The Top 25 Digitally Native Vertical Brands 2017 Introduction
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The Top 25 Digitally Native Vertical Brands 2017 Introduction We’re experiencing a notable transformation The digitally native vertical brands in this report in U.S. retail where e-commerce is starting to are revolutionizing retail and becoming household displace physical retail. names. Their digital innovation is chronicled in the, first ever, Top 25 Digitally Native Vertical Brands of Online sales in the United States are expected to 2017. reach $523 billion in the next five years, increasing by an average rate of 9.32% a year.¹ Yet no. 1-ranked Amazon is growing faster than the pace of e-commerce itself, forcing brands to rethink their online strategies to compete. 1 // THE TOP 25 DIGITALLY NATIVE VERTICAL BRANDS REPORT 2017 The Rise of the Digitally Native Vertical Brand Some analysts argue that the growth of “Digitally native vertical online sales is a result of competitive market dynamics. E-commerce companies are more brands are maniacally efficient in terms of real estate and labor costs focused on the customer and they have higher profit margins than their experience and they physical counterparts.² interact, transact, and As a result of the rising number of e-commerce story-tell to consumers companies and the growth of online sales, primarily on the web. “ some physical retailers are dramatically ANDY DUNN, CEO @ BONOBOS downsizing or going bankrupt. The number of bankruptcy filings by U.S. retailers, with at least While v-commerce brands may ultimately $250 million in liabilities, nearly doubled in expand offline through select partnerships or 2016 and will continue to take center stage in brick and mortar stores, they control their own bankruptcy courts in 2017.³ distribution tightly.⁴ But a secondary reason leading to this sea The differences between a digitally native change is a renaissance in innovation among vertical brand and an e-commerce brand are e-commerce players. Jeff Jones, managing profound. In addition to differentiation in the partner at Andreessen Horowitz, refers to this unit economics of the businesses and their as ‘e-commerce 2.0.’ However, the brands growth trajectories, there are subtleties in the emerging in the retail sector that are seeing the ways that v-commerce brands shape their greatest growth are quite different from their identities to inspire consumers. e-commerce predecessors. While it’s still incredibly early in the history of These digitally native vertical brands (DNVBs) or digital vertically integrated brands, many are v-commerce brands, for short, are trailblazing beginning to turn entire industries on their entirely new approaches to retail. Digitally heads. This report explores some of the major native vertical brands, a term coined by trends that are allowing for digitally native Bonobos founder Andy Dunn, follow specific brands’ explosive growth. criteria. POWERED BY PIXLEE // 2 Major Trends in Digitally Native Brands’ Innovation 1. DIRECT SOURCING OF Other companies, such as Everlane, have used their relationships with factories to better MATERIALS market their materials and to instate price transparency for customers on the true cost of One trend that we’re seeing in e-commerce their products.⁸ innovation is a shift to direct sourcing. Through a direct sourcing 2. ENHANCED BRAND model, retailers can realize EXPERIENCE between a 2% and 4% average reduction in cost Competing on retail alone is too commoditized of goods sold, possibly an approach in the digital age. The number of netting millions of dollars in channels that brands are expected to maintain in order to offer a seamless omnipresent savings.⁵ customer experience has grown. Pressures on revenue and top-line contraction Today, a combination have created an intense focus on managing these costs. of product, shopper experience, and customer Digitally native vertical brands are collapsing service collectively become inefficient legacy supply chains by cutting out the brand. intermediate layers. Their direct relationships with suppliers not only allow them to vet the The digital vertically integrated brand is Internet suppliers’ operating standards, but also to enabled, born digitally, and interacts with facilitate a rapid feedback loop so that they can customers primarily online. It seeks to build a quickly iterate on product design and demand.⁶ strong brand lifestyle that speaks to people and shapes their choices. To build such a With direct sourcing, brands such as Warby community, v-commerce brands present and Parker and Casper have bypassed antiquated design their products in a highly compelling industry standards and cost structures; both way and in a consistent voice. companies reaching over $100 million in sales in just a couple of years.⁷ 3 // THE TOP 25 DIGITALLY NATIVE VERTICAL BRANDS REPORT 2017 To scale content creation and meet content needs, DNVBs often rely on user-generated content. DNVBs’ products meticulously represent the drove the majority of consumer action. Two brand identity and both their products and years later, with the rise of social media and their packaging are designed to be shared on user-generated content, the influence of social media. These brands rely heavily on retailer-generated content had declined to less visual content displayed across a multitude of than a third.