There’s a lot in store for the D2C play in Southeast Asia
By Raja Hamzah Abidin March 31, 2020
- SEA D2C brands like Oxwhite and Althea adopt unique pre-order model
- Real challenge will be for D2C companies in this region to grow sustainably
Direct-to-consumer (D2C) brands have begun sprouting in Southeast Asia. The term “D2C” refers to companies manufacturing and shipping products straight to the consumer, skipping conventional stores and other traditional middlemen.
This allows savings on costs for distribution and benefitting the consumer through lower prices while maintaining end-to-end control, enabling them to make quick changes based on direct customer feedback.
While D2C brands might be new in the region, successful D2C companies have been around in the US for most of the 2010s. Many of these companies have evolved into household names in their respective industries – Warby Parker for glasses, Dollar Shave Club with razors, and Casper with mattresses.
The success of these companies can be nailed down to a few core characteristics – excellent branding and marketing, high quality products, affordable prices and convenience for the consumer.
Branding and marketing are essential given strong competition making it vital to stand out among the giants through innovative content and advertising. Dollar Shave Club for example created viral videos that propelled a cult following, despite only costing US$4,500 (RM19,462) and a day’s worth of shooting.
Warby Parker built a name for itself as the anti-Luxottica – high quality glasses at affordable prices by controlling their own supply chain and by going D2C, they can pass on savings to consumers.
The final characteristic, convenience, is illustrated by Casper. Casper ships the consumer’s mattress in a box instead of requiring you to go to a shop to test out mattresses. To ensure quality assurance, they offer a 100-day return guarantee. Return rate is under 5% where the dissatisfied products are donated to charity organizations in order to benefit local societies.
While we have seen greater benefits to consumers in terms of quality products at affordable prices, the question remains if the expensive customer acquisition costs through Facebook and Google ads through billions of venture funding justify the companies’ performances.
As D2C brands jostle for branding and market share, they resort to excessive marketing spending. As a result, their marketing expenditure increases disproportionate to their revenue. Casper in the first 9 months of 2019 made a loss of US$67 million on US$312 million in revenue with US$114 million in marketing, causing the unit economics to be negative as the lifetime value of a customer, is also relatively low given that mattresses have a 7-10 years purchase cycle.
[RM1 = US$0.23]
In contrast, despite the lack of venture funding, D2C brands in the region such as Oxwhite and Althea have mushroomed with slight variations. Uniquely to SEA, both brands adopt a pre-order model, sometimes taking months to deliver a product and requiring advance cash payments of products.
The similarity to Kickstarter is uncanny, as it funds the brand’s working capital. Despite the long lag time of goods delivery, we have seen both Oxwhite and Althea prospering in terms of sales as they enjoy strong brand loyalty – despite only entering its fifth year of operations, Althea has garnered almost 600,000 followers on its Facebook page, whilst Oxwhite has a strong following of 18,000 members in its private community forum where members actively engage with the founder on feedback and ideas for the brand’s future launches.
Strong sales volumes alongside significant decrease in customer acquisition costs for the companies’ products after 6-12 months of new products launches results in a profitable business unlike its American counterparts quickly in the early stages of the businesses.
The success of the pre-order model in SEA is simply attributable to consumer behaviour. Consumers in this region are more price sensitive, and therefore willing to wait in exchange for affordable quality products.
Another example is Signature Markets, despite taking typically 7-10 days of delivery, they have seen sales increase 20 times since 2016 with their revenue crossing the RM20 million mark in 2019 due to the strong brand and affordable pricing positioning.
[Disclosure: Signature Market and Althea are investee companies of RHL Ventures.]
Despite being a snacks business, the Signature Markets example perhaps points to the fact that e-commerce consumers in SEA are historically less pampered with the consistency of receiving their online orders within 1-2 days as compared to their US counterparts. As consumers become more sophisticated, we expect the service gap to narrow, as evident in the bricks and mortars space and the disruption from the D2C market.
Instant connectivity and access to customers have allowed D2C businesses to be nimble in terms of providing instant feedback and creating what the customers want and desire and at the same time cutting layers of costs from middlemen and distribution.
While the outlook for the D2C landscape appears to be positive, the real challenge will be for D2C companies in this region to grow sustainably and avoid the primary pitfall of spending uncontrollably on customer acquisition costs which may ultimately hinder their path towards profitability.
Raja Hamzah Abidin is Managing Partner of RHL Ventures, a multi-family private investment firm championing growth for the best businesses in Southeast Asia.