DTC Brands Struggle Even as Online Sales Rise Due to COVID-19
Photo of Away luggage
While consumers are avoiding stores and are shopping more online not all eCommerce retailers are benefiting from this shift. Direct to consumer retailers which span the likes of Away luggage to Casper to ThirdLove are struggling because of the COVID-19 pandemic. At $14.28 billion direct to consumer retail comprises just 2.6% of eCommerce sales in the U.S. but over the last several years sales from these retailers have grown quickly with direct to consumer retail sales up 33.1% in 2019 and up 56.5% in 2018. But since the pandemic hit these retailers have taken a hit. Recently ThirdLove laid off 30% of its workforce, Everlane’s eCommerce sales are down 25% and Away’s sales are down 90%.
A precarious time
Many direct to consumer retailers grew quickly by using savvy marketing to fuel their growth. Facebook and Instagram ads in particular have been the drug of choice for many years. Take online mattress retailer Casper. One of the drivers of Casper’s success has been its marketing with mattresses that are delivered in Instagramable friendly packaging. Influencers like Kylie Jenner have marketed Casper’s products on their social medial channels, reaching millions of people.
But over time as more and more retailers entered the direct to consumer space due to low barriers of entry it became crowded. There are more than 100 online mattress retailers in the U.S. that are seeking to be the next Casper or better. Increased competition has also increased marketing costs. In nearly four years, by September 2019, Casper spent $423 million on marketing. But Casper loses $157 dollars on every mattress it sells mostly due to the $305 it spends in marketing to get each sale.
High customer acquisition costs have brought into question the viability of the direct to consumer business model. Can a retailer have a viable business without retail stores with marketing as the primary vehicle for attracting new customers? The answer is no. Direct to consumer leaders like Warby Parker have opened hundreds of stores and brick and mortar stores have been a crucial source of revenues and growth. The CEO of minimalist clothing brand Everlane, Michael Preysman once told the New York Times: “we are going to shut the company down before we go to physical retail”.
Five years later Everlane back tracked and opened its first store in 2017. Speaking about the change in direction Preysman said: “when you’re in the online-only world, you can’t bring people into your space and your brand the same way you can with a physical store.” Other direct to consumer brands like Quip, Harry’s and Casper have ended up on the shelves at Target. It’s easier to stumble upon a new product while conducting a weekly shopping trip, this is especially the case for new digital brands that are still trying to building their brands.
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Retail stores it turns out is the strategy for achieving more profitable growth for direct to consumer retailers. Where does that leave these retailers during the COVID-19 crisis? In a precarious position. The challenge with a business model that is built largely on Facebook advertising to lure new customers in is that while customers may bite after seeing a few cool ads they may not become loyal to the brand.
In times like this when consumers are dramatically cutting back on spending they are more likely to choose brands that they have shopped with consistently over time and trust. That means the brands that are in the best position to weather the storm are brands like Nike or lululemon which have already created a real and long lasting relationship with their customers.
The other challenge for direct to consumer brands is that many consumers are not in the mood right for the very thing that has been key to their success. According to a survey of 35,000 people by Kantar Consulting, only 30% of consumers want to see brands offering discounts and promotions right now. 40% of consumers want to see brands making donations of products such as hand sanitizers or face masks.
Matt Scanlan, an investor in Buffy and True Botanicals, and CEO of Naadam Cashmere has said: “brands that have been backed by venture capital and private equity are expected to reach certain growth milestones on an annual basis. This means ramping up their staff and production months before they’ll reach that target, which means they might be carrying a lot of extra overhead right now.” Many direct to consumer brands have already cut their marketing budgets because of COVID-19. To reduce the risk of bankruptcy these companies are also cutting headcount. Once those resources are cut it is increasingly difficult to run a business.
The final blow to many direct to consumer retailers is that many of the leading ones like ThirdLove or Away luggage do not sell essential goods. “Even though consumers are buying more products online due to the coronavirus, digitally native [direct-to-consumer] brands should anticipate hardships in the coming months” eMarketer Analyst Oscar Orozco said. “Sales will continue to shift from nice-to-have products to must-have products, with [direct-to-consumer] brands falling under the nonessential category,” “Disruptions in the supply chain are also likely. That will mean slower shipping times, normally a distinguishing factor for [direct-to-consumer] products” he said.
Unfortunately what this time is going to reveal is which direct to consumer retailers have staying power and which do not. The brands that were already in a solid financial position pre-crisis may have the cash to make it through and those that were not may not. Since the climate for venture capital has soured the source of funding for many of these companies may have dried up and may not return in the foreseeable future. WeWork is already suffering from this. SoftBank recently pulled out of a $3 billion investment in the company citing the coronavirus as one of the reasons.
Speaking about why direct to consumer brands are struggling to grow, Andrew Lipsman, Principal Analyst at eMarketer said: “the same low barriers to entry that enabled D2Cs to spring up overnight have also led to overcrowding and increased customer acquisition costs (CACs). Many D2Cs also lack the competencies to scale their brand via new advertising and sales channels.” Lipsman has also said: “you have a lot of these smaller and medium-sized players that are now running into headwinds in terms of growing online,” “Much of their incremental growth..[comes from] offline channels.” Within the current situation opening stores is no longer a path to profitability. But omni-channel retail is still the best model its just on hold until things return to normal.