Vertical Commerce and How the Next Generation of Retail Will be Built

There’s a new term picking up steam to describe a kind of company we’ve all become familiar with — think Warby Parker, Dollar Shave Club, Everlane, MeUndies, Casper and Primary, to name a few from this rapidly growing list. “Vertical commerce” (aka digitally-native vertical brands) points to an important trend that is “reshaping the retail landscape”.

Digitally Native Vertical Brands (DNVBs) are companies that are born online. They’re taking a fresh look at commoditized products (like razors and mattresses), neglected demographics (like women and people of color), and taking out the pretension behind luxury goods (like furniture and wine). They’re typically bypassing retailers, preferring a direct-to-consumer relationship which improves their margins while reducing prices. Most importantly, they’re able to do this because of new technology and consumer behavior that has emerged in the past ten years.

I find it helpful to map out the landscape of retail along two axes: offline-native versus online-native companies, and brands versus retailers. DNVBs fall squarely in the upper right quadrant:

A notable fact is that DNVBs are relatively new. Most of them are less than five years old. But DNVBs are a growing concern for companies that operate in the other three quadrants. A few weeks ago, Dollar Shave Club, founded in 2011, was acquired by Unilever for one billion dollars. Procter & Gamble, Gillette’s parent company, has litigated against all three of the big shaving DNVBs (Dollar Shave Club, Harry’s and Bevel). And recently, in a move to gain more web-savvy, Walmart acquired Jet.com. These are only the first signs of the impending sea-change.

As new vertical commerce brands emerge for every industry and every demographic, I’ve been asking myself “Why now?” What are the enabling forces that led to the first generation of DNVBs, and what will the next ten years look like? These are four of my ideas.

1. Online sales will continue to grow

It’s impossible to talk about ecommerce without mentioning Amazon. In 2015, Amazon captured nearly 40% of all online spending during the holiday season. To give credit where credit’s due, Amazon has changed people’s habits.

Most of Amazon’s 22-year history has been about helping consumers get comfortable typing their credit card number into a website. One barrier at a time, Amazon has reduced skepticism by defining what ecommerce should look like, securely saving your credit card information, creating the expectation of free shipping, simplifying returns — all the things we now expect from any online store. With Dash buttons and Echo, Amazon continues to push the boundaries of what consumers are willing to trust when it comes to the online buying experience. This benefits DNVBs because consumers are more likely than ever to take a risk buying from a website they’ve never been to before.

To keep things in perspective, ecommerce still only accounts for about 10% of all retail sales in the US. According to data from the US Commerce Department, the past six years have seen a consistent average of 15% year-over-year growth in ecommerce sales, growing to $341.7B in 2015. For comparison, Walmart’s offline sales alone were around $300B (US). Only in the past five years has there been enough consumer demand online to make this many DNVBs viable. There is still a lot of room to grow.

Over the past 10 years the overall size of the ecommerce pie has grown about 4X. It’s also worth noting that during this time, broadband adoption grew from 30% to 70% and millennials entered the workforce. Not only are millennials avid customers of DNVBs, many of the companies were founded by millennial entrepreneurs who applied their digital-native perspective to retail. What will Gen Z’s idea of retail look like?

2. Software will continue to reduce barriers

Ten years ago, many of the services that enabled DNVBs didn’t exist or were just barely getting off the ground. Here are a some services (and their launch dates) that come to mind:

• Hosting: AWS (2006), Heroku (2007), DigitalOcean (2011)
• Web stores: Shopify (2006), Spree (2007), BigCommerce (2009)
• Crowdfunding: Kickstarter (2009), Indiegogo (2010)
• Fulfillment: Shipstation (2011), Easypost (2012), Shippo (2014)
• Payments: Square (2009), Braintree (2007), Stripe (2011)
• Newsletters: Mailchimp (2001), Campaign Monitor (2004)
• Customer service: Zendesk (2007), Desk (2009)
• Social networks: Instagram (2010), Pinterest (2010), Snapchat (2011)

This list barely scratches the surface of the hundreds of tools and platforms that make up the backend of DNVBs. These tools have helped companies keep their staff small and focus on what they do best: making a great product and sharing their story.

Before payment platforms like Stripe, ecommerce companies had to apply with their bank for a merchant account (remember those?) and build an entire payments solution. That process now takes less than a day. Every one of these services has a similar story behind it. Software has reduced the time, capital, and staff required to get DNVBs off the ground.

Going forward, these tools will continue to improve and new ones will emerge. Falling in line with the adage that “software is eating the world”, new software tools will continue to spread into even more areas of business. Bringing me to my next point…

3. Modern logistics will help them scale

A defining aspect of DNVBs is what Andy Dunn, CEO of Bonobos, calls a “maniacal focus on customer experience”. To that end, DNVBs are looking to create a cohesive link throughout the entire experience — from the marketing, to the branding, the buying experience, the delivery, the product itself, and even to the final stage of its lifecycle through recycling programs.

As software tools continue to streamline the digital side of DNVBs, we are beginning to see possible improvements to the physical supply chain as well.

On the product side one can point to lower entry points in prototyping tools such as 3D printing and laser cutting tools which have helped even tiny companies design production-ready parts that can be turned into industrial-grade tooling. Likewise, affordable prototyping and manufacturing services are becoming more accessible thanks to marketplaces like Maker’s Row and Etsy Manufacturing.

As you may know from the (sometimes undeserved) reputation that Kickstarter projects deliver behind schedule, manufacturing and shipping is challenging — especially if you’ve never done it before. We are now seeing companies that have learned this the hard way turning into services to help the next generation of DNVBs. This certainly applies to my company, Lumi, where we help DNVBs with packaging and fulfillment supplies, but also to companies like Cards Against Humanity, a Kickstarter success story which is now launching a fulfillment service called Blackbox. Other fulfillment services such as Shipbob and Amplifier come from similar origin stories, solving a problem they experienced first-hand.

As you continue to move through the supply chain stack, you find young companies bringing a fresh pair of eyes to problems such as freight (Flexport) and enterprise resource planning (ERPNext) — areas that have historically been the domain of ossified giants.

DNVBs sell physical things, atoms. But when it comes to making and moving them, DNVBs want these physical things to behave more digitally, like bits. They want their physical infrastructure to scale as easily as their AWS-powered site. That’s coming soon, and it will allow DNVBs to compete head to head with some of the reigning analog players like H&M or IKEA.

4. Old-school strategies will come back

Finally, strategies that have worked since the dawn of commerce will continue to be explored by DNVBs, namely physical sales and portfolios of brands.

Many DNVBs are already experimenting with physical sales to help their customers experience products first-hand. Whether it’s through a pop-up, pop-in, showroom, kiosk, store-within-a-store, flagship, or simply a retail partner, the move has already earned the obnoxiously catchy buzzword “clicks-to-bricks”.

Retailers are beginning to catch on by offering space for rent inside their stores. New retail experiments such as B8ta in Palo Alto, may further suggest that renting space in a store is a more appealing business proposition to new brands than traditional retail sales.

As more DNVBs emerge, we are likely to see the kind of consolidation that made P&G, VF, LVMH, PVH and other acronymed conglomerates successful. With its sister brand Ayr, we’ve already seen Bonobos move in that direction. Labels such as Matt Alexander’s Edition Collective suggest that a portfolio of small brands may be more effective in today’s climate than one big brand, and DNVBs are the perfect vehicle for that idea.

The Cambrian explosion of vertical commerce is still in its early stages, and Dollar Shave Club’s acquisition is only the first bit of evidence. At root, it’s the idea that there can be a brand for everyone. Consumers demand it, technology enables it, and incumbents will feel it.