Interview. Digital Brands Group: could it become the LVMH of DTC?
DTC or Direct To Consumer. It's being touted as the silver bullet for start-up brands. Bypass traditional retail and wholesale channels, go straight to you customer via digital routes, get to know them, offer keener prices, keep selling to them and success will follow. But as with all things retail, it's not quite as simple as that.
Getting DTC right can be expensive (customer acquisition via paid digital channels can cost more than the product you are selling, if you're not careful) and no retail presence at all means the customer has no chance of ever getting their hands on your product and truly understanding your brand proposition before making (or not making) the decision to buy.
Los Angeles-based, and potentially soon to be London-listed, Digital Brands Group gets this, which is why they have a vision to create a global group to support the DTC model. It plans to establish the infrastructure and marketing know-how that can support a number of DTC brands using economy of scale and abundance of expertise.
So, could it be the LVMH for DTC? Well, the executives leading the business wouldn't be some presumptuous as to say so, but headed, as it is, by the some of most experienced entrepreneurs in the DTC model, it certainly bears all the hallmarks of a truly significant global fashion group for the future. Key differences though, unlike the luxury conglomerates of today, for Digital Brands Group, big isn't necessarily better when it comes to brands they will support and launch, and it's not all about high-end luxury.
"There are a lot of big business out there and we looked at the market and thought 'someone is going to be the leader in DTC, someone is going to disintermediate the supply chain'."
"We do have a lot of expertise in the [DTC] space," Mark Lynn, co-founder and chief executive of Digital Brands Group and its inaugural brand DSTLD denim, tells TheIndustry.fashion. "There are a lot of big business out there and we looked at the market and thought 'someone is going to be the leader in DTC, someone is going to disintermediate the supply chain'." And why not them? "Exactly."
Lynn had previously founded Winc Wines, a leading DTC business in the wine market, and went on to found DSTLD denim with business partner Corey Epstein. He may not have had experience in fashion but when you live in LA (though Lynn is in fact Irish) and look around for markets to disrupt, denim is never going to be too far from your mind given that it's the home of pretty much every luxe denim brand of note from True Religion to Hudson, Mother, J Brand and countless others.
What Lynn and Epstein saw was a value proposition that was "so inflated" and a price that was too high. And given the price was too high, that price was too often discounted, which lead to brand devaluation. "Imagine if you bought a house, moved in and your neighbour was selling their house for 70% off. You'd be thinking 'what is wrong with this house?'," he explains.
His solution was to create a denim brand that retained the premium credentials of its rivals but which sold at a much friendlier price of around $99. "Of course we're going to have a margin," says Lynn. "But there is only so much you can spend on making a pair of jeans. You can have the absolutely best fabric, use the best cut and sewers, make it in the best circumstances for the workers and it's still only going to cost a certain amount. Even if you tried, you can't really spend more than $50 making a pair of jeans."
DSTLD is a contraction of the word distilled, meaning to take something back to its essence, and that it what they set out to do with the brand and it has also enabled a more honest conversation with the consumer.
But how do you get that consumer? That is often the challenge for DTC brands. Often brands turn to paid-for social media posts, which can be effective but, more importantly, can be very expensive. And it is on this subject that Hil Davis, CEO of Digital Brands Group, is something of an expert.
Davis founded DTC, made-to-measure shirting and tailoring brand J Hilburn which he took to sales of $55m in the six years until his departure in 2013. He went on to become CEO of Beautykind, a beauty retailer that donates 5% of all sales to a charity of the customer's choice and last year he joined Digital Brands Group, having been taken with the brand buzz it had built.
"When Mark called, I noticed that they'd built an amazing brand on very little revenue, they have great photos and great collaborations and the customer acquisition costs have been really low; some of that you either get it or you don't," Davis says.
But his advice is, as with all brands, you have to work on your brand first before pouring money into paid-for digital marketing channels to build audience as you won't get the cut-through. "You have to have processes and marketing systems that really work but they also had this hipness and coolness. You don't want to just come across as the value company," he explains.
