If you follow retail news, it’s very likely that you heard about DNVBs. An acronym which seems to be a synonym of success stories, popping everywhere: Dollar Shave Club – selling shave and grooming products, founded in 2011 – was acquired by Unilever for $1Bn in 2016 ; Glossier – a beauty and make-up brand created in 2014 – raised an additional $100M in 2019 and was valued $1.2Bn, thus entering the exclusive club of unicorns. Why have DNVBs become such a big deal? What are they exactly? Is this business opportunity as promising, viable and profitable as people think?

Digitally Native Vertical Brands: back to the origins

First quoted by Andy Dunn in 2016 in this article, DNVB stands for “Digitally Native Vertical Brand”. Andy Dunn, founder and CEO of Bonobos, intended to describe the business model of his men’s clothing brand created in 2007.

DNVBs are based on a business model that offers specific core advantages. The first key asset is the end-to-end control of all the operational value chain: thanks to the vertical integration of activities, from sourcing control and design to manufacturing and distribution. DNVBs usually start with a strong specialization, with a single-product approach that enables them to be clearly identified by customers before expanding and diversifying their offer (e.g. Slip Français, Jimmy Fairly, Casper). That is the “V” for “Vertical”. And as for the “B” of “Brand, unlike many e-commerce companies, DNVBs rely on a strong brand identity and image. This is central in their value proposition and is part of their differentiation strategy, as a proof of their product and service quality.

Many DNVBs have emerged for the past decade and their development has accelerated tremendously in the past five years, starting in the U.S., by leveraging the benefits of the increasing e-commerce and combining it with the margins of a traditional brand. Created for “Digital Natives”, who grew up with digital devices and the Internet, these brands resonate with young customers, among which the 15-24 year-old category as they were the first to become accustomed to smartphones and online shopping, and they now make up for 13% of the U.S. population according to the International Telecommunication Union.

Why the DNBV business model is innovative

As a consequence of their digital and vertical business model, DNVBs have a top-of-the-range positioning: thanks to disintermediation, the brands can lower their costs while ensuring high-quality products (qualitative materials, costly production location) and answering the needs of a high-end segment while keeping their margins high. Andy Dunn points out: “The product gross margins are at least double that of e-commerce (i.e. 65% versus 30%). The contribution margins can be 4–5x higher (i.e. 40–50% versus 10%)”.

Another core element of their business model is their customer-centric approach that focuses on the quality of service while shopping and aftersales, on trust and intimacy between customers and the brand and its values.

DNVBs are born online, which means that:

• on one hand, their presence on social networks is a key technical layer of their businesses for their growth strategy, as it is a lever for customer acquisition, sale and storytelling : for example, Sézane has been showcasing its brand universe through its founder Morgane Sézalory who shares parts of her private life, and through the brand’s Instagram account. These aspects make clients closer to the brand and the values it promotes,
• on the other hand, as their turnover is realized online directly from their websites, the brands have a data-driven management of operations that allows them to leverage on accurate data of visit and purchase statistics (for marketing, supply chain, customer knowledge purposes). For instance, Asphalte has been creating men’s clothing depending on their customers’ expectations and feedback to determine the clothes’ characteristics and the number of pieces to manufacture.

A fast-growing market that draws the interest of companies and investors

The expansion of DNVBs has been fueled by Millennials consumption, which has drastically evolved from that of previous generations. Digital has offered the advantage of bringing brands and consumers closer and in direct contact. The market of DNVBs first developed in the United-States, thanks to a dynamic Venture Capital ecosystem, and Europe followed, but remains a secondary market : according to a recent Clipperton study, the market depth has reached at least 700 DNVBs worldwide, with the U.S. concentrating more than half of them, followed by France (15%) and the rest of European countries making up the remaining third (the UK, Spain, Italy, Sweden…).

