Direct to consumer brands vs commodities: who will prevail?

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A few weeks ago, Dave Ambrose tweeted out the above image showing an Away suitcase and an Amazon Basics replica side-by-side. The Away bag costs $295 and the Amazon Basics one is $89.99. Away is one of the current darlings of the direct to consumer boom, and Amazon is, well, Amazon.

There are many consumer goods categories that are commodity driven. This happens if 1) the products themselves are commodities; or 2) if no brand "owns" the space as a result of fragmentation and downward price pressure, which is the market force that drives down prices. Socks, underwear, luggage, bedding, razors and many other products existed in categories where price drives many purchasing decisions. The majority of the market was splintered without a clear winner. The high end of these markets is often the exception, as luxury players have always been able to take once-commoditized products and charge a premium for them. Besides this, branded and unbranded products have been fighting for decades.

The direct to consumer economy is built on the promise of taking many of these commodities, building brands around them and then charging a significant premium for the products. These brands raise money on the premise that they will "disrupt" and "revolutionize" their relative spaces. The intended result of these sky-high ambitions is that direct to consumer brands will create a new middle of the market, although it remains to be seen if this new middle is strong enough to support big, long-lasting brands. At the same time, traditional brands are fleeing the middle of the market, an ominous sign for these new brands.

As I stared at the juxtaposition of the Away and Amazon bag, it sparked a larger thought about a fundamental premise of the direct to consumer boom: will direct to consumer brands ever "own" categories with little brand affinity in the low and middle end of the market? Or will these segments remain fragmented? Happy Socks is trying to solve this for socks, MeUndies and Mack Weldon for underwear, Away and Raden for luggage, Parachute and Snowe for bedding, Dollar Shave Club and Harry's for razors and so on. These brands exist on the premise that they can offer better products at cheaper prices because the pesky wholesale middleman is nowhere to be found.

This premise raises a few questions:

1) Should every category be branded?

As direct to consumer brands have tried to un-commoditize these categories, they do so on the premise that they can create this new middle of the market and then own it. But is there a reason the middle is empty right now? Why is there still immense fragmentation in these commodity markets? As the middle class continues to hollow out, price pressure is increasing everywhere but the high end. People want cheaper items, which further cuts into a brand's margins. This is good for the commodity market generally, even though it's bad for the products in it, since margins get squeezed. However, this is both bad for the branded market and the brands that sell branded products, as shoppers are challenging the idea of brand premiums all together. Is Away taking meaningful market share from Rimowa and Costco or will it forever remain a blip on the radar?

2) How branded will these categories become?

Will these new brands ever reach the market share that their valuations assume or will commodity players continue to thrive? If price pressure is increasing on the low end, and the high end is already stable, then the middle is in trouble. On the one hand, we're seeing everyone rave about the premise of branding these commodity categories and a litany of direct to consumer startups popping up. This makes sense because the vast majority of products sold in the economy are branded (over 80% according to some estimates). But at the same time, private labels are growing quickly, especially for Amazon, Target and Walmart.

Amazon's Away clone, which is a clone of most plastic luggage itself, will be an important test of how much brand matters in these categories. Do non-early adopters really care about brand or do they just want something cheap that works? Dollar Shave took only three years to hit one percent of the razor market, which is definitely a feat. But it's unclear if these early growth rates will persist.

3) Are direct to consumer brands strong enough to command a significant price premium?

Brands are powerful because they throw rationality out the window when it comes to price. However, the result is more of a sliding scale than a binary outcome. If a commodity player and a branded player have two relatively similar products, there's only so much a brand could do to price aggressively (outside of the luxury market).

Therefore, it was interesting that Away founder Jen Rubio responded to Ambrose's tweet by saying:

[Because]I know how the sausage gets made, I'm guessing it's not 100% polycarbonate + lower quality zippers, wheels, hardware. But just guessing.

I was expecting Rubio to write back something about how Away's brand and vibe is much more desirable than Amazon's, which is undeniable. However, the fact that her response was about comparing the products is itself an admission that shoppers are putting branded and commodity products toe to toe, rather than separating them into leagues of their own.

Is Away's brand worth 231% more? Time will tell.