The DNVB's scaling challenge in a post-pandemic world
DNVB (Digital Native Vertically integrated Brands) have exploded in the last decade. You certainly know a lot of them, especially from their Instagram accounts where they usually are very active building their awareness, their (emotionally charged) storytelling, their differentiation, and recruiting new customers.
Their specificity? They are digital of course, and more importantly born digital (often powered by platforms such as Shopify), but they are not tech companies: they're retailers. Mostly born in the 2010's, they have cut the intermediaries to sell DTC (direct to consumers) from their own platform or website. In addition to that, they are fully integrated brands, which means that they control everything, from production to supply chain and all the way down to the consumer's purchase and overall experience. That verticality makes them different from "traditional" e-commerce (eg. retail going e-retail/selling through a website to grow and expand beyond catchment area for example) : the fact that they were born digital and built vertically usually implies higher gross margins & contribution rates than traditional retailers gone e-retailers - but, as some founders explain*, that takes time, huge resources and scale to break even.
Credit : Peloton, one of the most famous example of DNVB
As a result of cutting the middleman and of controlling 100% of their distribution, they have grown accessing to and collecting invaluable, qualitative customers' data and were able to constantly analyse, finetune and customise their offer and range of services as the brand grows. They got to know their customers so well, they were able to build a very strong and emotional connection with them. The curation of content is so tailormade and targeted that the brand is (in theory) able to grow whilst remaining culturally relevant to its (niche) audience. DNVB are utterly focused and driven by a strong, consumer insight - and usually are "maniacal" about the customer's experience (a term employed by Andy Dunn in the past).
Credit : Away
In terms of offer/range, they usually start by selling a single product, or proposing a very short range of products from the same category. Think : mattress-only online sellers; niche beauty brands (Glossier); socks-only e-comm retailers (Happy socks); luggage (Away) or jewelry online brands...Their deep knowledge of a category and also of its potential weaknesses allows them to address that weakness specifically with a unique selling proposition, a clear purpose and a strong competitive advantage.
And finally, as there are now so many ready-to-use e-commerce solutions available, DNVBs were able to spend even less time on tech aspects of their brands, and more and more on tailoring the experience and curating their brand content.
Successful brand also usually master 3 aspects of their marketing:
- they are good at fostering organic word of mouth & at building a community of strong advocates
- they focus on converting social following into revenue.
- they constantly look at how to optimise performance marketing spend.
Credit : The Clear Cut
In 2017, those DNVB brands were already accounting for 2% of the US $453 billion e-comm market, and were promised to a faster growth than "traditional" e-commerce. They were supposed to lead the way and to represent the retail's brightest future, at the same time some experts observed what they called the "retail apocalypse" (id est : in 2019, when US retailers announced 9,302 store closings, a 59% increase compared to 2018).
However, the last two years have brought to light some structural challenges and worrying cracks in the much-admired DNVBs strategies. From Peloton suddenly laying off 2,800 employees around the world last month, to Glossier doing the same with one third of its corporate employees, it looks that DNVBs are entering a new phase and will now have to pivot strategies to survive the post-covid new normal....
In a way, the pandemic has shaken those companies, forcing them to transform themselves deeply:
- First, the pandemic, like many crises, has been a major hurdle for those young brands with limited cash reserves. Scaling up requires cash; uncertainty and putting everything on hold, even for a few days or weeks, requires deep pockets; plus, as some of them had just started to open brick-and-mortar stores in 2020, they had to shut everything down almost overnight, laying off newly hired retail teams.
- Then, as we are observing today, the pandemic has revealed and unleashed a new generation of activists consumers - that some of the iconic, pre-covid DNVBs might not have seen coming. As a result, some brands that were created pre-Covid are now struggling to remain culturally relevant (eg.Glossier);
- Then, entering to a somehow normal, "post-pandemic" life is also bringing its fair share of additional challenges (think Peloton vs. people returning to gyms) that has required some of them to pivot strategy - and quite quickly; Peloton, for example, are said to have reached out to McKinsey & Co. to look for cost redundancies;
"With uncertain exit strategies, DNVBs and their investors must seek to create sustainable businesses, as opposed to growth at any cost. [...] most of them lack the scalability or leverage required to really capture market share and potentially disrupt the large & well-established competitors of the same category." - ComCap, 2020 Evolution of digital brands report.
In addition to the above, one can imagine that in the next months and years, the rapid inflation that we see today might represent an additional threat to those companies' fragile margins. Maintaining quality and fair prices whilst keeping their customer base might an important challenge in the next months and years. Plus, customer acquisition and retention costs will increase as those brands compete with giants like Amazon.
So, what could we expect to see more in the near future, as DNVB try to grow in such a challenging environment?
- creation of their own physical point of sales : could start with temporary pop-up stores, helping to build brand awareness (from digital only to omnichannel strategies).
- diversifications of their product lines : challenging for them to generate the same margin as their iconic line, but needed to support future growth (from single product to multiproduct) - especially when competition (including amazon) have since copied those iconic products .... at sometimes a better price and with a steady learning curve.
- collaborations with established brick & mortar retailers: department stores for example, to maintain a high quality of customer experience and service (from 100% integrated to wholesale); That pivot will hopefully allow those brands to increase awareness and visibility whilst, widen the top of their funnel and generate more revenue (and cash) to reach scale.
After a decade of DNVBs being launched in almost every category, it appears that reaching scale is much more difficult than planned. Even "established" DNVB's founders now say that it has taken them a decade of struggle and constant learning to reach scale and finally break even. And to be able to do that, DNVB may need to give up on exactly what made them the dream retailers that everybody thought they were
- Digital only > from digital only to omni channel, mix of digital & brick & mortar
- Full Integration > from 100% controlled distribution to wholesale & partnerships
- Vertical > from one product to several lines of products
*For an insightful description and definition of DNVBs click here:
For a (non exhaustive/non up to date) list of DNVB, can be useful for inspiration, click here : https://www.skubana.com/blog/dnvb-list
For a brilliant report about DNVB's challenges, download & read this