An­kle-biters take on might of in­dus­try be­he­moths

Mi­cro­brands are flex­ing their lit­tle mar­ket mus­cles

The Weekend Australian - - BUSINESS -

Com­pa­nies such as Casper, which sells mat­tresses, Warby Parker, a spec­ta­cles brand, and Glossier, a cos­met­ics firm, were once seen as in­ter­est­ing cu­riosi­ties.

Tout­ing their prod­ucts on­line, lur­ing cus­tomers with dig­i­tal ad­ver­tis­ing and es­chew­ing con­ven­tional re­tail­ers and mar­keters, they were anom­alies shak­ing up small seg­ments of re­tail. In fact, the growth of mi­cro­brands — or di­rect-to-con­sumer brands — rep­re­sents a pro­found shift in the con­sumer-goods sec­tor.

In­dus­try gi­ants took time to be­gin wor­ry­ing about the ar­rival of game-chang­ing new­com­ers; bar­ri­ers to en­try in their busi­ness are high. But by now the in­cum­bents are stag­nat­ing. Ac­cord­ing to Nielsen, a con­sul­tancy, the big­gest 25 food-and-bev­er­age com­pa­nies, for ex­am­ple, gen­er­ated 45 per cent of sales in the cat­e­gory in Amer­ica but drove only 3 per cent of the to­tal growth in the in­dus­try be­tween 2011 and 2015. A long tail of 20,000 com­pa­nies be­low the top 100 pro­duced half of all growth.

Imag­ine, 25 years ago, com­ing up with the idea for a rad­i­cally bet­ter tooth­paste, sug­gests Ran­dall Rothen­berg, the boss of the In­ter­ac­tive Ad­ver­tis­ing Bureau, a trade or­gan­i­sa­tion for dig­i­tal ad­ver­tis­ers, who stud­ies mi­cro­brands.

Raw ma­te­ri­als would only be avail­able by the tonne. No fac­tory would pro­duce tooth­paste for a tiny new player. Ads would be hope­lessly ex­pen­sive, so driv­ing de­mand would be im­pos­si­ble. No large re­tailer would stock it.

That is no longer true, thanks to shifts in sup­ply chains and data. The growth of “just-in-time” man­u­fac­tur­ing means start-ups no longer need to splurge on in­ven­tory. The surge in food star­tups meant fac­to­ries had con­fi­dence to let him start with a small or­der, on the con­di­tion that fu­ture ones would be big­ger, says Blake Sorensen, founder of Blake’s Seed Based, which makes al­lergy-friendly snacks.

Other ser­vice providers can pass on economies of scale once avail­able only to con­sumer-goods gi­ants. Lumi, a pack­ag­ing firm, uses a net­work of fac­to­ries to de­sign and pro­duce pack­ag­ing for small brands. It rep­re­sents thou­sands of brands so bet­ter prices can be ob­tained.

Busi­nesses such as ShipBob, a Chicago start-up, do some­thing sim­i­lar with ship­ping, al­low­ing small brands to of­fer faster, cheaper de­liv­er­ies. E-com­merce com­pa­nies such as Shopify pro­vide turnkey on­line shops from as lit­tle as $US29 ($40) a month. Shopify han­dles the back-end in­fra­struc­ture that would have cost hun­dreds of thou­sands of dol­lars to build, says Steven Mazur, one of the founders of Ash & Erie, a brand of cloth­ing for short men. As­sem­bled Brands pro­vides fund- ing to mi­cro­brands. It in­vests in any kind of man­u­fac­tured con­sumer-goods prod­uct as long as the com­pany has started trad­ing.

Mi­cro­brands can also sell their prod­ucts through Ama­zon. The costs are high but it gives them ac­cess to the on­line gi­ant’s ship­ping ser­vices and huge user base. Many of the big firms have, by con­trast, been re­luc­tant to sell on the gi­ant’s web­site, so fea­ture low in search rank­ings. More of them have started sell­ing on Ama­zon in re­cent years, says R.J. Hot­tovy of Morn­ingstar, a re­search firm, but it still rep­re­sents a small slice of their sales.

Sell­ing di­rectly to con­sumers means that mi­cro­brands boast a wealth of data. Mr Sorensen launched his busi­ness on­line in Jan­uary 2018. He sold $69,000 of snacks and then, on the ba­sis of data gleaned, Blake’s Seed Based changed its recipe and re­launched in Septem­ber. M.Gemi, an on­line seller of posh shoes, of­fers new de­signs weekly so it can re­spond pre­cisely to con­sumer de­mands. Their gi­ant ri­vals, by con­trast, use data fil­tered by re­tail­ers.

On­line ad­ver­tis­ing, us­ing plat­forms such as Face­book, al­lows brands to tar­get cus­tomers with great ac­cu­racy. The vast ma­jor­ity of growth in ad­ver­tis­ing is com­ing from the dig­i­tal kind, and a large pro­por­tion of this is from small ad­ver­tis­ers, says Jonathan Barnard of Zenith, a me­dia agency. Mean­while many big com­pa­nies, es­pe­cially the con­sumer-goods firms, are keep­ing their spend­ing flat or re­duc­ing it in view of pres­sure on mar­gins.

Con­sumer-goods be­he­moths are well aware of the threat posed by mi­cro­brand an­kle-biters. One re­sponse is to buy them. Unilever bought Dol­lar Shave Club, a sub­scrip­tion ser­vice for ra­zor blades and now-canon­i­cal mi­cro­brand, for $1.38 bil­lion in 2016, grab­bing the mar­ket share the up­start had it­self snatched from Gil­lette. The big­gest 10 con­sumer-goods firms have all re­cently in­vested in di­rect-to-con­sumer start-ups. Nes­tle’s ac­qui­si­tion in 2017 of Blue Bot­tle, a hip Cal­i­for­nian cof­fee brand, bought it ex­po­sure to new mar­ket seg­ments.

Com­pe­ti­tion is fierce to buy the best mi­cro­brands, so big firms may over­pay for their ac­qui­si­tion, says Mr Hot­tovy. Ex­plain­ing its pur­chase last year of Na­tive, a small de­odor­ant brand, Marc Pritchard, the chief brand of­fi­cer of Proc­ter & Gam­ble, ex­plic­itly re­ferred to its di­rect-to-con­sumer model, say­ing it is “where things are go­ing”. Other big firms are try­ing to grow their own brands. Ear­lier this year Kraft Heinz launched Spring­board, an in­cu­ba­tor for small, dis­rup­tive food and drink brands.

In the long term, some small brands will be swal­lowed up but oth­ers will be en­cour­aged, ar­gues Son­ali De Ry­cker of Ac­cel, a ven­ture-cap­i­tal firm. More will want to re­main in­de­pen­dent for longer, or en­tirely, which will mean larger deals or IPOs.

To flour­ish, in­cum­bents will not only have to ac­quire th­ese new brands or start their own; they will have to learn from them. And in­stead of hav­ing many multi-bil­lion-dol­lar brands, they will have to come up with larger port­fo­lios of smaller ones, says Mr Rothen­berg. Scale still mat­ters, but it will have to be used more shrewdly.

BLOOMBERG

Shopify pro­vides turnkey on­line shop­ping ex­pe­ri­ence cheaply, tak­ing care of back-end in­fra­struc­ture for small brands

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