Print-on-Demand Project

With 15 years of experience in contract manufacturing, MADARA has expanded its manufacturing service by creating a print-on-demand (POD) start-up – Selfnamed. We consider Selfnamed as a synergy project for the contract manufacturing segment which potentially may significantly increase output volumes and margins. A valuable feature is that products are retaining the COSMOS natural and/or organic certification that is compatible with EU and US standards. The self-service experience via the Selfnamed platform includes a design studio with drag-and-drop features that allows placing the user’s brand elements into label and box layouts. Market research shows that there is no other POD manufacturer offering certified natural and organic cosmetics, however, Selfnamed has cooperation with an integrated platform “Sell” that does not own printing equipment but lists Selfnamed or Cosmetics Nord SIA products in their product assortment. Currently, the “Sell” platform complements what Selfnamed is missing, that is, the possibility of integration with an e-commerce store and drop-shipping. Also, the possibility to manufacture white-labelled cosmetics, on a contract basis, for other POD manufacturers is an option, but currently developing Selfnamed is a priority. The potential client segment is very wide. Custom labelling can be of interest for brand owners like hotels creating personalised hand soaps or body/hair wash or retail chains creating personalised hand care products. Considering that there is no minimum order size, such a service is available for clients that want to make a customised gift or have a custom product labelling for events. Also, influencers and content creators are seeking ways how to monetise their brand, such a platform is an easy way to personalise products. According to the management, the Selfnamed platform is targeting low-medium size orders; however, for high quantity orders, MADARA uses outsourced labelling service as it is done for contract manufacturing partners currently. The product assortment and features, like 3D product visualisation or platforms integration with Amazon, Shopify etc., at Selfnamed currently is limited or not available, but according to the management, it will be extended over time if the desired demand will approve. While the platform lacks vital features for clients who want to commercialise their brand, the Selfnamed platform is deemed to be more appealing for individual orders. However, as mentioned, the cooperation with Sell partly solves the problem. As more companies and society, in general, are looking for ways to make themselves more sustainable, MADARA products and packaging are suitable for such purposes. From a closer inspection of the Selfnamed product offer, products are very similar to MOSSA brand products considering the International Nomenclature of Cosmetic Ingredients (‘INCI’). However, the proportions of ingredients which are not displayed are likely different making Selfnamed products somewhat distinctive from MOSSA. The principles of production, inventory planning and risk management must also be taken into account here. It is more efficient to buy 1,000 kg of one basic raw material and use it for several brands than to buy 2 different basic raw materials just to make INCI different. In terms of both price and risk, there is no need to throw out the raw material if the product X that uses the base raw material for some reason does not sell.

We consider Selfnamed products manufactured by Cosmetics Nord SIA quite distinguished from the “MADARA” brand in terms of formula complexity and target customer. However, the Selfnamed products in price and supposedly quality overlaps with “MOSSA” and eventually targets same customers. This could potentially result in somewhat self-competition decreasing “MOSSA” sales. While Selfnamed will have a high gross margin, the positive effect potentially could occur only in high volumes. Importantly, our estimates do not include the potential contribution of Selfnamed in terms of revenues or profits. Currently, we are reviewing the Selfnamed itself, the industry it is operating in, and its overall market potential. POD Sector Overview

Print-on-demand (POD) and personalisation are two of the hottest trends happening right now in the printing business. But even though they’re having a moment, they’re not entirely new to the scene; it’s just that, currently, available technology lets entrepreneurs do some pretty amazing stuff with them. By the 1980s, printers started to become available to the public, and print on demand took off. It started out with paper and then evolved into being able to print on fabric too – what is called direct-to-garment (DTG) printing. The first real DTG printer was called ‘Revolution’, and it became available in the 90s. However, modern POD manufacturing as we know it today has risen in the last decade.