We can now see that the market of DNVBs covers start-ups at different stages of development, as the market has gained maturity since the beginning of the last decade., and the phenomenon has reached many industry verticals, the five main ones being apparel & footwear, personal care, food & beverage, home furnishing and consumer goods. According to the above-mentioned Clipperton study, 47% are fashion & apparel brands, 19% are personal care brands and 14% are accessories brands. Among the most famous DNVBs worldwide, we can mention the following brands:

• in the U.S.: Bonobos, Casper, Dollar Shave Club, Everlane, Glossier, Warby Parker, AdoreMe, AloYoga, Quai Australia, Fabletics, Morphe, Chubbies, Patagonia, etc.
• in France: Faguo, Sézane, Le Slip Françiais, Joone, Izipizi, Le Chocolat Français, Big Moustache, Lou Yetu, Horace, Cabaïa, Veja, etc.
• in the U.K.: Made.com, Missguided, Wonderbly, Goat, Monica Vinader, Rapha, Mahabis, Gym Shark, etc.
• in Spain: Hawkers, Mam Originals, Alohas, Diplomatic, Freshly Cosmetics, Laagam, Tropic Feel, Hemper, etc.
• in Sweden: NA-KD, Hope, Daniel Wellington, etc.

The tremendous growth of this market has largely been identified as an opportunity by large corporates and investment funds, especially after the $1Bn acquisition of Dollar Shave Club by Unilever in 2016 (only 5 years after its initial launch). Investors’ interest peaked in 2018 when $3.3Bn were flowing into the segment. As for large corporates, they have also started to integrate the DNVB business model by acquiring fast-growing brands: for example Danone acquired Michel & Augustin in 2019, likewise L’Oréal acquired the then digitally native make-up brand NYX in 2014.

How the Group partners with DNVBs to support their development

As the market becomes more mature, competition increases between brands, and as brands grow, they face new challenges and obstacles: their thriving growth of the beginning slows down, and their customer acquisition cost increases and their challenge is to find new ways of attracting and acquiring traffic and clients.

In that respect, extending offline by opening flagship points of sales in key locations is highly interesting for successful DNVBs since most consumer goods are still sold via retail channels (90% in the U.S.). Although these brands were born online, it is usually a starting point before being able to expand and combine digital and physical.

However, when it comes to entering the physical retail market, DNVBs face specific constraints, such as capital upfront, limited resources, limited brick retail user experience knowledge: thanks to its retail expertise and leading position, Unibail-Rodamco-Westfield is well-positioned to partner with these brands to encourage their growth in the physical retail market. Besides, thanks to shopping centres’ high traffic, DNVBs are able to keep the same acquisition cost – or even reduce it – and to get a higher customer retention rate. These indicators are key for DNVBs as they closely monitor their “customer acquisition cost to customer lifetime value” (based on the retention rate) ratio (CAC/LTV). So physical stores are actually more than a new sales channel, they are another powerful marketing tool for the brands. In addition, the Group offers other benefits such as its loyalty program and a digital presence that can reinforce DNVBs’ visibility and customer acquisition.

Indeed, the Group has been studying new ways of bringing additional value to DNVBs throughout all phases of their development, from opening a physical touchpoint to internationalizing the brand, by offering retail expertise, financial means and operational support and new retail formats tailored to their needs and constraints. They need more flexibility in access conditions (faster processes, shor- term leases, flexible contracts…) as well as innovative attractive concepts, such as concept stores gathering many DNVBs or plug-and-play formats for pop-up stores, to boost their visibility and customer acquisition. The Group has already started going this way, with new formats that put the spotlight on these emerging brands:

• The White Box plug-and-play store in Westfield Century City,
• Ephemeral stores (e.g. Dreamscape Experience in the U.S.),
• Concept stores such as the pop-up store in the Carrousel du Louvre which was dedicated to 20 French DNVBs in 2019,
• The Grand Prix Commerce in France, and now the Gran Premio Retail in Spain as well, that aim at spotting the most promising brands to offer them a chance to open a store in one of the Group’s shopping destinations.

So yes, collaborating with DNVBs, once they are mature enough to enter the physical market, can be a source of opportunities for the Group, and this requires to adopt innovative business models tailored for the brands’ specific constraints and desires, but it certainly is one main challenge to take up in order to become the go-to partner of the winning brands of tomorrow.