BRANDLESS

A PRIVATE-LABEL DTC OPPORTUNITY

12 min readMar 1, 2020

Brandless is an American manufacturer of healthy and environmentally-conscious private label products. The product range includes foods, beauty, and personal care items as well as Houseware, like hand soap and peanut butter. The company started with 115 products focusing on minimal packaging and product description, limiting packaging design to a white box showing the product name and several descriptors e.g. kosher, GMO-, or gluten-free.

Brandless sells mainly through its eCommerce channels directly to consumers (DTC), and also through pop-up stores in major American cities. With this model, the company wants to reduce markups compared to brand-name items. From a price perspective, Brandless simplified prices to $3 for single items or bundles. The pricing changed over time to introduce new items in their assortment.

After eight years, Brandless shut down its operations by end of 2019 naming missing market-fit of the business model and strong competition as major reasons. Although Brandless got investor backing in several rounds (e.g. $ 240 million Series C with Softbank), and being named “Startup of the Year 2018” or “The World’ Most Innovative Companies in Retail” by Fast Company, Brandless the company did not survive a C-Level change and shift in business model to distribution via brick-mortar retailers.

Situation & Theories applied from Clayton Christensen’s HBS Online Course “Disruptive Strategies”

Aligning with Innovation and Disruption
Brandless targets the overserved consumer basics market e.g. working-mums, as well as non-consumption of Millenials. Both of them are not willing to pay for features they do not need, neither they lack to pay for product attributes they value. Additionally, quality is valued superior to the brand. However, both groups have been lurking for retail applications that match their need for quick and convenient shopping for every-day basics.

In terms of shopping performance, Brandless makes use of a direct-to-consumer model for its private label products. Thereby, they reduce traditional attributes but cost burdens such as brick and mortar stores and relieve customers from shopping strolls for the ever-same products. With the direct to consumer model and the goal to save time for decision-making in shopping and add convenience to the shopping of consumer basics.

Further, the pricing of $ 3 for each item helps to continuously plan house-hold expenditure. The limitation of the assortment and item variants to a minimum which shoppers need daily positively adds to ethnic and environmental-friendly production and consumption. Additionally, Brandless advocates organic, culture and animal-friendly products, product features that are not always considered by high-volume international brands.

Exemplary, they only offer one variant of the flavor of toothpaste e.g. peppermint, which is an alcohol-free, no preservatives, no artificial flavors, fluoride-free option.

Using the eCommerce channel they can keep cost structure to a minimum compared to market incumbents such as Walmart or private-label discount grocery chains with investments in a nation-wide network of branches. Also, sourcing is limited to a range of products and categories. Introducing new products, Brandless test half-dozen or more varieties of one item, bringing in flavor experts and focus groups to come up with the formulation they believed would be best. Thereby, they assure consumer acceptance before products are brought to market. In a later stage, Brandless added a subscription service to its business model, to ensure recurring revenues and additional performance improvements through plannable sales. Brandless uses a discount price model aiming at low margins with a general price point of $ 3 per item or bundle utilizing a new business model of “simple price — defined assortment range — convenient access”. This indicates that they aim to earn attractive returns at discount prices with lower gross margin and higher volumes.

Combining these insights, the technology behind the Brandless (eCommerce approach) or the private-label concept is not the disruptive factor. Rather, it is how the business model makes use of target customers and assortment policy. As Brandless is in the market-creating phase, boundaries between low-end-disruption and new-market-disruption for customers, performance and business model are blurred. The common takeaway for both types of innovation is: Entrants typically win disruptive battles.

Discovering Customer Jobs to be Done
Looking at the types of innovation and markets Brandless is aiming for, it will be important to specify the job to be done for their organization. As Clayton Christensen states in the HBS course “Disruptive Strategy”, “a “job” is a problem a person is trying to solve. Customers don’t really buy products; they “hire” them to get a job done”. Therefore, we are not looking at the attributes of the customer at all but their functional and emotional motivation to buy at Brandless.

Functional: Get products of daily-use without paying “BrandTax”

Emotional: Provide convenience through easy access, transparent product information and ethical production

However, the job to be done also has a higher impetus. It is the base layer to create a purpose brand. This includes all experiences that have to apply the principles of simple products and convenience and their integration in resources, processes and profit formula. With Brandless we find this in the use of the webshop, product packaging but also the internal processes e.g. the sourcing example. However, also for emergent strategies, Brandless needs to find simplicity in the future. Exemplary, the subscription service added to this by further reducing the effort of shopping for basic groceries.

