December 29, 2023
Photo by John Schnobrich on Unsplash
What Does the Future Hold for DTC Retailers?
Direct-to-consumer, or DTC, is a contemporary business model that allows companies to market and sell their products or services directly to the end users. The tactic allows retailers to understand customers’ needs directly and thoroughly.
The advent of the internet and e-commerce shifted consumer habits and expanded retail beyond the gatekeepers of intermediaries, such as wholesalers and distributors. This bred a rise in DTC companies across various industries. Through personalized marketing and targeted campaigns, these brands can optimize audience reach and boost customer engagement and conversion rates. Also, controlling their brand image ensures consistent branding and superior product quality.
DTC Brands That Achieved New Heights of Success
There are numerous direct-to-consumer brands currently operating, but three stand out.
“By 2017, Allbirds, Warby Parker, and Casper were considered among the ‘DTC pioneers’ shaking up their respective industries — sneakers, eyeglasses, and mattresses.”
Business Insider
Allbirds
Allbirds, a sustainable footwear company co-founded by Tim Brown and Joey Zwillinger in 2015, gained prominence with its iconic wool sneaker and was titled the world’s most comfortable shoe by Time magazine. The company initially thrived with its direct-to-consumer business plan, becoming a staple in Silicon Valley wardrobes and opening 58 stores by 2022.
However, sales began to decline, with a 21% decrease in revenue in Q3 this year and continued disappointing earnings reports, leading to efforts to reignite the brand with new products. Allbirds went public in November 2021, with shares rising 90%, but its claims of being the first “sustainable” IPO were later dropped due to objections from the Securities and Exchange Commission.
Amid growing sales, the company also faced mounting losses, leading the once buzzy sustainable shoe brand to resort to wholesale in 2022, partnering with companies like Zalando, Public Lands, and Nordstrom. Despite these efforts, Allbirds shares plummeted, and in 2023, the company announced a reorganization plan, including slowing the pace of store openings, adding more wholesale partners, and refocusing on its core products. This led to the introduction of new products like Risers, Pacers, and SuperLights, developed by a team led by Nike veteran Ashley Comeaux.
However, the company’s shares remain below the IPO price. A leadership shakeup in May saw co-founder Tim Brown stepping into the role of chief innovation officer, leaving Zwillinger as the sole CEO. Despite exceeding second-quarter earnings expectations, Allbirds continues to face challenges, including layoffs and the discontinuation of underperforming products.
Warby Parker
Warby Parker revolutionized the eyeglass industry by delivering stylish, affordable frames directly to consumers. In Q3 of this year, Warby Parker’s revenue surged 14% to $170 million, driven by the opening of 11 new stores (totaling over 200), product debuts, and an uptick in contact lens sales. Despite this, the company saw its stock value tumble by over 20% following the earnings report, largely due to a decrease in gross margins to 55% from 57% the previous year.
Factors such as lower profit margins from contact lenses and the cost of store expansion — including hiring more optometrists — contributed to this decline. However, its sales growth helped reduce net losses by approximately $6 million. The company’s profit margins on adjusted EBITDA shrunk from 8% to 6.5% compared to the same period last year. Looking ahead, Warby Parker has revised its revenue growth forecast for 2023 upward to nearly 12%, from the previous 11%, but the profit dip in Q3 has left investors wary.
Dollar Shave Club
Dollar Shave Club, offering high-quality razors and grooming products via a subscription model, disrupted the grooming industry. Following its unrivaled success approximately seven years ago, London-based conglomerate Unilever made headlines by buying Dollar Shave Club, a men’s grooming company based in Marina Del Rey, California, for a reported $1 billion in 2016. That year, Dollar Shave Club celebrated a remarkable $225 million in sales.
Fast forward to the present, Unilever announced it has sold Dollar Shave Club to a private equity firm, Nexus Capital Management LP. Nexus’s portfolio includes notable brands like the shoe brand Toms, the plant-based food and beverage brand TruRoots, and the beauty supplement brand Sugarbear, among others. Despite the sale, Unilever will retain a minority interest of 35% in Dollar Shave Club.
