A small army of direct-to-consumer startups in the US is rattling large CPG companies and causing more headaches for traditional retailers.
In the past five years, venture capital firms have invested more than $3 billion in direct-to-consumer CPG startups, which typically sell uniquely branded household items to customers via online shops. Led by firms such as Warby Parker, which sells glasses, and mattress-maker Casper, the sector has grown rapidly, posing challenges to large incumbents, whether by competing on price or by zeroing in on the “pain points” associated with specific products.
The first DTC startups sprang up in product categories dominated by well-established multinationals. Gillette, for example, the world’s largest razorblade maker, had 70% of the American market back in 2010. By now Dollar Shave Club and Harry’s, subscription services that sell direct to consumers at low cost, have signed up more than 5 million customers – and Gillette’s market share has fallen to 54%. DTC firm Hubble Contacts has the $8 billion contact lens industry in its crosshairs, which could spell trouble for the likes of Johnson & Johnson and Bausch + Lomb.
Branding and marketing, particularly on social media, are elemental to the success of direct-to-consumer startups. Sophie Bakalar of VC firm Collaborative Fund says that brand is the first thing her team looks for in a consumer startup. Most customers learn about Away, a luggage firm, on social media, where people share images of their bags in envy-inspiring destinations and hotels. As The Economist explains, “Away’s social-media team collects and redistributes these posts on its Instagram account, which boasts 140,000 followers.” The company, founded in 2015, expects to generate $50 million in sales this year.
A DTC startup’s success, even with the most clever branding and social media strategy, is by no means guaranteed, however. For one thing, they have proliferated to the point where it can be very difficult to stand out. “The challenge is rising above the noise,” says Kirsten Green of Forerunner Ventures. Also, while being highly focused, often on a single item, has lent these firms a certain craftsman-like novelty, failing to offer more variety could be detrimental in the longer term.
Meanwhile, the giants of consumer goods and retailing have stirred. Some are changing the way they sell to consumers, expanding their own DTC distribution and working with Amazon. Others are going the acquisition route: Unilever bought Dollar Shave Club for $1 billion in 2016. Walmart spent $310 million to acquire menswear company Bonobos earlier this year. Most recently, P&G announced plans to buy Native, a DTC deodorant brand. For the moment at least, what Emily Heyward of branding agency Red Antler called the “DTC revolution” is making its mark.