Direct-to-Consumer Brands Are Reshaping the Face of Retail

And there are two big reasons why

The We Company was worth $47 billion and then it wasn’t. Peloton Interactive, branded like We to be valued as a tech company and not just a fitness company, is trading 20% off its IPO price. And a range of other direct-to-consumer brands see their stocks flagging as investors shift focus from growth to profitability.

All of this takes me back to a debate I’ve been having with both my friend Randall Rothenberg of the IAB and my students at Duke’s Innovation and Entrepreneurship Initiative about the relative importance and staying power of brands in the rise of what Randy coined “the direct brand economy.”

What is not up for discussion is whether DTC is fundamentally changing the world of marketing. In many CPG categories, direct brands are capturing all of the category’s growth at the expense of legacy brands. Unlike legacy brands, they have direct access to their customers. They have the data to react to customer complaints and optimize for customer delight in real time. And as they move from online-only to omnichannel, they are changing the face of retail.

The argument against brand is that whoever masters the data wins, constantly optimizing programs to drive down cost of acquisition and growing customer retention. That’s a complete 180 back to the customer relationship management (CRM) origins of the web.

I would argue that brand has never mattered more, with We’s clumsy attempt at pulling the wool over investors’ eyes notwithstanding. Name a single product category in which any offering can claim meaningful and sustainable product superiority, and I’ll eat my proverbial hat.

Harry’s is happily stealing share in the shaving category with a razor that’s five generations behind current technology. Casper sells nice beds, but you can find a lot better. And Warby Parker’s glasses are not, in and of themselves, obviously better than those of either LensCrafters’ at many times the price or Zenni’s at a fraction.

Name a single product category in which any offering can claim meaningful and sustainable product superiority, and I’ll eat my proverbial hat.

Any product-level advantage a marketer enjoys is either too insignificant to convey a competitive advantage, or if it truly is a breakthrough, it’s one that will be copied in a matter of months.

We already have too many things competing for our attention. If we have to shop one company for our bed, another for our toothbrush, another for our eyeglasses, another for our cosmetics and yet another for our home-delivered meals, we are making a lot of decisions. The only way for a disruptor to win in that clutter is to create a brand that stands above the product offering itself. A brand that, in the greatest tradition of the most powerful and enduring brands of all time, stands for the emotional reasons people come to the category in the first place.

There are over a hundred startups competing with Casper to sell home-delivered mattresses. Some will find success through geographic and socioeconomic segmentation. But Casper is the one that is leading the disruption for a simple reason: even if they launched with a disruptive product, they dominate the space because they wrapped that product in a compelling and engaging brand.

So no, brands will not matter less. Because brand matters more.

But that takes us to the second question, and that’s about the staying power of brands in a DTC world.

The answer to this one is more nuanced because it starts with a simple fact: The barriers to launching a brand have never been lower. No need to start with a brick-and-mortar lease. No need to pay slotting fees. No need to own your supply chain or your marketing stack. It’s all available off the shelf, for rent.

The math on this one is simple. The likelihood of failure has grown in proportion to the decline in barriers to entry. Many more companies will try their hand and many more of them will fail big and fast.

But there is no reason to believe that intelligent brands, built on relevant purpose and speaking powerfully to what really matters to people, can’t last forever. And there are two big reasons why.

First, a direct relationship between brand and consumer has always been the holy grail of marketing. Legacy brands are disintermediated from their consumers by their customer, the retailer. By taking advantage of a direct-to-consumer relationship and the data flows that come with it, a DTC brand has endless ways to create a powerful brand experience. A personalized experience designed to engage and delight, in turn lowering the cost to acquire and retain customers.

Second, you don’t have to have the scale of a Gillette or a Luxottica. While scale still confers advantages, in most categories, you can be quite successful without having to be a unicorn. And in that world, legacy brands may not be toppled by other giants—they are just as likely to be pinned down by hordes of thriving Lilliputians.

WeWork was never worth $47 billion. It was worth some premium over its leases because it offered an experience that was superior to its competitors. Just not superior enough to overcome the basic economics of shared workspace real estate. Peloton may provide enough of a sustainable user experience to not be limited by the cost of its hardware. Both represent reasonable attempts at harnessing the power of brand, albeit in categories where it can be hard to make a buck.

But in categories where there is margin to be made through disruption, be ready to see more mid-sized, personally relevant direct brands with real staying power.