Direct-to-Consumer (DTC) brands have grabbed much attention in the last several years, but is the bloom off the rose? This Modern Retail article defines a zombie brand as “one that simply isn’t growing. Maybe it has enough money to keep operating but not enough to pay off its liabilities.”
Gary Vaynerchuk went a step further in his prescient 2019 comment: “98% of DTC brands are already out of business; they just don’t know it yet.” Perhaps his ad/media agencies had a DTC client or two that did a dine-and-dash instead of sticking around to pay the bill.
I’d like to build on the well-written Modern Retail article and posit a few underlying reasons for the DTC-pocalypse.
Trade Media Narrative
Media shapes perceptions and points-of-view, and industry-based media is no different, whether it’s Advertising Age, Fast Company, or online-only content (whether editorial or sponsored / pay-to-play). Did all the publicity and adoration bestowed on these brands by the trade press ever square with reality? My experience as a consumer with DTC brands says no:
I tried Warby Parker, but bought a pair only after I walked into a store to try on 25 of them, not after they’d sent me 5 via FedEx.
I tried Hello Fresh meal kits, but only during the pandemic when Canadian authorities forced me to quarantine for two weeks after crossing the border. My daughter and I thought the meals were great, but being outlawed from the grocery store doesn’t inspire long-term loyalty.
I’m curious to learn about your experiences. Which DTC brands have you tried, and have you stuck by them?
The Power of Interest Rates
When rates were held artificially low – like for much of the last 15 years – people buy more big things like cars, houses, and companies. When they're earning next to nothing on money sitting in the bank, they put it in play. Even behind ideas that might not warrant it.
I believe that the market – individual buyers and sellers, loaners and lenders – should set interest rates, like they did for all recorded human history until The Fed and its global equivalents were created. This would’ve set the cost of capital – and resultant hurdle rates – at higher levels, raising the bar on DTC brands' viability.
If It Ain’t Broke…
Consumer behavior changes in far more subtle ways than we think. Prior to DTC brands, there was very little broken in the way consumers bought goods.
Stores enable retailers to provide an astonishing array of products for consumers in a relatively compact footprint (even club / superstores). Lost in the media coverage behind the rapid growth of e-commerce is that a huge portion of it comes from two sources: Retail.com websites of Walmart, LuLuLemon, Best Buy, Dick’s Sports, etc.,… with an easy return-to-store option, and...
Amazon enables consumers to buy a nearly endless shelf of goods from one app. Why go anywhere else? Amazon Prime’s flat annual fee for “free” delivery” has made 2/3 of Americans Prime customers.
How many consumers have the money, time, and patience left over to buy niche e-commerce brands? Are our options for buying socks so limited that we need to go to Stance to order them? Or to Graze for healthy snacks? I’d never heard of either brand until doing research for this article.
Over-Exuberant Projections
I covered this in detail in a separate piece: On Thin Ice: The Hidden Risks of Hockey Stick Graphs. You can bet that every DTC's investor pitch deck showed unabated growth in its industry, category, and thus company revenue projections. Anyone can plug an Excel model with ever-larger numbers, but those folks are often long gone by the time reality has sunk in a few years down the line.
Some DTCs are profitable, but virtually none are publicly traded for us to be able to tell. If even stalwarts like Allbirds, Warby Parker, and Rent the Runway have struggled to turn a profit, it doesn’t bode well for lesser-known players, unless their differentiation enables them to charge healthy price premiums that defray their operating expenses. HelloFresh, the global leader in meal kits, operates at a 5% EBITDA margin.
Recommendations
Despite these realities, not all is lost. There are steps DTC brands can take to find a path toward profitability:
Understand your customers at a deeper level -- in quantitative and qualitative terms -- so you can delineate profitable from unprofitable ones and go find more "lookalikes" of the former type.
Determine which of your products (or services) account for the majority of the profit and migrate your portfolio accordingly, whether launching more of those that are working or discontinuing marginal items that may only add complexity to your operations and to customers' buying decisions.
Scrutinize paid social media spend -- especially Facebook and Instagram -- which has ballooned in recent years due in part to bidding-up by DTC brands. Customer Acquisition Cost (CAC) grew by 60% in the several years since 2013, according to Shopify, and by all indications has continued to grow, whereas DTC brands' prices haven't increased by commensurate amounts to defray the costs. This is a key reason why their P&Ls are now upside-down. Cutting one's way to prosperity seldom works, but neither does overpaying to acquire customers who are apt to churn quickly.
If you need help in assessing any of this, I'd be happy to discuss the work I've performed as an independent consultant to similar businesses.
Comments