A Blog by Jonathan Low


Jan 28, 2020

How Direct To Consumer Startups Have Changed the Way We Shop

Brand loyalty is down, speed and convenience are up. Consumers dont need anyone mediating their commercial relationships anymore. Small, direct to consumer startups flooded the zone. JL

Lawrence Ingrassia reports in the New York Times:

The direct-to-consumer brand revolution is one of the most dominant forces in retailing today. Between 2013 and 2017, $17 billion in sales shifted from big consumer brands to small brands. This is likely to strengthen, thanks to the continued growth of sales on Amazon. In 2018, small and medium-size companies sold $160 billion on Amazon, up from $100 million in 1999, a 1,600-fold increase. Technology and globalization leveled the playing field. You didn’t need a big advertising budget, manufacturing (or) a retailer. (Of) the 100 top consumer product brands, 90% lost market share in recent years.
At 6:15 in the morning on March 6, 2012, Michael Dubin woke up and checked his computer. He was puzzled by what he saw — actually, by what he didn’t see. Before going to bed, he had posted a video about his startup, a company that virtually no one had ever heard of.
But his venture’s website wasn’t working. Even though everything had been set the night before, the site had crashed. So he hopped into the shower before heading to sort things out at the cramped office he shared at a startup incubator with other entrepreneurs who couldn’t afford to rent space themselves.
Dubin was 33 years old. He was at this point an unsuccessful — well, failed — entrepreneur. A few years earlier, after the financial markets’ meltdown, he got laid off from a digital marketing job at Time Inc.’s “Sports Illustrated Kids” and applied to Columbia, New York University, UCLA and a few other business schools to get an MBA, but he was turned down. By all of them.
Frustrated, he moved to Los Angeles, where he stayed rent-free at a cousin’s apartment while deciding what he wanted to do. After leaving Time, he did some consulting work for friends who had a holiday decorations business. Then he worked at a digital marketing firm in Los Angeles, developing and placing promotional videos online. After less than a year, he departed after a disagreement over the company’s strategy. His family and friends wondered if he’d ever find something he was both good at and liked.
Now Dubin was working on his most ambitious idea yet. Or perhaps quixotic would be a better word to describe it. His startup was named Dollar Shave Club. It would take on Gillette by selling blades — purchased from a South Korean supplier at just half the price of Gillette’s. He had already spent more than a year’s time on it, but the business had gotten off to a slow start.
What happened the morning of March 6 would change that, thanks to his startup’s one-minute, 33-second video. The good news was that the video was going viral, and a whole lot of people had been watching it. The bad news was that so many people were trying to watch it that the computer server was crashing at times, or sluggish when it worked.
The tech company managing the Dollar Shave Club website had put an expert to work trying to fix the problem. Then a second. Then a third, with little success. At 10:30 that morning, it sent an unnerving email to Dubin: “We have been working for three hours already to keep it working stable.” Dubin was in a panic. After all his false starts, this was his chance.
What he didn’t know at the time, what no one knew, was that the humorous video would humble one of the most dominant consumer companies in the annals of American business. Painstakingly written and rewritten over months, and then shot in a single day at a cost of just $4,500, it became an instant classic thanks to a now famous punch line: “Are the blades any good? No,” he says with a deadpan delivery, pausing briefly before adding: “Our blades are [expletive] great!”
Against all odds, Dollar Shave Club would go on to succeed wildly, with annual sales approaching $200 million when it was acquired by Unilever for $1 billion in 2016.Dubin helped usher in a business model for 21st century entrepreneurs to take on previously unassailable consumer brands: Technology had the potential to change the world of physical goods and the way brands are created.
He recognized that technology and globalization were leveling the playing field. You didn’t need to start with a big advertising budget to get the attention of consumers. You didn’t need a manufacturing plant. You didn’t need to spend millions of dollars on research and development. You didn’t need a retailer to carry your product.
By targeting a corporate giant’s weakness — high prices or inconvenience or a stodgy image — a clever startup with the right strategy, the right message and the right product value could create a new national brand virtually overnight. All this was happening at a time that more consumers in their 20s and 30s were up for grabs. They lived digital lives, so were accustomed to — happy to! — buy things online.
Not long ago, it would have been difficult to imagine that a startup company could take significant sales from Gillette, the giant global corporation that had long controlled 70% of the country’s sales of razors.
Astonishingly, Dollar Shave Club and Harry’s, a rival launched a year later, have done just that. By 2018, the two startups together had grabbed nearly 14% of U.S. razor blade sales.
