Direct-to-consumer: The New Battleground for Industry Leaders

Direct-to-consumer energy bar company RXBar is famous for their whole foods-based energy bars and simple branding: with ingredients listed on the front of the package, you always knew what you were getting. Given its holistic health-focused messaging, RX fans might be shocked to learn that RXBar was acquired by Kellogg, a brand consumers know best for its sugary, highly-processed cereals. Kellogg’s acquisition of RX may seem strange to consumers; after all, RX’s philosophy is as opposite from Kellogg’s as it can get. However, this trend of industry incumbents acquiring direct-to-consumer (DTC) entrants is becoming increasingly common.

The acquisition of DTC players by industry leaders can benefit both parties involved. DTC startup founders are often younger, less experienced business leaders who can benefit from the scale and experience established companies can provide. RXBar president Jim Murray shared that Kellogg has allowed RXBar to stay true to their values, while also allowing RXBar to improve their execution and scale. DTC shaving company Dollar Shave Club similarly benefitted from its acquisition by Unilever, a consumer product behemoth that provided Dollar Shave with unmatched category expertise.

While it’s clear that DTC brands benefit from acquisitions, industry incumbents may benefit even more: acquiring DTC startups allows them to target a market segment that isn’t likely to respond to a product introduced by corporate brands. As of 2018, more than $17 billion in U.S. consumer packaged goods (CPG) sales shifted from industry leaders to companies with annual revenues smaller than $100 million. This trend has spurred CPG giants to launch their own DTC brands; however, these product lines have failed to capture the loyalty and dollars of younger generations. As a result, industry leaders have turned to buying smaller players and operating them as independent subsidiaries to avoid the corporate stigma that turns millennials and Gen Z away from traditional retail brands. When executed correctly, acquisitions of smaller DTC brands can pay off for established companies: RXBar was a key driver of Kellogg’s 3% growth in Q2 2019.

Not only do industry leaders acquire DTC companies to regain lost sales, but they also acquire smaller players to steal market share away from the competition. Unilever acquired direct-to-consumer shaving company Dollar Shave Club in 2016 in a bid to compete against Procter & Gamble and Edgewell Personal Care. The Dollar Shave Club acquisition made Unilever the biggest player in the U.S. shaving subscription market, with a market share of 60% versus 5% for P&G. Jefferies analysts aptly described the acquisition as “Unilever parking their tanks on P&G’s lawn in one of their most profitable categories”, but noted that the acquisition wouldn’t be without its complications. After all, Unilever and P&G have a history of fighting brutal price wars that ended up negatively impacting both companies’ profit margins; their battle over the razor blade market could end up eating into profit margins and threatening the benefits of the acquisition.

The FTC, however, had the opposite concern of Jefferies analysts; instead of rival razor brands lowering prices to compete with each other, the FTC worried that the acquisition of smaller players would give big razor brands more power to raise prices. In May 2019, Edgewell (the parent company of the Schick razor brand) announced its intentions to buy DTC razor brand Harry’s for $1.37 billion. The FTC blocked Edgewell’s acquisition of Harry’s in February 2020, saying the acquisition “would remove a critical disruptive rival that has driven down prices and spurred innovation in an industry that was previously dominated by two main suppliers, one of whom is the acquirer”. Consumers should also note that Edgewell cut its razor prices as a result of competition from Harry’s; acquiring Harry’s could be Edgewell’s strategic move to compete against Unilever and P&G, but it could also be motivated by a bid to increase prices without facing competition from Harry’s.

Industry incumbents may gain a competitive advantage by buying up their DTC competitors, but it’s questionable how long the competitive advantage can last. Cosmetics conglomerate Coty recently paid $600 million for a majority stake in Kylie Cosmetics, a DTC beauty business started by reality TV mogul Kylie Jenner. Kylie Cosmetics’ online sales declined 62% from their peak in May 2016, including a 14% drop between 2018 and 2019 alone. With Kylie Cosmetics, Coty aims to gain a competitive advantage with millenials and Gen Z; faced with Kylie Cosmetics’ declining sales, however, it’s unclear whether the acquisition was a smart move for Coty.

Industry incumbents can learn from Coty’s acquisition of Kylie Cosmetics when they consider acquiring DTC competitors in the future. The most important lesson: millennials and Gen Z are attracted to the trendiness of DTC companies, an aspect that doesn’t necessarily engender customer loyalty and high lifetime value. Industry leaders must ensure that they focus on acquiring DTC companies who make customer loyalty a priority. For example, cosmetics company Glossier has put customer satisfaction and loyalty at the forefront of its business and has correspondingly doubled its annual revenue. Glossier’s approach to customer satisfaction and loyalty is in stark contrast to that of Kylie Cosmetics, where customer loyalty depends more on the loyalty customers feel for a reality TV star, than to the product itself.

In 2020, more brands are expected to go through “DTC purgatory”, a stage in which DTC brands struggle to increase revenue growth. To even hope for an acquisition or public offering that satisfies their investors’ high rates of return, DTC brands must focus on increasing customer lifetime value and diversifying product offerings. DTC brands who successfully do so are likely to be acquired by industry leaders, making direct-to-consumer the new battleground for large businesses across all consumer categories.