The Future of DTC Brands
This past year, many companies have had to cut costs or resort to layoffs in order to stay financially afloat due to inflation and other factors. Wayfair and Everlane are two other DTC brands facing these and other new challenges. Meanwhile, some brands like Glossier increased their overall price point, while Morphe faced bankruptcy.
Furthermore, big retail brands like Nike and Levi’s have decided to make DTC retail a major part of their strategies. Levi’s gained increased revenue and a 40% increase in customer loyalty, while Nike needed to find a better balance between DTC channels and traditional wholesale means.
Experts forecast that many direct-to-consumer brands may not endure in the long run. This prediction stems from the increasing competition in this sector and the necessity for physical outlets, even as temporary pop-up stores. For longevity, DTC brands will need to promptly and precisely identify their target audience while offering unique products and value. Additionally, they should understand that investors are not a certainty. This impending evolution in the DTC landscape is certainly intriguing and worth tracking.
BrainTrust
David Biernbaum
Founder & President, David Biernbaum & Associates LLC
Zach Zalowitz
Founder, Salient Commerce Consulting
Ricardo Belmar
Retail Transformation Thought Leader, Advisor, & Strategist
Recent Discussions
Discussion Questions
As digital platforms shape consumer behavior, how can companies strategically balance the advantages of DTC models with the value provided by traditional intermediaries like wholesalers and distributors? Considering the rise and challenges of DTC pioneers like Allbirds and Warby Parker, what are the key factors that determine the sustainability and profitability of a DTC model in the long run? How do these factors differ across various industries? Based on your experience and observations, how can DTC brands better manage investor expectations and navigate financial setbacks, such as those encountered by Allbirds and Warby Parker? What lessons can be learned from their trajectories?
Poll
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DTC is a mixed bag. There are some firms, like Warby Parker and Chewy, that have good underlying business models and a path to sustained profitability. However, there are others, like Allbirds, where the whole reason for existence is questionable. Meanwhile, other players like Wayfair are still cranking out extensive losses. Sadly, for those on the losing side, the cost of capital is much higher and investors are less tolerant of continuous loss-making. 2024 will be the year when reality starts to bite for some of these firms.
Chewy is still not profitable, I don’t think. And Warby has stores. I just think stores are requirements for profits. Wayfair and furniture are a whole other topic I won’t bore you with here, but yeah….stores, or at least warehouse stores would be a BIG help to them.
In the fiscal year to-date, Chewy is profitable at net income level. Although the latest quarter’s numbers were poor and the company made a loss. I think Chewy has a better pathway to profitability because of the habitual nature of what it sells which drives repeat/subscription custom without the need for ridiculous advertising spend. As you say, Paula, Wayfair is a whole basket of something else!
High acquisition costs are a major reason why the market is slowing down. The current economic volatility requires brands to be tighter with their finances and burn…you cannot live and die in it, because you will have to diversify your revenue streams, particularly with wholesale and retail.
DTC brands are not all on a downward spiral. Several brands, especially in shoes and clothing, have reported record sales due to their direct-to-consumer businesses.
A few years ago, DTC was at its peak, then got a big boost again during the pandemic, and obviously, digitally native brands, and even e-commerce companies, are seeing a slower trend.
As a brand grows and establishes itself, omnichannel strategies become essential. For newer brands, DTC may simply be the best place to start. For a new brand, it is difficult to get shelf space right away, since shelf space is limited, so DTC is the best way to launch your brand with the right targeted marketing. – Db
Creating a new brand that resonates with consumers is hard; transforming a hot DTC brand into a sustainably growing and profitable enterprise is much harder. From my observations it appears the key challenge for DTC brands is making the jump to physical stores. It’s well understood that, for most brands, having physical stores in addition to a strong online presence is required for long term success, and herein lies the challenge that many DTC brands encounter. DTC brands need to think through the challenges and opportunities that creating and growing a physical store footprint entail, and unfortunately many DTC brands can’t seem to see past their IPOs.
DTC is not a one size fits all move for retailers. As the department store model fades into the sunset, every brand needs to rethink their distribution strategy. But that doesn’t mean DTC is always a good answer or should even be part of that strategy. It depends mostly on the brand recognition. But even Nike, with huge brand recognition and possibly the most newsworthy DTC convert, has backed off from their DTC commitment.
