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.

And when these digital arbitrages—like low CAC on platforms such as Facebook, Google and Instagram—increased in price, DTC businesses became a less attractive investment opportunity.

Once search happened on a social network, you’re on your way to paid advertising, and once paid advertising becomes ubiquitous, everyone has the same access to it [and it] becomes democratic—there’s no arbitrage,” Derris explains.

Like Derris, Emily Heyward, co-founder and chief brand officer of Red Antler, the agency behind the aesthetic of challenger brands like Casper, also takes issue with the term DTC. She recently told Adobe 99U one of her New Year’s resolutions is to remove the acronym from her vocabulary entirely. She notes that the label defines a company that only operates digitally—a model that many new brands are moving away from.

Companies like shoemaker Allbirds (launched in 2014) and furniture firm Burrow (2017), for example, opened physical stores to complement their online presence, adopting a bricks-and-clicks strategy.

Rothy’s approach is to own the supply chain and let customers vote for favorite old styles—which in turn lets Rothy’s only produce silhouettes it knows will sell. It can also pull new shoe styles when they don’t meet its standards, as it did with its “Slide” silhouette in May 2019.

Rothy's approach is to own the supply chain and let customers vote for favorite old styles.

We can build this process as we go, which is definitely something that people are going to try and reverse engineer,” says Elie Donahue, svp, marketing at Rothy’s.  

Rothy’s will “continue to have thoughtful growth,” she says, such as testing new styles, as it did with a sneaker in 2018 and with a wool shoe in fall 2019. A growing retail footprint is also in the works for the brand, with three stores currently open and a wholesale relationship with Neighborhood Goods’ two stores.

“This is just the beginning,” says Donahue. “We see this woman everywhere. We have developed this product that she just loves, and now is the time and the moment to deliver and give her what she needs.”

The ways forward

Paul Munford, founder of Lean Luxe, an ecommerce newsletter and investor in DTC brands like cookware startup Great Jones and Gen Z underwear company Parade, says the DTC category is still in the process of maturing and evolving. But even if it’s experiencing growing pains, its impact is undeniable.

No one company is going to take over P&G,” he says, “but what [DTC brands] have been able to do [is] reshape the conversation and make the marketplace more about the consumer than the conglomerates themselves.”

“We saw a lot of exuberance around commerce and DTC brands, and there are certain categories and companies [where we’ll see] very large outcomes,” says Laura Chau, principal at Canaan Partners. “We haven’t seen that many exits, and that’s part of where this whole equation needs to be tested.”

From the venture side, Andrea Hippeau, principal at Lerer Hippeau, a venture fund whose portfolio includes Casper and Glossier, says the newest crop of DTC brands, like the piercing shop Studs, is focusing on sustainability and community building. First- and second-wave DTC brands focused on hero products or owning the supply chain. But to become successful in today’s landscape, it’s not enough—and even legacy companies are expanding beyond these initial brand storytelling moments.

Piercing shop Studs is focusing on sustainability and community building.

Allbirds, for example, hands out unique pins in each of its stores as a gift to customers and encourages them to share their shoe style with the hashtag #weareallbirds. Universal Standard lets customers book its showroom for meetings and parties, free of charge. Burrow has teamed up with pet brand Wild One and CBD drink Recess to stage events at its SoHo store in New York.

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

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