If E-commerce 1.0 was offline retailers simply listing their goods online with a crude website and E-commerce 2.0 was the phase of aggregation and the rise of E-commerce giants, E-commerce 3.0 is shaping up to be the rise of micro-brands, that eventually get aggregated.
The SEA Story
E-commerce 1.0 - Crude transfer
Internet penetration in SEA was low (Indonesia was 10.9% in 2010) with exception of the wealthier cities and although the starting point was quite different, in that the wealthier cities started purchasing off websites, the end result, being that most of SEA is purchasing off mobile is looking very similar
E-commerce 2.0 - Internet Fluent
In this phase, consumers and sellers alike are becoming familiar with the internet and in SEA, most countries made the direct jump to mobile.
Winners - Aggregators like Shopee and Lazada. Smaller winners would be sellers that have gotten adept at selling online
E-commerce 3.0 - Internet Natives
In the US, DTC startups like Warby Parker, Dollar Shave club and Smile Direct Club have crossed the unicorn chasm while you have other successful DTC startups like Bonobos and Everlane that have had pretty good outcomes too.
SEA has had some successful companies of it’s own, SecretLab, Love Bonito, Pomelo Fashion and Zenyum to name a few. These are companies that tend to do well in more developed countries and target a digitally native consumer.
We are also starting to see a slew of Indo food brands like Mangkokku and which sells rice bowls and Kopi Kenangan which is a coffee chain leveraging delivery and ghost kitchens to scale rapidly
When and why does DTC take off?
Warby Parker and Everlane were both founded in 2010, Dollar Shave Club in 2011, 16-17 years after Amazon was founded. It takes some time people to build a habit of buying online. After which, people get tired of big box brands and want niche brands that not everyone has and has the perception of being mass produced
The Economics Of DTC
The offering is cheaper. This could be Warby Parker pricing their glasses lower than Luxottica, Dollar Shave Club pricing it at a fraction of Gillette or Everlane selling premium basics at a lower price than high brands.
Purely online = lower cost structure, no expensive shopfront to pay for with staffing and inventory.
Eat lower margins - Every successful DTC company was looking to disrupt an incumbent with crazy high margins. Luxottica (64.5%), Gillette (70%), Invisalign (~80%).
A lower price point is usually a big attraction to most consumers, and pair that with great marketing, and you have a great formula for success!
Marketing DTC products
The end user that these companies target tend to be digitally native, and want brands to be transparent, speak their language, and provide an experience that they’re used to.
The Fun Stuff
Who can forget the Dollar Shave Club Ad that went viral, or looking at the transparency of Everlane, it’s obvious why this appeals to your digital native Millennial or Gen Z that wants transparency, sustainability, personalised and value for money products!
Building your online community in an authentic manner is one way to beat the corporate drone. The advantage the startup has over the large corporation is that they can be focused and niche in their message as opposed to the giant corporation that has to cater to everyone
The Boring Stuff
While large companies have gotten very adept at digital marketing today, this wasn’t the case in 2010 when the first wave of DTC companies in the US came about. They were much better at digital marketing, Facebook and Google ads were also much cheaper back then.
Brands today will need to find the next thing to reach their customers in a way that the big boys have been slow to, for now.
Influencers
McBeast Burgers in the US was started by MrBeast, one of the top YouTube influencers. in less than 6 months, they launched 300 outlets throughout the US through a ghost kitchen model. Mangkokku has followed this model to great success. Launched by Indonesian MasterChef judge, F&B entrepreneurs and Jokowi’s sons, they launched a chain of rice bowls in Jakarta and Surabaya, scaling to 22 branches in under 18 months and is planning an overseas expansion to Australia.
Why Influencers?
They tend to have a large following, MrBeast has more than 100m subscribers in total, which reduces the cost of acquisition greatly since there’s reach and the brand is already recognised
DTC in SEA
The first wave of DTC brands like Secret Lab and Pomelo Fashion were founded before 2015 and they were targeted at a demographic either in developed cities or in a similar income bracket. This demographic was very used to making purchases online and were true digital natives.
As the next wave of DTC brands emerge, they will target the growing middle class in SEA. As this group of young people become internet natives, they too will follow the cycle. Although, as income levels will still be much lower than the developed cities, DTC brands in the region will have to go for smaller margins but a wider base.
The Next Wave of Disruption
Unbundling of CPG
Unilever bought Dollar Shave Club for $1bn, Graze is riding the wave of healthy snacking, Ritual is starting to make a dent in the world of vitamins.
What we are seeing here is the traditional startup play book. Big traditional company is slow to move, and fails to connect with a new emerging demographic. Startup takes advantage of this paradigm shift and capitalises on the opportunity.
Brands built around influencers
McBeast Burger was started by the YouTube star Mr McBeast and has grown to more than 300 shops in a matter of months. In Indonesia, we are starting to see similar patterns emerge. Mangkokku an Indonesian rice bowl chain that was started with the sons of Jowkowi (President of Indonesia).
The thesis is that these influencers already have a following that they can reach out to. In a low margin category like food, your cost of acquiring a customer (CAC) becomes critical and a strong following is a huge advantage for a business operating in this space
The Rise of the Roll-Ups
We are starting to witness the rise of the roll-ups like Thrasio, Rainforest, Wolfpack, Hypefast etc Each one of these players is trying to be the next P&G or Unilever.
The playbook is around acquiring small businesses that have proven product market fit and cashflow and then optimising it with their expertise and bringing synergies with their existing infrastructure. They normally select Amazon FBA companies as they are easy to compare as the metrics are standardised, but we are witnessing some of these roll-up companies target Shopify companies as well.
While the vision is sound, it’s too early in the game to make a call on how they’re executing on this vision. The relationship between them and Amazon would be very similar to how P&G and Wallmart function, one owns the distribution, the other owns the brands. While the value of owning the distribution will be higher as they call the shots, it is still a sizeable business at the end of the day. P&G’s market cap as of Sept 20th 2021 is 350bn USD, which is about 3 Snapchats.
If this takes off, we will see more entrepreneurs start small DTC businesses as there is a viable exit within a short period of time. While we’ll see a lot of crappy products out in the market, buyers will vote with their dollars and the weak ones will fade away quickly and those that survive will deliver products that are innovative, high quality and packaged in a manner that resonates with their target audience. With more brands out there targeting specific audiences, by definition, we will be seeing more niche brands out there, and at the end of the day, consumers will benefit.
In Conclusion
We’ve witnessed the trend take off in the US, and in this part of the world too. The reason it does is that consumers are getting very used to purchasing online. In addition to that, younger people are looking for brands that resonate with them and as young people become more and more internet native, they form more and more fragmented sub-cultures, which allow different niche brands to cater to each of them.