Print on demand means that your piece of clothing (or whatever else you’re printing on) doesn’t actually get printed until a client places an order, allowing prints of single or small quantities. Furthermore, designing has been largely simplified and does not require extensive knowledge. For a business owner, it means you don’t print unless you’ve really sold something. This is a fairly new way of going about printing. Traditionally, they would create inventory by printing a certain number of products. Then, they would work with this inventory to sell their creations. Especially beneficial for individuals who almost in any scenario do not prefer to order bulk personalised t-shirts or other merchandise, can now access single quantity order for reasonable price. There are a few reasons why traditional printing can be inconvenient. One, it’s riskier. Business owners need to make their best guess at what people will want to buy unless they’ve got extrasensory perception. Then, businesses can easily end up with a big stack of products that for whatever reason just aren’t selling, as they typically have to order in bulk. For building up inventory, capital is needed that sometimes isn’t there or people aren’t willing to risk with. Printon-demand changes this approach. For example, content creators, influencers, or any kind of brand holder can design a product on the POD platform and list it on their e-commerce platform which is connected with the POD manufacturer. A popular approach for today’s merchants is using Shopify which enables them to create a website in minutes with all the necessary integrated features like payment gateways, performance tracking, and easy integration with many POD manufacturers. When you receive an order for your custom product, it goes to the POD manufacturer which fulfils the order and ships it to the customer. Doesn´t seem much effort compared to the traditional business approach, right? That is the reason why so many are using POD as it is a low-risk business model and creators can concentrate mostly on creating their public figures and visualisations for products. However, there are some limitations and not so appealing aspects. Naturally, your costs per item will be higher than if you buy in bulk. Also, these integrated platforms do cost a commission and there are many intermediaries, thus margins are usually very thin. Choices are limited, meaning that the ability to customise products depends on the vendor and the product. You’ll have to weigh base costs, customisation options, and available sizes when deciding which products to customise. Also, shipping costs can get complicated, as it might vary for different POD products. Options are also limited if you want to create a standout unboxing experience. But POD is not only for content creators or influencers to sell their brand. Companies can use it to print work uniforms or custom accessories with the company’s logo on them for their own use or gift them to clients. Also, individuals, which is actually the largest customer base for POD manufacturer businesses, can create personalised apparel or other accessories for their own use or design them, especially for

Source: EcommerceCEO

some events or personalising gifts to friends and family. The target segment is very wide for POD platforms considering different types of business clients and different types and ages of individuals. The demand for POD is expected to grow at a high rate in the coming years. According to Research Reports World, the global POD software market size was valued at USD 1.81bn in 2021 and is projected to reach USD 7.05bn by 2028, growing at a CAGR of 19.7% during 2022-2028.

Global core print on demand software manufacturers includes Printful, Teespring, SPOD, Gelato, Teelaunch, etc. The top five companies hold a global market share of about 40%. Americas is the largest market, with a share of c.a. 47%, followed by Europe and Asia-Pacific with a share of c.a. 27% and 20% respectively. In terms of product, integrated is the largest segment (integrated fulfilment), with a share of over 65%. In terms of user groups, the largest user group is individuals, followed by businesses. The POD manufacturing business is largely automated, with high margins. According to the latest data on Lursoft, Printful Latvia AS (a subsidiary of Printful Inc, also known as the first unicorn originating from Latvia), which owns POD manufacturing and distribution facilities in Latvia, Spain and the UK reported a gross margin of 50% in 2020 and 57% in 2019. The operating margin reached 30% in 2020, compared to 34% in 2019. Also, the CEO of MADARA indicated that the gross margin for Selfnamed is high and comparable to the direct e-commerce segment’s gross margin. POD manufacturers commonly have product assortment from thirdparty providers, thus as an intermediary in the sale of products, the margins get thinner as opposed to Selfnamed which sells cosmetics provided by its parent Cosmetics Nord SIA. When it comes to products that are offered, there are plenty of options (e.g., t-shirts, mugs, bags, posters, towels etc.), with the most popular ones being clothing and different accessories. This can be concluded from the general offer categories from POD platforms. Also, by looking at Google Trend statistics we see that personalised clothing and accessories are subject to the highest interest in Google search, followed by stickers and posters (see Graph 1). Personalised cosmetics are rather unpopular in comparison. According to our research, no other POD manufacturer is offering organic certified cosmetics, however, Selfnamed has cooperation with an integrated platform “Sell” that does not own printing equipment but lists

150 Google Trends, Interest Over Time (100=max) Graph 1

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Personalised clothing Personalised sticker Personalised posters

Source: Google Trends Personalised accessories Personalised cosmetics Google Trends, Interest Over Time (100=max) Graph 2

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Selfnamed products in their product assortment. The unpopularity might be simply explained that if such products have not been on the market, people do not consider searching for them so often. As for almost every new product or service, it will require an extensive advertising campaign to introduce people to it before the word spreads out. Furthermore, according to Google trends, the overwhelming majority of searches are for personalised gifts in general (see Graph 2). As a rule of thumb, cosmetics are often used as a gift, thus this could indicate the demand for personalised cosmetics. Last but not least, keeping in mind the general increase in demand for natural and organic cosmetics which was discussed earlier, should also drive the demand.

