Photo: Allbirds
Are DTC brands still primed for growth?
Some direct-to-consumer (DTC) brands have gained traction during the pandemic while others appear to have lost some advantages as traditional retailers and more brand manufacturers accelerate digital shifts.
Among favorable findings, a survey of 89 DTC brands from Totem Media conducted last June showed that the wide majority found growth in the early months of the pandemic as most retailers dependent on purchases made in stores were seeing declines. Digital capabilities and agility were seen enabling DTC brands to more quickly pivot online for selling, marketing and customer service.
Diffusion’s “2021 DTC Purchase Intent Index” that came out last November indicated that DTC brands are “permeating mainstream consumer consciousness.”
The study showed 43 percent of Americans are knowledgeable about at least one DTC brand. Of the respondents familiar with DTC brands, 44 percent believe DTC brands produce a higher quality product at a lower price point than traditional competitors and 23 percent perceive DTC brands to be an authority of what’s cool and on trend.
Scalefast’s just-released annual “DTC Hype Report,” however, found that traditional retailers and legacy brand manufacturers have gained ground over the past six months as they’ve ramped up their digital capabilities. In a year of “immense uncertainty,” consumers also found comfort with more familiar brands, according to the study.
Disruption at Brandless, Active Voices and Birchbox, as well as the lackluster Casper initial public offering, have been seen as signs of challenges facing DTC brands.
Allbirds, the eco-friendly wool sneaker brand, received a $1.7 billion valuation in a funding round last October. Funding opportunities for the majority of DTC brands, however, were becoming skimpier even prior to the pandemic as the marketplace became more competitive and advertising across social feeds became significantly more pricey.
“It’s a very crowded market, and it’s an expensive market,” Susan Lyne, BBG Ventures’ managing partner recently told Glossy. “DTC companies have to have something beyond a good product. They have to have values that are aligned with new consumer preferences and, in some cases, very strong content marketing, as well as a distribution advantage.”
- DTC Brands – Response To Covid – Totem Media
- Going mainstream: Diffusion’s 2021 Direct-to-Consumer Purchase Intent Index – Diffusion PR
- One in Three Americans See No Difference Between Buying From a DTC Company and a Traditional Retailer – Doubled From 2020 – Scalefast
- C Susan Lyne: DTC companies need ‘something beyond a good product’ – Glossy
- Covid Has Direct-To-Consumer Brands Pumping Resources Into Expanded Services, Digital Channels – Forbes
- The end of the Series A: While tech financing booms, DTC brands face a new reality – Digiday
- Despite hungry VCs, DTC brands are rethinking their fundraising approach – Modern Retail
Discussion Questions
DISCUSSION QUESTIONS: Do you still see advantages in being a DTC-first brand or can many traditional retailers and brands now match their digital prowess? What advice would you have for DTC-breakout wannabees?
Poll
BrainTrust
Georganne Bender
Principal, KIZER & BENDER Speaking
Lauren Goldberg
Principal, LSG Marketing Solutions
As a whole, the DTC market is on fire. There are so many emerging companies, so much innovation, and a whole bunch of passion. For the most part, the passion fuels authentic connections with consumers and products which are very customer-centric, and often nicely differentiated. These, and not just because companies are digitally native, are the reason for the strong growth. Of course savvy mainstream retailers are cashing in on this, particularly Target, by partnering with DTC brands and selling them in their stores. For me, the DTC market is a breath of fresh air in a retail market that can sometimes seem stale.
DTC native brands came from one side and traditional CPG brands are coming from the opposite side. Both realize that the customer is the channel and need to be everywhere where the customer interacts – browsing, shopping, getting influenced, receiving product, etc.
While the DTC approach has many advantages like cutting out the middleman, developing direct customer relationships, offering testing grounds for new products, etc., the biggest challenge most of DTC brands face (especially the ones selling online) is that of discoverability. With so many DTC brands available in each category, who can remember all the names and websites to visit? What we need is a DTC marketplace — but wait, isn’t that why retailers came into being in the first place?
