DTC gold rush leads to the rise of holding companies

So, the great disintermediation of consumer brands is heading toward a great re-clumping. Retail is no easy business. Margins are thin, competition is dense, customers are fickle and raising VC money while it is flowing into direct-to-consumer businesses is a tempting path that can turn dark quickly.

Consider the dearth of successful exits in the heavily VC-funded direct-to-consumer brand category. In 2016, Unilever bought Dollar Shave Club for $1 billion, a healthy payout for investors that poured a total of $163 million into the subscription razor company. Bonobos sold to Walmart in 2017 for $310 million, barely double its total fundraising of $128 million.

Andy Dunn, the founder of Bonobos who was CEO at the time of the Walmart acquisition, says that his company was a few days away from signing a deal for another round of private equity when Walmart, which had acquired e-commerce marketplace Jet.com a year earlier, came knocking. At the time, Dunn had his sights set on an IPO, but needed to raise more money to get there, and it was stressful.

“With Walmart, we get a safe and permanent home, which is not to be underestimated,” says Dunn. “Building a standalone brand is incredibly hard and going for an IPO with economy swings and quarterly results — you have a couple bad quarters and your stock gets destroyed. We wanted a safe home with a longtime view, rather than be beholden to quarterly earnings.”

Dunn is now the svp of digital brands for Walmart e-commerce, and oversees other brand acquisitions, which have included online retailers Modcloth, Eloquii and Moosejaw. The goal is to build the “LVMH of digital brands,” which, if designed to reflect LVMH’s business model, would mean a group of brands, vertically integrated within LVMH’s supply chain, that benefit from synergies across shared logistical resources, while still allowing room to breathe. On a call with investors for its fourth-quarter financial earnings results, Walmart CEO Doug McMillon said that the company was being aggressive in identifying companies to acquire, and looking for brands that would bring new assortments and repetitive customer behavior to the table.

There’s more to it than Walmart vacuuming up smaller brands as it rebuilds its digital image for the Amazon age. Scrappier companies more closely aligned to the DTC spirit are popping up to offer a non-Walmart approach to the new-age holding company: Assembled Brands, founded by Adam Pritzker, is a collection of fashion brands that gives companies working capital and access to e-commerce, supply chain, marketing and fulfillment resources. Resonance is a venture operating and holding company that provides a similar backdrop for designers, telling them to design the clothing and the company will take care of the business legwork in the meantime. Digital Brands Group is a nascent holding company built off of the back of DTC denim brand DSTLD, co-founded by Mark Lynn and Corey Epstein.

“We think it will be easier to build five $50 to $100-million brands than it is to build one $1-billion-dollar brand,” says Lynn. “We’ve done the work to prove we can launch brands, the next step is proving that we can acquire brands.”

As Lynn describes it, the road to a rut for a VC-backed DTC brand starts as soon as big, triple-digit year-over-year growth rates start to taper off, as early adopter buzz dies downs and Facebook campaigns get less traction. “If you have a 30-percent growth year as a public retail company, you’re a darling. To a VC, you’re out of gas,” Lynn says. Raising more money could cut a Series C valuation to half of what it was at Series A. Public perception of a booming startup starts to slip, and employees might head off for new gigs.

Holding companies can help startups, that have proven there are customers for what they are selling, get past the hump that usually kicks in around $100 million in sales.

“The way to survive today is be capital efficient — skip the era where you’re buying customers through Facebook marketing and focus on products,” says Dunn. Within Walmart’s digital brands group, the company’s massive marketing and advertising platform is built in. With shared customer data resources across brands, they can also target new customers more efficiently. “Not everyone is going to survive, but a brand can die off that had viability. We believe a roll-up makes sense for brands that could make it, but may not have the chance to because of idiosyncratic reasons.”

Joining forces could also mean that a direct-to-consumer brand can avoid scraping the barrel to find new paths to scale, like selling on Amazon or Target, expanding into more and more product categories or discounting — retail strategies that they set out to avoid. But the need for DTC-brand holding companies, a decidedly not digital or new-age idea, speaks to the limitations of the individual brand era.