¹¹ marketing channels. To scale content creation and to meet content needs, DNVBs often rely on Why do digitally native vertical brands rely on user-generated content. real customer photos and videos to scale their marketing efforts? Take Glossier, for example. The beauty brand launched its product line on Instagram as part User-generated content of its core promotion strategy. Glossier CEO, builds trust, increases Emily Weiss, estimates that Glossier owes 90% of its revenue to its fans on Instagram. “It hasn’t conversion, amplifies the been through paid or built marketing spend,” brand, and is an unlimited she said. “It’s been mostly word-of-mouth.”⁹ source of authentic content.¹² Glossier consumers are not outliers, 74% of consumers identify word-of-mouth as a key V-commerce brands have a deep influencer in their purchasing decision.¹⁰ In understanding of what inspires their 2014, Deloitte’s Digital retail practice started community, and they curate user-generated exploring which content drives consumer content to further brand image and reach, action. They found that the brand’s advertising POWERED BY PIXLEE // 4 offer social proof for products, and welcome merchandisers. Across the e-commerce customers to engage with their brands. landscape, the DTC model is increasingly prevalent. 3. ALTERNATIVE DISTRIBUTION Direct-to-consumer sales METHODS will reach $16 billion by 2020—a massive increase A third major trend that we’re seeing is a shift in retail distribution. In the past, e-commerce from the $6.6 billion this consisted mostly of retailers distributing other channel generated in 2015.¹⁴ companies’ goods. However, the reality is that third party e-commerce companies today are Investors have taken note, with 2015 and 2016 forced to go head-to-head with Amazon, which seeing the two largest direct-to-consumer has become increasingly fierce in leveraging its funding deals ever. There were 64 financing tremendous scale and cost advantage to offer rounds worth $708M in total. the largest selection of low priced goods on the Internet.¹³ For digitally native vertical brands, the e-commerce channel serves as an enablement DNVBs have found an alternative route: direct- layer, not the core asset. Take Harry’s, Dollar to-consumer (DTC) models that combine Shave Club, and Walker and Company as the growth of an e-commerce company with examples. By selling directly to consumers, the controlled distribution of proprietary these digitally native consumer packaged Number of Deals to Direct-to-Consumer Brands 2012 2013 2014 2015 2016 This chart does not include direct-to-consumer food or beverage brands.¹⁵ — Source: CB Insights 5 // THE TOP 25 DIGITALLY NATIVE VERTICAL BRANDS REPORT 2017 goods brands are not only able to control their 4. INCREASED ENGAGEMENT ON own distribution but are also able to better SOCIAL MEDIA control their brand stories and relay messages directly to customers. As a result, they collect Finally, digitally native brands place a massive amounts of customer data that allows tremendous amount of weight on community them to test and develop new products.¹⁶ building through one-to-one marketing. Through strong presences on today’s leading Despite online and mobile sales’ continued social platforms, v-commerce brands bring growth, 94% of total retail sales still occur at their customer service and content to the brick-and-mortar stores.¹⁷ Nearly half of US platforms on which their customer base is shoppers still prefer to make purchases in-store active. rather than online.¹⁸ Bain Consulting found that 67% of consumers The importance of brick claim to use a company’s social media channel and mortar has not been for customer service²⁰ and 72% expect a brand lost on digital vertically to respond within the hour.²¹ However, five out of six interactions go unanswered by the brand. integrated brands. As they When companies do engage and respond to mature, DNVBs more often customer service requests over social media, than not extend offline: those customers spend 20% to 40% more either through experiential money with the company than other customers do.²² physical retail or through exclusive partnerships. Digitally native brands attempt to stay highly engaged on social, but they go beyond the However, these physical locations are deeply commerce transaction. They build digital integrated with the overarching brand experiences that customers can engage experience and their openings are heavily with and share their brand allegiance about. marketed with influencers, strategic content, These experiences cater to Millennial and Gen and promotions. Z customers in particular, who make up the majority of digitally native brands’ customer Alo Yoga, founded in 2007, is one such brand. It bases. was just this year that the company developed an offline presence and decided to open its Millennials are the first generation to be truly flagship store in Beverly Hills.