What Does It Take to Build A Profitable Consumer Brand?
5 takeaways from analyzing profitable (and not so profitable) brands
Over the past decade, a raft of well-designed brands like Warby Parker upended large brand houses by going direct-to-consumer.
Or did they?
Luxxotica, the slow incumbent eyewear manufacturer supposedly disrupted by Warby Parker, has watched its stock steadily appreciate since Warby’s founding in 2010. Warby Parker, on the other hand, debuted on the public markets via direct listing, and has seen a 50% drop in price. The company has yet to make a profit.
Other top direct-to-consumer brands have struggled. Mattress company Casper had to be rescued by the private markets after losing over two-thirds of its market value post IPO. Glossier recently laid off a third of staff. Allbirds IPO’d in 2021 and shed 80% of its value.
Is the direct to consumer model not all its cracked up to be?
Rising competition, supply chain disruption, and higher costs of digital advertising are all reasons for less rosy outlooks for DTC brands. Nevertheless, some DTC brands have flourished, with profitable models and successful IPOs. And big brand houses have grown profits despite being disrupted by DTC. The question is not, does DTC work, but how do you build a successful brand (DTC or not) today?
What does it take to create a profitable (and well-known) consumer brand?
Behind the numbers of consumer brands
I looked at publicly available finances of (4) types of consumer branded companies to get an idea their business models and who is actually making money:
- CPG houses — P&G, Unilever, Nestle, L’Oreal
- Softgoods houses — Luxxotica, VF Corp, LVMH
- Softgoods single brands — Lululemon, YETI, LEVIs
- DTC softgood single brands — FIGs, Warby Parker, Allbirds, Gymshark
Data-wise, I compared the following metrics to build a basic idea of where profitable and non-profitable brands invest their cash:
- Product spend: Cost of goods sold / Total Revenue
2. (Rough) Marketing spend: SG&A / Total Revenue
Exact marketing spend by firm is not publicly available. But since marketing typically falls into SG&A, we can look at SG&A as a proxy. Other typical SG&A items include rent, salaries, and distribution.
3. Is the business profitable? Net income / Total revenue
The data is not perfectly scientific; different company data covers different time periods. However, it still provides a good sense of where brands are allocating funds.
Profitability by consumer brand, summarized:
What does a profitable consumer brand look like today? Some takeaways
1. Multiple models exist
You can be profitable as a single DTC brand or a CPG house. But the economics are different. CPG houses which distribute via retailers can spend significantly less on marketing than direct-to-consumer (DTC) brands who have to acquire each customer on their own:
- CPG houses like P&G invest a majority of spend into product (50–57% of revenue goes to COGS), with 18–33% remaining going to marketing and ops. The exception is L’Oreal, which spends less on product (26%), and more on SG&A (54%), implying that marketing cosmetics is quite expensive.
- Soft goods like LEVIs and VF Corp spend less on product (30–45%), and more on marketing and operations (40–50%), potentially due to owned stores. Nevertheless, they still eke out a profit.
- Direct-to-consumer brands invest heavily in marketing (56–125% of revenue) as they have to acquire each customer, with 27–46% on product — DTC brands tend to keep product costs under half of revenue (Warby Parker and Allbirds spend 42–46% of revenue on product, while FIGs and Gymshark keep it to 27–32%). Profitability becomes a problem with marketing costs — Warby Parker’s SG&A is a whopping 125% of revenue, while Allbirds sits at 73%, resulting in neither brand producing profits. FIGs and Gymshark keep marketing to 56–62% and are profitable.
2. Given DTC’s inherently high marketing costs, they can cut their product costs or raise prices to allow more room for marketing:
Marketing is often listed as the culprit for DTC brands’ lack of profitability. But product cost also plays a role. The two profitable DTC brands I analysed, Gymshark and FIGs, have lower relative cost of goods (27–32%) than unprofitable Warby Parker and Allbirds (42 — 46%). Warby and Allbirds might consider raising prices to offset their expensive marketing costs, and/or cutting product investment.
3. It’s possible to build a single consumer brand to IPO. But it requires marketing discipline via community instead of expensive campaigns
Warby Parker and Allbird’s high marketing spend and poor IPO performance make it easy to question the single brand model. Potentially those firms would have had a stronger exit via acquisition to a brand house like Luxxotica. Brand houses have the benefit of being able to spread media cost across multiple brands and invest profits from established brands into new ideas.
