Private label brands have long had the unfortunate reputation of representing cheap, lower quality products. Today, and as the industry continuously evolves, these brands have built a different positioning for themselves; they’re sought out for their improved quality, and the targeted products they provide to fulfill existing consumer demand through direct-to-consumer (DTC) strategies.
Earlier, we discussed the evolution of retail and what models were likely to better weather the economic storm. And while by and large, it seems that globally DTC businesses are no longer the media sweethearts they once were, I wanted to pause on that and further explore with you how we at Nuwa Capital define DTC strategies, and how we’ve seen them reward companies in MENA and our portfolio.
An unrecognizable landscape
Private label brands have existed at different points in the history of retail and seem to surface largely during recessions. Trends throughout history point to private labels being born out of a competitive reaction to highly priced merchandise. This suggests that private label strength varies with fluctuating economic conditions; meaning their market share generally goes up when the economy contracts and down when it surges.
Moreover, with globalization and an accelerated pace of technological change, private label brands continue to soar. Brands can easily create their own identity and reach customers without the need to heavily invest in manufacturing capex, spend on R&D, or run global operations to start competing on an international scale.
For private label brands, retaining an asset-light model creates a solid path to scale with higher cost savings, stabilized margins, strengthened customer loyalty and better returns. And it’s working.
In fact, between 2011 and 2017, according to BCG and the IRI research group, over $20 billion in sales shifted from large consumer brands to smaller brands in North America alone. A similar trend was noticeable in Europe, and the MENA region is starting to head in the same direction.
The challenge in DTC strategies
A number of DTC-led models leveraging today’s technology have emerged. They either build their own brands on top of an existing retail strategy, or serve a clean-cut, “better” option to what is currently on offer to consumers. Of course, the strategy does bring its own set of challenges, especially in the DTC game.
The first being that the new branded products are built by third party manufacturers and therefore making it complicated, but not impossible, to control product quality. Secondly, selling own private label brands on a marketplace could create tension with suppliers, and if marketplaces wish to venture in that direction, the strategy and rollout should be carefully executed.
Thirdly, and a trending challenge faced by global companies such as Casper, Dollar Shave Club and Harry’s, is the fact that they are uni-directional with single-product brands. The product line is narrow, and competition emerges quickly.
Although it’s gotten a lot of flak, the private label / DTC model is not flawed, it’s just nascent and global stories have offered both examples of success (Amazon with Amazon Basics, notably) and cautionary tales. So, what is the right path to success in DTC brands and are we labeling this retail segment correctly?
Recently, the consensus has shifted towards naming DTC brands “DNVB”, digitally native vertical brands, a term that is far more appropriate given that those brands will need to find the right combination of channels to sustain their growth. Retail outlets providing a more experiential proposition, adding presence through specific retail, and other strategies have emerged worldwide to support scaling the brand, gain further market share and balance out the online-only strategy.
Marketplaces taking on a central position in the space
We tend to think of it differently. We see the opportunity within DTC marketplaces that sell a variety of products from a number of suppliers. They act as the infrastructure upon which companies can introduce an offline retail component and eventually bring in their own label products.
As traditional retail is suffering, DTC was born as an omnichannel approach that marries the online and offline retail concepts into one. Our definition of the DTC sector leans towards marketplaces that have taken a multi-directional approach and opened up their platforms to multiple third party brands – usually first – as well as their own. Wayfair, Warby Parker and Lenskart all started with an online marketplace model and only launched their own private labels and introduced offline retail components once they had a strong brand and customer loyalty.
Companies in the region today who launched their own brands play a pivotal role in defining the industry. Namshi has multiple private brands in fashion, Noon launched its own brands in beauty, cosmetics and home goods, Eyewa – a Nuwa Capital portfolio company – started its own labels for contact lenses and glasses.
These companies tend to take a central position in their industry whereby manufacturers and other stakeholders as well as consumers develop some sort of dependency on them, usually due to the seamlessness of the process, the transparency and credibility offered as well as the variety of the products and their prices.
And we’ve also backed a company that is transforming the furniture space by doing exactly that.
When we first met Homzmart earlier this year, it was clear that the company already had a head start in transforming the furniture industry in MENA. The space is fragmented and the existing players are mostly offline or only dabbling with an online presence.
Launching an online marketplace centralized all players onto one platform and has, as Homzmart can demonstrate, created a much more seamless end-to-end experience for the customers. As is, the company has already cemented its position in the space. Additionally, and because the founders have built it as a platform, Homzmart can decide to complement the offering of existing brands by launching its own private label products, and as such perhaps put some pressure where needed when prices grow too steep – more in our upcoming podcast with cofounder Mahmoud Ibrahim.
Sarah Abu Risheh is Partner at Nuwa Capital.