What it takes to be a successful DTC brand in 2023
Direct-to-consumer brands have faced a number of challenges in the first several weeks of 2023 alone.
After being faced with early pandemic disruptions, including store closures, staff cuts and supply chain turbulence, brands are now met with new challenges, including the impacts of inflation and the higher costs of doing business.
Over the past several months, brands including Everlane, Wayfair and Warby Parker have announced new rounds of layoffs in an effort to cut costs.
Other brands — like Glossier, The Ordinary, Dr. Dennis Gross and Nugget — have raised prices as a result of increased production and shipping costs.
For some companies, the difficulties over the past several years have proved to be too much for their businesses. Already in 2023, Forma Brands, the parent company of beauty brand Morphe, filed for Chapter 11 citing liquidity and operational issues as a result of the pandemic, changing consumer beauty habits and terminated influencer partnerships. And it likely isn’t alone.
Experts are predicting many brands won’t make it through this new round of challenges.
So, as competition heats up — and funding becomes harder to come by — what does it take for a DTC brand to be successful in today’s retail environment?
‘You can't just roll out the DTC playbook’
Over the past decade, “DTC” has grown from a buzzword in retail to a widely used business model. The space has become increasingly crowded from both startups and traditional retailers adopting the model.
Levi’s, Adidas, Nike and Under Armour have all outlined plans to lean more into their direct-to-consumer businesses.
“There's a lot more competition. They're no longer the rebels. They're becoming a bit more mainstream,” said Jonah Ellin, chief product officer at 1010data, adding that the term DTC is “becoming more jumbled and confusing. There are so many brands and because so many of the national brands are now establishing their own DTC, it is certainly becoming a much more crowded space.”
And what consumers are interested in is becoming more focused. Today’s consumers, particularly those in younger generations, are increasingly seeking out brands that tout social or environmental good, according to Ellin.
“Buy a pair of socks for you, we’ll give a pair of socks to charity. Purchase these products and you're also helping to save the environment. I think that's really something that's building loyalty with those customers and establishing the relationship,” Ellin said.
To succeed, brands not only need to have a mission that’s attractive to customers, but also meet consumers where they’re shopping.
As a result, many digitally native brands have taken their business offline and moved into brick and mortar through pop-up stores or permanent locations. Allbirds has opened several locations over the years — including in New York, Colorado and California — and now operates around 60 stores. Glossier and ThirdLove have also pushed into physical retail recently. And Warby Parker as of November operates just under 200 stores.
“The difference between a store and a website is a store is on the street,” Emmett Shine, co-founder of former brand agency Gin Lane and multi-brand DTC company Pattern Brands, said. He added that brick-and-mortar locations can serve as an additional marketing channel for brands looking to acquire and retain customers.
Other brands have inked wholesale deals as a way to get their products in front of customers. Skincare brand Loops earlier this month announced a nationwide expansion into Target after already forming partnerships with Nordstrom and Ulta Beauty. Casper has entered retailers like Costco, Nordstrom and Bed Bath & Beyond. And Allbirds has hit the shelves of REI, Zalando, Dick’s Sporting Good’s Public Lands banner and Nordstrom.
“There's a lot of value from it,” Shine said. “You can effectively meet high attention customers where they're at, while getting very good brand awareness at a price point ratio for what you send and what you get back that is ensured and understood and relatively stable.”
Pushing into wholesale has become necessary for many brands looking to scale their businesses because it introduces a brand to a broader set of consumers and helps to legitimize it. However, it does come with some risks.
When a brand enters wholesale, it loses some control over its messaging that it otherwise would be able to manage within its own stores.
“Once you decide to open up to other channels, it can be a great route to expansion, but you will lose some of that relationship. You will lose a lot of that control,” Ellin said. “That needs to be a careful consideration if you're going to go that pathway.”
Physical retail is also becoming an increasingly important marketing channel for brands as they continue to grapple with the effects of the iOS14.5 update, which made tracking online activity through apps like Facebook much more difficult.
“It's a lot noisier, it's harder to cut through. You can't just roll out the DTC playbook, like Warby Parker did, and use Facebook to really generate the first initial audience and target the consumer base as efficiently as you once could,” Alex Song, founder and CEO of Proxima, said.
