What next for the DTC ecosystem

At WEH Ventures, we've been closely tracking the DTC ecosystem for over four years now and we've made some investments along the way. In the last 12 months, we've seen more digital-only brands pop up in India than ever before. A lot of them consider this a side-hustle and continue to hold on to their day jobs. Fulfillment has become quite easy, you just need to tie up players like Shiprocket or Pickkr for logistics and if you want to give a better experience you can even stock your products in 'cloud' warehouses with WareIQ and others. For most brands, including some of the venture-funded ones, marketing had been limited to FB/IG advertising; FB had made it so easy for small businesses to target new customers, that most brands never felt the need to do anything else to either get new customers or to retain existing ones. While the bar for launching a brand has lowered tremendously, we believe it's going to take some effort to scale it up. Here's why we think so -

Reason #1: Large advertisers would drive up the ad rates

FB & Google are auction driven ad-platforms. One of the primary reasons they've attracted ad dollars over the last decade is because they can track performance while other avenues like TV & Paper couldn't. In the offline world, if the newspaper circulation goes down or if it's perceived to be less effective, then the pricing goes down. In online platforms, however, this isn't the case. The pricing here is not dependent on performance; the ad rates don't necessarily have to go down if your Return on Ad Spend (ROAS) dips from say 4x to 2x. As long as there are enough brands out there that are either happy with 2x or as long as even at 2x this is the best trackable ad channel, the prices will continue to go up.

In fact, in the latest earnings call, FB expects "higher prices for Facebook ads to drive revenue growth for H2 2021". This has been exasperated by Covid, as offline advertising took a beating, quickening the shift to online advertising. Covid increased the screen time for all of us and this coupled with the offline world shutting down, has resulted in a blockbuster year for the digital ad market. Facebook's ad revenue from the US increased by 65% last quarter, as compared to the same time last year. Snap's ad revenues were up 115%. Large advertisers like Dell are expected to spend over $35mn on Google ads alone this year. From their viewpoint this is probably a much better spend than billboards, cause here at least the impressions are trackable.

Reason #2: There are a lot of DTC brands competing for attention

Unfortunately, most DTC brands do not have any other mode of distribution and the primary mode of acquisition is FB/Google. So they end up fighting for the same consumers' attention and drive up the ad bid. And even amongst DTC brands, what a brand can afford to spend on CAC is wildly different, for instance, a mattress brand that has an AOV of Rs.15,000 or a beauty brand that knows that its LTV over 12 months is over Rs.10,000 can spend a lot more than a young F&B brand with an AOV of Rs.1000 and unclear LTV. So while the bar for starting an online brand has never been lower, we think the bar for scaling up is definitely quite high. The chart below sums it up quite well (data from Forerunner Ventures).

Reason #3: Personalized targeting would be less effective

Apple wasn't kidding when they said they are serious about user's privacy and launched the "Privacy. That's iPhone" campaign. One of the reasons ads work so well is because data collected by apps is clubbed together by advertisers to get a better user persona for more accurate targeting. Apple recently launched 'App Tracking Transparency' where an app that's installed or already installed and collecting data, have to specifically get users permission for tracking and sending the data to its maker or for sharing it with other advertisers. Not surprisingly, when users get a blanket notification like this, most end up choosing "Ask app not to track". According to Branch, which analyses app growth, 75% of iPhone users in the US are opting out of being tracked across the apps in the US.

..and it doesn't end there, the upcoming update to the Mail app stops the sender from collecting data about the user through email. Now senders can't know when you opened an email nor the IP address to get more context on who you are. In addition, even if users allow an app to track them, apple now provides App Privacy Report which now shows users exactly which app has tracked them for how long, how, and how they are using this data to advertise to you; this might make more users to opt-out. Apple is now forcing Google's hand; Google Chrome is going to remove third-party cookie tracking in 18 months.

Possible opportunities

Consumers in India have actually started to trust online brands a lot more since the beginning of the pandemic. They are open to discovering new brands on content platforms and trying out a few SKUs to see if they like them. The way we see it, the problem is that all brands are currently fighting for space on the same platform; this is akin to a small brand getting a Walmart listing for stocking its products on Aisle "W" and expecting consumers to discover it.

And the way the ad-targeting algorithm is designed, it's not meant to promote loyalty/repeat purchases. In fact, if you buy chinos on Instagram, chances are that you'll be shown ads of a lot more apparel brands in the next few days, and the brand you actually bought it from might stop advertising to you, hoping that you'll repeat soon!

While Amazon is a great alternative for DTC brands to increase revenue, the threat of private labels is too real, plus the platform doesn't work for crowded categories. Everyone's on Amazon, this, in our opinion is hygiene but doesn't help a brand to stand apart, next to a P&G or HUL.

Given that consumers are happy purchasing online and this is a secular upward trend, we think there's space for a lot more new specialized commerce platforms. In the US, over the last couple of years a lot of such platforms have sprung up & scaling quite well —>

Curated - Three-sided marketplace to buy along with other experts (works well for sporting goods)

The Yes - Started by Ex-COO of Stitch Fix, this is a mobile-first, personalized fashion shopping platform for women

Faire - Marketplace connecting independent brands to specialty retailers in the US; even has a category called "Brands not sold on Amazon" which enables offline retailers to differentiate

ThingTesting - Started as an Instagram handle that reviews DTC brands across Europe and the US; now received funding to highlight honest detailed reviews of new brands; great discovery tool for brands

ShopShops - Dubbed as the "QVC for social-media generation"; live-shopping for niche, bridge-luxury brands

These are just a few examples of interesting models that are rethinking commerce. We believe that new platforms will emerge in India as well, to solve for the top-of-the-funnel/discovery for the long-tail brands. One thing that's common across all these platforms is that they stand for & by the brand, they do not operate any private label.?

Logistics + Warehousing + Payments + Customer Acquisition = 'Amazon-like' experience for DTC Brands?

• Shiprocket aggregates logistics companies to provide a better reach to DTC brands.
• WareIQ aggregates warehouses and solves for next-day delivery.
• India has probably the most advanced payment stack, so no real problems here.

In our view, the customer acquisition piece is yet to be solved and this is a huge opportunity. At WEH Ventures, we've been early backers of content leaders like Pratilipi, social-commerce platforms like Trell, and consumer brands like NOTO. If you're building something exciting, reach out to me at [email protected].