The omnichannel race - why now?

Over the summer, Gen Z and Millennial beauty brand favourite Glossier announced through a joint Instagram post with Sephora that its products would soon be available to shop in Sephora stores, online at Sephora.com, and on the Sephora app in the United States and Canada, starting early 2023 – delighting its millions of dedicated fans across North America.

Glossier is one of a growing number of digitally direct-to-consumer (DTC) brands exploring an omnichannel strategy to grow and futureproof their businesses. In particular, we’re seeing more and more businesses moving from a primarily DTC model to include wholesale as part of the sales mix. These include Peloton, which has raced after the profits of omnichannel by becoming a wholesale partner to Amazon this year.

Businesses with multiple revenue streams and a strong understanding of their customer proposition are using omnichannel to peel ahead of the pack. And we’re reaching a turning point in consumer markets through omnichannel adoption that is set to lead to a more sustainable future for both high-growth businesses - and investors.

The trend is driven, in part by the rising cost of acquisition online which grew during the pandemic as many businesses were forced to move online in order to keep their businesses going, driving up competition for ad space.

The rising cost of acquisition has been compounded by IRS changes which have impacted businesses’ ability to gather data from tracking. With Google set to implement its own limits on tracking within the next few years, cost of acquisition online is set to continue to increase.

It is expensive to pay for advertising on Meta platforms and Google to generate traffic to your online store (your website). Wholesale, on the other hand, does incur costs but they’re significantly lower, and it’s a channel that’s much more likely to reach an audience that is targeted and ready to buy. For example, think about consumers entering a supermarket for their weekly shop and seeing a product on shelf, versus sees an Instagram advert for a food product.

The shift to omnichannel is also driven by consumer behaviour. The pandemic drove many consumers to buy much more online, and as we’ve emerged from the pandemic many of us are hungry for out of home experiences. Consumers now relish the sheer experience of walking round the shops, and picking up and trying out products in a way they took for granted pre-pandemic.

In the meantime, many brands have invested heavily into in-store experiences to draw consumers back into physical stores – meaning consumers are returning to much more engaging in-store experiences.

And retail data shows the trend is sticky: NielsenIQ data shows a persistent trend of consumers returning to shop in-store with store visits up +6.5% compared with a year ago, and online visits are down -9.3% with 1 in 4 households now shopping online, down slightly from last year. The online share of FMCG sales has now fallen to 10.9%, down from 11.1% last month.

For investors like myself, there are several key reasons that businesses with an omnichannel business model – or at least, businesses open to exploring one – motivate us to invest.

Firstly, willingness to explore an omnichannel approach tells us that the founder operates with a degree of mental flexibility that means they’ll be willing to make other changes to improve the way the business operates.

Secondly, it assures us that there can be a Plan B. In a DTC-only model, if the customer acquisition cost (CAC) starts to really rise, the business model could be rendered obsolete overnight as the profits generated by an order are eroded by a rising CAC – so having multiple sales channels is a contingency plan.

A successful omnichannel strategy also shows us that different pools of customers are willing to try your product and that your brand is able to resonate outside of your core or current target audience.

Take JustWears, a company we’ve backed which was launched in 2018 by co-founders Yang Liu and Alex Walsh to address a gap in the male underwear market. If a customer searches on Google for ‘men’s pouch underwear’, it’s very likely that JustWears will appear in the search results – ensuring that the brand reaches consumers who value high comfort and performance.

But JustWears also sells on Amazon, potentially reaching consumers who typically choose underwear primarily based on price and ease of purchase. It also sells its products in store at John Lewis, where it may reach an older demographic that it would attract online via its ‘tongue and cheek’ marketing. Both routes to market potentially open the brand up to a totally different pool of customers than its core target market.

We meet founders with brilliant products all the time, but if the product has a low gross profit margin of 20-30% and is only selling DTC, it’s very risky for us to invest because a retailer or wholesaler will skim a share of the gross profit – which can mean the business model just doesn’t work unless the product is sold purely DTC. In these cases, there’s no Plan B.

It’s good to bear in mind that your omnichannel strategy can work both ways: it’s not always the case that an omnichannel strategy involves a move from purely DTC to wholesale. Ro&Zo, for example, which we’ve just invested £1.5m in, have found success with a strategy that had focused almost exclusively on wholesale and only recently launched their own website to sell their products.

Diverse revenue streams is no longer a nice to have for consumer businesses; it is now essential in a market of quickly changing consumer habits and shifting market economics, and for investors like myself, it presents huge opportunity.

Fred Ursell, Investment Director, Pembroke Investment Managers LLP