The 2017 consumer is looking strong 💪
Unemployment is at 4.9% and falling. Savings are in good shape. Consumers have low debt-service rates and better access to credit. Interest rate rises, tax cuts, stock market gains, and wage growth mean Americans should see an increase in disposable income too. Times haven’t been this good in a decade.
Consumer startups have the opportunity to get in front of a very healthy consumer this year. In this post I look at 8 of the top areas for consumer startups in 2017 and where the best opportunities lie to take advantage of the current state of the consumer.
1. Emerging Brands
The consumer space is increasingly noisy and the top emerging brands are using novel marketing methods to cut through the clutter. These new, scalable, repeatable, customer acquisition channels to both find and retain users represent a key opportunity for consumer brands to succeed.
These strategies should decrease a startup’s CAC (customer acquisition cost) and allow distribution to be gained much faster. Thus allowing brands to be created far faster and far cheaper than ever before.
One area of emerging brands that I am excited about is in the material revolution. The past few years have seen consumers move away from generic, branded items in favor of quality items. 2017 is going to see a step change in this direction. Consumers now want the best quality materials, personalized to them, which are also good for the environment and mission driven, which drives customer loyalty and word of mouth. The two key areas I expect to see this manifest itself in 2017 are 3D printing and smart clothing. As the cost of 3D printing continues to fall 50% from 2013 to 2018, I see this as an increasingly popular way for young people to differentiate themselves. Nike is already seeing this with their 3D printing custom-design sneakers. FitBits are here to stay and the next step is smart clothing, which Levi saw with their Google jacket with jacquard technology. I predict startups will also innovate in the material revolution and I am excited to be a consumer (and an investor) in these innovative businesses.
I have heard many an investor speak of fatigue in the market on subscription services but the data tells a different story. 50% of the growth in consumer internet is expected to be driven by subscription, according to Activate, as 65% of 18–35 year olds have more than 3 subscriptions at any one time, and rising.
There is a fine line between the convenience of subscription in a product that you love and the product coming so often that the magic dies. However, when that balance is struck you reach the bliss point between convenience and magic. Hungryroot* is a great example of a subscription based product where the number and satisfaction of customers has increased since introducing subscription. One of the most attractive exits this year was in subscription — Dollar Shave Club, which sold in July to Unilever for 5x sales. I think subscription companies will continue to command higher valuations this year due to the repeatable and predictable revenue streams. While subscription may already be persuasive in our music, news and more, it really it has only just begun in consumer products (e.g. diapers, razors, food), which are particularly attractive given these get used up each month so you need more.
3. Emotional spending
As was apparent in an election driven in large part by emotion, as opposed to logic, we live in a world where many of our decisions are influenced by emotions. We are naturally attracted to brands that appeal to our emotions as a consumer. As Maya Angelou stated:
“I’ve learnt that people will forget what you said, people will forget what you did, but people will not forget how you made them feel.”
Perhaps those products that consumer will buy in 2017 will be the ones that do not tout their features but instead focus on how the product makes the users feel. For me, the dopamine hit of receiving that pink shinny Ipsy bag with a surprise in it is worth far more than the $10 it costs and I can’t wait to receive it every month.
4. Combined Commerce — web, mobile, chat & voice
Online Chatbots, offline popups, in store experiences and out of store events, from festivals to marathons, commerce is happening all around us and those brands that are able to prioritize these new channels will be at an advantage. eCommerce accounts for <10% of U.S Retail sales at present but this number will continue to increase towards levels seen in Europe and Asia. We will also see buying through Chatbots continue to increase in the U.S. where we lag behind what is happening in Asia with WeChat’s commerce functionality. Startups need to own their full value proposition and understand that every consumer touch point adds value. The ones that are able to fully embrace the new marketing and commerce channels and be everywhere that the consumer is will be the brands of 2017 and on.
5. Voice 1st
Amazon Alexa is quickly becoming the best Trojan horse since the ancient Greek times. It was the most gifted item on Amazon this Christmas and by 2020, 12% of U.S. households are expected to own at least one Alexa. Music subscriptions are the most popular way to use the device currently, but increasingly people are using it to add items to the grocery list or order items directly from Amazon. The open API means many great startups are able to quickly grow and use Alexa as the hub so allowing many voice first companies to gain meaningful traction far faster in 2017. My partner, Aaron Batalion, spoke of the network effects and opportunities in smart home here.
Google also recently announced that 20% of all search queries on their app were voice initiated. I see this as a huge opportunity and believe companies that are thinking about purchase behavior through voice alone and building products that are voice first are onto something and would love to speak to any that are. Large tech firms (e.g. Google) are already making many AI acquisitions and 2017 will see the non tech firms follow suit. They realize they need an AI strategy for their future.
6. Increased beauty, wellness and fitness online
87% of shoppers have bought apparel online, compared to 50% for beauty. This number should steadily increase for beauty as companies that resonate with millennials, such as Glossier, continue to take market share. Private Equity firms, such as Warburg Pincus, and beauty conglomerates such as Estee Lauder are on buying sprees of beauty brands as they expect to see increasing consumer spending in online beauty.
Wellness and fitness are untapped categories with fitness apps such as Skyfit and meditation apps, such as Headspace, offering excellent 1.0 versions but we wait to see what the 2.0 versions will be in this space. Festivals, such as Wanderlust, have are now integrating wellness and Zola* (which Lightspeed recently walked down the aisle with) have been quick to react to this trend by offering experience gifts such as Soul Cycle. This is an increasing trend as customers demand more zen in the rat race.
7. Products for the 99%
Brexit (given I’m a Brit) and now the U.S. election have taught me many things this year. One of which is how divided we are as western nations and the way in which our spending habits differ. 1% products, such as another on demand home cleaning service, have fallen out of favor and 2016 was a tough year for luxury good brands. 2017 will be far more focused on the 99%. Wish have done a magical job here, appealing to the masses. Walmart acquiring Jet showed us mass market retailers have money to put to work and we will see more of this, especially given the high levels of cash sitting on balance sheets of non tech firms wanting more of a tech presence (my partner Alex Taussig wrote an excellent blog here on this). Hollar, Snap, Stitch Fix, GIPHY and Little Things are among the Lightspeed portfolio companies for the masses and I hope to find many more of these loved products in 2017.
8. Disruption of Video and Gaming
Gaming will also be disrupted throughout 2017 as more and more people turn to competitive video gaming. eSports will be a huge opportunity in 2017. It is growing at a tremendous rate and is expected to hit 500m fans globally, which is >10% of all sports globally and a $5bn in revenue by 2020, as shown in the chart below:
Global consumer spend on digital media in 2020
Traditional pay TV services will continue to be disrupted by video startups that offer best in class user experiences, simple guides and recommendations that are personal to your tastes. It may be difficult to undercut existing TV offerings without scale but these network effects are exactly where VC funding should be used. Online native players such as Snap*, Mic* and Cheddar* are already doing a great job of this with their differentiated offers to young consumers. On demand and live video services that target multicultural users in the US is also a growing opportunity for 2017. This continues to be a focus for us at Lightspeed, as my partner Alex Taussig discusses here and we would like to hear from more founders building companies within this space.
* Denotes a Lightspeed portfolio company
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