So as the DTC space becomes more crowded, it’s becoming increasingly more important for brands to prove they have a real value proposition.
According to Song, while it’s “meaningfully easier” now to launch a brand than ever before because finding manufacturers to work with — which was once a challenge for DTC brands — has become easier, successfully executing on their business objectives is where challenges begin to arise.
“It's easy to market anything but the fulfillment side of it and becoming that trusted partnership between the customer and your brand is really critical,” Ellin said.
And while the early days of DTC included a lot of disruption to traditional retailers, given today’s competition, brands will need to lean on those aspects that distinguished them from the start to set themselves apart: effectively connecting with their customers.
Part of this will mean offering consumers an experience that can only be encountered directly through their channels. For example, Converse can be bought through several traditional retailers, including DSW, Kohl’s and Finish Line. But by shopping directly from Converse’s website, consumers are given the ability to create custom shoes, giving them control over the material, print and other aspects of the product’s design.
“I could buy a pair of high tops in a store, but I can go directly to the website and buy custom high tops that have the designs on them that are going to be more reflective of who I am,” Ellin said.
The new era of DTC
While early DTC darlings helped pave the way for brand launches over the years, the strategies necessary for success have changed.
“I think DTC as we knew it — from the Warby Parker and Dollar Shave Club days — is dead. The playbook has changed,” Song said. “We’re probably already past DTC 2.0, and are working on what does 3.0 now look like?”
As far as what’s important in this new DTC era, Song said brands need to be committed to ensuring they can deliver on promises to consumers, seek out new customer acquisition opportunities — like partnering with a celebrity or personality — to grow their audiences, and providing value to consumers.
To the latter point, proving their value is becoming more important in getting consumers to ultimately make a purchase, especially in today’s economic environment where shoppers are more mindful of their buying behavior. They are seeking to get the best value and quality out of the products they do buy, Song says.
“Many people are going to be more economically conscious,” Song said, adding that customers are concerned about “getting as much value as I can out of purchasing from this brand. That's where the quality of a product becomes more important than ever.”
“I think there will be a big cleansing of the DTC landscape."
Founder and CEO of Proxima
Brands can no longer just focus on launching with an appealing aesthetic, but must ensure that they have a clear product market fit in order to be successful.
“There's a lot of really great founders with a lot of really great ideas — great branding, great typography, cool marketing, great photography. They're digitally savvy, they're good on social media. Those are kind of table stakes now,” Shine said. “What's so hard today is to actually make a product that has good unit economics on it. It's really hard to make a product that is high quality, that people want, that you're going to break even by the time you actually sell to market, and pay for your overhead and do everything. That's what so many people fall into.”
One of the biggest challenges many brands are still trying to overcome today is figuring out how to scale a business profitably.
“You've heard many stories where people were writing checks for businesses that were losing a lot of money. The previous sentiment was: Well, if you grow your top line enough and you have a big enough brand presence, you can figure out the profitability and operational disciplines later,” Song said. “The environment today where capital is much more expensive ... every investor out there is asking, ‘What are your unit economics?’ This matters more than ever because that is a big sign of what the value proposition is in terms of your business and your product.”
But trying to grow a business through multiple funding rounds while operating unprofitably isn’t sustainable, Song added, especially as investors pivot away from the “growth-at-all-costs” mindset and funding becomes more scarce.
“I kind of think of Series B as a line in the sand where if you got to a Series B at this point — you have enough scale, you have enough capital — that you have to actually figure out how to run a profitable business,” Song said. “If you are able to run a profitable business, you have a much more increased likelihood to be able to navigate these challenging and choppy waters ahead. But if you didn't get there, and you didn't raise enough money that you're going to have enough runway to last, and you didn't get to this more profitable version of your business where you're not just growing at all costs, you're going to have a hard time.”
This has become a pinnacle moment for DTC brands that are still struggling to reach profitability, which may result in a narrowing of competition.
“My bet is you're going to have a lot of brands fold. Just basically say, ‘We're not doing this anymore. Doesn't work. Can't get money,’ unfortunately,” Song said. “I think there will be a big cleansing of the DTC landscape if you will. You'll see the people that made it are going to be benefiting from a less noisy environment.”