For the Next Wave of DTC Brands, the Path to Success Looks More Complicated Than Ever

How they will need to evolve in order to be profitable

Collage of DTC businesses
Investments in ecommerce companies and related businesses declined 8% to $19.7 billion in 2019.

Ten years ago, when the internet still held infinite possibilities, a new breed of brand built on the web began to pop up, promising to cut out the middleman and bring consumers cheaper, better products.

This newfangled category was given the very official-sounding name “direct to consumer” (DTC). And then, because one buzzword is never enough, Andy Dunn, co-founder of Bonobos, coined “digitally native vertical brand” (DNVB) in 2016 as an alternative—and pretty soon rookie brands like Bonobos, Dollar Shave Club, Everlane and Glossier became synonymous with the segment. Women’s shoe brand Rothy’s, for example, is emblematic of DTC brands’ early success. Founded in 2012 and fully launched in 2016, and known for its professional, washable and sustainably made flat, the company is now valued at $700 million, has raised $42 million in three rounds of funding and has been profitable since day one.

Each promised to use the powers of the internet for good while taking away market share from the entrenched incumbent conglomerates like Unilever and retailers like Gap, which were largely creating siloed ecommerce strategies from brick-and-mortar shops, with a much less direct relationship with consumers.

Shoppers, and investors, responded enthusiastically.

But the DTC fervor is dying down. Investments in ecommerce companies and related businesses declined 8% to $19.7 billion in 2019, down from $21.5 billion the year before, according to research firm CB Insights. And the past few weeks have brought a parade of punishing headlines: The luggage company Away had a leadership meltdown after the CEO’s Slack messages were leaked to the press. Athletic-apparel company Outdoor Voices’ CEO stepped down after poor financial results. Brandless, which offered everyday household items in minimalistic packages at low prices, abruptly halted operations because the “fiercely competitive direct-to-consumer market has proven unsustainable for our current business model.” And Edgewell abandoned its $1.37 billion acquisition of Harry’s razor company after the FTC sued on grounds that the deal was bad for consumers.

Casper's IPO recently valued the company at about $468 million instead of the $1.1 billion projected a year earlier.

Tempting as it may be, don’t call it a bubble. Insiders we spoke to—from vps at DTC brands to venture capitalists on the front lines—instead said a correction is upon us. To navigate DTC 3.0, the next wave of brands will have to go beyond simply being digital, mastering values like community and sustainability. And their investors will have to adopt more realistic financial expectations, with acquisitions looking less like Unilever’s $1 billion purchase of Dollar Shave Club and more like Casper’s IPO, which recently valued the company at about $468 million instead of the $1.1 billion projected a year earlier.

A new era in the industry is here, with insiders calling on the category to combine the flexibility and customer-centricity of DTC with the core strengths of traditional retail.

Identity crisis

Derris, a public relations and marketing consultancy, is often credited with helping DTC darlings like Everlane, Glossier, Harry’s and Warby Parker grow. In the early days, DTC brands were known for a customer-centric mindset and an emphasis on storytelling, and it was possible to advertise on digital channels for cents because customer-acquisition costs (CAC) were low and social media channels weren’t saturated with DTC messaging.

But now, says founder and CEO Jesse Derris, the moniker has come to represent brands whose “primary consideration was the customer experience,” with a strong ability to tell a story about a product—as opposed to solely delivering products on a one-on-one basis to customers. He points out that DTC brands sprouted because of a digital arbitrage—and that investors pumping money into them misunderstood the margin structure of a consumer business, mistakenly assuming that a DTC operation functions just like a tech company.

This story first appeared in the March 2, 2020, issue of Brandweek magazine. Click here to subscribe.

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