Warby Parker came from online only, so that’s a different play than say Caspar or Nike or J. Crew or now Hoka. The other sides of the equation are distribution, marketing, and returns logistics. And I’m probably missing some here. Long story short, DTC is not for everyone, and brands should clearly think twice before going all-in on it. It’s all about the shopper and the brand.
DTC has enabled a significant number of brands to appear and flourish in ways unimaginable 20 years ago.
Previously brands were at the mercy of retailers but also competing for shelf-edge placement with much larger organisation.
For someone with an idea and a product, taking it direct to consumer through careful orchestration of social media channels is hugely powerful. It also represents the ability to disrupt markets. Amazing examples of this are Dollar Shave Club – who had a significant impact on Gillette but also Christopher Ward who sell high quality watches direct to consumer – cutting out the traditional jewellery retail channel and thus undercutting many other brands. Christopher Ward have also utilised the ‘influencer’ channel to attain publicity – rather than relying solely on advertising.
The most successful businesses may well get purchased by another organisation – in the way Dollar Shave Club was purchased by Unilever. Consequently a long-term ‘exit strategy’ may well be part of the thinking of brand owners.
Could Warby Parker be purchased by Luxottica or Allbirds by VF Corp?
DTC is nirvana for brands that can pull it off, for all the reasons already known (strong feedback loop, you “own” the customer relationship, pricing power, etc.). Otherwise you are stuck with fighting for shelf space and attention with your retail trading partners-which, from an SG&A perspective represents a fair amount of hidden cost that may companies do not forecast or measure effectively.
The initial starry-eyed appeal of the DTC model and the sexiness of the IPO’s are now barely discernable in our rear view mirrors. The bounce provided by the pandemic has been checked by the realities of post-pandemic performance and math. There is a new normal where consumers don’t really look at channels. They just want to shop with confidence and convenience. And that means some kind of combination of physical stores and ecommerce. It depends on the product, the urgency, availability, quality and price/value, knowns and unknowns. In my view, it is the confidence built at the physical store level that enables ecommerce to operate profitably. Meaning, a minimum of returns, even if the return rate is still higher than physical store shopping.
The convenience of ecommerce + “free” returns created a monster. Growth and customer acquisition made losses look reasonable…for a while. Then all of a sudden the path to profitability looks really murky, and the brand is experiencing a business model crisis, not a simple financial setback. Physical retail isn’t going anywhere and neither is wholesale. DTC will still work, it just won’t be as simple as many thought it would be.
I think this area of Commerce is ripe for continued consolidation and potentially the end of a few brands. Supply chain execution is key, and some companies continue to use 3PL models well past when they should, yielding margin and to some degree control of their order execution. In others, a perfect storm of consumer sentiment changing, new challengers in their space and also a lack of focus on innovation. In Chewy’s example, there’s also the factor of consolidating operations, people and product management / assortment into the acquiring company and not realizing the expected synergies.
The current state of many DTC brands just proves that having a good product isn’t enough to success with consumers. You have to raise enough awareness to acquire new customers. Then you need customers to keep buying. If your DTC product is not an “essential product” or is one with a long lifecycle, it can be challenging maintain growth int he business. It means you need a consistent supply of new customers. Acquiring this new customers via social channels alone is both costly and unsustainable. Growth will hit a ceiling. So what then? Open stores? Find new wholesale channels? The answer is really all of the above, and that carries new operational costs that most digitally native DTC brands did not factor into their original business plan. Many DTC brand then decide to release new products in adjacent categories to capture some of those repeat customers, and this can potentially help create more scale for the business. All of these factors contribute to the success, or lack thereof, of a DTC brand. But if we consider the largest, and most successful consumer goods brands, we’ll find that the majority did not achieve their scale through DTC channels alone!
