Direct-to-consumer brands by the numbers — Breaking down the hype into dollars and cents
Last month, I wrote a blog post about the rise of D2C and the things that set D2C brands apart from traditional retailers. The momentum of D2C has only grown stronger, with just this week, Forerunner Ventures, the VC firm that funded Warby Parker, Glossier, Away, Birchbox, and Jet.com, announcing a $360 million fund.
There’s a lot of money and attention in the D2C space compared to just a few years ago. This CB Insights article from just two and a half years ago outlines the need for VCs to start funding the overlooked consumer goods ecosystem. According to the article, VCs were more inclined to invest in internet and software goods because of “strong network effects and near-zero marginal costs”. The article cites a 54-page report by Saar Gur of Charles River Ventures stating that consumer businesses can achieve significant scale, margins and market share, and potentially overtake aggregate retailers. It also states that apparel and accessories are attractive for early-stage investments as they’re relatively capital-light and have attractive margins, especially with D2C brands gaining popularity.
In 2018, many VCs such as Forerunner Ventures have portfolios filled with D2C brands. According to Rafael Martins of Outroll Capital, companies like Brandless and Casper are on the path to becoming unicorns. One of the main drivers for his focus on the CPG space is the hype created by millennials surrounding these brands that lead to high growth potential.
If you look at the top 15 D2C brands by funding, they’ve raised a total of over $2.2 billion. I took a look at the funding data of 92 D2C brands from Andy Dunn’s list alongside a few other brands I’m personally familiar with, using numbers publicly available on Crunchbase. I grouped them into the following categories: Accessories, Apparel, Health & Beauty, Food & Bev, Home & Furnishings, Shoes, and Outdoor Products. Here are a few observations:
Health & Beauty and Apparel brands attracted the most funding
The Health & Beauty category includes cosmetic brands like Glossier and vitamin brands like Care/of. Apparel brands include the likes of Bonobos and Outdoor Voices. Brands in the Health & Beauty category have been able to raise over $1.5 billion in funding since 2007. Likewise, brands in the Apparel category have raised over $800 million since 2007.
In my list, there are a total of 14 brands in the Health & Beauty category and 31 in the Apparel category. So, on average, Health & Beauty brands were able to attract more funding. The top 5 Health & Beauty brands by funding are:
- The Honest Company — $503,000,000
- Harry’s — $474,600,000
- Dollar Shave Club — $163,500,000
- Hims — $97,000,000
- Glossier — $86,000,000
Likewise, the top few brands in the other popular categories are:
- JustFab — $259,700,000
- Bonobos — $127,600,000 (Acquired for $310,000,000)
- Stance — $116,000,000
- Warby Parker — $290,500,000
- Away — $81,000,000
- Raden — $5,600,000
Food & Beverages
- Brandless — $292,500,000
- Hungryroot — $35,400,000
- Food52 — $13,300,000
Home & Furnishings
- Casper — $239,700,000
- Parachute Home — $44,800,000
- Interior Define — $27,200,000
The reason Health & Beauty stands out is likely because of the large market potential and the tendency for loyal and repeat buyers. According to Reuters, the market for cosmetics is posed to grow to $805.61 billion by 2023, and was valued at $532.43 billion in 2017. Apparel & Accessories only have a combined market value of $92.3 billion, according to the New York Times. The growth that’s seen in the overall beauty industry could be reflective of, or a cause of the potential growth that VCs and entrepreneurs are hoping for in the digital-native brand space too.
These types of businesses are also able to create a unique brand that resonates with their customer base and combine that with high customer lifetime value. The lifetime value for these brands is high because they encourage large orders or small but repeated purchases, as mentioned in this article by TechCrunch.
Dollar Shave Club has a subscription-based model where customers are able to get shaving products delivered to them on a monthly basis. If a customer spends $5 a month, they’re able to generate $60 over the year. On top of that, because of the convenience of receiving these products on a monthly basis for what is an “essential” good, churn rates are lower. Glossier is priced comparably to many cosmetic brands a consumer might find in Sephora or Ulta. However, on its website it encourages customers to spend at least $30 by promising free standard shipping. It doesn’t make sense for customers spend $5–$7 on shipping for a $15-$20 product. Speaking from personal experience with makeup, once I find a brand I like that works for me, I end up loyal to that brand. I’m afraid the other brand’s colors won’t work or they might spoil my skin. Friends of mine have shared similar experiences. Instead of buying a new brand, once we find something we like, we stay loyal and restock to our brands of choice. This creates a strong bond between cosmetics brands and their return customers, who repurchase products anywhere between 3–6 months, creating at least $60 of revenue per customer per year, based on my assumptions for Glossier.
