Big Brands Take On The Challenge Of Building Their Own DTCs

 Large, established companies such as P&G, Verizon and Kellogg’s are building direct-to-consumer (DTC) brands to compete with the challengers encroaching on their territory.

In addition to investing in or acquiring other DTC brands, there are strategic advantages to a company building its own. P&G for instance thinks of buying, building and acquiring brands as a “three-legged stool.”

“It’s going to take a lot of different bets,” said Lauren Thaman, communications leader at P&G Ventures.

P&G Ventures created skincare brand Meladerm and Pepper & Wits, whose products alleviate menopause symptoms, as well as the essential oil bug spray Zevo. Verizon went DTC for its low-cost mobile service, Visible. Kellogg’s created a “speed team” to launch new brands including Joybol and Happy Inside.

Retailers like Target, Walmart and Amazon are bringing DTC approaches to their private label products. They’re also incubating DTC services, like subscriptions for baby apparel or text-based personal shoppers for moms.

Building a DTC brand from the ground up makes more strategic sense for big companies than it has in the past, because acquiring and investing in DTC brands is getting harder.

Many independent DTC companies have grown enough to pose a threat to market leaders. But that fast growth means they command high valuations, limiting their field of buyers.

Investing in a DTC brand is another viable inroad, but founders are cautious about accepting funding from a potential acquirer or competitor, as they don’t want to constrain their possibilities.

Incubating a DTC brand within a huge enterprise confers massive strategic advantages on both sides. Big companies learn how to spin up new brands and think like the competition. DTC product leaders get to spend time building a brand, not managing investors. They can lean on the manufacturing, distributing and marketing expertise of their parent company.

But scrappy DTC companies competing with these brands hold more cards than they think. They move fast, attract talent that likes change and don’t need to worry about conflicting with their parent brand.

Shrinking down to a startup level poses cultural and logistical challenges big companies are dead set on getting right, since the future of how products are sold is on the line.

The Product Challenge

A unique product is key to a big company launching a successful DTC brand.

P&G Ventures creates products that draw on its institutional strengths, but don’t conflict with existing brands – so no laundry detergent.

For example, Meladerm’s skin brightening products drew on P&G’s knowledge of how soaps and lotions affect the skin. The product is “authentic and true to who we are and what we do really well,” Thaman said. P&G can also do rigorous product testing and quality control, like it does for its larger products. Startups don’t have those resources.

Similarly, Visible uses Verizon’s network but repackages the service with an ecommerce experience and simple, transparent pricing – a new “product” for consumers.

Product innovation helps these big companies compete with digitally native brands. DTC razor company Harry’s bought its own factory in Germany to provide better products, for example. Purple makes mattresses out of its own US-based factory, Purple CEO Joe Megibow said.

Focusing on product before marketing is table stakes, said Red Antler CEO JB Osborne, the branding agency behind DTC companies like Casper, Brandless, Birchbox and Allbirds. He’s read many briefs where big companies being disrupted by startups try to fix the problem by tweaking their marketing, not coming up with a DTC-style offering.

“You can’t market your way out of that problem. That’s the opposite of what Verizon and Kellogg’s did, which is true product-first innovation with a team that can work nimbly and take risks to get products out in the world,” Osborne said.

The Culture Challenge

Startups move fast and take risks. Big companies move slowly and minimize risks.

“Does a large, legacy business have the desire and will to foster new ways of thinking? Can they recruit people interested in challenging the status quo to start something?” asked David Whitcroft, VP of d.Luxury brands, an investor in DTC brands, such as Parachute and Cuyana.

Most big companies partition off their DTCs from the rest of the company. Some recruit new teams far away from the home office, as Verizon Visible did. While others, like P&G Ventures and Kellogg’s, create teams with internal talent (but separate spaces).

Getting internal talent to adopt a DTC mindset is tough. “For people used to managing brands with tremendous amounts of brand equity, and making decisions after everything is rigorously tested with all the data points behind it, going out in the world with a DTC brand is very scary,” Osborne said.

