ONVBs are the new DNVBs
|Nov 2, 2020|| 1|
In 2007, Digital Native Vertical Brands (DNVB) opened a new chapter in modern commerce. Today, their weaknesses show and are giving way to a more advanced model: the ONVB.
The DNVB model: a victim of its own success
The Digital-Native Vertical Brands (DNVB) model has inspired thousands of entrepreneurs, and almost all everyday products have been released under a DNVB version. The low barriers to entry were a key factor in the DNVB tsunami: in 2019, there were 170 mattresses DNVBs on the U.S. market. But they became a curse on the viability of the model, generating ruthless competition on margins and acquisition costs. This was further accentuated by the fact that most DNVBs focus on the same digital-native target.
Thus, while their model was based on disintermediation to regain margins (and share them with customers according to a “fair price” logic), most DNVBs have become so dependent on online acquisition that their margins are fully captured by Google and Facebook. This is why more and more DNVBs have turned to open physical outlets. But just as retail networks struggle with e-commerce, pure web players have a hard time mastering physical distribution for the very same reason: it is a completely different craft.
Omnichannel-native: the birth of a new model
In this context, we have witnessed the emergence of a new category of commerce that is structurally omnichannel: ONVBs, for Omnichannel-Native Vertical Brand. The concept of omnichannel is nothing new, but it is the “native” side of ONVBs that makes this model innovative. Indeed, ONVBs are brands designed from day one to operate multiple distribution channels (e-commerce, outlets, pop-up stores, resellers…) Thus, the brand, audience, products, margin level, pricing policy, internal organization, hiring, processes, IT (CRM, payment, inventory management), customer experience, communication, etc. everything is designed for an omnichannel approach. The ONVB doesn’t suffer from the technical or organizational debt that plague incumbent players, preventing them from seizing the opportunities offered by varied distribution channels.
Decreased dependence on paid acquisition
Online, ONVBs are much less reliant on paid acquisition as they can adjust acquisition efforts to suit market conditions. For example, if competitive pressure intensifies on the online acquisition of customers for a given product, DNVBs have no choice but to maintain acquisition investments, at the cost of degrading performance and eating margins. Whereas an ONVB will be able to balance between its different channels and, in this example, chose to increase its network of resellers or open new pop-up stores. Of course, such agility requires being able to accurately measure the performance of the various acquisition channels in real-time.
A wider and international audience at your fingertips
Most DNVBs do not distribute their products through resellers. They fear it could damage their brand image and ruin their exclusive positioning. Also, they’ve put a lot of effort into creating specific merchandising and storytelling that are hard to transfer to third-party sellers.
In contrast, ONVBs are free to broadly deploy indirect channels. Their brand is often targeted on the mass market and they can address larger audiences who are less sensitive to the exclusive nature of the brand. By turning their back on the red ocean of the affluent digital-natives who have been saturated over the past 10 years, ONVBs embrace a much larger market, eager for product innovation, with significantly lower acquisition costs.
Pop-up stores in shopping malls is another prime example of an efficient acquisition channel for ONVBs. They allow the brand and its products to be exposed to millions of visitors at a very competitive price. This is also an opportunity for the brand to physically interact with customers (storytelling, customer feedback, etc.), in a highly differentiating "event" effect.
Most DNVBs cannot replicate this strategy because they refrain from associating their upscale brand with shopping malls that their targeted audience does not even visit. Besides, their product offering and purchasing experience were not designed for this and most DNVBs don’t have the experience or expertise to effectively manage dozens of points of sale (which location? Which surface? Which product lineup? Does this make sense for the customers? Does the margin structure allow it? What kind and what quality of service should we provide? What profile of salesperson should we hire? How can we unify the supply chain and the customer journey? How do we avoid channel conflict? etc.). For DNVBs, omnichannel is often reduced to a flagship store in a major city center with high costs and low traffic.
The same goes for international expansion. This has been a very difficult challenge for pure DNVBs and in 12 years the model has failed to create a single world leader in any product category.
ONVBs, on the other hand, can use digital tools to test new geographies cost-effectively, then leverage their distribution partners (concept stores, retail networks, malls, etc.) to deploy the brand at scale.
Some early ONVB success-stories
The first ONVBs were developed instinctively by visionary entrepreneurs. In France, the precursor was perhaps Bobbies, launched in 2010 with a simple showroom, quickly followed by an e-commerce and an indirect sales strategy, and a first store in 2013. Or Balibaris, which started online in 2010, then opened its stores and deployed its indirect strategy less than 2 years later. In 2014, Merci Handy simultaneously launched its colored antibacterial gels in e-commerce and wholesale, with nearly 3,000 retailers today.
Cabaïa (a portfolio company of Spring Invest) is an accessories brand (beanies, backpacks, socks, etc.) launched in 2015 in a native omnichannel approach. The brand doubles in size each year and has reached €7 million revenue through an e-commerce site, 40 pop-up stores, and a network of 1,000 distributors. Its success is a good illustration of the ONVB model: strong creativity on products that bring differentiation, rigorous management of the network of resellers and physical points of sale, total control of the performance of online acquisition expenses.
A more demanding but more attractive model
We see ONVBs as an evolution, a maturation of the DNVB model. ONVBs take up the main strengths of the DNVB model, the focus on the customer experience, lean launches (generally a single product in controlled quantity), a differentiated brand with transparent communication and proximity to its audience, leveraging social networks for direct communication and co-creation of products, etc...
But the barrier to entry for ONVBs is much higher. The brand must be stronger and storytelling must be able to survive indirect sales. By design, the model requires a far broader range of skills, including everything relating to the deployment and management of dozens of points of sale and hundreds of resellers. The model also takes more time to deploy, with an average of 2 to 3 years to be operational on all channels, compared to around 6 months for a DNVB.
Unlike the massive wave of DNVBs between 2008 and 2020, we don’t expect to see as many ONVB launches. But this lesser competitive pressure will leave higher margins for those ONVBs who will succeed. This is why more and more seasoned retail entrepreneurs (followed by investors) are turning to ONVB, as they know that the future will be omnichannel.
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Spring Invest is a French investment fund dedicated to companies that are shaping the future of retail. We invest both in Enablers, B2B companies providing innovative solutions to (e)retailers and brands, and Disrupters creating new models of distribution. Our investment approach relies on strong relationships with 50+ European Retailers and Brands in order to provide sales acceleration to our portfolio. We also provide operational support with a dedicated team of Venture Partners working with our portfolio on sales, communication, HR, and internationalization.