Amazon, CPG, DTC: what’s happened in consumer over the last decade

Ask a millenial what their daily routine looks like and I bet it involves some combination of a Casper mattress, Harry’s razor, Quip toothbrush, pair of Allbirds and a $16 salad from Sweetgreen for lunch. This is a far cry from the brands their parents grew up with and probably still use today.

The big picture…

Over the last decade, many large consumer companies have been sleepy, too slow to innovate and adapt to evolving consumer preferences. Incumbents have often under-invested in R&D and product development and relied heavily on M&A to compensate for their shortcomings.

Further, the growth in e-commerce and emergence of the direct-to-consumer (DTC) channel facilitated a massive unbundling across consumer categories and helped give rise to an “unlimited shelf”. At the same time, the back-end infrastructure to start a company made it easier than ever to launch a brand:

• Commerce tech (Squarespace, Wix, Shopify, Stripe, etc.)
• Co-manufacturers
• Social media platforms for customer acquisition
• Co-working spaces (WeWork)
• Innovation in packaging (Lumi)

The outcome has been a surge in nimble, entrepreneurial challenger brands that have captured significant market share across categories. Their founders have solved real friction points and told stories that resonate with consumers, creating authentic brand affinity.

It’s a trend that occurred across the consumer landscape in personal care, food, pet, wellness, home and more. VC Teddy Citrin created a great overview of DTC categories here.

While it might be easier than ever to start a consumer brand today, it’s no secret that it’s harder than ever to scale one. Grabbing consumers’ attention in a world where they’re inundated with shameless influencer plugs and Instagram ads has given rise to a new era of “DTC fatigue” — nearly 200 mattress brands later.

Amazon’s ascent as a double-edged sword…

My grandparents came to the US in the early ‘60s. Like many immigrants without a formal education, they did what they could to make ends meet, eventually setting up shop as merchants on Miami Beach, launching a modest but successful linens business. Today, specialty stores like that are rare — a search on Amazon for “linens” yields over 40,000 results, ~100 of which I could get delivered to my Upper West Side apartment within two hours of adding it to my cart. The rate of change in commerce has been truly staggering from their generation to mine, but perhaps even more mind boggling is that the majority of that has occurred since the mid-2000s.

Over the last decade and a half, just as DTC brands gained prominence, so too did Amazon, going from “bookstore” to nearly “everything store”. Amazon copied the Costco playbook with the launch of Prime in 2005, implementing an annual, recurring membership fee while cutting margins elsewhere to compete on price. In a lot of ways Amazon was able to leverage the profitability of AWS, its on-demand cloud computing platform, to invest in the much lower margin, e-commerce side of its business.

Ask a few people what they think of Amazon and you’ll get varying perspectives. On one hand, Amazon has given rise to an entirely new genre of entrepreneurs, enabling $300bn of third-party sales in 2020. On the other hand, Amazon has contributed to the demise of many local businesses similar to my grandparent’s linen store (they fortunately left the business many years prior).

One of Amazon’s biggest impacts has been its influence in enabling the commoditization of many consumer categories. This has taken place through a few of its attributes:

1. Its private label brand, Amazon Basics, which generated $8bn of revenue in 2020 and grew nearly 100% since 2018
2. Its complicated ranking and review algorithm, which enables products that reach “Best Seller” or “Amazon’s Choice” status to achieve leading market share, obfuscating the need for an actual brand
3. Its scale in Pay-Per-Click acquisition costs, which it can amortize over a much larger basket size and customer lifetime value vs. a more niche DTC brand (e.g., AMZN can meaningfully outbid a brand that sells a suitcase once every decade)
4. Its two-day and in some cases, two-hour Prime delivery service which makes it nearly impossible to compete against its fleet of 80 planes, 30,000 vans, 40,000 semi-trucks and 400,000 drivers worldwide
5. And last…its 2017 acquisition of Whole Foods and the subsequent growth of its private label brand, 365 by WFM, putting pressure on branded CPGs

Love it or hate it, Amazon has contributed to profound changes across the consumer landscape and my guess is we’re just getting started.

Where we are today…

It’s clear that the consumer landscape is evolving at an incredibly fast clip. A few observations:

• McKinsey estimates that e-commerce adoption accelerated by nearly 10 years in just a matter of months during the pandemic. Further research suggests most of these share gains have remained intact
• Millennials continue to want yesterday’s (evoking nostalgia, like MagicSpoon) or tomorrow’s brands (disruptive, sustainable and those with a voice)
• Consumers are increasingly fragmented; the rise of niche brands has created loyal “tribes” vs. a prior age of uniformity
• CAC is the new rent; in an age that is increasingly digital, customer acquisition costs are rivaling the spend brands historically allocated to physical real estate
• DTC as a channel is here to stay, enabling much quicker product cycles and innovation
• That said, omnichannel remains critical to scale. We’ll likely see smaller footprints and more engaging experiences to complement digital commerce
• Private label continues to take share, especially in grocery and on Amazon where brands are becoming less relevant
• Brands must be differentiated and solve real friction points. Those with staying power will create authenticity and prioritize community, telling a story that genuinely resonates with its consumer
• Unit economics matter more than ever: successful brands will demonstrate healthy gross margins, high LTV / CACs, strong velocities & efficiency in marketing spend

For investors and strategics alike, this environment has created an opportunity to back emerging brands that meet the criteria above. I’m incredibly excited by a few themes and companies, some of them below:

Source: CB Insights

Commerce Enablement

• Spoiler Alert, which developed an inventory liquidation platform designed to help CPG brands sell and donate excess and short-dated inventory through discount retailers and nonprofit channels
• Archive, a white label operating system that enables brands to launch their own secondhand fashion marketplace
• VetCove, an e-commerce purchasing platform that enables veterinary clinics to research products, compare pricing and buy from one central location

Intersection of Consumer & Healthcare

• FridaBaby, which sells its hero product, the SnotSucker, a nasal aspirator for babies with ~70% market share. The company has since leveraged its trust in the category to launch a much broader line of products that follow the journey of new parenthood extending customer LTV while benefiting from its customer base of brand ambassadors
• Poo-Pourri, which created an entirely new category of “before you go” fragrances, destigmatizing going #2 through brilliant marketing
• Figs (NYSE:FIGS), a DTC apparel company that sells premium scrubs, akin to Lululemon for healthcare professionals with a cult-like following, mid-twenties % top-line growth, ~70% gross margins and a 1-year CAC payback period

Humanization of Pets

• Pet supplements like ZestyPaws, an underpenetrated market that stands to benefit from higher discretionary spend on pet wellness and preventive care, sold via an omnichannel strategy with healthy margins and retention
• PetPawlicy, an online pet insurance discovery marketplace and brokerage platform
• Disruptive vet platforms like Bond Vet and Small Door Vet, which are eliminating key friction points of the incumbent vet model through tech-enablement, price transparency, convenient hours and elegant spaces

Grocery goes Online in a Sustainable Way

• Concentrated products like Cometeer accelerating the shift of online grocery while simplifying the supply chain (i.e., shipping water) and eliminating single use plastic

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