The rise of online shopping behavior and conscious consumerism has fueled the era of direct-to-consumer (D2C) brands. During COVID-19, over 66% of online shoppers purchased directly from D2C brands. Industry projections indicate that this number will reach 80% by 2025.
Predictably, this significant momentum did not go unnoticed by global investors and was followed by a funding frenzy. In Q1 2021, $1.3 billion in venture funding was raised by D2C brands in the US, India at $500 million. USA witnessed 7 D2C IPOs (Warby Parker, Allbirds, Honest Company, Barkbox, Brilliant Earth, Torrid, FIGS) while India produced D2C unicorns like Licious, MyGlamm, Rebel Foods and Mamaearth . Fueled by investor and consumer interests, the D2C market is on track to become a $1 trillion global market by 2025, with the Indian market size being $100 billion.
The hyper-accelerated explosion of D2C brands has given way to many disruptions, with the “House of Brands (HOB)” being the most important business model. The one where the HOB, also known as “market-based aggregators (MBAs),” acquires multiple businesses in a certain segment and/or region, leveraging their combined strengths and growing them together. This has also been referred to as a digital clone of Unilever or P&G. Although this concept is not new, it has found unprecedented interest and rapid growth in e-commerce.
The Rise of Thrasio
It all started in 2018 with Thrasio with a team experienced in Amazon Marketplace growth-hacking. Keeping their ties to the “Fulfillment by Amazon (FBA)” ecosystem, they operated on a simple model of acquiring Amazon’s third-party sellers with a solid reputation on the 3 Rs (reviews, ratings and rankings). Thrasio became profitable in 2019 with 20% margins, entered 2020 with $500 million in revenue with $100 million in profit, and became unicorn in 2021.
With a reported valuation of between $5 billion and $10 billion, Thrasio has become a beast with a huge appetite. Its portfolio of more than 200 brands is growing with the acquisition of approximately 1.5 companies per week. From zero to one billion, Thrasio’s rapid growth is attributed to two factors:
1. Fast acquisition process – Thrasio has created an acquisition machine to close deals in less than 2 months. Thrasio rates sellers on last twelve months (TTM) earnings, then assigns a valuation multiple to TTM earnings based on various factors such as perceived cash flow stability, competitive positioning (reviews, product rating, ranking SEO), size, margin structure and efficiency of operations
2. Systematic approach driven by technology and data – Using tools like Keepa, Seller Legend and PickFu, Thrasio leverages key data insights and actionable hacks for FBA brands at scale.
With such a successful case study in the west, it was inevitable that entrepreneurs everywhere would get inspired to start their own HOB. Several Indian entrepreneurs, especially digital brand operators, have launched their own version of HOB, each with a similar proposition on the surface but quite different in approach and focus.
Since India has always been an underserved market from a brand perspective, this has created a golden opportunity for investors to fuel HOBs. With an accelerated pace of fundraising, creating FOMO among investors, funding rounds reached over $40 million. Mensa Brands, founded by former Myntra CEO, Ananth Narayanan, claimed unicorn status within 6 months of its launch, the fastest in India and possibly the world.
Within a year, nearly $1 billion in venture capital funds poured into Thrasio clones in India. Although there is a lot of potential in the HOB model, there are several differences between the classic Thrasio model and its clones in India.
The clone game
As every industry evolves with imitators and challengers, the House of Brands model has unique nuances that must be considered for long-term viability. The initial euphoria and investment in this space has all been focused on acquiring brands and aggregating revenue faster than the competition. Many founders and investors have prioritized brand acquisition at all costs over operational efficiency and technological differentiation that will separate winners from losers in this race. Comparative analysis of the Thrasio model with the existing approach in India sheds more light on the same.
Anyone who has built or grown a single brand will tell you how difficult it is to grow a brand in a sustainable way. It is simply unimaginable to develop dozens of them at the same time without a solid technological differentiator.
We firmly believe that the Tech Differentiator will be the dividing line between winners and losers in the HOB space in this digital native world. Without differentiated technology, it’s just an aggregation of dozens of brands where each of them is managed independently without many synergies.
Technology is what will prevent a “house of brands” from becoming a “house of cards”.
Technology as a game changer
For a brand house to give Unilever or P&G a hard time, it must seek sustainable growth both at the unit brand level as well as efficiencies and synergies at the global level. Technology is the only silver bullet.
Technology for unit brand growth
The only thing easy about a D2C brand is launching it. Founders struggle to scale their business in a sustainable way, trying to attract customers accustomed to the convenience of marketplaces.
The problem is that brands still rely heavily on performance marketing to drive their customers to what looks like a typical retailer website. Using legacy e-commerce technology solutions (designed for SMBs or retailers), brands continue to seek inorganic growth. With Facebook’s rising ad prices, worsening ad measurement, Apple’s privacy changes, and the impending deprecation of cookies, this model is doomed to fail, especially when consumers constantly want a content-rich, community-driven commerce experience.
It’s time for brands to leverage technology and data to build a better D2C flywheel. It’s possible with a purpose-built platform that delivers an experiential D2C site, combining the power of quality content and engaged communities to deliver sustainable business growth.
The right way
1. Attract through CONTENT
2. Conservation through COMMUNITY
3. Grow through COMMERCE
Technology for Global Growth
The current HOB model can work for x to 10x growth, but will limit scale within an ingrained ability to leverage data, technology, and operational excellence in this high-stakes game. A relevant approach to rethinking the HOB operating model is what we call COSS (Organize, Integrate, Streamline, Scale)
1. CURATE: To effectively identify high-potential brands in a limited universe, creating a Brand 360 view for seamless collaboration is a key step. HOBs should develop capabilities for research and analysis based on enterprise value chain map, category and segment analysis, competitor benchmarking, and business metrics analysis. Hyper-automating the entire workflow can enhance brand watchlists with intuitive recommendations.
2. INTEGRATION: Enable rapid and seamless brand integration based on transparent metrics (financial, operational, sales, marketing, distribution). Smarter orchestration of these metrics will enable proper valuation modeling during due diligence, followed by successful close and handover.
3. STREAMLINE: Once the brand is integrated, the next step is to streamline people, processes and technology. This requires benchmarking and goal planning based on supply visibility, demand planning, production and distribution systems, and omnichannel order fulfillment capability.
4. SCALE: Portfolio hyper-growth enabled by a global scaling framework based on consumer feedback, brand vision, omnichannel roadmap and product expansion strategy. Leveraging a business dashboard to track weekly/monthly/quarterly plans and chart trends will ensure the simultaneous sustainable scale of every brand in the portfolio.
Avoid building a house of cards
While speed is key in the House of Brands model, execution wins the game. Consumer and category-centric HOBs with a non-linear, hyper-automated operating plan will build the future of D2C brands. But if the intention is simply to cash in on the buzz, emphasizing quick exits, inorganic growth, inflated numbers, and tech-free foundations, these companies are doomed to fall like a house of cards.
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