The next generation of commerce is arriving, and with it are a slew of new startup brands that forego traditional retail channels and instead sell directly to shoppers. These direct-to-consumer (D2C) startups aim to compete with monopolistic brands in huge markets by offering a vastly improved consumer experience along with a more attractive price point. In the razor market, Dollar Shave Club (now part of Unilever) and Harry’s are going after Gillette; the Honest Company has made huge headway against Procter & Gamble and Kimberly-Clark; and in the eyeglass market, Warby Parker and European players like Mister Spex have become viable competitors to Luxottica.
Why Today’s Environment Supports The Growth Of New D2C Players
Ultimately, monopolistic players are stuck in a paradigm that is very profitable, but that leaves them with reduced ability to innovate and form direct, meaningful relationships with their customers. Ben Sun, General Partner at Primary Venture Partners, who gained widespread attention earlier this year as one of the earliest investors to take a bet on Jet.com, told us that “new D2C brands emerging today understand these challenges, and have built platforms that directly attack those vulnerabilities and provide consumers something of real value - either a far superior shopping experience, higher-quality goods, cheaper products or greater convenience.”
Indeed, there are a number of factors that make it possible for young, scrappy D2C startups to upend incumbents in monopolistic industries.
1) Legacy players aren’t pressured to innovate - and it’s a Herculean task for them to overhaul existing systems and processes.
You see this issue with many historically successful companies that find themselves sitting on a large profit pool. They’ve become so accustomed to doing business one way - and they’ve become so large - that it’s nearly impossible for them to pivot and think outside the box. Warby Parker was able to do this when it emerged in 2010 with a redesigned customer experience featuring home try-on and dramatically reduced price points as compared to dominant industry players.
2) One or two large players have driven significant pricing inequality.
The razor market is a prime example here, with Gillette having cornered the retail market and established high price points. By offering a D2C subscription model, upstarts like Dollar Shave Club and Harry’s have bypassed the retail channel completely, which enable them to offer hugely discounted prices. And despite Gillette trying to play catch-up with its own D2C offering, its prices are still higher as compared to new crowd favorites.
3) Startups are often far better at creative marketing than monopolistic players.
While Huggies and Pampers have been the diaper mainstay for generations, for example, Honest has been giving them a run for their money, thanks largely to its superstar spokeswoman and brilliant marketing tactics.
4) Legacy brands don’t want to disrupt retail relationships.
Once CPG companies gain a foothold with a retailer and establish a powerful brand, their ultimate goal becomes shelf-space domination. While many of these brands are now expanding their D2C offerings so as not to lose ground in the evolving market, the overwhelming majority of their sales will continue to come through wholesale partners. So brands’ deference to their partners has limited their ability to innovate, and they cannot alienate those partners without risking their market position.
D2C Startups Challenge Leaders Across A Wide Range Of Categories
Ben Lerer, managing partner at Lerer Hippeau Ventures and CEO of Group Nine Media, has built an e-commerce and media empire by understanding the critical connection a company must have with the new generation of digital-first consumers. Having invested in a number of successful D2C disruptors, including Casper, Warby Parker and Glossier, Lerer looks for brands “in mature industries that are reengineering the entire commerce experience in an effort to connect deeply with consumers every step of the way - from product to design to customer support to social engagement. These are the brands that will leave the biggest legacy.”
There are a number of new brands today that are taking on established industries. Below are four up-and-comers that are challenging traditional mainstays in their respective verticals.
1) Oral Care
Electric toothbrushes have become fairly mainstream but come with their own set of problems, including some needless bells and whistles and sky-high prices for replacement heads. Goby is aiming to change that paradigm, offering the first subscription-based D2C rechargeable electric toothbrush that’s simpler and half the price of retail brands. Dental hygiene is a tight market, with just a few familiar consumer brands from which to choose. Goby has circumvented traditional distribution channels by aligning itself with dentists who have come to recommend the product. In an effort to create a modern brand that appeals to consumers, the company has signed on with the design firm behind Harry’s.
2) Pet Food
Ollie, which delivers fresh pet food to consumers’ doorsteps, is a prime example of a new player disrupting an established industry. The $30 billion U.S. pet food market has nearly doubled since 2000, and of the 11 largest brands of dog food, seven belong to either Mars or Nestle. But more importantly, the industry is suffering from a lack of innovation among these dominant players, with ingredients and highly processed finished products that no longer meet the expectations of consumers who are paying closer attention to what they feed their pets. Ollie has tackled this problem by focusing on producing exclusively fresh dog food with organic ingredients, and developing close relationships with its customers so that it can create tailored meal plans.
3) Wine
Recent regulatory changes have altered the traditional Three-Tier System of wine distribution in the U.S., allowing wineries to ship direct to consumers in almost every state, rather than having to go through retail channels. This has cracked opened the $40 billion per year market, 46% of which is dominated by just three brands: E. & J. Gallo Winery, The Wine Group and Constellation Brands (all of which have continued to gobble up smaller brands in the market). A number of disruptors have popped up, vying for customer attention with digital-first brands in a highly fragmented industry where brand loyalty is notoriously low. Among those breaking ground is Penrose Hill, which is reinventing the wine club experience through homegrown wine brands that offer improved value, selection and convenient delivery formats direct to consumers.
4) Feminine Care
LOLA is disrupting the feminine care industry with its chemical-free, customizable monthly D2C subscription service. This is a particularly difficult market to break into, as customer loyalty (to largely one of two brands: Playtex and Tampax) is usually dictated by the first product a woman was given by her mother or other trusted source when she was a teenager. LOLA, however, has already made strong headway, and the entrance of additional D2C startups that offer similar subscription offerings - like Cora, Le Parcel and Monthly Gift. - have validated consumer desires to oust the incumbents and redefine the space.
New D2C startups will continue to gain on large players in monopolistic industries. In addition to acquiring D2C businesses that will give them a leg up, incumbents will stay relevant and maintain a strong customer base only if they challenge some of their pre-existing business models and give new product lines license to operate outside of traditional channels and relationships. Early-stage companies will never be shackled by the same legacy technologies or entrenched, risk-averse cultures that large companies so often are, but today’s established players will need to do far more to emulate their startup counterparts if they want to tap into high-growth market opportunities.
Note: Primary Venture Partners is an early investor in Ollie and Penrose Hill. Lerer Hippeau Ventures is an investor in Ollie, Goby and LOLA.
