating anything from €500,000 to €30 million in revenues.
- Perch — Raised $123.5M, Oct 2020. Perch focuses on its ‘platform,’ which can run analytics on sales, determine pricing and ad strategy, monitor inventory positioning and make other marketing decisions. The company has 10+ brands including women’s athleisure brand Satina, and kitchen brands Flathead and Aulett.
- Heroes — Raised $65M November 2020. Heroes plans to roll up high-performing Amazon businesses in Europe from a range of different sectors spanning baby, pets, homeware, kitchenware, garden, DIY, sports and outdoors categories. Heroes will lean on its ‘in house team of experts’ to scale brands internationally.
- SellerX — Raised $118M, Nov 2020 to pick up ‘evergreen consumer goods’ in areas like household, pets, kids, and beauty on Amazon and apply SellerX’s own analytics and processes, and production relationships to drive growth and economies of scale.
- Heyday — Raised $175M, Nov 2020. Heyday has moved quickly since its August inception, acquiring and launching several brands, ending 2020 with $20M+ of annualized revenue. Co-founders Sebastian Rymarz and Adam Gerchen expect Heyday to cross $200 million of annualized revenue by the end of 2021, and $1 billion by the end of 2023. Heyday’s approach includes data science, supply chain management, operations, advertising and customer service, all designed for brands to specifically sell through marketplaces.
These ‘roll-up’ firms will create a new legion of mini-consumer corporations offering a range of products.
They also represent a shift in DTC. The focus is not on sexy, cool brands. There is no Casper Mattress or Glossier here. Instead, roll-ups acquire small companies that are typically already profitable. And their value adds are not about building brand and cultural resonance, but optimisation — of supply chain, of ad spend, of analytics.
What might happen as a result? Some predictions…
1. Amazon takes FB/Google’s (and the roll-up’s) lunch —
While DTC brands are characterised by their ‘Instagram’ aesthetic, roll-ups are focused on Amazon success stories. It’s a signal that Amazon is the true decider of DTC brand success. It makes sense. More and more consumers search directly for what they want on Amazon (and bypass Google search altogether). Tech analyst Ben Evans noted that Amazon’s ad business may be more profitable than AWS, with revenues close to $20Bn. As Amazon’s ad business grows, Amazon can demand higher prices and the profit will move from FB/Google to Amazon.
There are a lot of reasons to believe Amazon’s ad business will continue to grow. For one, Amazon owns voice. Roll ups like Thrasio would likely pay big money to be the brand of choice when a consumer asks Alexa to order a massage gun. Two, Amazon is fast entering new categories like healthcare which will offer it even more data to help with ad targeting.
Amazon is also not shy about entering the categories of sellers. What’s to stop Amazon from jumping into the roll-up business itself?
2. New department stores, recreated from the core—
As roll-ups develop, they will want to decrease their dependence on Amazon. They will also want to capitalise on the many brands they sell, and drive consumer awareness and loyalty across products. The next step? Roll-ups will develop parent brands, akin to a new ‘Sony’ to halo across their portfolio and alert consumers of a common level of quality across their products.
Parent brands will be great for consumers as well. Right now, shoppers rely on Amazon reviews to drive purchase decisions. But, reviews are a business of their own, and not always authentic. Parent brands will offer credibility and trusted quality to thousands of Amazon listed products.
Looking further ahead, what’s to stop a roll-up from launching their own physical department store? A John Lewis or Bed Bath and Beyond of just high quality, top selling, perfectly reviewed, FFBA items (formerly fulfilled by Amazon)?
3. A return to brand purpose —
Brand has seemingly taken a backseat in the DTC roll-up strategy. And as ‘blanding’ shows, brand can be commoditised. But data, ad targeting and supply chain optimisation only go so far. Once these roll-ups have optimised their acquisitions, there will still be multiple fitness-wear brands, multiple home-care providers, and many pet care brands, only optimised. Why should consumers buy from one over another? Roll-ups will look toward brand purpose as a way to differentiate their offering.
My $.02? Roll-ups should consider their brand position as they select their acquisitions. A filter, focused just on say, carbon-neutral brands, could build expertise in the sustainability space and develop a new house of brands with strong economics and strong purpose. A distinctive, non-bland set of visuals wouldn’t hurt, either.
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