Over the years, as the direct-to-consumer space has heated up, a number of brands have entered the scene, from DTC darlings like Warby Parker and Bonobos to newer, emerging brands.
In most cases, these brands have largely operated and scaled independently. More recently, however, DTC holding companies are emerging and growing multiple brands under one umbrella. By doing so, companies can more effectively and efficiently scale these brands by providing the resources and knowledge needed to grow.
Harry's Inc., for example, houses its namesake brand, as well as Flamingo, Headquarters and Cat Person. In April, the company announced it raised $155 million in Series E funding, valuing it at $1.7 billion. Harry's said it will primarily use the funds to add more brands to its portfolio as well as expand into additional product categories.
Similarly, Very Great operates three brands under itself. The company focuses on growing brands internally rather than seeking out brands to buy, though co-founder Eric Prum didn't rule out the possibility of an acquisition in the future. It initially launched W&P, which Prum and co-founder Josh Williams spent around seven years building.
"Within that, we built out every system and department vertically and independently," Prum said. "We thought to ourselves, if we could actually create a platform and a centralized service, we could actually do more, more efficiently within other categories that we had a lot of interest in exploring."
The brand has since launched dog products brand Wild One and home tech accessories brand Courant.
Pattern Brands (formerly branding agency Gin Lane, which helped launch to market several brands like Harry's, Hims, Ayr and Stadium Goods) created brands Open Spaces and Equal Parts and recently announced its mission to acquire more brands in the home space.
"What we're looking to do when we're operating Pattern and building Pattern is do the same thing we've always done, which is building brands and bringing them together," Nick Ling, co-founder and CEO of Pattern Brands, said. "What I love about the model of family brands is that you can grow any individual brand sustainably. No one brand has to overgrow too fast. I think they naturally should grow and address the audience that they were bought for."
The brand kicked off its home brand acquisition strategy with home accessories brand "Get It Right" (GIR) in June. "I don't think we need to reinvent the wheel when there are great products out there," Ling said. "We can do what we're best at, which is building brands that matter for our generation."
Coinciding with the acquisition announcement, Pattern also relaunched its website, creating a curated shopping experience featuring both its own brands as well as a selection of products from other companies.
The idea to shift to more of an acquisition model came from Pattern's own consumers. "During the last year, we've been shooting a lot of content, both for social and for our websites," Ling said. "We consistently got questions and requests from consumers around, 'What was the lamp in that photo?' or 'What was the desk in that video?' Often, they were for other brands we were curating alongside our own brands."
And similarly following the acquisition route, DTC holding company Win Brands Group has bought candle brand Homesick, silicone wedding band brand QALO and Gravity (the makers of the Gravity Blanket).
Advantages of scaling alongside other brands
If DTC brands have historically launched on their own as stand-alone entities, why would one opt to be acquired and operate alongside other brands?
For one, it may be more efficient from an operating perspective: Rather than building out individual departments — like HR or logistics, for example — the parent company can build out strong departments used across all of the brands.
"Could we not go out and recruit a really incredible team that spans all of the operating areas of the business and have that coverage as a shared service?"
Co-founder and CEO, Win Brands Group
"You don't need three separate accounting teams at each of our brands," Very Great's Prum said. "We just have one centralized, one that is able to offer its services to each of those brands. The idea is that if we're able to get it right, we can both scale the businesses more quickly than you would with a single brand, and you can do it more efficiently as well."
Win Brands Group co-founder and CEO Kyle Widrick similarly thought that by having a single team focusing on various aspects of a business, Win Brands could grow its portfolio more efficiently.
"It's really challenging to have all the necessary skill set to be able to operate and scale these businesses, and I was seeing that time and time again," Widrick told Retail Dive. "Could we not go out and recruit a really incredible team that spans all of the operating areas of the business and have that coverage as a shared service?"
Widrick added that Win has 12 verticals within its organization — including customer service, product sourcing, and shipping and logistics — with an individual leader for each.
"What we really try to get the brands most focused on is product and product innovation. And then community and community building," he added. "The exact things that make that brand and have always made that brand are really special. To have those folks really hyper focused on those things, while the broader shared team can handle some of the larger operating issues."
Holding companies can also provide access to resources, which Win's Widrick said is the biggest challenge DTC brands face today. "I think founders today in this space are asked to do so much," he added. "Oftentimes, they have to choose between which channels they want to focus on because they have a limited amount of resources. And that's really the unlock that we can solve for."
These companies, with their expertise in scaling businesses, can help smaller DTC brands reach that next milestone in their growth path, whether it be moving into new online channels or expanding offline.
"We can come in and really help them build out their channel strategy, specifically launching and having success on Amazon, which we consider to be the largest shopping mall in the world," Widrick said. "And also at retail: We're sold in over 7,000 stores today — Walmart, Target, Dick's, Bloomingdale's, etc. For a brand that's already working, we can really help accelerate that growth."
Being part of a larger company can also potentially make it easier for brands to form partnerships with large, traditional retailers if another brand in the portfolio has previously worked with them. Very Great, for example, has partnerships with retailers like Nordstrom and Target.