Being a quite young company visible for customers for less than three years, Brandless has not achieved a status where customers immediately think to “hire” for simple shopping for consumer basics. However, they have been able to create awareness for their business model and the way they work.

Managing the Strategy Development Process
As mentioned earlier, from my point of view Brandless is still in the market-creating phase — the profitable strategy is not yet known, and several emergent strategies need to be validated to find a deliberate strategy that allows sustaining operations. After the last investment round and with management change a new strategy emerged — listing products with grocery retailers. As learned in the course, we should not regard that the current strategy always stays the “right” strategy. Therefore, it makes sense to look at the profit formula to see how it defines resource allocation to assess the emergent strategy.

Organizing for Innovation
Resources: The 70 Brandless employees have been hired with the intention to build a direct-to-consumer business. Product development is sourced out. The main focus is on the online shop where the money should be made.

Processes: Processes are laid out to deliver “packaged shopping baskets” to single households. Shopping baskets include all categories and single as well as bundle items that are assembled by each customer online. Shipping takes place in their facilities in Los Angeles, CA and Minneapolis, MN. Product development is limited to sourcing manufacturers and must apply to products that are “shippable”.

Profit Formula: Initial profit formula as laid out in Aligning with Innovation and Disruption. TLDR: Building an online community looking to save brand tax (up to 40 percent) by the provision of simple, private-label products of daily use. Earning lower gross margins but focusing on higher volume through online sales and recurring customers. Simplifying everything from pricing (all items are $3) to distribution (limited distribution centers). With new investor money, the profit formula might shift.

Recommendations & Future Course

To move from market-creating to sustaining phase, Brandless has to proceed from testing emergent strategies to focus on strategies that show profitability — a deliberate strategy. Currently, Brandless has to prove three emergent strategies: single basket direct-to-consumer, subscription-based direct-to-consumer, brand-label for brick and mortar retailers. Let’s have a look at all three of them:

Single basket direct-to-consumer: The current strategy allows Brandless to grow organically, expand product categories continuously and build a brand that reflects customer needs. However, company officials make fierce competition and business model inviability the reason for unsatisfying profits. Competition in the grocery and consumer basic industries has been strong ever since. The development of discount grocery chains and the rise of private-label brands are two placative examples of this development also shown in the graph below with the revenue share of private label-brands in US/UK wholesale.

Share of private label product revenue compared to total revenue of wholesalers. Source:https://static1.squarespace.com/static/50363cf324ac8e905e7df861/t/5e3761ff3e87613dac063a5f/1580688038108/2020+01+Benedict+Evans+Shoulders+of+Giants.pdf

However, focusing on a good enough product to a better price (functional job to be done) and additional attributes (emotional job to be done) that are valued by their early adopters will be differentiating factors to AmazonBasics, Uniquely J (Jet.com), Smartly (Target).

Even more, the direct-to-consumer model can help to keep cost low in the supply chain when considering current shipping models: free shipping after $ 48 basket size, $ 6.98 for shipments below the threshold.

Therefore, I suggest integrating product development as a core function into the company and tie closer relationships with current suppliers as well as enlarging their assortment. Currently, Brandless has to capture a bigger share of the lower-end of the mainstream markets. Focusing on working mums and millennials is a start that helps to build trust in the brand and fires the organic recommendation engine (also through brand advocates).

Further, cost in the supply chain is a performance defining component which needs integration into the core. Through pop-up pick-up-locations rather than stores, focus on growth areas in major cities and closer relationships with local logistic partners to reduce delivery times, cost efficiencies could be achieved. Especially, improvement and/or modularization in the supply chain are crucial for future success, since DTC relies on efficient delivery of goods and scalability of the supply chain in terms of logistics. Even more, major competitors e.g. Amazon could move quickly into the niche with existing brands and logistic networks. Since Brandless strives for simplicity it might be necessary to automate logistics where possible to compete with major incumbents.

ARK analyzing supply chain cost of Amazon being the cost leader, showcasing their last-mile activities fulfillment and delivery. Source:https://research.ark-invest.com/hubfs/1_Download_Files_ARK-Invest/White_Papers/Big%20Ideas%202020-Final_011020.pdf?hsCtaTracking=78df7914-8393-4b78-b326-7dfb47024083%7C4ade617d-5fc7-4646-b699-84d7ac1213c6

Both, product development (external/customer view) and supply chain (internal/business model view) are performance defining components.

