Direct-to-Consumer (D2C) Brand Landscape 2018

Lude Rong
Lude Rong
Dec 22, 2018 · 6 min read

Introduction

What is the ultimate proof of success for a retail brand? There may not be a universally accepted answer, but one can hardly dispute the market recognition of Kleenex as a go-to brand for tissues. Direct-to-Consumer (D2C) startups strive for this type of recognition by skipping intermediaries and directly interacting with end consumers. For example, Warby Parker took over online eyewear; Dollar Shave Club revolutionized grooming retail; Casper is renowned for delivering mattresses to doors. Although brands’ specific strategies vary, there have been patterns with respect to different markets, regions, and time. In addition, almost all brands that stood out crafted and told unique stories about their products and services. This landscape article examines trends and proven strategies for D2C startups to break into and succeed in retail markets that are historically dominated by incumbent brick-to-mortar businesses.

Methodology

The seven categories of the landscape each represent a consumer market sector that is going through the D2C transition: Health & Beauty, Clothing & Accessories, Home, Food, Baby & Kids, Travel & Outdoors, and Pet. Although not an exhaustive list or ranking of all emerging D2C brands, this landscape with 135 companies provides a cross-sectoral overview of D2C startups, predominantly founded in the past decade.

Each brand in the landscape has gone through at least a fundraising round or has a proven revenue stream. Sources to identify those companies include Business Insider, VC Cafe, TechCrunch, Medium, and Interactive Advertising Bureau (IAB). Company-specific information was gathered from Crunchbase, Bloomberg, and company websites and was aggregated in Airtable.

Findings

I. Geographical Hubs

The figure above represents the geographical distribution of brands by headquarter location. Except for three startups without clearly identified headquarters, the other 132 brands in the landscape are all included. As shown, a high percentage of D2C startups were headquartered in metropolitan areas, such as New York (36.4%), Los Angeles (19.7%), and the Bay Area (16.7%) domestically. This geographical trend may have resulted from convenience in these areas and founders’ motivation to gain and better take advantage of direct consumer insights.

II. Target Groups

Some D2C startups succeeded by targeting underserved markets. For example, Universal Standard and Indochino focus on oversized/undersized clothing, which used to be either hard to find or expensive to customize. Another startup named Lola targets a taboo market — feminine hygiene, which lacks innovative designs and convenient customer experiences.

Nevertheless, brands also succeeded by achieving product-market in overserved markets. For example, Swoon and Burrow sell affordable furniture (Home); AYR makes high-quality clothing available at cheap prices (Clothing & Accessories); Dollar Shave Club delivers grooming products at low monthly subscription fees (Health & Beauty). All those companies attempt to provide the best combination of price and quality to undercut incumbent companies that dominate these industries with high profit margins and relatively low barrier to entry.

III. Subscription

In light of certain characteristics of target consumer groups, there was a boom in the number of D2C startups with subscription-based business models in early 2010s. As shown in the figure below, categories that stand out with high percentages of such brands include Pets, Health & Beauty, Baby & Kids, and Food.

The trend for food subscription started with HelloFresh in 2010, which was soon followed by Plated and Freshly in 2011. Nevertheless, the most successful player by revenue today is Blue Apron, a unicorn startup who went public in 2017 at a $1.9B valuation. Because the food subscription service was well received, more startups emerged after 2013 and provided pet food subscription. During the same period, subscription box also took over Baby & Kids apparel and toys (e.g. Please and Carrots, Kidbox, Rockets of Awesome). Across those different industries, subscription service was demonstrated effective for retention and scalability.

In Health & Beauty, there have been two major subscription models. First, founded around 2011, Birchbox, Glossybox, and Ipsy deliver medium size samples in forms of gift boxes. Second, initiated by Dollar Shave Club in 2011, there was a trend for D2C startups on shaving product, which spread to oral care (e.g. Quip and Goby) and other health care products (e.g. Ritual, Seed, Care/of) in around 2014. While the first model focuses more on marketing new products, the second model works on retention. Going forward, the second model seems to be gaining more traction among D2C startups, especially those in markets with low barriers to entry and limited product differentiation. Because consumers in those markets tend to be less sensitive to designs but willing to make recurring purchases for convenience, it is more advisable to work more on retaining existing consumers.

IV. Click-to-Brick

Modern pop-up retail started in 1997 when Patrick Courrielche initiated the Ritual Expo in LA. Before long, brands such as AT&T, Kate Spade, Gucci, and LV adopted the strategy to promote to target audiences through brief experiences. Compared to those big brands with established customer bases, D2C brands are using pop-up shops as a transitional step to provide more customized offline experiences. In 2013, for example, Warby Parker transformed an old school bus into a rolling store, driving around the country for 18 months and setting up pop-ups in 15 cities. It was a strategic move for Warby Parker’s decisions on more permanent retail locations, which utilized direct customer insights gathered during the pop-up retail process.

The timeline below shows an increasing number of D2C startups in the landscape going click-to-brick (started online, but have set up showrooms and retail stores) over the past decade. Many of them were founded around and after 2014.

V. Brand recognition

To increase brand recognition, D2C brands have come up with four major value propositions, from product quality and shopping experience to social responsibility, which appeal to different target consumers:

  1. Simple and comfortable: Casper, ThirdLove
  2. Customizable: M. Gemi, Simply Framed
  3. Natural, safe, and sustainable: Allbirds, Wondercide
  4. Charity: Bombas, Leesa, Warby Parker

VI. E-commerce Platforms & Tools

Amazon is well known for its market dominance strategy of paid advertising and Fulfillment by Amazon (FBA) dropshipping. Though providing convenience to both consumers and merchants, its business model does not necessarily serve D2C brands’ long-run interest considering brand recognition: first, it is difficult to compete with big brands in paid advertising and outlast second-hand sellers in price wars; second, Amazon subscribers tend to be more loyal to the marketplace instead of specific brands. For those reasons, the ambitious online marketplace Amazon is not an ideal starting point for a D2C brand to establish its name online. To circumvent inconsistent values with Amazon concerning brand recognition, D2C brands utilize some e-commerce platforms and tools with better product-market fits.

For instance, Shopify is a cloud-based, multi-channel e-commerce platform designed for small and medium-sized businesses. Founded in 2004, Shopify grew to achieve a 13% share of e-commerce platform revenue by September 2017. Shopify has designed its platform, pursued market expansion, and achieved a competitive advantage among online platforms through integrated marketing and merchant solutions. Much of its popularity can be attributed to focusing on an underserved group — small businesses — by allowing for migration across established platforms, brand recognition through web design, and simplification of logistics and analytics.

Conclusion

Over the past decade, D2C startups have been able to quickly establish brand recognition by deploying different strategies, such as using subscription service for marketing and retention, as well as telling unique brand stories to target customer groups. Across various sectors, there were two major trends. First, D2C startups headquartered mostly in metropolitan areas for better access to customer insights. Second, after gaining traction online, D2C brands enhance their influence by going click-to-brick. For continued success, existing and new D2C brands are marketing unique stories about their products and living up to social responsibility commitments.

In the meantime, consumers seem to benefit from a more fragmented retail industry, which offers more diversified and tailored products and services. It will be exciting to witness how D2C brands will continue to influence consumer behaviors and revolutionize the retail industry.

Thanks to Prashant Fonseka

Lude Rong

Written by

Lude Rong

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