4th July 2017
Disclaimer: the movie the article references has sadly very little, if anything, in common with our day-to-day work here at U-Start.
Direct-to-consumer brands have dominated the headlines of the past year or so, and to our minds, for quite the right reasons. This is a sector we have been, and still are, following quite closely since we believe there are unique defensible advantages in vertically-integrated operations and direct relationship with the customer. This conviction led us to support some category-defining DTC brands: Horizn Studios (disrupting cabin luggage market), Aloha (their protein bars are otherworldly) and Outfittery (private label like no other). At the same time, we believe an important trend is unfolding that only a handful of people are taking notice of; this trend might also drive important changes in the direct-to-consumer (DTC) landscape. Today we want to share what that trend is, why it is important for DTC companies and why Italian brands are well positioned to capitalize on that trend.
The incoming plateau no one seems to be talking about
The good old days of easy growth for e-commerce are over. The growth in online shopping is expected to slow down in many of the developed economies of the world: in countries ranging from Australia to the United States. Back in 2015 McKinsey announced that ‘luxury e-commerce is nearing its tipping point’. Up to 92% of respondents for a BCG survey have confirmed that they don’t plan to increase their online spending in 41 different product categories over the next three years. Why is this happening? Well, e-commerce is a channel like many others and double-digit rate growth cannot go on forever, implying maturity in penetration for many product categories. However, one could point to the argument of scale and would be right – global e-commerce sales stood at $22 trillion in 2016 and are expected to grow at 6% until 2020 – if plateauing means adding $1.4 trillion to global online spending, so be it. However, this argument fails to take into the context of these developments:
1) Growth isn’t shared equally. More than half of online shopping growth is eaten away by Amazon and the, further narrowing the addressable market size. One never knows when Bezos might utter “alea iacta est” while entering your product category. This means that DTC brands are fighting against a decreasing addressable market with a narrowing time window to enter.
2) The very raison d’etre for DTC brands is that people will increasingly spend time and money online. We are also seeing a literal mushrooming of DTC brands, increasingly competing for the same pie, which isn’t growing that much! Hence the costs of competition are increasing for DTC brands.
So, what does it mean for DTC brands?
1) The shrinking TAM means that companies might want to reforecast their revenue targets. This invites all involved parties, startups and investors alike, for greater caution when evaluating plans. In other words, beware the hefty valuations.
2) As loyalty is hard to come by (30% of the US are changing brands just because they can) and brands are looking to deliver individualized services, DTC brands might be looking to upend their margins by going brick-and-mortar sooner than later.
As the party is getting crowded, players without a unique value proposition will suffer, while leaders will have to provide better user experience while making the pricing ever more competitive. And as customers are craving for tailored offerings, DTC brands might want to switch to ol’ good brick and mortar as a way to create and maintain direct relationships – until we can replace something as powerful as human contact in retail settings. Going offline early isn’t something we see as derogatory to innovation – it’s a strategic shift that most DTC brands will have to adjust to. Moreover, since physical shopping isn’t going anywhere (at least in the nearest future) – a lot can be done to improve the experience. So how does U-Start come into this?
The Italian Job
As e-commerce is inevitably maturing and DTC brands are becoming increasingly competitive, the aggregate experience and know-how of Italian brands might prove to be a ‘winning hand’ for DTC companies.
Just a quick reminder about us to connect the missing dots: we’re an investment company channeling capital and expertise from Italian family offices towards awesome international startups. To date we’ve backed 28 companies and are both sector and stage agnostic. Our edge is that we bring decades, if not centuries, of experience of our clients in building globally renowned brands in sectors ranging from lifestyle to manufacturing.
It’s received wisdom that national brand ‘Made in Italy’ carries weight globally – world-level Italian products contribute to the national trade balance with a $63 billion surplus. However national brands are as useful as they are representative of values embroiled into its products. For Italian brands these are values of competitive vitality, perseverance and militaristic focus on quality. In times when online customers boast a memory of a goldfish, creating a powerful lock-in through branding can prove a lethal weapon for DTC brands – something Italian brands have been doing years in and years out. Here are several reasons why Italian commercial acumen can prove itself extremely useful for DTC brands:
1) Distinct and consistent brand identity
Italian investors with experience in company building have a maniac-like focus on the continuity of brand identity – as they see the quality standards as the factor that allows brand identity to be time-proof. You don’t receive a national brand praising quality for spending centuries on squeezing margins. Expect nothing less form Italian investors with a stake in family business – what they will bring is a mindset on how to make your brand identity durable and consistent.
2) Family-first outlook
What makes Italian businesses different from French ones, as the Economist points out, is that Italian businesses are very often smaller, resistant to consolidation and family-owned. Italian businesses have a tradition being family-led and family-funded (and hence smaller). How is this relevant for a DTC brand? The unspoken, emotional attachment many of Italian owners have with their businesses, for the merits and faults it entails, is very relatable to what founders in startups experience. Family businesses by the very virtue of the ownership are founder-focused. Having someone on board who understands and recognizes the attachment founders have to the company can prove itself extremely valuable.
3) Focus on technological prowess
An important fact revealed by the Fondazione Symbola study mentioned above is that 57% of Italian products contributing to the trade surplus relates to mechanic automation, tires, plastics, glass and chemicals, while only 43% is due to typical Italian lifestyle businesses. This is important since Italian brand identity is not only based on quality, but on building defensible technological barriers to entry. Hence what Italian investors can bring to the table is the formative realization that great businesses are built on the basis of creating a defensible value proposition, and DTC brands have to be focused on maxing out a specific edge they have vis-à-vis similar DTC brands.
All of this was not to say that the DTC model is somewhat unattractive or screwed by design due to plateauing online shopping. Nor did this article intend to formulate a united behavioral pattern of all Italian investors – qualities discussed above are purely the fruits of my experience working with our community members. The gist of this article is to underline, that in times when DTC companies might have to go offline sooner than planned, having the right investor might be the edge you’re looking for. Italian families are extremely keen on investing in startups, and it’s their focus on brand identity, founder-centric mentality and technological prowess that might provide DTC brands with exactly what they’re looking for.
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