The direct-to-consumer brand revolution is one of the most dominant forces in the retailing business today. It began with a handful of startups, then grew to dozens, then hundreds — from mattresses (Casper) to bras (ThirdLove) to electric toothbrushes (Quip) to vitamins (Ritual) to tampons (Lola) to luggage (Away) to sneakers (Allbirds) to makeup (Glossier) to hair color (eSalon) to pet food (Farmer’s Dog) — and even thousands, counting the brands filling the endless digital aisles and shelves of Amazon Marketplace.
Between 2013 and 2017, some $17 billion in sales shifted from big consumer brands to small brands — and that was before many of the latest startups began getting traction. This trend is likely to strengthen in the coming years, thanks in large part to the continued growth of sales on Amazon. In 2018, small and medium-size companies sold $160 billion in goods on Amazon, up from just $100 million in 1999, a 1,600-fold increase. While some of those companies are reselling products made by others, many of them, including Amazon itself, are creating their own new brands.
Entrepreneur Jeffrey Raider has observed the brand revolution from a front-row seat. He started not one, but two, direct-to-consumer unicorns before he reached his mid-30s. He co-founded Harry’s in 2013 and sold it to Edgewell for $1.37 billion six years later. Earlier, he had co-founded Warby Parker, which is worth $1.75 billion.
Harry’s and Warby Parker, along with Dollar Shave Club and many of the other new successful direct-to-consumer brands, share a strategy: Each saw an opening to challenge entrenched market leaders with quality products at a much lower price. In Raider’s view, however, what catapulted each to become a billion-dollar brand is an obsession with connecting with the customer. Everyone who joins the staff of Harry’s, no matter what the job, has to spend a day working in the call center as part of the customer experience team.
Raider and his co-founder, Andy Katz-Mayfield, themselves spend several hours each month listening to customers’ complaints or suggestions. Among these was an odd inquiry that they heard from about 100 customers in Harry’s first year.
“People were calling us all the time, saying, ‘Hey, can I get one of those little plastic covers that go over the blade?’” Raider recalled. “And we’re like, why?” From the start, Harry’s had included a blade cover — a small, rigid plastic piece that snaps snugly over the razor cartridge — when it shipped a customer’s first order, to protect the blade from getting dull. Many people threw the cover out or lost it, only to decide later that it might have been nice to use while traveling, not just to shield the blade but also to protect their fingers from getting nicked when they reached into their toiletry kit. “Since I travel a lot, and the razor goes into my travel kit, I would like to get another. I don’t need another handle/blade set. Is the blade guard alone available?” one customer wrote in an email.
So, in 2015, Harry’s began selling a replacement Travel Blade Cover for $1. It may seem insignificant, and indeed it brings in only a tiny amount of revenue, but Raider points to it as something that signals to customers that Harry’s cares about what they have to say. And that helps to build loyalty that will last for a long time, which is one of the things that makes for a successful and enduring brand.
Yet Raider understands that the proliferation of startup brands has fragmented the consumer product business, and that could make it harder than ever to create mass brands in the mold of Serta or Victoria’s Secret or Gillette.
In the old world, once a popular mass-market brand was established, it could count on a long reign. In the new world, this is no longer true. Brand loyalty is declining as never before. One report on the 100 top consumer product brands found that 90% had lost market share in recent years.The decline in brand loyalty, of course, has helped power the rise of the new direct-to-consumer brands
This development hasn’t gone unnoticed by Neil Blumenthal, another founder of Warby Parker. “It’s never been cheaper to start a business, although I think it’s never been harder to scale a business,” he says. Warby Parker is the most prominent new eyewear brand, but its market share is still less than 5%. And in the years since it sold its first pair of eyeglasses, in 2010, other startups have launched well over a dozen new online eyeglass brands.
Many of the newcomers are copycats with essentially the same business model as Warby Parker, but others are niche players, such as Lensabl, which will make prescription lenses for your frames so you don’t have to buy new ones — “Our Lenses, Your Specs” — or Pixel, which sells eyeglasses with a pigment in the lenses, so they filter out “blue light” from computer screens, which can cause eye strain; or Topology, which makes frames custom-fitted to your face using an iPhone’s 3D scan technology.
How many of these startups will succeed? To some, the constant influx of new entrants offering eyeglasses and other products underscores that the direct-to-consumer frenzy has elements of a bubble — much like the dot-com boom of the 1990s, with venture capital firms financing rival brands that are chasing the same customers. But while not all will survive, it’s possible that many will.
The good news for brands, new and old, is that the market for consumer products isn’t just tens of billions or even hundreds of billions of dollars a year, but several trillion dollars a year in the United States alone. That leaves plenty of room for startups, with the most successful ones joining the billion dollar brand club. After all, they could be a $1 razor blade and a one-minute, 33-second video away from making it happen.


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