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Why Investors Still Like Direct-to-Consumer Brands

Data, it seems, is one reason investors like direct-to-consumer brands.

Speaking on an HSBC panel in New York City Wednesday, investors cited data as one reason why they like to invest in direct-to-consumer brands. The panel spoke on “Direct-to-Consumer Investment Strategy: Funding the Industry’s Next Big Thing.” Participants included: Lisa Myers of L Catterton; Anthony Choe of Provenance and Chris Carey of Stripes Group. Geoff Headington, head of global ventures at HSBC, moderated the panel.

Myers said there’s interest in the DTC brands because of their ability to engage directly to consumers. “The ability to control your relationship with brands is amazing,” she said, explaining that the ability helps companies understand their consumers better. But she also said that the “retailer is not going away, nor is the wholesaler-distribution relationship.”  Rather, it’s the ability to gain data that is driving the DTC channel.

Myers also said that the product lifecycle is changing, and consequently so is the growth trajectory. That’s because the barriers to entry have come down, she explained, noting that so many brands are now selling via social media. The result is that there is a huge number of brands in the space that have annual volume between zero and $10 million.

“The fragmentation of brands means that market share is also fragmented…. The days of building a billion dollar brand may be past,” she said.

According to the private equity investor, longevity is determined by a brand’s ability to evolve with changing consumer preferences. That also means that many of the bigger brands, even if not a billion dollar brand, could have an lifecycle that’s just as long as a current mega brand.

Choe said, “I think a lot about the data, and I think a lot about the distribution.” And while many DTC firms say they are online only, Choe said that could be very limiting to a company’s ability to grow. According to the investor, many who say they are only online “don’t understand wholesale, retail, or how truly complex it is to be omnichannel.”

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As Choe looks at consumer behavior, he said he tells his team that brand loyalty at a very fundamental level is essentially the same across all consumer groups. That’s why he tends not to think of firms as just Millennial brands. He explained that for digitally intensive brands, on average 40 percent are Millennials, 30 percent are Gen X and 30 percent represent Baby Boomers. Personal spending power peaks at between ages 45 to 52, making the apex at the Gen X cohort group.

“You want to be relevant to the next generation, especially as you think about future sales so you have to think ahead. But if you are too narrow, you won’t be as big [when it comes to growing your brand],” Choe cautioned.

Carey tends to focus on product and making sure the right product is in the marketplace. He said once you have that, it can help with determining the right distribution channel. But he also said that when it comes to sustainability, supply chain innovation, particularly the circular economy concept, has become a way for brands to differentiate themselves from their competitors.

Innovation on the environmental front, particular with process and material technology, is often top of mind. He noted his firm’s investment in Reformation, a cult L.A. fashion brand started in 2009 by Yael Alfalo. The brand is known for a focus on sustainable fashion for the masses.

“Sustainability is an ethos for the brand, [looking at] how to reduce the impact for each garment,” Carey said. He also expects that because of costs, it will take some time before the industry will see commercialization of sustainable practices.

Choe noted his firm’s investment in Marine Layer, which recently began a program called Re-Spun. The program takes “ratty old T-shirts for up to a $25.00 credit, recycles them and then turns them back into tees,” he said.