New DTC toolkit   //   November 5, 2019

The case for and against the DTC holding company

Direct-to-consumer brands were born trying to disrupt holding companies like Procter & Gamble — predicated on the idea that they could do a better job talking directly to customers and keeping control of their brands.

Now some of them want to become the next Procter & Gamble.

As some single-product DTC brands struggle to scale on their own, more entrepreneurs are looking at building a DTC holding company. The idea is that by grouping many brands under one company, these brands may be able to grow sales more quickly, and achieve profitability faster, by sharing some operational costs.

Some of the holding companies that have launched this year include Pattern, which was formerly the branding agency known as Gin Lane, and fashion holding company Digital Brands Group. Former Glossier COO Henry Davis is also working on launching a new holding company called Arfa.

But transitioning to a holding company won’t solve all of the problems DTC brands face today. Here, Modern Retail breaks down the case for and against the DTC holding company.

For: Companies can cut down on some marketing and operational costs.
The biggest argument in favor of holding companies are that brands can operate more cost-effectively than if they were each their own company. Alex Song, the founder and CEO of Innovation Department, formerly a startup studio that transitioned to a holding company this year, said that Innovation Department’s brands share the same engineering, marketing, content and design teams. Additionally, Innovation Department’s two brands — a vitamins and supplement brand called WellPath, and a soon-to-launch pet care supplement brand, share some suppliers.

“You can leverage the same team to share that knowledge, and also save on the inefficiencies that usually happen for trying to do something for the first time,” Song said.

Against: A holding company won’t solve a company’s customer acquisition woes.
Just because a company might be able to justify employing fewer staff doesn’t necessarily make the path to building profitable brands that much easier. Forming a holding company won’t do much to lower one of a DTC brand’s biggest costs — customer acquisition costs — so long as the company relies heavily on Facebook and Google advertising.

“You talk to the Estée Lauders of the world, and they’re talking about their [marketing] costs going up, especially their digital marketing costs,” said Karen Howland, managing director at CircleUp, a fintech company that offers both equity and loan financing to CPG startup. “Scale would absolutely improve your ability to negotiate better rates, but I don’t think that ultimately changes the fact that costs are going up.”

For: A holding company can more narrowly target a select group of customers through multiple brands.
Resident, a furniture holding company that launched earlier this year, currently has six different brands on the market, including four different mattress brands, a sofa brand, and a rug brand. Resident could have launched all of these products under a single furniture brand. But Eric Hutchinson, co-founder of Resident, believes that by launching these products under different brand names, it allows each brand to more clearly communicate its value proposition.

For example, one of Resident’s mattress brands, Awara, is marketed for eco-friendly consumers, while another called Level Sleep is positioned as a mattress designed for customers with back pain.

“One of the things we really know from a digitally-native perspective is it’s better for a brand to stand for something fairly narrow, so you can create clarity and communication with the consumer,” Hutchinson said.

Against: A holding company still risks losing focus if it expands too quickly.
Particularly if a holding company launches its second brand or third brand before it’s figured out how to cost-effectively acquire customers for its first brand, it may not ever be able to establish a clear path to profitability. Additionally, a holding company may have to temporarily divert resources from one brand to ramp up growth at another.

Song said that Innovation Department pivoted away from a startup studio model to a holding company after it had built up a few other side businesses that made the company confident that it had the resources to launch and grow brands on its own. One is a marketing platform called DojoMojo, which allows brands to collaborate on product giveaways through which they both can collect customer email, and a media company called Valryian Media which produces weekly newsletters.

“The number one thing that we saw is once we built the platform, there really is this ability to have a repeatable method of success,” Song said.

For: Newer brands may be able to grow more quickly by leveraging the existing brands’ customers.
When holding companies like Resident and Innovation Department launch new brands, they are going to have an advantage in that they have a group of existing customers’ emails that they can encourage to try products from the new brand.

Hutchinson said that Resident just started tracking how many of its customers buy products from multiple brands, as four of its six brands were just launched this year. He said that the number of customers who buy products from multiple Resident brands is “growing on a percentage basis really nicely month-over-month,” but declined to share specifics.

Against: Innovation can be stifled as the bigger brands in the portfolio take priority.
Founders may launch a holding company with a vision of investing in all of their brands equally. But at some point in time, holding companies will have to decide whether it makes sense to cut an underperforming brand, in order to invest the money that’s being spent building that brand into the portfolio’s best-performing brands.

Howland said that the risk here is that holding companies might sacrifice long-term innovation for short-term gains, by not giving younger brands the time they need to succeed.

“As you combine and consolidate brands, there is always going to be tension,” Howland said. “And even though there’s the best intent — that you are always going to innovate, you’re always going to have the hungry, upstart mentality — when you’ve got one brand that’s a $100 million brand, and you’ve got one brand that’s a $2 million brand, you understandably have different priorities.”