Dollar Shave Club, as I mentioned in my previous post, was acquired by Unilever for $1 billion. Harry’s is now available in mass market retailers like Target and Nordstrom. The Honest Company has established a brand through its celebrity founder, Jessica Alba, and is now being sold at Target too. Glossier has been able to establish a strong brand among millennials and Gen Zers on social media and through founder Emily Weiss’s blog Into the Gloss. Hims, in my opinion, is trying to establish a similar brand presence as Glossier, by breaking the stigma against men’s beauty and skincare.
2013 and 2014 were popular years for starting a D2C brand, but brands founded in 2011 have received the most funding so far
Out of the 92 brands that I looked at, 20 were founded in 2013 and 18 were founded in 2014. Brands founded in 2013 include Casper and MVMT Watches, and those founded in 2014 include Glossier and Away. Although all these brands have been very successful, establishing almost a cult-like following in the case of Glossier, and being acquired for $100 million in the case of MVMT, 2011 was the year that created the brands that have attracted the most funding.
Although brands founded in 2011 received a total of over $765 million in funding, most of this funding was given to two brands that I’ve mentioned a few times: Dollar Shave Club and Harry’s. I see this as a reflection of the latent consumer demand and unhappiness that had been in this category for quite some time.. I think that given more time for brands to grow and establish themselves, we will see more brands founded in later years attracting more funding with more money in the venture space dedicated towards consumer goods, particular to D2C brands and the DNVB space.
New York City is the biggest hub for consumer brands
This is not surprising to me. Out of the 92 brands I looked at, 29 were headquartered in New York City, followed by 17 in Los Angeles, and 14 in San Francisco. Likewise, New York City-based brands received over $1.5 billion in funding. Los Angeles-based brands also received a sizable amount of $1.2 billion in funding, but San Francisco-based brands are lagging behind with a comparatively meager $480 million in funding. New York City is home to brands like Bonobos, Warby Parker, Away and Glossier. I think the reason New York has attracted these brands is because it has always been a global center for culture, fashion and beauty, setting many industry standards and trends that we see today. New York has always been home to cosmetic brands in the US, like LVMH for instance. Even with the rise of technology and globalization, we’ve seen that regions can hold disproportionate cultural influence, as is the case in Silicon Valley with technology. Consumer brands are attracted to places where they can find money and be able to grow, and they find this in New York City and Los Angeles.
CPG and Retail giants in the D2C space
In the past couple of years, a lot of retail giants have taken note of this booming change in e-commerce, as I mentioned in my last article. Many traditional CPG manufacturers have looked into D2C initiatives to compete with smaller industry disruptors, whether it be through acquisitions, partnerships or building a new D2C brand ground-up. Walmart, for example, acquired Jet.com in order to compete with Amazon, shifting a large focus to e-commerce. They also bought D2C clothing retailers Bonobos and ModCloth, and they’ve looked into acquiring Away, the popular luggage brand. This could also be a reflection of their attempts to attract younger, trendier customers who are attracted to such brands. Unilever also purchased Dollar Shave Club for $1 billion, and MVMT Watches was purchased by Movado Group for $100 million.
I wouldn’t be surprised to see more manufacturers and retailers going after these brands, as DNVBs have already been able to establish lower customer acquisition costs through social media and ‘hype’, and high customer lifetime value. Giants like LVMH and L’Oreal who’ve acquired many traditional luxury goods in the past will be obvious potential candidates for acquiring D2C cosmetics and apparel brands. Same goes for Unilever and Procter & Gamble in the Health & Beauty space.
This analysis by McKinsey notes that traditional CPG companies should consider these indicators along with general business indicators, as VCs do when analyzing companies in the D2C space. The article also outlines what CPG manufacturers need to look into before foraying into D2C: what is D2C’s role in the larger firm, how to attract and retain customers, how to gain the required capabilities, and what a scalable economic model looks like, combined with a VC mindset towards metrics.
My research did not by any means contain a complete list of D2C brands and companies. The space is growing so quickly it’s impossible to keep track of every D2C brand popping up overnight. If you’re interested in keeping on top of the trends, there’s an Instagram account run by a London-based VC that has reviews of many of these D2C brands and more. I’d highly recommend following that account if you’re interested in the space, or just interested in seeing what’s trending.
In conclusion, the D2C space is growing rapidly, both by reach and by funding, year by year, with no decline in sight. As more VCs and institutions see value in these brands, they’re only more likely to be funded or acquired for large sums of money by more traditional companies. I’m personally very excited to see what this space has in store (no pun intended). More cool brands means more of an excuse to spend money on “research”.