A new class of startup is upending America’s consumer-goods industry

Article tiré du magazine The Economist.

A “direct-to-consumer” revolution

In many ways, Tommy John, a startup based in Manhattan, resembles a tech company straight out of Silicon Valley. On its website the venture-backed firm touts its innovative materials and patented designs. When recruiting talent, it describes itself as “disruptive” and “revolutionary”. But Tommy John does not deal in computer hardware, software or any other kind of technology. It makes men’s underwear.

Following the example of successful e-commerce brands such as Warby Parker, a glasses firm, and Casper, a mattress-maker, a growing number of startups are reimagining everyday household items—from pants and socks to toothbrushes and cookware. These “direct-to-consumer” (DTC) companies bypass conventional retailers and bring their products straight to customers via their online stores. They began several years ago to catch the attention of venture-capital (VC) firms, which have poured in more than $3bn since 2012. But the success of some DTC firms has attracted a lot of wannabes, making this a crowded market and leaving some wondering whether the boom has reached its limits.

The DTC business model first emerged in product areas dominated by slow-moving incumbents with hefty profit margins, such as spectacles and razor blades. In 2010 Gillette, the world’s largest razor-blade-maker, enjoyed 70% of the American market and gross margins as high as 60%. Since then, Dollar Shave Club and Harry’s, two subscription services that sell blades at a fraction of the price of big brands, have amassed more than 5m customers. Gillette’s market share has fallen to 54%.

Hubble Contacts, founded in 2016, wants to do the same to the $8bn contact-lens industry, which is dominated by giants such as Johnson & Johnson and Bausch + Lomb. Lenses are well-suited to the DTC model, being a commoditised product that customers purchase on a regular basis, says Jesse Horwitz, one of Hubble’s founders. The startup is on track to generate $20m in sales in 2017 and has attracted money from several VC firms.

Startups that cannot undercut incumbents on price must differentiate themselves in other ways. Casper won over many shoppers by getting rid of the worst bits of the bed-buying process, including choosing among dozens of similar products and haggling with pushy salesmen. Allbirds, a two-year-old San Francisco-based firm that makes all-wool trainers, has tweaked the design of its shoes 27 times based on feedback from customers.

Investors say branding and marketing are crucial if DTC startups are to make it. Sophie Bakalar of Collaborative Fund, a VC firm, says that brand is the first thing her team looks for in a consumer startup. Suitcases made by Away, a firm founded by two Warby Parker alumnae, have been featured in Vogue and endorsed by celebrities such as Karlie Kloss, a supermodel. But most customers learn about the brand on social media, where globe-trotting millennials share images of their bags, artfully displayed on hotel-room beds or rolling in front of iconic landmarks. Away’s social-media team collects and redistributes these posts on its Instagram account, which boasts 140,000 followers. This year the firm expects to generate $50m in sales.

For all the buzz surrounding such online brands, they face high hurdles. Investors worry about a glut of startups, which makes it difficult to stand out. “The challenge is rising above the noise,” says Kirsten Green of Forerunner Ventures, an early investor in companies like Bonobos, a clothing retailer. Some DTC firms insist on focusing on a single item in the bedroom, kitchen or bathroom, when they would do better to offer a stable of products.

Moreover, the giants of consumer goods and retailing, initially slow to respond to competition from these upstarts, have wised up. They are reacting in two ways. The first is to make it easier to buy their goods, both by expanding their own DTC distribution, as Procter & Gamble (which owns Gillette) does, and by working more closely with Amazon.

That may not be good news for the startups, but the big firms’ second tactic is what the founders of every new DTC firm, and their VC backers, dream of: spending big to acquire young rivals. Unilever, for instance, paid $1bn for Dollar Shave Club in 2016; Walmart spent $310m to acquire Bonobos in June; and this week P&G said it was buying Native, a DTC deodorant brand, for an undisclosed sum.

This spending spree explains why optimism still abounds, even as more startups jostle to carve out a niche. The consumer-goods business remains gripped by a “DTC revolution”, says Emily Heyward of Red Antler, a branding agency. A comforting thought for buyers of briefs.

 

From the print edition