I am hugely skeptical about DTC cutting out middlemen. If such is the case, DTC brands should be swimming in profits. But many are not profitable even operationally (i.e. at EBITDA to take out the effect of investments) even after acquiring hundreds of thousands of users. That tells me that the marketing expense is pretty high. Secondly, the competition is brutal so they have to keep the pricing low and cannot pass the true cost of service to the customers.
If we talk about the digital native DTC companies, their products have a very high contributing margin, which is the key here IMO. Their marketing costs are disproportionately higher because they lack the scale- they are spending the dollars towards customer acquisition and retention. As for pricing, my humble opinion is that the DTCs are able to charge a premium because of their purpose-driven approach (e.g. Patagonia). I strongly believe that the crux of their problem is discoverability. That is why DTC brands like Harry’s are now venturing into the retail channel to be discovered by more customers – while still driving repeat purchases through DTC.
Totally agree with you, Venky, on the contribution margins. Not to belabor the point, but for new age, digitally native DTCs, it doesn’t nearly capture true costs. It is great to see 80% contribution margin — ThredUp is exhibit A, and yet make operating losses. Clearly, the unit cost model is broken.
What can sometimes gets lost in the DTC conversation is the need for an integrated and seamless experience for the customer. They shop where and when they want – and that clearly works both online to bricks and bricks to online. So the only thing better than a great online experience is a consistent online and bricks experience. What should never get lost, however, is the significant advantage for brands executing DTC to control the brand experience for the end-consumer. It is no accident that more brands are reclaiming that right (critical to survival) in the face of indifferent end-user experiences with many bricks partners.
DTC might be crowded and expensive, but it’s still direct. And direct = control. Direct means avoiding the wholesale channel, at least in the beginning. DTC is going to be hyper competitive, but also hyper creative. Social media gives new and emerging brands so many opportunities to talk directly to their target customers.
Oh yes, DTC has been on a tear for a while now. I believe even more so with the pandemic and buyers finding companies that sell products/services that are innovative and differentiated from the masses. I think this trend is here to stay.
DTC has first-mover advantage on innovative new products and consumers are more open than ever to their digital engagement. The threats are customer acquisition costs and creative traditional retailers – like Target – who offer irresistible product to their large shopper base.
Shipping costs (whether for new or ongoing customers) are a rapidly-growing hurdle for DTC as well, thanks to the yearly drumbeat of base rate hikes from UPS and FedEx, plus the raft of surcharges they’ve imposed. Amazon has so much more leverage in this area that it’s much less expensive for my company to use FBA, even with the margin taken right off the top. Of course, we lose all access to shopper data, but for our historic median direct order size, free shipping can’t work anymore.
Maybe I am too old to understand DTC. Why would anyone go to multiple websites to shop what they want when they could go to just one (Amazon, Walmart, Target, et. al.) and get everything they want?
Help!
Baby Boomers are 12 times wealthier than Millennials, and account for over 55 percent of U.S. spending, so why wouldn’t a company be interested in what you have to say? We asked this question on Twitter the other day and Tom Peters replied, “And this is not a ‘social justice’ riff, it is a ‘how to increase your profits’ riff.” As it should be!
Finding new DTC brands takes time I do not have so as a consumer I deal with very few of these brands. I’ll look if something interesting shows up on Instagram or Facebook. If I can only get that item DTC I will purchase it that way, but I don’t like having to share personal and credit card info with companies I do not know.
Certainly brands want more control over products, but for many shoppers it’s just easier to shop with a retailer they already know and trust.
Yes, that is the problem I have with DTC. Unless you are a Nike or Levi’s how does a shopper find you? And even then, is there better selection and convenience from the Amazons, Walmarts or Targets?
The success of the powerful online retailers has everything to do with saving time and convenience.
DTC brands have an advantage in that they can be nimble, innovative and react quickly to consumer needs due to the lack of a middleman. But as the cost of customer acquisition online continues to rise, DTC brands are seeing the benefits of being in-store, either through their own locations or wholesalers. Where industry insiders think about the differences in DTC vs legacy retailers, customers do not think about channels like DTC or wholesale — they think about brands. And to win customers’ loyalties (and wallets), DTC brands need to continue to focus on customers’ needs, be it online or in-store.