DTC Brands Need a Publishing Arm

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. 

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Is DTC less Profitable than Wholesale?

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.

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Pricing Power at Retail

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. 

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Your Favorite Retailer Might be Selling 3rd Party Products

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. 

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DTC Startups – The Bear/Bull Case

Brands aren’t built overnight. Some of the most successful brands (Nike, LVMH, etc) have taken years to achieve the awareness (and more importantly relevance) they have now. In the case of LVMH, there is a key element to owning a piece of European heritage that has driven the company to be the largest luxury goods company in the world. Louis Vuitton owns much of their own supply chain. As an example, over the past couple of years they opened a manufacturing center in Texas to create leather goods here in the US that further allows them to create local stories around their products.

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Venture Debt & Revenue Based Investing

If you have a small but growing business selling on Amazon or even direct-to-consumer (D2C) you’re bound to hit a point where you require money to scale. For as much as the media talks about venture capital, the reality is that less than 1% of startups here in the US are able to raise money from VC’s. The challenge, however, is that consumer brands often have working capital needs associated with carrying inventory or affording increasingly expensive paid media.  So where do these types of businesses get the cash to grow? Traditional lenders, such as banks, often have strict covenants in their terms and have not historically catered their products to this cohort, but a growing number of new, innovative solutions are disrupting the model. I should note that pre-revenue/pre-product startups are likely not going to be a candidate for institutional debt – but a convertible note, SAFE or crowdfunding remain a viable alternative at this early stage. As a side note on crowdfunding, the SEC recently increased the cap for fundraising via this channel to $5m (from $1m) which I suspect will open up more activity in this space. 

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Disintermediation is Eating the World

Venture capitalist Marc Andreessen coined the term “Software is eating the world” nearly 10 years ago. His argument that software would be at the heart of every business moving forward could not have been more astute. For example, Amazon’s not a retailer; their primary capability is their software technology enabling sellers around the world to get their products to consumers. The same could be said for their AWS cloud business; again a software play. Uber, Google, Facebook, Netflix, and to some extent Apple’s app store business, are all examples of companies that are fundamentally software first. Interestingly, this same software has empowered a foundational shift in business model. It has enabled disintermediation. The complex network of intermediaries that have existed historically have been circumvented which has led to the world of everything being direct-to-consumer (D2C) or direct to source. Many think of D2C as mainly having an impact on consumer goods, but the theme permeates into numerous industries.  Here are some examples:

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Paying the Toll

As tech companies descended on Capitol Hill this week, the ongoing debate around antitrust continues. Startups have long lamented about the anticompetitive business practices adopted by the big 4:  Apple, Amazon, Facebook and Google. If you build a business that relies on the Apple or Google app stores then you automatically know you’re going to pay a ~30% toll to access consumers. The debate has further been heightened as some startups like Classpass have been hit with this toll as they roll out virtual classes due to COVID. The founders argue that they are forgoing their normal take rate from providers (gym’s, etc) they work with during COVID so why is Apple charging them 30%. Apple is in an interesting situation, because if they make exceptions for one business, they need to make for others. They also would face potential legal battles from previous customers that did have to pay. 

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