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How Software Ate the Consumer Goods Industry

(Photo: BogdanVJ/iStock/Getty Images)

Over the past fifteen years, internet-born disruption has upended the book, music, news, and travel industries. Now it’s happening to consumer goods, as digitally born brands go direct to consumers. This disruption promises to reshape the brands we buy and use every day — and the technology landscape of America.

Digital-born consumer brands like Dollar Shave Club, Bonobos, Warby Parker, Allbirds and Casper burst onto the scene over the past ten years. Each had its sights fixed on taking share from market leaders in multibillion-dollar consumer industries, including shaving, fashion, prescription glasses, shoes, and mattresses.

They have sold their goods directly to consumers, typically as part of recurring subscription offerings. To do that, they leveraged digital infrastructure, global supply chains, low-cost shipping, and digital direct marketing, while offering user-friendly products and packaging. All of this was accomplished with little or no physical retail presence.

To put the market impact of these brands into perspective, consider that in less than five years, and with relatively modest capital, Dollar Shave Club, Harry’s, and a denizen of small shaving upstarts captured 14 percent of the U.S. men’s razor market. Procter & Gamble had thought its market dominance was well in hand after it spent $57 billion in 2005 to buy Gillette.

This trend is happening across multiple categories of consumer goods. According to research conducted by Randall Rothenberg, CEO of the Internet Advertising Bureau and one of the strongest voices on the revolutionary impact of these “direct brands,” shoe brands like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 points of share over five years. It has had devastating impact on the category. Shoe sales in traditional retail fell five percentage points in 2016 alone. An in-depth piece on the topic was produced by the IAB, called “The Rise of the 21st Century Direct Brand Economy.”

Is this another example of Silicon Valley displacing industries from America’s heartland? Not at all. These new brands are emerging all over America, though a disproportionate number of them seem to be sprouting around New York City, especially in Brooklyn.

Rob Kalin and Chad Dickerson were pioneers when they founded the high-profile online craft marketplace Etsy in Brooklyn. They believed they were creating a global center for the “maker” movement, but I doubt they anticipated Brooklyn would become home to makers of tooth brushes (Quip), luggage (Away), disposable contact lenses (Hubble Contacts), and dog food (The Farmer’s Dog).

Just across the river, Manhattan hosts many new direct brands as well, including established upstarts like Casper, Warby Parker, and Bonobos. Hundreds of even newer brands are Manhattan-based as well, including big successes like Glossier in cosmetics, Mack Weldon in underwear, and Peloton in fitness.

That these companies are in New York and not in Silicon Valley is no surprise. In fact, it would be more surprising if they were in the Valley. The founders of these direct brands are not engineers. Most often they come out of roles in marketing, operations, design or finance. Their teams typically contain engineers, but many of those come out of the same fields, too. And since New York City also serves as a headquarters or global trading center for incumbents in retail, fashion, pharmaceutical, marketing, advertising, finance and shipping, this market affords these new brands access to specialized talent and lots of potential specialized partners.

Just as the Valley developed a deep bench of specialized venture capital firms that supported its several booms, New York City and Brooklyn lay claim to a number of investing firms with strong chops building direct-to-consumer brands. Thrive Capital, Lerer Hippeau, and Brooklyn Ventures have each backed a number of the market’s early successes. And even high-profile Union Square Ventures recently brought over a new partner, Rebecca Kaden, from consumer-focused, early-stage fund Maveron to bolster its ability to serve such entrepreneurs. (San Francisco-based Comcast Ventures and First Round Capital have also opened New York offices to focus on this growing opportunity.)

The technology innovations of Silicon Valley have democratized innumerable markets well beyond technology. It makes it possible for consumer goods startups to challenge incumbents with many billions in sales, and enables entrepreneurs to create those disruptive consumer brands anywhere across the world.

Dave Morgan is the CEO of Simulmedia, a New York-based marketing technology company. “Retail in the Age of Amazon” will be a main topic at the Techonomy 2018 conference this November 11-13 in Half Moon Bay, California. Learn more.

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