10, Feb 2019
By Jenny Ronney
The Interactive Advertising Bureau, or IAB, today unveils its second-annual list of the 250 most innovative direct-to-consumer, or DTC, brands in the marketplace. The trade organization launched its inaugural IAB 250 last year to overwhelming interest. These are the leading brands disrupting traditional brands and retail—companies like Everlane, Birchbox, Madison Reed, Drizly, Glossier, Quip, Seesaw, Bombas and Stitch Fix.
The rise of the so-called direct brand economy has become one of the most talked-about in marketing circles; it has been steadily upending the way consumers interact with and buy products and services as well as causing incumbent, legacy brands to rethink how they market and sell and grow business.
This year’s IAB 250 is rooted in a more robust methodology and deeper research, including data on total funding, number of employees, social score, valuation and revenue as provided by Dun & Bradstreet, Rival IQ, CB Insights, public filings and other resources. As a result, nearly 90 companies on this year’s list were not on the 2018 list.
The study of brands across categories such as alcohol, beauty, food, apparel and beauty uncovered key trends:
- Women lead nearly a quarter of the brands, as compared to the 5% of Fortune 500 brands that claim female leadership.
- Nearly 100 of the brands hail from locations other than digital-disruption bastions California and New York, including Texas, Washington, Massachusetts and Illinois.
- While the report includes 10 product categories, apparel/fashion companies top the list, with 91 from that category.
- Virtually every category is seeing rapid increases in social attention.
- Nearly 30% of the brands have subscription models.
Of the impetus behind and defining features of the list, “We had research that proved definitively that growth is shifting a fraction of a share point at a time from incumbents to disruptors in every consumer category with almost no exception,” said IAB CEO Randall Rothenberg. “They shared two characteristics: They create value through their expertise at accessing and managing as an agile stack your own supply chain. The key part is the shift from the need to own or control your supply-chain functions to the ability to access every single one of these functions on a leased or rented basis and extract value from direct connection with the end consumer. This is radically different from companies of previous years,” he added. “Now companies can use leased or rented production, fulfillment, data and other capabilities.”
Value extraction used to come “through a series of indirect third-party handoffs,” he continued, from ad agency to publishers to driving consumers to a retail store. “Overwhelmingly 97% of all consumer brand revenues happened in stores almost all owned by third parties. The internet is a direct connection between client and servers, consumers and companies. Companies can now at scale develop consumer relationships and derive copious amounts of data,” he said.
Sue Hogan, senior VP of research and measurement for IAB, led the research effort behind this year’s list. Understanding the headlines, the underlying economic conditions, the changes that have happened in the end-to-end supply chain, the IAB last year set out to determine which companies “fit the bill,” she said. “We worked with D&B to try and identify how many companies represent the direct brand economy and which ones are the ones to watch—the most powerful representation of the economy.”
About 100 of the companies on the 2018 list are on this year’s list. Hogan emphasized the point that this year’s list is the result of much more rigorous research with many more data sources, and that additional data sets will be considered for lists moving forward.
All companies have launched since 2010. “That’s when Warby Parker made its launch, and we used them as a paradigm for moving forward,” she said.
A “really important component” of this year’s list was social footprint and social velocity, Hogan added; the research assessed how large of a presence the companies had on social channels as well as year-over-year growth. “We gave everyone a normalized chance.”
Meanwhile, the list is 95% companies that sell tangible products, but “we also know that services is a huge area,” she said, for example, financial services and travel. “Those are something we’ll be focused on in creating [another] list.”
I asked additional questions of Rothenberg to better understand the thesis and research behind the IAB 250. Our interview, edited for length and clarity, follows.
Jenny Rooney: Why do this list?
Randall Rothenberg: The reason to do the 250 is to take the underlying concept--which can be a little intellectualized--about what is the DTC economy, and then root them in reality, to use them as illustrations of what we’re uncovering about the direct economy. It represents a set of best practices that are revolutionizing consumer markets in the U.S. and globally. They are also small companies. You have to look at these as their own sector. People would look at a company like Glossier and say ‘Oh, it’s a cosmetics company and cool, but it’s a tiny company.’ But when you take a step back, you see that these are all actually in the same industry, they’re just monetizing it in a different way—a specific way to extract value from end consumers rather than going to retailers. What the 250 are also a significant source of business growth but they’re also setting the new standard on which the large companies are basing their strategies and investments.