But Lululemon, FIGs and YETI have all managed to become successful (read: profitable) solo.
Looking at the data, Lululemon and YETI have near identical models, spending ~42% of revenue on cost of goods and ~37% on operations (incl. marketing). The two companies boast cult brands and significant growth in share price post IPO.
More recently DTC scrubs purveyor FIGs was founded 3 years after Warby Parker, but has nearly the same market cap as a result of keeping product costs low (27%) and marketing/ops reasonable for a newish brand (62%).
How do these brands manage to market so efficiently?
They are community first. According to the WSJ, outdoor brand YETI avoids expensive mass marketing like celebrity endorsements or large scale brand activations at Miami Art Basil to focus on community:
But while most brands embrace influencer culture, Yeti is not taking the bait. Instead, the brand is doubling down on what it calls “the tip of the spear,” hardy fishers, hunters, rodeo wranglers, back-country snowboarders and the like. “We build our products for those people,” said Paulie Dery, Yeti’s vice president of marketing — Wall Street Journal
Lululemon built bottom up through community at its yoga studios in store. Lululemon did not go on TV until 2021, when it was already a multi-billion dollar behemoth.
FIGs has the benefit of marketing to an existing community (healthcare professionals). Still, they invest heavily in community marketing. According to Modern Retail, “the company has an almost symbiotic relationship with medical professionals:”
Figs sends members of its tight knit network on mission trips to Peru and India as part of its Threads for Threads initiative, and invites them to dinners and wellbeing retreats. It also arranges in-person meetups ... Ambassadors, in return, have helped to establish Figs as the foremost scrubs brand in an otherwise faceless, commoditized industry. Online, Figs has amassed over 970,000 followers across major social media platforms, more than 500,000 of which are on Instagram alone. Meanwhile, its hashtag “wearfigs” has popped up in TikTok videos, generating almost 283 million views at the time of writing. -Modern Retail
Community marketing has built-in virality, as engaged customers tend to share among friends. This strategy may be category dependent, as community among glasses (Warby Parker) or sustainable shoe wearers (Allbirds) is less structured than community among doctors (FIGs) or gymgoers (Lululemon, Gymshark). Nevertheless, savvy fashion brands like Telfar have managed to build community through smart content and product launches.
4. Don’t be afraid to break out of DTC and into 3rd party retail
When it launched, Warby Parker touted their DTC model as a way to save money by ‘cutting out the middleman’ of expensive retailers. The problem is, selling direct-to-consumer requires another form of real estate: digital marketing costs.
A quicker way to scale may be to simply distribute via established distribution networks (read: others’ stores). Lululemon boasts an online shop, owned retail, and is also sold in retailers. The same goes for YETI coolers, LEVIs jeans, and the array of brands owned by VF Corp (Vans, The North Face) and LVMH.
5. Develop a brand beyond product before its too late
Many DTC brands start by marketing a single iconic product.
Allbirds wool shoes.
The problem is, building a brand is expensive. A return on brand investment typically requires a customer to come back multiple times. 50% of FIGs customers come back for a second purchase, and 63% of those purchasers come back a third time or more. In contrast, Casper sold a once in a decade purchase (mattresses) at a loss. Casper attempted to shift their brand from mattress company to sleep company to sell bedding and tech products to their audience. Unfortunately, Casper was too ingrained as the mattress company, and lost money on each customer.
Profitable single-brands Levis, Lululemon and YETI all started with flagship products (jeans, leggings, and coolers) but expanded their brand ideas beyond their flagship product to sell multiple products (denim jackets, sports bras, tumblers). As DTC brands scale, the question is not if, but when to shift from product-led to brand-led. This is not an easy transition. It requires a brand mission beyond product, as well as additional marketing investment to sell the brand mission.
Brands make for incredible businesses. They drive customer loyalty, provide a basis for product innovation, and pull in great talent. But building them is not easy. In addition to product, customer acquisition, and supply chain, brand leaders need to think about investing in community, product extensions, and new distribution channels. Given that branding is about standing out, there is also the truth that what works for one company or category won’t work for all. However, brands like FIGs, YETI, and Lululemon offer some learnings for founders on how to make a brand not just well known, but profitable.