The brand “value chain”

The brand “value chain”

Consumers need for brands and their meaning is evolving. It will change where in the value chain most value accrues.

Established consumer brands have a good run for decades, servicing the majority share of increasing consumer demand. It’s no news to anyone that first the emergence of Amazon and then the emergence of DTC brands has completely disrupted the playbook of established brands.

The need for brands and the value they create is both changing. In a decade, the landscape of brands will look completely different, both in terms of the spread of brands that resonate with consumers and what they mean for them. Established brands in some categories will be replaced by no-name brands and in some other categories by DTC brands. This will change where the brand value accrues.

Evolving brand landscape and representative players in the value chain

Many no-name brands will be either Amazon’s private label brands or new Chinese brands selling on Amazon, and Amazon obviously will capture most of the value in these cases. Also, by being the virtual equivalent of a physical retailer’s shelf-space, it will capture most of the value for established brands as well, probably outside luxury brands.

In this post, I will NOT talk about Amazon’s value capture but instead focus on other entities that can expect to see significant value accruing to them as part of the changing brand landscape. These entities are:

  1. Platforms enabling DTC brands
  2. Secondary goods marketplaces
  3. “Social brand-network” focused on building communities around brands

1. Platforms enabling DTC brands

There is a lot that DTC brands have to get right when they are starting off. Mostly, there isn’t a lot of value in trying to recreate the technology (commerce) stack for selling to the customer. Platforms such as Shopify have made that commerce stack easily accessible. Below a excerpt from a recent article on Shopify.

What Shopify does is power all of that ability — from selling to payments to marketing. “We run the gamut of a retail operating system.” Like any platform, Shopify is building an ecosystem of developers, startups and ad agencies.

This evolution of Shopify from helping small businesses get online to helping venture funded DTC brands disrupt their markets is fascinating. It reminds me of how Nvidia found that its GPUs built for gaming are perfect for AI applications. As DTC brands increase in number and scale, Shopify (and other similar platforms) will accrue a lot of brand value. They are helping brands create their own virtual shelf space, not dependent on any retailer. As the needs of DTC brands grow, so will the tools that Shopify or other platforms offer to meet them, becoming the infrastructure layer for a part of the consumer brand economy.

2. Secondary goods marketplaces

Before the internet, brands were a proxy for trust. Buying from a known brand meant that you could trust what you were buying, short-circuiting the complexity of the buying process. So, it was enough for brands to just stand for trust. Today, Amazon has centralized trust, changing what it means to be a brand; this tweet captures it beautifully. Larger brands need to do more than just build trust. They need to stand for something to make consumers choose them over a no-name or a DTC brand.

This means adopting strategies that these brands would have scarcely used historically. Two come to mind, both centered around creating spikes of activity around the brand.

  • Taking a stance on social/political issue: An example of this is Nike’s ad campaign with Colin Kaepernick which led to significant increase in sales.
  • Engaging in product drops: Drops have emerged as a great way to create buzz. Streetwear brand Supreme pioneered it many years back and now more and more brand are adopting it. It creates scarcity for marquee products released in limited volume, giving the brand an opportunity to make itself aspirational and amplify what it stands for. Couple of examples of this are Adidas’ Alexander Wang drop and LV x Supreme drop.

In acknowledgement of these trends, Shopify has launched an app “Frenzy” to make it easier for consumers to know about upcoming drops and “buy at retail, not resale”. In my opinion, this only furthers the hype that these brands are trying to create, increasing the value of the products in the resale i.e. secondary market. eBay’s new ad campaign “It’s happening” speaks to this evolving strategy of brands. Below is an excerpt from the campaign.

Designed as more than just a brand campaign, we’re aiming to express to shoppers around the world what we’ve known all along: Everything that’s current, relevant and interesting is on eBay — and your audience can buy it now

The question then, as posed in this article around Supreme, is why would a brand let secondary goods marketplaces capture a significant part of the value it is creating. The answer is that secondary goods marketplaces help brands extend the buzz around them, increasing the brand value. They help more people feel part of the community that the brand is trying to create. They create a virtuous cycle in which both they and the brands benefit.

Secondary goods marketplaces have historically struggled at capturing the most value that brands create because of concerns around trust of the authenticity of the products. However, marketplace-provided authentication services (e.g. eBay Authenticate) are increasingly becoming a standard part of their commerce stack, resolving most of the trust issues.

With trust as a barrier mostly addressed, there is an opportunity for secondary goods marketplaces to more proactively participate in this trend. An example is eBay recently organizing it’s first-ever community sneaker drop, creating an artificial incentive for its sneaker-crazy buyers and sellers to trade on marquee sneakers, in the process increasing the brand value of the sneaker brands and accruing a lot of value to eBay.

