Why now is the time for D2C brands to shine
Many investors are currently shying away from the retail industry, specifically the indirect brand economy. We believe there has never been a more exciting time to invest behind the combination of consumer behavioural change and technological acceleration, the key drivers shaping the future of our industry and our investment strategy at True.
Our business model of choice to exploit this seismic shift is digital first, multi-channel, vertically integrated direct to consumer (D2C) brands. As I write True owns five of these companies across categories including cycling, health & fitness, homeware, sustainable apparel and women’s fashion. To be clear, these are profitable businesses with clear competitive advantages versus the traditional retailers which still today represents c.75-80% of the retail industry. A recent IAB survey revealed 52% of consumers still do not buy any direct to consumer brands illustrating this structural trade has many years to run.
The D2C business model has material advantages. Fundamentally, the brand develops a direct but flexible relationship with the factories to source product resulting in higher gross margins and a simpler supply chain which delivers a greater ability to invest in marketing and sales driven activity. The business also develops a direct, digitally-driven and engaging relationship with consumers enabling it to more easily build a brand and consumer loyalty, where product is sold (predominantly) directly. The glue that binds these advantages is real time data, at every step of the decision-making process.
These brands participate in channels consumers are gravitating towards, satisfy an identified consumer need faster and with better value than competitors and can demonstrate a competitive moat vs. their traditional peers. True, these businesses must still deliver the core components of building a global brand. Namely a content-based ecosystem, live events, relevant product curation, a global community of passionate fans, a stronger value proposition (better, faster, cheaper) and valuable intellectual property. However, it is the variable cost structures, the cross-channel interaction, the capital-light model, the speed of movement and the abundance of data that is delivering significant market share gains for these businesses.
Figure X: Technology has driven a global explosion in direct to consumer brands
As retail landlords attempt to establish turnover figures for stores with some still experimenting with footfall counters, the direct to consumer brand is looking at the arbitrage available from opening or operating stores as one of a host of different native marketing channels. The brand understands the cost of acquiring that customer across all these channels across multiple isochrone scenarios. These brands bring a very different and data rich argument to the property negotiating table. Sales per sq ft or like for like (LFL) have been replaced with customer lifetime value, engagement and retention metrics. It is an opportune time to be starting with a blank sheet of paper.
Technology will ultimately improve this business model further, most notably in areas such as enhanced personalisation and customer service (Artificial intelligence), shortened supply chains (3D printing) and improved logistics options (electric and automation). Retail will consist of a series of micro hubs that attract, create, manufacture and deliver the brand’s offer all in one place, all under the data-enabled control of the business itself. This business model is now coursing through the veins of even the most commoditised categories and this crisis has seen many of the large FMCG players begin to wake up to this fact.
This is far from an open goal. Pitfalls are plentiful. Venture capitalists have been lulled into wild assumptions about lifetime value calculations and falling marketing costs in very competitive markets with promiscuous consumers. Growth has been prioritised at all costs resulting in mis-execution, weak infrastructure and poor consumer experience. Direct communication gaffes with passionate consumers have resulted in real time global isolation for brands and complicated consumer delivery mechanisms coupled with low gross margins have proved a fruitless investment pursuit.
Covid-19 will accelerate an already fast-moving trend and create a vast blue ocean of opportunity for those with superior business models. D2C models will re-invest their superior single trade economics into market share gain and with time will likely become the new market leaders.