With news today that Bob Iger is returning to Disney as CEO after a roughly 3 year hiatus, it’s pretty clear that one of the main motives for this move has been the highly un-profitable Disney +, the company’s streaming arm, or as some call it, the new ‘cable’ bill. Like many companies that have legacy wholesale relationships, Disney is trying to make the economics of selling content directly to consumers sustainable. There are a lot of similarities between all the DTC brands today (Warby Parker, Casper, Away, AllBirds, Blue Apron, etc) and Disney+.
It seems everywhere you turn, DTC (direct to consumer online brands) are struggling. Between rising input costs and more expensive marketing, the economics of selling online continues to look bleak. Let’s break down the struggle.
Why is a publisher model appealing to brands? An emerging crop of companies with recurring revenue and large customer bases have discovered that “owning” audiences is better than “renting” them according to CBInsights and ultimately a way to reduce CAC and build more loyalty. Over the last few years, a growing crop of financial service and SaaS based firms have been acquiring media companies – JPMorgan bought the Infatuation, HubSpot purchased the Hustle and Robinhood snatched up MarketSnacks. Make no mistake – this was a play to decrease CAC (customer acquisition cost) and drive up LTV (lifetime value). A recent CEO said “Every company should go direct to its audience and become a media company.” While the noise has mainly been centered on businesses with subscription economics, another cohort that would benefit from this trend are the emerging crop of DTC lifestyle brands that have been growing rapidly over the last 5-10 years. This isn’t unchartered waters; brands have been acquiring media companies for years. Going back to the days following the Dot.com bubble, J&J purchased Baby Center in 2001 for ~$10m with the goal of providing more content to expecting moms. Flash forward to today and the pandemic has created another opportune environment for brands to snatch up media companies. Since the spring of 2020, we’ve seen ecommerce sales skyrocket, digital advertising costs increase precipitously and LTV become paramount leading to the newfound realization that paying to advertise won’t have the same ROI as owning an audience to market to. One of the largest blights these newly public DTC companies have is that they aren’t profitable – the primary reason being the amount of money spent on marketing.
When I consult companies I often get asked about either building a DTC (direct-to-consumer) strategy or growing wholesale/retailer partnerships. The argument for DTC is rooted in the continuing belief that it’s more profitable than selling your physical product through retailers. But what if it’s really not? There’s definitely arguments in support of a DTC strategy (better control of the brand experience, ability to collect 1st party data for consumer insights, offer a more personalized customer experience, etc) but it’s important to be realistic with your investors/stakeholders that there’s very likely a fallacy that it will be better for the bottom line.
You can’t go anywhere and not hear about inflation hitting everything from food, to oil, to cars, and furniture. Whether you ultimately believe it’s transitory or not, it’s an interesting time on the pricing front for brands/mfgs.
I’ve written before about the appeal of partnerships and Peloton’s recent deal with United Healthcare (UHC) is another example of why this can be extremely powerful. Beginning in September, UHC customers on employer sponsored plans will get complimentary access to Peloton’s digital subscription for one year. Afterwards, customers can continue and pay Peloton directly or simply let the subscription lapse. We’ve seen trial deals on entertainment subscription products now for a few years (think Netflix and TMobile, Verizon and Disney+, Hulu & Spotify, etc), with more likely in the pipeline. All of these services struggle with high customer acquisition costs and partnerships are an extremely effective way to grow.
What do Peloton, Express, Urban Outfitters and J.Crew all have in common? They have items for sale on their websites that aren’t actually theirs. Each of these retailers has taken a page out of Amazon’s playbook and decided to build a 3rd party marketplace of brands to complement their core offering. The main objective is twofold – increase traffic to their site while providing an opportunity to create a new revenue stream.
The WSJ had a piece recently on the rise of virtual brands in the restaurant space. Such a novel idea. Given the rise of super delivery apps (DoorDash, UberEats,GrubHub, etc), legacy restaurants such as Chili’s and Applebees can quickly develop new brands that cater to a digital audience. In one such example, Chili’s was able to spool up a completely new virtual brand with no physical stores called ‘It’s Just Wings’ and grow it to $150m in one year – that’s roughly 5% of Chili’s total business. Furthermore, they can keep their costs to a minimum with no massive advertising budgets, additional leases or significant overhead. Even after accounting for fees tacked on by the delivery apps this business is likely highly accretive. In fact, the majority of customers had no idea that this food was even being prepared at a Chili’s restaurant which shows having a virtual brand can help create new, non-cannibalistic revenue streams, and serve as an incubator for new food concepts. Startups and ad agencies should take note as there is ample space to create new businesses around this changing landscape.
What’s at stake is a massive TAM expected to hit $1T by 2030 made up exclusively of virtual brands and ghost kitchens. Similar to the private label business in grocery, get ready for a crowded, opaque market where it’s harder to tell where or by whom your food was created.
When I was at Jarden (now Newell Brands), we always had clear acquisition criteria when it came to M&A.
- Strong cash flow characteristics
- Category leading positions in niche markets
- Products that generate recurring revenue
- Attractive historical margins / or margin expansion opportunities
- Accretive to earnings
- Post earnout EBITDA multiple of 6-8x
This strategy allowed us to grow from one brand (The Ball Jar company in 2002) to over 50 brands and ~$8b in sales by 2015 when the company merged with Newell Rubbermaid.