DTC alone is not profitable at scale. And before you say “Amazon” I would point out that Amazon relies very little on DTC revenue. They make their money through leverage of all of the very expensive assets that are required to operate a DTC business: their tech, their fulfillment, their distribution, their site. The golden age of “DTC darlings”, which was also funded by cheap/free money, is over. Yes, it’s a necessary part of a brand’s strategy, but it is only a part, and one that needs to be managed carefully so as not to tank the rest of your business, as Nike learned the hard way.
As in any business, DTC brands need to focus on their reason to be and do it better than anyone else – in a profitable way. Endless growth is rarely sustainable if the focus is constant product expansion. That seems to be a downfall for many.
Gotta have stores. The catalog business (the original DTC) topped out at 5% of total sales. Obviously eComm is doing better, but I do believe most, if not all of the profits lie in stores.
Paula, Where would Sears be today if they let their catalog morph into what is now Amazon?
This is one of the great tragedies of retail. Sears could have literally been Amazon. Just goes to show what poor management thinking, a lack of vision, and a big dose of short-termism can do to a business!
As a start-up, there is no better way to introduce your product than DTC. It is necessary to spend relatively massive amounts of funds to get the word to consumers. Why not provide them with a venue to also try the product?
Consider how much you would need to spend to generate awareness alone to sustain a new brand through owned stores or retailers. With DTC, I can reach the world.
First of all let’s try to get the definition of DTC straight. It’s anything other than wholesale. So if it is your own store, it’s DTC. As has been true with all direct to consumer for decades, the answer is: it depends. Lots of brand have been wildly successful with a DTC strategy (see Abercrombie & Fitch as just one of many dozens of examples). The mistake that most DNVB’s made is thinking it would be cheap to build a brand online (whoops) and misunderstanding the value (and ROI) from physical presence, be that owned stores and/or wholesale.
Thank you for the distinction between DTC and DNVB. Lots of mall retailers were DTC before we called it DTC.
Remember that pandemic period when we were told store were no longer important? How absurd those predicts now seem!
DTC offers direct customer insights and brand control; traditional channels ensure broader reach and established distribution. Brands can balance between DTC and distribution models through an integrated hybrid approach, combining direct engagement with consumers through DTC channels and leveraging traditional distribution for wider market reach
Strategic partnerships with key intermediaries aligning with brand values can enhance distribution efforts. Employing data-driven decision-making allows brands to allocate resources efficiently based on consumer behavior insights, ensuring a dynamic and optimized balance between DTC and traditional channels.
Long-term DTC success hinges on adapting to challenges, maintaining product quality, strategic cost management, and fostering brand loyalty. Flexibility, customer-centricity, and data-driven decisions are crucial for sustained profitability.
DTC brands should set realistic expectations, prioritize financial resilience, and learn from setbacks. Flexibility and constant adaptation are key.
DTC is a way for brands who has a strong underlying value to get to the consumers to build revenue stream quickly and bypassing the retailer until the brand establishes a better bargaining position. Given the higher cost of capital and customer acqusition, DTC is no longer a “slam dunk” for expansion and brands need to set realistic expectations to investors in terms of growth and profitability.
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DTC is a mixed bag. There are some firms, like Warby Parker and Chewy, that have good underlying business models and a path to sustained profitability. However, there are others, like Allbirds, where the whole reason for existence is questionable. Meanwhile, other players like Wayfair are still cranking out extensive losses. Sadly, for those on the losing side, the cost of capital is much higher and investors are less tolerant of continuous loss-making. 2024 will be the year when reality starts to bite for some of these firms.
Chewy is still not profitable, I don’t think. And Warby has stores. I just think stores are requirements for profits. Wayfair and furniture are a whole other topic I won’t bore you with here, but yeah….stores, or at least warehouse stores would be a BIG help to them.
In the fiscal year to-date, Chewy is profitable at net income level. Although the latest quarter’s numbers were poor and the company made a loss. I think Chewy has a better pathway to profitability because of the habitual nature of what it sells which drives repeat/subscription custom without the need for ridiculous advertising spend. As you say, Paula, Wayfair is a whole basket of something else!
High acquisition costs are a major reason why the market is slowing down. The current economic volatility requires brands to be tighter with their finances and burn…you cannot live and die in it, because you will have to diversify your revenue streams, particularly with wholesale and retail.
