2021-04-03
People love convenience in every shape it comes. Some may say they want choice, but many are comfortable with the illusion of choice.
When there are too many choices an aggregator can come along to offer a one-stop shop. Everyone loves it at first. But success breeds competition, which increases customer acquisition costs, and commoditizes the originating value proposition. The aggregator realizes most of the margin lies further up (and down) the value chain and is faced with a difficult decision. Do you vertically integrate? Do you double down on being a platform? Do you spin out a new business? Do you do all of them?
This post will focus on vertical integration [1]. It results in a playbook that is easy to describe but extremely difficult to execute.
Let's call it the Studio Effect.
The Studio Effect is when an aggregator expands its position on the value chain by first owning the distribution channel followed by creating in-house products to shift brand affiliation. Best of all, it applies to multiple industries.
Media: Netflix built a destination for all your favorite content. Took over distribution with the shift to streaming. Analyzed what made content binge-worthy. And built an in-house studio to produce original content.
Retail: Amazon built the "Everything Store", online. Refined their logistics and supply chain to replace third-party fulfillment providers. Understood the top selling items, their underlying economics, and the manufacturing that backed them. And created a line of low-cost generics — Amazon Basics [2].
Food will be next.
Marketplaces have been aggregating restaurant supply for years. They know the popular items, missing cuisines, and branding that make them appealing.
So what’s different now?
Ghost kitchens and virtual brands have unlocked a new distribution model for food [3]. Marketplaces have built out their logistics to own fulfillment. But in order to expand their presence on the value chain, they need to take it one step further.
The real change happens when the fulfillment brand is a stronger signal than the supplier brand.
Most people couldn't name which studio produced their favorite show. But they know they watched it on Netflix. Most people don't care what brand their HDMI cable is. But they know Amazon Basics (powered by Amazon Prime) will be the cheapest option, arrive on time, and have a painless return policy if anything is wrong. Eventually people won't know the name of the restaurant they ordered lunch from, but they will know it was from DoorDash — or whoever executes this playbook the best [4].
The amount of work required to get the unit economics for this type of business to work is enormous. But if you can make it work and exploit a change in distribution, there is a powerful playbook waiting for you.
This is the Studio Effect. And it’s coming for your industry next.
Thank you to Kevin Kwok, Matthew Achariam, and Mike Karnjanaprakorn for reviewing drafts and making this much stronger.
NOTES
[1] I considered writing about all the options, or how to think about which path to take as the CEO of a company, but wanted to keep the post short and focused. If there is enough interest I will write a follow-up. There are some really interesting examples to unpack (e.g. Shopify, Spotify, Thumbtack, Uber, Yelp).
[2] Amazon has actually run this playbook with multiple business units. Working Backwards has examples of how they did this with the Kindle (moving down chain to own the device), Amazon Video (moving up chain to own production like Netflix), and Fire TV (moving down chain to own the device).
[3] Streaming gave media an alternative to theaters and scheduled programming. Dropshipping gave retailers an alternative to warehousing and storefronts. Ghost kitchens are giving restaurants an alternative to fixed branding and storefronts.
[4] This may sound like a bleak future. The unfortunate reality is that our desire for convenience will make it true. However, I believe this will ignite an equal and opposing surge in a new generation of independent restaurant brands who work directly with their customers. The top players already have this with native loyalty programs (e.g. McDonald's, Dunkin, Starbucks), but I anticipate it happening for smaller brands empowered by platforms that give them the say tools as the big players (e.g. Shopify "arming the rebels"). If you are working on this for other industries, I'd love to talk!