The competition between POD providers takes on several aspects: service and product price, product assortment, integrations, service, and product quality. Considering price aspects, POD platforms compete with subscription plans that give access to additional features for designing, product discounts, better fulfilment service, etc. Some POD providers have fulfilment locations internationally, which does reduce shipping costs and time substantially, thus appealing to users in different markets. Furthermore, a wider product assortment means a wider target segment. Also, business clients have more possibilities to expand their product assortment and individuals will likely seek for gifts to personalise where the product assortment is the widest. For instance, Printify offers a selection of over 300 products while Printful offers access to 293 customisable products, including t-shirts, tank tops, hats, hoodies, face masks, and more. According to the Printful survey 2021, sustainability is part of the business focus for 55% of businesses and most eco-friendly products are considered natural and organic (80%), recycled (76%), fair trade (49%) and vegan (26%). Integrations play one of the main roles for POD platforms. Commonly sellers would want to list their merchandise on as many e-commerce platforms as possible. The POD automatic fulfilment principle works only for those e-commerce platforms for which they have application programming interface (‘API’) integration, thus the range of integrated e-commerce platforms plays a vital role in the POD business model. Further, service and product quality also give a competitive advantage. The service quality is set by undisrupted operations, available features such as being able to view a designed product in 3D or the amount of available ready to use images for designs and capabilities of design software in general. Understandably, product quality is important as customers expect good price/performance for products, importantly, it directly impacts the reputation of the business client’s brand. SWOT Analysis of Selfnamed Strengths Consumers are gradually becoming more informed about the adverse effects of many synthetic chemicals used in daily use products and leaning towards the use of natural, organic origin products including cosmetics, that are friendlier to nature and the human body. Also, industry legislators are pushing towards safer cosmetics and packaging for consumers and the environment and a meaningful contribution to both objectives is employing natural raw materials. As this becomes more important for consumers it becomes more important also for business owners that use POD services, as data shows in the Printful survey (2021), sustainability is part of the business focus for 55% of POD business clients. Selfnamed products do possess all the rigid sustainability principles that other MADARA products possess, making Selfnamed products very appealing for both individuals and businesses. Especially, customers could respect the ECOCERT certification for Selfnamed products. Products which are produced by the parent company, especially at a very close location, significantly reduce supply chain risks, better priority in order processing, reduces logistic costs, and increases margins. Opportunities Based on our market research, Selfnamed currently is the only POD manufacturer providing natural or organic cosmetics. Thus the Company can have a first-mover advantage and gain substantial niche market share. Furthermore, Selfnamed has an opportunity to start similar cooperations as they have with Sell e.g. with Printify or other platforms that do not have printing equipment but have more advanced designing and integration features and a wide client base. This project can lead to three revenue sources: direct selling, cooperation with other more advanced POD platforms with wide client base that do not have printing equipment, and contract manufacturing of white-labelled cosmetics for other POD manufacturers like Printful which manages all the POD processes by itself. Although the last does not involve Selfnamed, for the SIA Cosmetics Nord and MADARA overall it can turn out to be a very lucrative opportunity. Weaknesses

Compared to its peers, Selfnamed has quite many weaknesses, however, most of these weaknesses can be eliminated if the Company´s demand expectations will materialise. Currently, Selfnamed has no integration possibility with e-commerce platforms and no integrated shipping which puts a relatively heavy burden for fulfilling and sending the products by business customers to their clients manually. The two latter are one of the key success factors for POD manufacturers attracting business clients, thus we believe that the platform will be more utilised for individual orders. Comparing the design features with peers, Selfnamed still has to make designing a product more convenient, for example, introducing 3D visualisation of design or adding more ready to use images, patterns etc. Clients usually like to have all in one place, it simplifies things, thus one competitive advantage for POD manufacturers is to have many types of products in their product assortment. Selfnamed has only a cosmetics category

Internal Factors Strengths (+) Weaknesses (-) • Sustainable product and packaging • No integration with ecomerce providers • Vertical integration • No automatic order shipping • Few design features • No other products except for cosmetics

External Factors Opportunities (+) Threats (-) • First mover advantage in cosmetic POD manufacturing • Replication from other POD providers

and we believe that this will be the only category on which Selfnamed will concentrate. As mentioned in the beginning, we consider that all of these weaknesses except for the latter one can and will be eliminated over time if the project shows signs of success. Currently, the cooperation with “Sell” somewhat solves missing integration and drop-shipping. Threats

There are a lot more capable POD providers in Latvia and globally, which could copy the idea and crush Selfnamed. This could mean that it is much better for SIA Cosmetics Nord to become a certified natural and organic white-labelled cosmetics contract manufacturer for the world’s leading POD manufacturers or providing also printing services to POD platforms like Sell or Printify. We see very good potential in POD certified natural and organic cosmetics but building a strong POD platform will be very difficult if the other leading POD platforms will utilise this idea.