Subscription-based direct-to-consumer: Brandless needs to “skate” to where the money is. Using a subscription-based model they can ensure consistent money flow and improve demand planning. Further, a fixed amount of orders helps to optimize transportation planning and utilization of the workforce. The strategy enables Brandless to build stronger relationships with customers which in term helps to improve product development. Even more, this strategy does not require big changes in the profit formula or resource allocation. Providing a consistent supply of good enough, low price consumer basic products to households will help to build a barrier for competitors to capture Brandless’ share of wallet. As part of the consumer packaged goods market, Brandless can make a dent in a $ 2 trillion industry. The key point for this strategy is, how long it will take to acquire or convince a reasonable customer base to pay for operations and make future revenue estimates.

However, Brandless needs to find investor money patiently enough to wait for this strategy to become profitable. Investors eager for profits and quick wins won’t be happy to invest in this kind of strategy. However, once the strategy shows profitability, further money has to be available to push the company towards a sustaining/deliberate phase.

Even more, Brandless needs to convince customers to stay customer by providing the expected quality of goods and becoming as efficient in the last mile as their competition.

Shopping basket size of Brandless competition set in 2018.
Source:https://www.vox.com/2018/10/18/17979610/brandless-consumer-packaged-goods-retention

In my opinion, Brandless needs to improve the retention rate and size of assortment to fill shopping baskets, as this model works best if customers stay loyal and Brandless sticks to its unique pricing model.

At this point, competition still does a better job of retaining customers as seen below.

Customer retention rate of Brandless competition set from 2017 to Q3 2018.
Source:https://www.vox.com/2018/10/18/17979610/brandless-consumer-packaged-goods-retention

Therefore, it will be necessary to identify customers with similar jobs to be done and create product categories for them. Even more, with their focus on non-traditional product attributes (GMO-free, animal-friendly, palm-oil-free) they can grow in this spectrum to tap customer groups around new diets and lifestyle trends.

Brand-label for brick and mortar retailers: As Brandless received a $ 240 million investment by Softbank’s Vision fund in May 2019, the company saw another strategy emerge. To fulfill expectations of strong growth and imminent profit, the investment solely bets for this strategy. Surely, partnering with brick and mortar retailers helps to increase the visibility of the brand as well as sales potential.

Nonetheless, this bears different challenges that do not harmonize with initial profit formula, resource allocation, and processes. As Tina Sharkley, founder and CEO mentions:

“… we’re getting out in front by building for ship, not shelf, even if the shelf is the lion’s share of the industry right now,” […] “Building for ship makes more sense — you can have price transparency, and you’re not competing alongside other brands and trying to manipulate customers into thinking they’re getting a better deal.”

Another hurdle is to develop a sales force that can pitch products against major incumbents. In this scenario, Brandless walks away from a private-label company and increases competition for shelf space against major brands or private-labels of incumbents as well as other consumer basics with more traditional attributes. Furthermore, Brandless has to ensure the supply of the required quantity of goods which has to be produced and shipped to fill shelves. This also requires new processes and resources from a supply chain perspective such as building or renting a logistic network to supply retailers encompassing storage as well as transportation of goods.

From my point of view, their series C round brought Brandless into a situation where good money becomes bad money. Since Brandless was not yet clear about the winning strategy for their job to be done, profit formula and resource allocation, the investment pushed them to create profits quickly and therefore jump into the shark tank of shelf space. In contrast, the money needed to be patient to allow adjustment of resources and profit formula to find their competitive advantage for this strategy which might work due to the unique job to be done.

To bring in one more perspective, this strategy is likely to be acquired by an incumbent if the product line attracts customers on the shelf.

CONCLUSION

Since Brandless had to cease operations in February 2019 after working towards the “Brand-label for brick and mortar retailers” strategy, markets gave quick feedback to what works and what not, also showcasing the theories of our course. First, proofing emergent strategies and allocate resources wisely to uncover a deliberate strategy. Always skate to where the money is to become profitable and reach a sustaining business phase (later to efficiency phase). Bearing in mind that your job to be done is valuable and design your profit formula around it, to adjust resource allocation according to your current/future strategy needs. Close the performance gap to the market standard and start to modularize your business to create a surplus in performance defining components such as customer retention, product development and supply chain in the case of Brandless.

In the end, Brandless had the opportunity to create a low-end disruption which later on, would have been an interesting target for incumbents. Hopefully, the buyer would have known about Clayton Christensen’s course and kept Brandless as autonomous as economically feasible.

REFERENCES

This paper has been produced as the final paper for Clayton Christensen’s HBS online course “Disruptive Strategy”.