"We become like a reliable vendor," Prum said. "They're doing business with Very Great, and so they're more willing to take risks on our brands if it's not known whether or not they're going to do well."
"You're really creating almost the next digital e-tail department stores of the future."
Principal in the Consumer and Media Practice of Kearney
For digitally natives exploring their next move, joining a portfolio of other brands can also be an exit strategy. While some DTC darlings, like Casper, Chewy and most recently Warby Parker, have gone the route of public listings, for brands that have yet to scale to the same extent as these larger players, holding companies are a viable option for next-stage growth.
"A lot of these companies have success. Being at $10, and $15, and $20 million in revenue — that's a tremendous business that can be quite profitable, but they still don't have the size and scale to be a public business," Widrick said. "So the question then becomes: How can I attach myself to a larger enterprise and achieve that outcome?"
Housing like-minded brands alongside each other, like what Pattern has done with its recently revamped website, also creates a curated shopping experience for the consumer, according to Michael Felice, principal in the consumer and media practice of Kearney.
"You're really creating almost the next digital e-tail department stores of the future. You're aggregating into a group of curated brands that are predominantly privately held, which gives a big advantage over a publicly held brand when you're in a DTC growth phase where your margin may not be up to the standards of some of these others," Felice said. "It's a very advantageous way to come into other curated brands that fit the lifestyle you're looking at."
Something many DTC brands have historically struggled with is profitability, as a result of high costs related to customer acquisition, among other things. Casper, for example, has yet to report a positive net income since going public early last year. And up until recently, when circumstances brought on by the pandemic made the home and pet category particularly popular, Wayfair and Chewy reported years of losses. Operating under a larger parent company can alleviate some of the pain points brands struggle with, by providing necessary resources and helping to take their brands offline — something that, in the past, has offset the high costs of customer acquisition.
"I think there was a period of time where there were a lot of efficiencies there, say, in the time that the Outdoor Voices and Harry's of the world were first coming up. There was a distinct advantage and a value there," Prum said. But now that the barrier to entry has become lower than ever, with services like Shopify or other apps, the competition has grown, making it difficult for brands to stand out to consumers. "The fact that there's more competition and noise in each of these categories, with ever-increasing costs, makes it a challenge to be strictly a direct-to-consumer brand and/or a stand-alone one."
Prum also strongly believes brands should have an omnichannel presence and meet consumers where they are at any point in their life. While entering physical retail creates some challenges for DTC brands, the risks — and costs — of operating exclusively online are far greater.
"I think there are some existential threats, and some of the brands out there that might be digital only and really focused only on that — I think there's real opportunity there for some of these holding companies or platforms, such as ourselves, to help fix those problems and issues," Prum said. "I think those things are going to come up in the relatively near future."
All of the holding company founders Retail Dive spoke with for this story highly consider and value profitability when it comes to standing up or acquiring these brands.
"Call us crazy, if we're selling products, we like to be able to do that profitably," Widrick said. "I think there was some irrational thought and behavior on venture capital coming into the consumer space. I think that has started to change. People are thinking about the space more rationally today than they were maybe five years ago. But the reality is, there is a tremendous opportunity to scale these businesses, double-digit growth year over year while maintaining profitability. That's really what we focus on."
Growing the business
Acquiring or building brands under a single parent company seems easy enough, but what factors do holding companies need to consider to ensure the brands are a good fit?
Harry's Inc. has added brands that are, for the most part, natural extensions from its existing products. The company started with razor brand Harry's, which is primarily targeted toward men, then launched Flamingo to try to capture more of the female audience, and more recently, it's launched Headquarters, a hair products brand, remaining in the personal care space. (Harry's, however, has also ventured out slightly, helping build pet brand Cat Person.)
"In other areas, you're starting to see companies form their own CPGs of the future, if you will," Felice said. "If I'm going to live a lifestyle with someone, then I need to offer more than just one thing. So what are other elements of their lifestyle that are important to them? In Pattern's case, someone that is into home essentials probably is also into cooking and entertaining. So I can see them also branching into things around entertainment or other elements of the home."
Aside from the logical category extensions holding companies consider when building out brands, Ling said Pattern thinks about the size of the brands in terms of their financials when forming deals. Ling said the company tends to buy and scale brands that are doing much less revenue than a company pursuing an IPO. Among the top priorities for the company when determining what brands it will work with is having healthy and sustainable margins. Pattern expects to announce its second acquisition later this year.
And Win Brands will only take a majority ownership in brands that have already shown product-market fit in the marketplace, which Widrick defines as roughly $5 million in sales, and typically haven't raised a lot of venture capital funding. The company also looks at Shopify data, customer acquisition costs and the lifetime value of the customer.
"If you look at our portfolio — with Homesick, with Gravity Blanket, with QALO — these are all category leaders in their own respect that we specifically sought out as part of the Win portfolio," Widrick said. "We want to have something that we can stand behind as that category leader and help the founders continue to scale that business."
The goal, he said, is to ink three to five deals per year, and the company currently has a few planned for the back half of this year.
"If you can find support and find a team like Win that can help take some of that operating load off your back, it's a really good partnership," Widrick said.