3. “Social brand-network” focused on building communities around brands

As mentioned above, one of the biggest elements that makes brands valuable is the is sense that the customers of the brand get around belonging to the community. Historically one’s membership to the community could only come from one owning a product of the brand. That has its limitations; it can work well if you are a luxury brand but when millions of people own the brand, its hard to feel like you are a part of the community. There is a need for non-luxury brands to explore ways to build a network/community in a scalable way; this article articulates this very well.

As you would expect, internet has unique potential to help brands do that. Till date, social networks such as Instagram and Pinterest have been primarily helping DTC brands get off the ground by getting them in front of people. They haven’t built tools to continuously engage people around conversations with a brand. Glossier, a DTC beauty company that I highly admire, has been taking a community first approach to building its brand and its products, thanks to its origins from the blog Into The Gloss. It now plans to take the next step in its evolution by building a social network centered around beauty. Excerpt below from this article:

Weiss wants to build her own version of a social media and shopping mashup, something that will allow shoppers to get feedback from other users to find beauty products that are right for them. This is not a social network that sells ads for revenue: Instead, Glossier will sell its own beauty items on the platform.

While Glossier might be able to afford building a social media and shopping mashup to help it build a network of brand enthusiasts, most of the DTC brands won’t either have the resources or the category need to build a network of their own. That is where the opportunity lies for a NEW social network to think of shopping beyond lead generation and ads, and repurpose the concepts of forums, chat rooms, news feed, etc. to build a destination where consumers can truly connect with brands on an ongoing basis.

Instagram is the most likely candidate to build something like that with their new Shopping app but I am skeptical if they will be able to move beyond ads. Whoever ends up building such a destination, which I call a social brand-network, will accrue a lot of value that DTC brands are building. It won’t be a bad addition to Shopify’s commerce stack btw if they can pull it off.

 

As with any fundamental shift in any industry, there are winners and losers. Winners understand how the value chain is changing and how they are positioned to capture a large part of the value. The landscape of consumer brands is changing faster than expected. Amazon is without doubt the key driver of the change and capturing a lot of value. However, there is a lot of value to be captured elsewhere and I am excited about seeing how the different players rise up to the opportunities that exist.

The AWS of brands

Amazon is building an ecosystem of features to power the next generation of brands

AWS is the single biggest reason for the glut of tech startups we see today. It has significantly reduced the time, money and skills required to go to market. There has been a lot written about Amazon’s recent push into online advertising and whether it could one day challenge Google and Facebook. While that is anyone’s guess, a direct comparison misses the point of how the world of brands has changed from the time when Google and Facebook were built and how Amazon is trying to build for the future.

Amazon is building an ecosystem of features, advertising being one of them, to fundamentally change the way new brands are launched. It is positioning itself as the AWS for new brand launches; simple, cheaper and better.

Over the last few years, there has been a secular trend towards DTC (direct to consumer) brands. These brands have emerged to fill in the need gaps created by years of minimal innovation in product and delivery mechanisms on the part of the incumbents. Recent acquisitions of Dollar Shave Club and Bonobos prove that these brands are creating something of value. While more and more DTC brands are coming up in all kinds of categories, discovering product-market fit continues to be a process of tying together multiple loose ends. One has to build a differentiated consumer website/ app, get consumers to visit it by deploying a range of social media strategies, and then make these customers cross the chasm to a sale by having them set up their account (and enter their credit card info).

There are so many things in this process that could go wrong that one isn’t able to get a clear signal on the value of the product itself. In addition, the fact that everyone is playing the same customer acquisition game creates a lot of waste, pushing up the cost of resources required to be successful. Consumers looking for a shoe aren’t always shown a recommendation for interesting shoes while they are shopping (like on Amazon) and are instead shown different shoes at different points of time on social media in anticipation of the moment they will actually buy a shoe. By allowing new brands to simply list their product and tell their story through advertising, Amazon is trying to be the quickest and the cheapest way to go to market. No hassles! Over the years, it has created an efficient infrastructure, designed for sales conversion, and it is now building tools to allow brands to plug into it at lower unit costs than elsewhere.

To be fair, Amazon isn’t there yet. It’s advertising formats are still limited and product discovery is tactical and therefore, not sufficient for different stages of brand building. However, a look at some recent launches, Spark and Interesting Finds, will tell you that Amazon is trying to close the gaps quickly. This is a replica of the approach Amazon has taken with AWS, building the infrastructure and then layering on top of it platforms/ services for different use cases.

Amazon Spark landing page

What makes me confident that Amazon will be able to build this branding engine is that fact that it has already been able to build a multitude of its own brands without us realizing it. This recent article gives a peek into the brands that Amazon already owns; Amazon Basics is just a tip of the iceberg. If you believe in the best customer theory as highlighted by Ben Thompson aptly in his piece on Amazon’s Whole Foods acquisition, then you can see that in it’s own brands, Amazon has found its best customer. Building a branding engine for “any brand” will now just be the application of this successful strategy.