DTC brands are not all on a downward spiral. Several brands, especially in shoes and clothing, have reported record sales due to their direct-to-consumer businesses.
A few years ago, DTC was at its peak, then got a big boost again during the pandemic, and obviously, digitally native brands, and even e-commerce companies, are seeing a slower trend.
As a brand grows and establishes itself, omnichannel strategies become essential. For newer brands, DTC may simply be the best place to start. For a new brand, it is difficult to get shelf space right away, since shelf space is limited, so DTC is the best way to launch your brand with the right targeted marketing. – Db
Creating a new brand that resonates with consumers is hard; transforming a hot DTC brand into a sustainably growing and profitable enterprise is much harder. From my observations it appears the key challenge for DTC brands is making the jump to physical stores. It’s well understood that, for most brands, having physical stores in addition to a strong online presence is required for long term success, and herein lies the challenge that many DTC brands encounter. DTC brands need to think through the challenges and opportunities that creating and growing a physical store footprint entail, and unfortunately many DTC brands can’t seem to see past their IPOs.
DTC is not a one size fits all move for retailers. As the department store model fades into the sunset, every brand needs to rethink their distribution strategy. But that doesn’t mean DTC is always a good answer or should even be part of that strategy. It depends mostly on the brand recognition. But even Nike, with huge brand recognition and possibly the most newsworthy DTC convert, has backed off from their DTC commitment.
Warby Parker came from online only, so that’s a different play than say Caspar or Nike or J. Crew or now Hoka. The other sides of the equation are distribution, marketing, and returns logistics. And I’m probably missing some here. Long story short, DTC is not for everyone, and brands should clearly think twice before going all-in on it. It’s all about the shopper and the brand.
DTC has enabled a significant number of brands to appear and flourish in ways unimaginable 20 years ago.
Previously brands were at the mercy of retailers but also competing for shelf-edge placement with much larger organisation.
For someone with an idea and a product, taking it direct to consumer through careful orchestration of social media channels is hugely powerful. It also represents the ability to disrupt markets. Amazing examples of this are Dollar Shave Club – who had a significant impact on Gillette but also Christopher Ward who sell high quality watches direct to consumer – cutting out the traditional jewellery retail channel and thus undercutting many other brands. Christopher Ward have also utilised the ‘influencer’ channel to attain publicity – rather than relying solely on advertising.
The most successful businesses may well get purchased by another organisation – in the way Dollar Shave Club was purchased by Unilever. Consequently a long-term ‘exit strategy’ may well be part of the thinking of brand owners.
Could Warby Parker be purchased by Luxottica or Allbirds by VF Corp?
DTC is nirvana for brands that can pull it off, for all the reasons already known (strong feedback loop, you “own” the customer relationship, pricing power, etc.). Otherwise you are stuck with fighting for shelf space and attention with your retail trading partners-which, from an SG&A perspective represents a fair amount of hidden cost that may companies do not forecast or measure effectively.
The initial starry-eyed appeal of the DTC model and the sexiness of the IPO’s are now barely discernable in our rear view mirrors. The bounce provided by the pandemic has been checked by the realities of post-pandemic performance and math. There is a new normal where consumers don’t really look at channels. They just want to shop with confidence and convenience. And that means some kind of combination of physical stores and ecommerce. It depends on the product, the urgency, availability, quality and price/value, knowns and unknowns. In my view, it is the confidence built at the physical store level that enables ecommerce to operate profitably. Meaning, a minimum of returns, even if the return rate is still higher than physical store shopping.
The convenience of ecommerce + “free” returns created a monster. Growth and customer acquisition made losses look reasonable…for a while. Then all of a sudden the path to profitability looks really murky, and the brand is experiencing a business model crisis, not a simple financial setback. Physical retail isn’t going anywhere and neither is wholesale. DTC will still work, it just won’t be as simple as many thought it would be.
I think this area of Commerce is ripe for continued consolidation and potentially the end of a few brands. Supply chain execution is key, and some companies continue to use 3PL models well past when they should, yielding margin and to some degree control of their order execution. In others, a perfect storm of consumer sentiment changing, new challengers in their space and also a lack of focus on innovation. In Chewy’s example, there’s also the factor of consolidating operations, people and product management / assortment into the acquiring company and not realizing the expected synergies.
