Ecommerce

Direct-to-Consumer (D2C) opportunities in MENA: The time is right

Value creation in the consumer-goods industry has historically been centered around economies of scale and high barriers of entry in distribution and marketing. ‘Big’ brands captured a significant share of voice, through spending hefty amounts on TV/ offline ads, and built deep partnerships with retailers, guaranteeing premium placement for their products.

However, over the past decade, a new breed of online-born companies, armed with low overhead and high customer acquisition efficiency, disrupted consumer retail and gradually stole market share from incumbents. Labeled Direct-to-Consumer (DTC) or, more recently, digitally native vertical brands (DNVB), these companies, fueled by $10+ billion in VC funding, built billion-dollar brands in almost every consumer category.

via Tales of Growth

The time is right for MENA DTCs

The MENA region has been slow to adopt the new consumer model; however, recent shifts in the consumer and supply chain landscape have laid the necessary foundation for DTCs to emerge and challenge established incumbents.

Four trends are fueling these shifts:

Changing consumer preferences

The MENA region’s population is predominately young: Out of 700 million people, around 450 million are below the age of 30. These young consumers have very different consumption preferences than their parents:

They maintain a strong bias towards new and authentic brands, believing them to be better and more sustainable than traditional brands. A Mckinsey study found Millennials to be 3x more likely to see new brands as better and more innovative and 2x more likely to prefer up-and-coming designer brands.

They vote with their wallets, choosing products that embrace values they identify with and provide personalized products and offerings.

They have a growing preference for local products. Another Mckinsey study found that younger MENA consumers particularly care about supporting local businesses and buying locally sourced products.

These emerging consumption patterns have eroded consumer loyalty towards ‘big’ traditional brands and reduced barriers of entry for newer, smaller brands.

Decentralization of influence

Social media has democratized marketing and fueled consumer-to-consumer conversations that challenged the previous marketing monopoly of big brands. Consumers now turn to social media platforms and their peers for recommendations, with Instagram and Facebook becoming the dominant channels for discovery (and even purchase today)

This shift has particularly materialized in the region, where consumers are among the most connected in the world, with 66% smartphone and 99% social media penetration in UAE (62% and 75% for KSA), according to this study by Bain/Google.

These changes are great for smaller brands, who are now able to cost-effectively reach the right customers and convert them.

Democratization of distribution

Similar to marketing, the distribution game has been disrupted, as ecommerce leveled the competitive playing field in two ways:

Digital shelf-space: Ecommerce eliminates the prohibitively high fixed distribution costs brands used to pay retailers for shelf-space and replaces it with variable costs to list on their website or an ecommerce marketplace (i.e., Amazon, Noon, Awok)

Data: Historically monopolized by retailers and distributors, distribution data and insights are now available to all (through widely accessible analytics tools). As a result, smaller brands are better positioned to develop, iterate on, and promote their products

Ecommerce penetration is still low in our region; however, it has been growing at a staggering 25% and is expected to reach $20+ billion by 2022 (same Bain/Google study). This growth will further accelerate as product selection increases and delivery experiences become more consistent (a positive feedback loop)

With 56% of GCC consumers starting their purchase journey (discovery) online, DTCs with differentiated offerings are well-positioned to capture market share and grow.

Rise of asset-light models

The historical significance of ‘economies of scale’ in manufacturing is eroding, as smaller brands start to ‘rent’ scale from their manufacturing partners (through contract-manufacturing) and outsource fulfillment and logistics to 3PLs (Fulfilment-as-a-service models) paying per unit. Accordingly, smaller brands can now replace massive fixed capital spending, with more manageable variable costs.

Our region still faces friction in this area, due to high preference towards cash-on-delivery and inconsistent delivery experiences. However, private and public sectors are investing heavily to remove the friction: Mobile wallets are rapidly gaining traction in the region (which will gradually help solve the high Cash-on-Delivery figures), and new 3PL players have recently emerged with innovative solutions to reduce the time and complexity of last-mile delivery (specifically in KSA, the region’s largest market)

Not all DTCs are created equal

Casper, one of the most iconic DTC brands in the US, recently filed its papers for an IPO. From the outside, the company looks great:

  • A 5-star team: Five co-founders, with complementary skills and past startup experiences
  • Impeccable execution: A lot has been written about their best-practice product launches and ‘genius’ marketing campaigns
  • Off-the-charts brand equity: 31% aided brand awareness!
  • Fantastic customer experience: 80% positive brand sentiment and 60 in Net Promoter Score!
  • Great partners: Since its inception, the company has raised a total of $339 million from Northwest Partners, Target and IVP

Yet, six years in, Casper, like many other DTCs, still loses money.

via Tales of Growth

This begs the question: Do DTCs make money? The short answer: It depends.

As customer acquisition costs rapidly increase, due to higher CPM rates and lower efficiency, the 2014 strategy of cutting costs by stripping out the middle-man no longer works. To be successful (read profitable), DTC needs to get a few critical things right:

  1. Solve a better problem (or play in a better category)
  2. Build a clear value proposition (not just a ‘me-too’ products with lots of influencers thrown at it
  3. Start with one product/ solution (not two, not ten. One thing!)
  4. Obsess over ‘data’ in everything they do
  5. Optimize the customer-brand experience (and are present at every step of the journey)
  6. Start online but quickly move offline (never pure-DTC, more like DTC as part of an omnichannel strategy)
  7. Maintain an asset-light model and lean financials

Over the coming weeks, we will deep dive into each one of the above elements, where we will try to highlight what founders should focus on when building a DTC.

There has never been a more exciting time to build consumer brands and DTC companies. A few bold players have successfully set up their brands (Huda Beauty, Nudwear, and a few others); however, the playing field is as open as ever for founders with ideas for products that people love.

If you’re a founder or contemplate building a consumer brand, please reach out. I’m always happy to talk!

The views and opinions expressed in this article are those of the author.

Imad El Fay

Imad El Fay

Head of Ventures at HB Investments
Head of Ventures at HB Investments, a newly established Dubai-based venture capital fund focused on building and scaling digitally-enabled consumer brands. He can be reached on LinkedIn.
Imad El Fay
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