The State of Consumer

Valuations, IRL Retail - and the nature of the game

At the peak of UK Lockdown in January 2021, I wrote this article about the opportunities and limitations of the DTC model. That was when the consumer investment market was still rampant.

In terms of the limitations, I wrote of over-reliance on performance marketing and the importance of strong repeat rates. Now that the market has gone the other way, those two things (that underlie any strong customer economics) have become even more pertinent in the industry chatter and VC conversations.

So in many ways this is an updated version of that previous piece.  I will cover consumer tech, B2B SaaS and other business models in a later article. Today, I’m writing about three major focus areas for consumer businesses during this period: i) Valuations ii) Physical Retail iii) Tactics

Valuations

Before the pandemic, we were already seeing VC investors pulling out of the market. There just were not enough VC-sized exits. Furthermore, timeframe is an issue: Lululemon took 24 years to get to its $42 billion valuation, whilst VCs want a return in 5-10 years. Recently, the Made.com IPO has fallen back in on itself.

If you’ve not heard of something called fund economics, broadly it means that if a fund has raised £60m, then they apply a theoretical framework such that each investment should be able to return £60m. It’s a sniff test of sorts. It means that if they have a 10% stake then they have to believe the business can exit for £600m. So you can see how this logically follows that bigger VC firms will start to pull out of the market if they don’t believe a consumer investment can return the fund.

During the pandemic, we had a sugar-growth period for consumer businesses whilst we were locked indoors. New investors piled into the market and valuations soared with unexpected month-on-month growth. Those sitting on high valuations have cold feet now, for sure, in fear of down rounds.

There is still active capital in the market today, long-term consumer-focused firms aren’t going anywhere. Also, I expect angel syndicates and family offices will increase their involvement - especially with SEIS rules set to improve significantly.

But there is a clear reconciliation as outdoor shopping has returned, and that has been compounded upon with rising supply chain costs and general inflation.

Ios14 has also been problematic for some companies - those that spend less, are less channel-diversified, and less brand / creative driven. But I feel the uproar about IoS14 often masks some deeper issues.

So this is a market correction in the truest sense. A market correction was supposed to happen sharply just before the pandemic hit, so it’s doubly bad now. Clearly the name of the game is lower valuations, leaving room for future rounds. It feels like more accurate pricing from Mr Market, so we have to accept it. Securing the highest possible valuation you can get is not always a good strategy. It’s a huge amount of pressure on the business, especially during a difficult macroeconomic climate.

Physical Retail

The biggest shift in the last year and a half has been the focus on physical retail. In 2018 / 2019, we watched as many of our US cousins across the pond jumped from DTC to Retail. There was still a lot of debate and discussion as to whether it was the right move. Every investor / board member seemed to have a different take.

These days it feels like every DTC business is looking at retail as early as possible, whether that’s selling wholesale or their own shops. It’s sensible channel diversification when people have less trust in the customer economics of relying on Facebook. It’s also a way of flushing out whether the product has real legs in the mass market.

It’s one thing getting a business to £1m - £10m run rate on DTC only, but cutting through in the mass market and outside of early adopters is a big leap. That’s in part because the promise of DTC is not that you save money on having a physical store, but that you’re able to target a particular community with a particular brand & product.

So there has to be some soul searching as to whether this is a niche or mass market product, most likely the very things that made the business successful on DTC are the same reasons it won’t scale mass market as it stands today. A DTC business might need to rebrand and restock significantly to make the leap. Retail is a good hack for understanding this. If the big retailers will sell your product then it’s a strong signal that the product has mass appeal and crucially solves a very real problem for the population. Lots of people picking up something from the shelf often without the consumer having seen tons of advertising means that whatever it says on the tin / lid / box actually solves a big problem for the market. 

Also, the benefit of diversifying into retail is that you can make brand media work harder. The reason why the classical FMCG model of spending on brand media to own the category works, is because when I’m in the aisle of Sainsbury’s and looking for a “somewhat healthy cereal”, I grasp for Weetabix. People are prompted in store about what they need and can recall the advertising.

It’s not as clean with an online-only product. You have to do the top-of-funnel brand advertising and then catch them again with a retargeting ad - not when they are in a place of shopping but a place of mass-distraction (FB, IG, TikTok etc).

So where does that leave us?

The macro picture has changed but the fundamentals of growing a consumer DTC startup and the associated decisions are exactly the same.

Changed:

Macro-economic picture
Valuations
Amount of capital in market
Retail diversification earlier in journey

Stayed the same:

Burning need to diversify channel mix
Strong customer economics / repeat rates to offset rise in CAC that happens when you scale
Need for strong creative, bold tests that can actually drive statistically significant results
Need for a strong band with clear communications hierarchy fit for converting people outside of “early adopters”

As I said in this article about TikTok, I think any consumer business should be attacking this channel systematically. The past 12 months has seen a huge change from DTC businesses being skeptical about the channel to spending large sums of money at decent CPAs. We’re only at the beginning of this shift, there are still cheaper CPMs and huge organic opportunities. You can also use TikTok strategically at the top of the funnel, as long as you have a good attribution / analytical set-up.

But the most important thing to scaling cost-effectively, as it always has been, is to make sure that your consumer proposition is solving a real problem. A Medicine vs a Vitamin. Understanding the blockers to conversion is key: through i) interviews (check out The Mom Test if you haven’t) with people who abandon cart or ii) classic user testing of the site with people in your target market that haven’t seen the brand / product yet (you can try usertesting.com or make your own DIY version through friends of friends).

Bringing real, psychological honesty to your creative, website and marketing programme - through cold, hard qualitative feedback - will keep you grounded in the reality of your situation. You can’t build a DTC business to £50m - £100m+ out of sheer will or because products should be more beautiful, or slightly better than what we have.

You have to hunt down the reasons people won’t buy this. And understand how those reasons change as you move from early adopters to the late stage market, or how those reasons change across demographic or behavioural segments.

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