Lynn adds that spending good money after bad on digital media can be a "fool's errand" unless you are disciplined, unless you track the success rate and unless you are able to flex your spend when need be. Being part of a group would mean that brands can fall back infrastructure and expertise that supports a suite of companies, rather than bearing the burden of the cost themselves.
The second brand to come out of the Digital Brands Group, draws on Davis' background and is an accessibly priced, yet high quality, suiting brand called ACE Studios. The price for a suit will be around $395 and it will offer both custom-made and ready-to-wear options. The brand will, of course, be sold online but part of its go-to-market (and indeed DSTLD has also done this) is using bricks and mortar retail via temporary stores and partnerships with department stores, such as Macy's and Nordstrom.
At this point in time of ever-increasing store closures there are plenty of deals to be had on temporary stores and, while partnering with department stores may seem somewhat old school-wholesale in approach (except it's not wholesale as Digital Brands Group controls the price), Davis believes it is another excellent way to build brand awareness and capitalise on the retail partner's existing customer base.
The idea is, once you get to know the customer in the flesh, you can migrate them online and move your physical presence around every so often to acquire new customers. That way you get the benefits of retail stores without carrying the costs of them on your balance sheet.
This formula can be apply to any new brand the group launches in the future, and there will be more launches, but there will also be acquisitions too. The proliferation of DTC brands launching means there will be a lot of "orphans" on the market looking for a home and Digital Brands Group may well be the perfect haven for them, since their size will render them uninteresting to global conglomerates.
"Attempting to build a $1bn brand is really hard if you can't leverage wholesale but building a $10m is very doable."
But for Digital Brands Group the smaller, targeted brands is exactly where the interest lies. "When you think about it," says Davis. "Attempting to build a $1bn brand is really hard if you can't leverage wholesale but building a $10m is very doable. The days of the big, massive chains with these same products are gone. You see that with Zara and H&M who are operating their subsets of brands. We want to create these narrow niches," he says.
One of the most recent casualties of the DTC boom was slipper brand Mahabis which, despite selling 1m pairs of its luxe slippers, went bust over Christmas. It was subsequently snapped up by Simba Sleep founder James Cox of YYX Capital who has ditched the purely DTC model in favour of a more balanced approach.
While Davis and Lynn are unfamiliar with this particular case (being US-based) it is an indicative case study as no doubt there will be many other brands who, while having a great product, will be struggling to scale profitably. "We're looking at sub-$10m businesses. We want to be a platform for the entrepreneurs and creatives, those businesses who are spending all of their time trying to raise money and stopping their CFO quitting," Lynn jokes (sort of).
And they certainly have the capital having raised $6m in equity crowdfunding and with a potential IPO on London's junior stock market, AIM, in the first half of this year. Quite when in the first half will depend what happens with Brexit. Whatever happens, it won't derail them, but it may impact timings.
Given that the prevailing talk, and indeed action, in the UK business sector is of companies leaving the UK, it is perhaps surprising that an LA-based group would consider listing here (after all UK-bred Farfetch went to New York for its IPO). But, again, this has been as clearly thought-through as the business model.
"The US doesn't have a mid-market and OTC (over-the-counter) markets are not an attractive option. You need to be doing $1bn to do NYSE and Nasdaq or you don't get interest from investors," explains Lynn.
But why list at all? Why not private equity? Both Lynn and Davis have experience of private equity in the past and didn't feel it was aligned with what they were trying to do with Digital Brands Group. On top of which it already has something in the region of 4,000 shareholders through its crowdfunding rounds "so we're already something of a reporting company, we're already half pregnant," says Lynn.
Besides the UK is home to some of the most disruptive digital retail brands from Net-A-Porter to Boohoo and AIM is already host to ASOS, Boohoo, Quiz and Sosandar among others innovators in the fashion space, so the investor interest is already there. "London isn't going anywhere [despite Brexit], it will always be a global innovation hub," says Lynn. And it will be all the more so for having this new entrant listed here.