The current state of many DTC brands just proves that having a good product isn’t enough to success with consumers. You have to raise enough awareness to acquire new customers. Then you need customers to keep buying. If your DTC product is not an “essential product” or is one with a long lifecycle, it can be challenging maintain growth int he business. It means you need a consistent supply of new customers. Acquiring this new customers via social channels alone is both costly and unsustainable. Growth will hit a ceiling. So what then? Open stores? Find new wholesale channels? The answer is really all of the above, and that carries new operational costs that most digitally native DTC brands did not factor into their original business plan. Many DTC brand then decide to release new products in adjacent categories to capture some of those repeat customers, and this can potentially help create more scale for the business. All of these factors contribute to the success, or lack thereof, of a DTC brand. But if we consider the largest, and most successful consumer goods brands, we’ll find that the majority did not achieve their scale through DTC channels alone!
DTC alone is not profitable at scale. And before you say “Amazon” I would point out that Amazon relies very little on DTC revenue. They make their money through leverage of all of the very expensive assets that are required to operate a DTC business: their tech, their fulfillment, their distribution, their site. The golden age of “DTC darlings”, which was also funded by cheap/free money, is over. Yes, it’s a necessary part of a brand’s strategy, but it is only a part, and one that needs to be managed carefully so as not to tank the rest of your business, as Nike learned the hard way.
As in any business, DTC brands need to focus on their reason to be and do it better than anyone else – in a profitable way. Endless growth is rarely sustainable if the focus is constant product expansion. That seems to be a downfall for many.
Gotta have stores. The catalog business (the original DTC) topped out at 5% of total sales. Obviously eComm is doing better, but I do believe most, if not all of the profits lie in stores.
Paula, Where would Sears be today if they let their catalog morph into what is now Amazon?
This is one of the great tragedies of retail. Sears could have literally been Amazon. Just goes to show what poor management thinking, a lack of vision, and a big dose of short-termism can do to a business!
As a start-up, there is no better way to introduce your product than DTC. It is necessary to spend relatively massive amounts of funds to get the word to consumers. Why not provide them with a venue to also try the product?
Consider how much you would need to spend to generate awareness alone to sustain a new brand through owned stores or retailers. With DTC, I can reach the world.
First of all let’s try to get the definition of DTC straight. It’s anything other than wholesale. So if it is your own store, it’s DTC. As has been true with all direct to consumer for decades, the answer is: it depends. Lots of brand have been wildly successful with a DTC strategy (see Abercrombie & Fitch as just one of many dozens of examples). The mistake that most DNVB’s made is thinking it would be cheap to build a brand online (whoops) and misunderstanding the value (and ROI) from physical presence, be that owned stores and/or wholesale.
Thank you for the distinction between DTC and DNVB. Lots of mall retailers were DTC before we called it DTC.
Remember that pandemic period when we were told store were no longer important? How absurd those predicts now seem!
DTC offers direct customer insights and brand control; traditional channels ensure broader reach and established distribution. Brands can balance between DTC and distribution models through an integrated hybrid approach, combining direct engagement with consumers through DTC channels and leveraging traditional distribution for wider market reach
Strategic partnerships with key intermediaries aligning with brand values can enhance distribution efforts. Employing data-driven decision-making allows brands to allocate resources efficiently based on consumer behavior insights, ensuring a dynamic and optimized balance between DTC and traditional channels.
Long-term DTC success hinges on adapting to challenges, maintaining product quality, strategic cost management, and fostering brand loyalty. Flexibility, customer-centricity, and data-driven decisions are crucial for sustained profitability.
DTC brands should set realistic expectations, prioritize financial resilience, and learn from setbacks. Flexibility and constant adaptation are key.
DTC is a way for brands who has a strong underlying value to get to the consumers to build revenue stream quickly and bypassing the retailer until the brand establishes a better bargaining position. Given the higher cost of capital and customer acqusition, DTC is no longer a “slam dunk” for expansion and brands need to set realistic expectations to investors in terms of growth and profitability.