Will VC backed startups create new mass brands?
In the past few years there has been a rise in the number of VC backed firms that are building businesses designed to compete with some of the largest consumer packaged goods companies in the world. From VC backed shaving companies, diapers, soaps, eyeglasses and more there is a new wave of ventured backed consumer products companies that have arisen to prominence in the past few years. Many of these firms are raising vast amounts and seem to be doing quite well.
However reading the press about these companies I think many, perhaps including some of the entrepreneurs and investors, are missing key opportunities.
See an article from TechCrunch on Jan 27th – which talks about venture backed companies such as Madison Reed, The Honest Company competing with Procter & Gamble, Harry’s and Dollar Shave Club that compete with Gillette (and though the article doesn’t mention them Schick) and a bunch of other firms. As the article notes venture backed consumer goods companies have raised over $1.1B in recent years with many companies that were distributors of products from other businesses moving into direct manufacturing. Harry’s recently raised over $125M to purchase their 90+ year old German manufacturing partner and Fab which has raised a lot of money recently purchased a supplier of custom furniture to bring that manufacturing capabilities in house.
What the article misses and what most startups in the space seem at least publicly to be missing is that great consumer products companies actually serve TWO (at least) customers.
Their marketing and brands are built to sell to individual consumers – with marketing and branding frequently being among the largest expenses of many consumer products companies (for at least some products likely being a larger component of the prices those goods sell to consumers at than the actual costs of to make say the soap). These are companies that have had a rich, often 100+ year history of building up their brands on a national and international scale.
But all that work to build brands that consumers seek out are done, for the most part, to sell the goods once they are available in retail stores (or these days available online via ecommerce sites). While consumers see the individual brands and marketing efforts the big retailers see distribution integrations, inventory and order management, payments for shelf space and in-store marketing/promotions, volume discounts, special packaging or product variations and more. All designed to help retailers make more money selling the consumer products business’ products (and in the case of goods sold in grocery stores to attempt in many cases to be as attractive or more attractive for retailers than those retailer’s house or generic alternatives).
Few VC backed startups building consumer goods are focusing on distribution of those products into the larger retail marketplace. Harry’s via their recent acquisition is somewhat of an exception – the company they just bought makes private label razors for many retailers across Europe (primarily). A recent CNBC article about the deal also notes that they have a distribution deal with J Crew and Standard hotels.
Integrating with large retailers is a very different business than selling to individual consumers one at a time via a website (or mobile application). It involves integration into ERP systems. Capabilities to take orders from retailers with potentially 1000’s of locations, distribution warehouses and many other complex logistics and payment processes. All while selling at a wholesale price that allows for an attractive retail price point (with pressure from many retailers like Walmart to drive down the retail prices – often by driving margins to be as slim as possible). All while also expecting that partners will build global brands as well as targeted marketing to drive in-store (or online) sales of the brand via the retail partners.
Very tricky stuff – but if companies like Harry’s or The Honest Company really want to scale to take on the consumer goods giants they probably have to master the art of relationships with large retail channels. It is possible that one or more startups will find a way to reach mass scale via a digital only direct channel – but most likely they will require leveraging the investments in time (and brand) of mass retailers to reach truly mass scale of sales.
An alternative approach may be for some startups to take on the mass retailers with some new approaches that will help drive mass sales without the drawbacks of the big box model. Whether this is via crafting a network of retail channels from smaller stores (an approach that many smaller coffee roasters are starting to take as a national network of small cafes has started growing that buy beans from national smaller roasters) or whether it is via building up a startup into a mass scale, likely online first business. Amazon.com for example but there are 100’s of other large scale online retailers.
Some of the newer same-day delivery businesses may offer yet another opportunity – potentially a startup brand might find a way to bypass physical retail stores via offering inventory to such same day delivery services directly. (Ebay, Amazon, even Google all might be open to this). Though it would have to products that compliment those business’ existing retail partners and such an approach may have complications around local taxes and costs of warehousing/inventory management.