The energy in the DTC sector is undeniable. In just about every vertical we see new businesses taking advantage of the evaporation of friction in launching an ecommerce brand. With the democratisation of tools like Shopify and Instagram Ads anyone can launch a DTC business. And it sometimes feels everyone has.

The focus is growth and these businesses see real revenue from real customers early on. Reinvesting this in more stock and more marketing can drive rapid growth. Unsurprisingly this growth has attracted investors. With more capital, we tend to see the evolution from pure online into adoption of more traditional strategies – real world stores and testing TV and Out Of Home advertising.

But a few conversations with VCs and Private Equity people highlights a potential issue. Getting quickly to sales of $20m, $30m even $50m is relatively easy.

Getting from there to the $100m or $200m that make it interesting to PE firms is proving harder.

Brands max out their marketing channels and Acquisition costs soar. And new competition just keep showing up. Can these difficulties be overcome? Maybe. For some. But not for all.

We think many of the new DTC businesses are Bonsai Brands. They look very like big successful businesses. But they are a lot smaller and don’t grow beyond a certain size.

The factors that enabled big brands to get really big just don’t apply in the GAFA age.

Scarcity of distribution was essential to the success of the brands owned by P&G, J&J and Unilever etc. A handful of major retailers took a huge share of grocery sales; Walmart, Tesco, Carrefour etc. And despite the move to huge out of town stores, they had limited shelf space for each category so tended to feature the two biggest brands and often a third ‘interesting’ one.

Knowing they had this dominant retail distribution Brands then invested millions in TV advertising so when consumers went to Tesco they would, hopefully, pick up their product. This symbios of supermarket distribution and TV advertising was encouraged by the retailers. (One of my first jobs a million years ago was running the media strategy for Tesco and one regular task was to sense check the media plans that brands submitted to Tesco, to make sure they were spending the money they had promised.)

This was a huge barrier to entry and ensured dominance by the big brands. The option of a third “interesting” brand was usually a way to get challenger brands to pay the retailer for a presence. The best example of the interesting third brand working is Method / Ecover where a radically different product approach got the third spot and built the brand without that much traditional media support.

Benedict Evans made the point that these big brands were never actually consumer brands – they were essentially B2B brands selling to the big retailers, with a promise to spend heavily on advertising. And scarcity of distribution exists in most other retail sectors.

In the DTC world it’s all very different. Infinite shelf space demolishes this strategy; Amazon and Shopify let you reach anyone and everyone and there is no gatekeeper. And every category now has dozens (and sometimes even hundreds) of brands. (Ask your friends about the DTC brands they see in their feed – likely to be quite different to yours)

Even in grocery the barriers are disappearing – with Ocado, Amazon and online sites for Tesco we are moving towards infinite shelf space. (Search for Peanut Butter on Ocado and you find 79 SKUs in spreads alone)

And this wealth of choice is the paradox. Sure I love the shirts from Form and Thread but when i need some more, why won’t I try that new brand I saw the ads for? This holiday I am buying those trainers, but for the next break i want something different and i saw an ad with just the right one.

The problem of familiarity that ultimately cursed Levis, Gap, JCrew etc applies here too.Why risk having the same as a friend when there is a brand new brand to be tried?

So we think that many of these brands are going to be super healthy businesses. But they wont grow like the brands that went before them. So they will never be really big businesses.

Warby Parker will never be as big Sunglass Hut. Away will never be as big as Samsonite

They are Bonsai Brands. And if you accept that, they are great businesses.

(The hyper growth play therefore is to build a modern holding company – use data to build a house of brands like P&G, LVMH and H&M have done. But that’s a different set of skills to building a modern ecommerce brand)

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