What we’re saying is, these 250 are representatives of a change. They are the roadmap. Because they’re the roadmap and because most of the big incumbents have been suffering slow growth, they are now being forced to find ways to compete against these tiny disruptors.
Rooney: Didn’t we see this similar rise of ecommerce companies during the dot-com boom of the late 1990s? What’s different in DTCs?
Rothenberg: We now can see those same conditions that affected very specific markets in the early days of the internet now overtaking and overcoming all markets. From the early days of the internet there was a realization that any product that can be digitized—music, video, a written entertainment, a 30-second spot, a magazine ad—anything that can be digitized can be disrupted.
[Companies like ] Pets.com, Drugtore.com—they were a harbinger. But they were essentially service organizations that are moving other people’s products.
The big change is that this is now an underpinning that influences the end-to-end supply chain. The conditions that have allowed the flourishing of ecommerce at the back end we now see operating very well at the front end of the supply chain. We have had ecommerce for a long time, but not the ability to create new products across any category with as little capital investment as possible. [Ecommerce was previously] done by being able to piece together a non-embedded, non-owned supply chain. You can now do that via the internet.
[We’ve had] ecommerce as a service for 20 years now. It’s the product and the production side that’s been such a surprise to people: [Products can be] sourced, shipped, distributed, connected directly to end consumers, [enabling brands to] learn directly about their product usage and behaviors and preferences. The data you get from them you can put back very quickly into improving the product.
End-to-end stack-your-own supply chain and extension of the back end into the front end. That’s the big shift.
Rooney: What are trends among these companies vis a vis CMOs and brand and marketing strategy?
Rothenberg: Anecdotally, as a set of general observations, none start with CMOs. They start with their founders acting in the CMO role. Almost without exception [they employ] a combination of marketing people and product people. They see the product and the marketplace tactic as one and the same thing. We definitely see that after a certain period of time which looks like it could be two to three years into existence, many of them bring an outsider in to the role that’s called CMO or might be called chief growth officer or SVP or EVP of growth. You still have in just about every case the founders are the product and market visionaries but you see them [add CMOs] as they expand and especially as they begin to contemplate and act upon physical expansion. You begin to see that happen. Here’s where there is a real differentiation: The classic CMO—their historic expertise has always been what has been top of the funnel, above the line, and using inferred metrics to understand or make links as to how their marketing and advertising are driving sales growth at the bottom of the funnel. That’s managing ad campaigns as well as managing consumer promotions and trade promotions and then inferring from those investments to successful revenue generation for the company. The difference here is that this class of CMO, this class of growth officer and of company, do not see any distinction whatsoever between top of the funnel and bottom of the funnel. The underlying principle is that performance is the only metric that matters, period. They still do brand advertising and marketing but it must perform: It must deliver on customer acquisition cost targets. If you’re not, then your marketing is not working. And at the backend all focus is on the lifetime value of the consumer. If you’re not driving that then your marketing is not performing. That’s very different from the past. Incumbent brands in consumer categories overwhelmingly didn’t know who their end consumers were. They didn’t have those direct relationships. These companies know who they are. The competencies of the CMO are just different. As [DTCs] go from digital channel to omnichannel, how are they going to integrate their revolutionary formula and evolve and adapt in these new omnichannel environments? That will be the next wave of super CMOs.
Rooney: To what extent do you anticipate a whittling down or flaming out of DTCs?
Rothenberg: Who knows. There are a number of things we’re pretty sure of: Many of these small disruptors will go out of business. Many will be acquired by larger incumbents. In fact, that is the goal that most of them have. And then there will be a small number that will become the Unilevers and P&Gs of tomorrow. By nature that’s what’s going to happen. That’s how economies replenish. For all that, there is one very big change that looks to be permanent: It is easier to get into a marketplace and disrupt it than ever before. The capital-investment requirement to get into even the hard-goods space is lower than ever. There will be continual disruption in every consumer segment because it’s easier to disrupt than ever before. We’re not going to see a reversion to the comfortable times of industry oligopoly.
Rooney: To what extent is the economy’s performance having an impact on DTC performance?
Rothenberg: Hard to tell. Looking at overall CPG industry, its growth still lags robust GDP growth. You see that being illustrated through the performance of some of the largest companies. You do see some outperforming, like Unilever. These small fires are certainly feeding that, but it’s beginning from a small base. Their impact on total market growth is still very small, but they’re sucking whatever growth there is away from the incumbent and into this aggregation of disruptor ants.
Full original post can be viewed here.