Instant gratification: why D2C start-ups are getting snapped up

Busi­ness­es that use the direct-to-con­sumer chan­nel to sell their prod­ucts have per­formed rel­a­tive­ly well dur­ing the pan­dem­ic – a fact that has not gone unno­ticed by the giants of the fast-mov­ing con­sumer goods (FMCG) indus­try. Some of them – Heinz and Pep­si­Co, for instance – have cre­at­ed their own sites to cut out the mid­dle­man and let online shop­pers to buy some of their favourite brands direct­ly. 

Oth­ers have tak­en the acquis­i­tive route. Mon­delez has agreed to buy a con­trol­ling stake in pro­tein-bar brand Grenade, whose D2C turnover is up 34% on the pre­vi­ous year’s total. Nestlé, mean­while, has sought to prof­it from the rise of home-cook­ing recipe kits by gob­bling up Fresh­ly in the US and both Sim­ply­Cook and Mind­ful Chef in the UK.

Not all such M&A attempts have been suc­cess­ful. In Jan­u­ary, Proc­ter & Gam­ble was forced to aban­don its planned takeover of Bil­lie, a new brand of beau­ty prod­ucts in the US. The Fed­er­al Trade Com­mis­sion blocked the move on the grounds that it would “elim­i­nate inno­v­a­tive nascent com­peti­tors for wet-shave razors”. 

It’s not hard to see why many of the industry’s big names are invest­ing heav­i­ly in the D2C chan­nel, accord­ing to Elliott Jacobs, direc­tor of com­merce con­sult­ing at LiveArea. “The rea­son they are adopt­ing this strat­e­gy lies in the data,” he says. 

Once their prod­ucts are sit­ting on the shelves in super­mar­kets, man­u­fac­tur­ers have to rely on their retail part­ners to feed sales infor­ma­tion back to them. By sell­ing to con­sumers direct­ly, they can “own the entire cus­tomer jour­ney and can devel­op a 360-degree under­stand­ing” of how their brands are per­form­ing, Jacobs explains. 

What’s more, by acquir­ing D2C start-ups, they are in many cas­es bring­ing fresh mar­ket­ing ideas, tech­nol­o­gy and exper­tise into the fold.

Working towards an exit

Even after the high street returns to nor­mal lev­els of activ­i­ty, many con­sumers will con­tin­ue to enjoy the con­ve­nience of buy­ing direct­ly online. The acqui­si­tion trend is there­fore like­ly to con­tin­ue as the FMCG behe­moths try to keep up with the for­ward-think­ing new enter­pris­es based on the D2C mod­el. 

For the start-ups them­selves, invest­ment from an acquir­er can be a lucra­tive chance to push their busi­ness­es up to the next lev­el. 

One such enter­prise is Lon­don-based com­pa­ny Vieve Pro­tein Water. The firm expe­ri­enced sup­ply man­age­ment prob­lems dur­ing 2020, reports its founder and CEO, Rafael Rozen­son. The clo­sure of pro­duc­tion and dis­tri­b­u­tion facil­i­ties, com­bined with ris­ing demand for its prod­ucts, meant that it strug­gled to main­tain suf­fi­cient stock lev­els at times. Despite all that, it still achieved a year-on-year rev­enue growth of 350% in its D2C chan­nel.

“Our biggest chal­lenge now is get­ting the cap­i­tal to fuel our growth and dri­ve our D2C seg­ment,” he says, adding that such invest­ment would “help us to devel­op new prod­ucts and expand into new cat­e­gories. Our ambi­tion is to become the num­ber-one pro­tein water brand in the UK and Europe.” 

Vieve, which is expect­ing its sales rev­enue to increase by 50% year on year in 2021, is plan­ning to expand into the US in the medi­um term. The firm’s poten­tial mar­ket there is 20 times larg­er than it is in the UK, accord­ing to Rozen­son. He’s under no illu­sion that this would be a huge task, but it could be key to attract­ing inter­est from poten­tial buy­ers. 

“Ide­al­ly, we’d like to work towards an exit, be it through a pri­vate equi­ty buy­out or an acqui­si­tion by a larg­er play­er,” he says.

When being acquired doesn’t align 

Ced­ing con­trol of the busi­ness to a big­ger play­er isn’t nec­es­sar­i­ly on the menu for all new D2C play­ers, of course. Helsin­ki-based Alvar Pet is anoth­er ambi­tious start-up, but its plan for growth dif­fers from that favoured by Vieve.

The com­pa­ny, which has devel­oped a range of zero-emis­sions dog food made from sus­tain­able ingre­di­ents, only start­ed trad­ing in April 2020, but it still turned over about €1m (£860,000) that year. Rev­enue is fore­cast to increase by more than 300% in 2021. 

“The online channel’s share of pet food sales has near­ly tripled dur­ing the pan­dem­ic,” says Alvar Pet’s co-founder and chief mar­ket­ing offi­cer, Han­na Lem­met­ti. “As peo­ple have spent more time at home with their pets, they’ve been putting more thought into what their pets con­sume. Both of these fac­tors have been in our favour.”

The com­pa­ny has already cap­i­talised on its rapid growth by extend­ing its oper­a­tions from Fin­land into Ger­many. Its goal is to become the lead­ing sus­tain­able dog nutri­tion com­pa­ny in Europe. In doing so, it wants to “change the direc­tion of the pet food indus­try towards a more eco-friend­ly future”, Lem­met­ti says. 

Many pet food brands have start­ed sell­ing prod­ucts with high­er-qual­i­ty ingre­di­ents that would be safe enough for humans to eat. But such is the demand for human-grade food that, in coun­tries with high rates of pet own­er­ship, the sec­tor is respon­si­ble for up to a quar­ter of all green­house gas emis­sions asso­ci­at­ed with meat pro­duc­tion. With this fac­tor in mind, Alvar Pet believes that sell­ing out to a big FMCG play­er wouldn’t align with its val­ues. 

“We don’t believe that a large incum­bent would be the right part­ner for us,” Lem­met­ti says. “We want to dis­rupt this indus­try.”