P&G Ventures recruited people comfortable creating new systems and less hierarchal structures, Thaman said.

The difficulty of building culture in house is why Walmart has focused most of its efforts on acquiring ecommerce companies and but keeping them autonomous, Whitcroft said.

Done right, build-your-own DTC promises big companies the best of both worlds.

“These incubators can be a dream, if you are able to have innovation and efficiency [of a DTC] plus operational expertise and the backing [of the parent company],” said Jenny Son, head of industry at Wpromote, a digital marketing agency that works with DTC brands, including ones owned by large companies.

The technology challenge

When big companies launch DTC brands, they’re hit with more data than they have ever had before. Existing tech stacks and marketing resources at big companies don’t meet the needs of a startup with a handful of customers.

“Our systems are set up to run billion-dollar businesses. They aren’t agile enough for DTC,” P&G Ventures’ Thaman said.

P&G Ventures created a “get to yes” team that helps it bring in new tools and tech quickly when internal systems don’t meet startup-size needs. P&G Ventures, for example, needed a credit card processor and to figure out how to calculate retail taxes.

They were also granted the freedom to go outside P&G’s agency roster when needed. P&G Ventures works with an agency purchasing organization to find the right marketing partner for projects, but sometimes needs to work with startup-focused agencies outside of that roster.

In contrast, small DTC brands pick tech that’s suited to their own size, not an enterprise.

“DTC companies are more natively aware of data, new marketing and creative channels and new ways of doing things,” Whitcroft said.

The disruption challenge

Legacy companies launching DTC brands risk disrupting themselves and threatening their core business.

That’s why there aren’t many examples of build-your-own DTC brands today.

Mattresses are a prime example. Casper recognized that buying mattresses in stores was a horrible customer experience, and sold customers a cheaper product online. The biggest mattress companies couldn’t do the same without undercutting their margins or upsetting retail partners. So Serta Simmons merged with Tuft & Needle, and Mattress Firm filed for bankruptcy – and now sells Purple mattresses in store.

“At what point can a legacy brand walk away from their existing revenue and focus on new channels, when they have a vested interest in maintaining higher prices for their customer base?” Whitcroft said. Samsonite, for example, could devalue all its products if it launched a DTC competitor to Away, he said.

Disruption also explains why retailers like Target and Walmart have enthusiastically embraced DTC brands. Unlike product manufacturers, brick-and-mortar retailers have already struggled through 20 years of disruption by ecommerce. “They’ve had to think about how to exist digitally for a longer period of time,” Red Antler’s Osborne said.

The exit

Ideally, DTCs created by large enterprises will grow into their next billion-dollar brands. If that happens, they’ll need distribution methods, like an in-store strategy, and marketing support similar to the enterprise’s legacy brands.

At that next growth point, the parent company’s resources become a critical advantage.

“Digitally native brands hit a ceiling, where in order to grow you need to have channel retail partners,” Purple’s Megibow said. “That’s why Harry’s, Quip and Casper went into Target.”

Purple, for example, only sells half of its mattresses online today, making it look similar to a traditional business. Being a digitally native vertical brand made that initial growth stage happen at hyperspeed. “Digital allows us to achieve reach and penetration much faster than we could have through a traditional model,” Megibow said.

The Instagram-and-influencer marketing used by DTC brands only works to a point. Once they grow enough to start advertising on TV, they pay much more for media than a massive buyer like P&G would. In-house DTCs will get through this stage with fewer growing pains that a startup figuring out mass marketing for the first time.

But the big companies need to get to that point first. Many fail. Even would-be unicorns look like rounding errors for the first few years (or more) that they appear on a big company’s balance sheet.

To help evaluate success, P&G Ventures created benchmarks with clear milestones about where a startup should be at the three, five, seven and 10-year marks, Thaman said.

After all, P&G is 181 years old, an argument for patience and perseverance as the company – and its peers – prepare for a future when DTC-launched brands join the billion-dollar brands of today.

This post was syndicated from Ad Exchanger.