Mapping V-Commerce
The Rise of Digital Vertical Brands
The massive shift to e-commerce 2.0.
New Direct-to-Consumer brands, also known as digitally native vertical brands (DNVBs) or V-Commerce brands, are trailblazing entirely new approaches to retail. Billion-dollar success stories like Bonobos, Warby Parker, DollarShaveClub and Casper paved the way in recent years.
The potential is tremendous: Online sales in the US alone are expected to reach $523 billion in the next five years, increasing by more than 9% per year. Direct-to-consumer sales will reach $16 billion by 2020 — a massive increase from the $6.6 billion this channel generated in 2015.
Andreessen Horowitz partner Jeff Jones famously named this new era ‘e-commerce 2.0.’ DTC brands are very different from their e-commerce predecessors. They are financed, designed, produced, marketed, distributed and sold by the same company. Hence, these brands bypass the middleman and don’t have to share their margins with retailers. They connect directly to the customer and own the entire client relationship.
Margins! Margins. Margins?
Traditional brands take a tumble everywhere in the value chain — promotion, distribution and shipping. By passing on costly brick and mortar stores, focusing on online channels and owning the customer, margins for DTC differ radically from traditional retail and e-commerce. The product gross margins can be double that of e-commerce (e.g. 65% versus 30%). The contribution margins can be 4x higher (e.g. 40% versus 10%).
Andy Dunn, CEO and cofounder of apparel company Bonobos, describes the vertical brand as follows:
“The E-Commerce company is a channel; the V-Commerce company is a brand. The E-Commerce company has low margins; the DNVB has high margins. The E-Commerce company can grow unbelievably fast; the DNVB can’t grow as fast, but it’s more valuable in the long run because it’s about more than just price.”
VCs have taken note: 2015 and 2016 were marked by the two largest direct-to-consumer funding deals ever (Warby Parker & The Honest Company). 2016 also marks the year that Acton made its first investment in the space and funded in New York based fast-fashion company Eloquii, a digital vertical brand for plus-size women.
Data driven brand powerhouses
The array of DTC products is diverse, covering subscription services / repeat purchases (contact lenses, razors, groceries) as well as trend driven items (sneakers, workout gear, jewelry) and even low frequency purchase products (mattresses & luggage). Many of these brands target digital natives and millennials. They are powerful examples for taking on customers who are blind to traditional advertising.
DTC brands are 100 percent in control over how their products are sold. A superior customer experience is part of the journey and determines brand vision, aesthetics and execution. With their strong direct connection to the consumer these brands foster trust and increase the probability of selling their product.
V-Commerce companies are skilled in entertaining their clients across different channels. They’re also masters in interweaving online and offline experiences. Think about Eloquii’s recent opening of brick and mortar pop-up stores in strategically well-chosen locations. DTC brands are also famous for building meaningful purpose beyond the product itself. Eloquii aims to empower plus-sized women by building a community of confidence. The brand comes with its own set of values that customers buy into.
To give another example: The overarching core value of online retail startup Everlane is transparency. The company sells contemporary high quality apparel at a fraction of the cost other retailers do. Each fashion item lists sourcing, provenance and the labor practices under which the item was produced.
The physical product also differs as the V-Commerce nature allows for a better overall bundle of product and service than competitors.
Ultimately DTC brands are above all data driven firms that measure the complete user journey. They excel in iterating funnel as well as product designs and marketing in fast cycles. The ultimate goal is a more personalized, loyal and effective relationship with the client.
The elephant in the room
There’s an elephant in the room when it comes to online commerce: Amazon is still growing faster than the pace of e-commerce itself. Going head-to-head with Amazon has become increasingly fierce for e-commerce companies taking Amazon’s enormous scale and cost advantages into account.
Legacy brands that fail to rethink their online strategy will be crushed sooner or later. Investing in DTC companies can be a matter of survival for incumbents to stay relevant and to address digital natives.
Clearly, venture capital is increasingly interested in these new verticals. However, so far private equity and family offices have taken the lead in chasing DTC investment opportunities. Most recently the Carlyle Group bought an alleged 50 percent stake in clothing brand Supreme for around $500 million. If true, this would put Supreme’s enterprise valuation at around $1.1 billion. Above all, VCs look for scalability and fast growth. V-Commerce brands have tremendous growth capital, but don’t scale overnight. This might be one of the reasons, VCs have shied away from opportunities.
A brief look at the cosmetics sector highlights the enormous appeal of DTC brands: Unilever acquired Carver Korea for $2.7 billion. Estee Lauder purchased Too Faced Cosmetics for $1.45 billion. CVC Capital Brands bought PDC Brands for $1.43 billion. L’Oreal purchased a trio of skincare brands for $1.3 billion. None of these businesses were VC funded. The same applies for a wide range of further beauty brands that have recently sold for hundreds of millions.
Shaping consumer choices
Millennials who approach the peak of their professional careers, are primed to be the greatest spenders in the global economy and they’re looking for new consumer experiences. Consumption has become more complicated with tighter shopping budgets. People are aware that their choices can make a difference. Cue: sustainability and consciousness. Consumption equals identity and politics — a shift which is quite likely not going to change soon.
Nimble DTC startups can transform the future of retail by providing customers with new choices and consumer universes that translate beyond mere consumption but speak to people’s minds and shape their choices. Ultimately V-Commerce brands capitalize on technology and substantial shifts in consumer buying behavior to open up new market opportunities.
Dr. Aline Vedder is Director of Communications at Acton Capital Partners, a leading European Venture Capital firm based in Munich, Germany. More: actoncapital.com
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