As 2020 kicks off a new decade, the DTC space continues to change, with industry experts predicting more acquisitions, an expanding home category, a new kind of sustainability messaging and more.
Mergers and acquisitions will continue
Expect more acquisitions to occur in the DTC space, particularly in consumer packaged goods, according to Emily Singer, a marketing manager at Alma, an office-sharing service for mental health professionals, and the founder of the ecommerce newsletter Chips and Dips.
Web Smith, founder of 2PM, another newsletter about ecommerce, said some M&A action will come from real estate companies buying up brands at a relatively low exit in the $100 million to $150 million range.
“Their malls would help scale these brands to potential billion-dollar companies,” Smith said.
And while this year wasn’t a great one for companies that went public (or tried to, in the case of WeWork), Osborne said IPOs will happen in 2020, with people using this year’s IPO challenges as a learning tool about what to do correctly.
However, JB Osborne, co-founder and CEO at branding agency Red Antler, said companies will most likely get acquired at a price that’s a great deal less than their valuation.
Changing seed and Series A rounds
Brands will see a more realistic valuation as part of an ongoing market correction, according to the experts.
As the DTC field has become ever more crowded, seed and Series A rounds of funding have ballooned. But, as Lerer Hippeau principal Andrea Hippeau explained, as investors realize the true value and potential of these companies, both early and late-stage brands will look elsewhere to raise their initial funds—or simply lose out.
“That’s going to make companies have to focus on existing user base, getting repeat purchases up, more organic growth, [and] getting smarter about building community and content as a way to grow with organic versus paid [media,]” Hippeau said.
Osborne added that investors are also looking for proof before funding a company, so once a brand shows its potential in the market, early rounds of funding tend to be bigger.
“With the increase caution [from] investors comes increased confidence when they are making bets,” Osborne said.
On the flip side, Smith said early large funding rounds can also mask other problems within the company, such as not having an “efficient marketing model” to acquire customers.
There’s still room for disruption in certain categories
Despite some categories—such as toilet paper—feeling saturated, Singer said there are still some emerging categories such as cookware, dinnerware, furniture and the home space that present potential opportunities in 2020.
Melissa Duren Conner, partner and managing director at Jennifer Bett Communications, a public relations agency that works with DTC brands such as Recess and Parachute, said sleep products continue to grow as well—beyond mattresses, with new companies popping up around sleep tech. She added that the personal care, wellness and CBD categories are seeing much more growth and earlier funding rounds, now that these categories have become more normalized with consumers.
BDS Analytics predicts CBD industry sales to grow from $624 million in 2018 to $12.6 billion in 2024, with even legacy retailers such as Lululemon releasing products around self-care and wellness.
“Every consumer is thinking about wellness, so everyone from venture capitalists to brand marketers is focused on this space,” Conner said.
Hippeau agreed, saying adjacent products in the health space, such as meditation and therapy apps, are also on the rise. And with Gen Z continuing to grow up (and with $1.3 trillion in purchasing power), new brands focused on targeting this group are emerging, such as underwear brand Parade.
As the wellness sector grows, so do products in the cannabis, sexual health and alcohol categories, said Smith. Considering these are more “taboo” subjects, it’s taken real consumer interest and social acceptance for venture capitalists to fund these brands.
New media plays
Whether it’s brands partnering with each other or investing in other forms of advertising—such as out of home—companies are going to experiment more with their media plays. Conner said for JB Comms, which works with brands prelaunch and others valued at $1 billion, the big emphasis is still on earned media, as it gains consumer trust.
A key part of earned media involves investing in social and content marketing teams, said Conner, which these brands view as important parts of the business.
“You can’t get away with all paid and no earned,” Conner said. “That’s what a lot of brands battle with—where do we make our investment?”
As brands continue to grow, expect them to take more pages out of the traditional retail playbook, such as investing in more traditional marketing such as billboards or direct mail to gain repeat purchases and acquire new customers, according to Hippeau.
However, Osborne said these forms of advertising are also getting saturated, and brands next year will need to find “white spaces in the media landscape,” such as using Pinterest as a marketing channel.
The key is figuring out when brands can find people who are curious about them, in the purchasing mindset and a setting where there are no competitors, Osborne said. “It’s about not copying what every other startup is doing, but thinking about what you can uniquely do.”
Sustainability as business model
Between the United Nations Climate Action Summit and Greta Thunberg, the 16-year-old environmental activist recently named Time’s Person of the Year, it felt like 2019 was the year of sustainability. Brands, as well, hopped on the train, whether it was Everlane launching a new line made out of recycled plastic and promising to stop using virgin plastic by 2021, or Adidas releasing a shoe made out of recycled materials.
However, Singer said there’s still no great example of a brand fully owning that end-to-end process of letting consumers buy and recycle a product with the same company. Hippeau predicted it will be brands that embed sustainability into “their DNA” that’ll resonate with consumers, such as Allbirds’ open-source technology on how to create shoes from sugarcane.
“Sustainability is just going to be something that every brand has to tackle, no matter category,” Hippeau said.
Osborne agreed that more companies will “embrace the fact that sustainability is a good business model and not a good marketing tactic.” He said it’s a principle Red Antler is following as well, looking at businesses and seeing if they hurt or help the environment.
“[Sustainability is] going to be table stakes, but that’s just only going to increase, whether that’s about food supply chain or cleaning products or beauty or all these different categories,” Osborne said. “There’s a lot of stuff we buy that has unnecessary volume and material, and I think the jig is up on all of that.”
Moving beyond the founder diaspora
With the recent controversies around ThirdLove and Away, the founder-as-eternal CEO may soon be on its way out. Hippeau expects to see corporate governance become a higher priority among investors and board members, and to happen earlier—even before a Series B round.
“Someone who’s really great at the beginning stages of the company are not always the right person to lead a large organization,” Hippeau said. “The skillsets are so different, and it’s much more the exception than the rule that someone can take the company all the way.”
Singer expects more stories similar to Away’s to come out in 2020. While the work environments detailed in the story aren’t “unique to Away,” she said, employees will “start to hold companies accountable.”
“The days of working people into the ground are over,” Singer said.
An evolving outlook on DTC
At this point, similar to the phrase “digital transformation,” direct-to-consumer no longer applies to brands that use ecommerce as a means to introduce a product. Most brands are thinking about an omnichannel presence, said Conner, and are no longer solely considering an online presence as their only business model.
“What we’ve seen and realized is the smartest of [digitally native vertical brands] knew the internet wasn’t the end all, be all—it was just a way to get their idea out,” Conner said. “They always knew they had to be in real life. For us, omnichannel was always the only strategy, and for 99% of our brands it was always going to be something they were going to be doing. We never saw being online only as the winning strategy—that was just the way to get to market faster.”
Osborne added that the industry is going to need a new way to talk about these brands without using the term DTC.
“It no longer describes what these businesses are doing or the impact it has on the market,” Osborne said. “Everyone is playing the same game and it’s much more of a hybrid, and it’s going to be less about distribution model and more about who’s delivering the best value to the consumer.”