This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →
For many consumer startups, 2023 is proving to be a tough year, and the challenges show no signs of abating anytime soon.
While inflation has cooled, it hasn’t gone away completely. Brands still have to grapple with raw materials getting more expensive or plan around some key ingredients being more difficult to source. Meanwhile, capital remains hard to access, as VC funding in North America fell during the second quarter.
In turn, the sentiment among many founders this year is to look for ways to continuously conserve cash. That means looking for creative ways to pay for things, like by using credit card points to buy office supplies. On the employee side, they are looking at which functions they can bring in-house, or consolidate into an existing role. On the product side, the profitability of every single SKU is being examined, with the worst-performing ones getting the axes. It also means having to mean making hard choices like being more conservative with new product launches, or cutting back on wholesale expansion — things that would have been considered unthinkable when funding was easier to come by.
There is one bright spot: people are still spending. Retail sales grew 1.7% in June, according to the Commerce Department. Nonetheless, the bottom is falling out for many DTC brands, as we wrote about last week. Some startups are filing for bankruptcy, while others are looking to replace their CEOs amid a tough year. And it seems like there’s always a new crisis around the corner that could wreak havoc on people’s business, from a potential UPS strike to the return of student loan payments.
Much of this cost cutting started taking place at the end of last year. But now is when founders are starting to see the changes they made are paying off — or if further cost cutting is necessary. As Aaron Luo, co-founder and CEO of bag brand Caraa and CPG startup Mercado Famous put it, “cash is king in uncertainties.” While some DTC brands have been able to get through 2023 relatively unscathed — and may end the year with sales growth — they have been preparing for the worst.
“You can always redeploy cash,” Luo said. “When you are dealing with uncertainty, I think it’s wiser to be conserving cash versus business as usual.”
Take Weezie, a startup that sells monogrammed towels and other home goods. Weezie co-founder and CEO Lindsey Johnson said her company started to take more steps to conserve cash, and have less product on hand, at the end of 2022. As big retailers grappled with an inventory glut, Johnson didn’t want to contend with the same thing in 2023.
“We are not buying new launches as big as we may have previously,” Johnson said. Instead, she’s more focused on staying stocked up on Weezie’s best sellers, the products that drive the bulk of the company’s revenue.
When Weezie launched pool lounge covers this summer, the company opted to go with a conservative initial order — with Weezie’s merchandiser warning that it would probably sell out quickly. Indeed, the lounge cover sold out within three weeks, and has been on back order for most of the summer.
Johnson said that in 2021, when a grow-at-all-costs mentality was the norm, she probably would have thought “oh god, we left money on the table, this launch sold out so fast, we’re so annoyed.” But this year, she said she’s much more comfortable leaving money on the table instead of running the risk of overbuying.
Similarly, Luo said that at Caraa, the brand has been much more focused on finding ways to use as many of the same materials as possible for a new collection. “Instead of coming up with or developing 10 different materials [for one collection], we are holding on to our anti-bacterial lining for all of our bags,” he cited as one example.
In order to conserve more cash this year, Weezie has also brought some functions in house, like influencer management and engineering and development. Johnson said she’s also gotten more creative with some buys. For example, she buys all of the company’s office supplies now using credit card points.
How much of a cash crunch startups face right now depends greatly on what sector they operate in, and how reliant they are on DTC sales. Alison Cayne, founder and CEO of sauce startup Haven’s Kitchen, said she feels like CPG startups face a “perfect storm” right now.
Like other startups, CPG brands have to contend with rising raw material costs. But given that grocery is one of the areas that has been most heavily impacted by inflation, it is also the area where some shoppers are cutting back most significantly. Cayne also said that climate change is leading to shortages of key ingredients. In turn, Haven’s Kitchen had to reformulate one of its products that previously contained mirin after that item experienced a shortage last year.
Cayne, like other founders, has had to make some hard decisions in order to improve the profitability of her product portfolio. Last year, Haven’s Kitchen discontinued two SKUs, a harissa sauce and a barbecue sauce. While both items had “superfans,” Cayne said that these two SKUs were the least likely to be picked up by retailers and in turn, were the least profitable.
Given that Haven’s Kitchen operates in a category — refrigerated condiments — that only has so much shelf space in any given store, “it was unlikely for any retailer to take more than four or five SKUs,” Cayne said. “There was always going to be a bottom two.” She advised other founders: “You have to be sort of relentless when looking at your SKUs”
Cayne said that she has also been looking more closely at cutting unprofitable retail accounts. “There are some retailers that we all have been sort of comfortable losing money in because they were arguably better marketing channels, or they gave us attention, or they made us look big to potential investors,” Cayne said. “I think people have started to wean themselves off of those accounts.”
During the previous growth-at-all-costs mentality in the CPG space, there used to be much more of a willingness from startups to launch in bigger retailers for the name recognition, even if they required startups to spend heavily on things like trade marketing and slotting fees. But now, there is more of a realization of “wait a second, I’m losing money on every single sale I’m making in this retailer,” Cayne said. And startups can no longer justify that while investor money is still hard to come by.
A lot of what Cayne said she is speaking with other CPG founders about is “going back to the basics of business.” For example, more closely scrutinizing gross margin, since that is “always going to be the number one contributor to profitability.” Or, figuring out ways to bring more money in while slowing down the amount of money going out, such as extending the payment window with a co-packer from 30 days to 45 or even 60 days.
“They are pretty straightforward rules,” Cayne said. “I think the rules have just been a little cloudy over the last couple years, because there has been so much money being spent on stuff that it made people feel like they needed to spend on stuff.”
What I’m reading
- Savannah Sachs, CEO of digitally-native skincare brand Tula, is stepping down. Tula was acquired by Proctor & Gamble in 2022 and the conglomerate’s CEO of specialty beauty, Colin Walsh, will oversee the brand until a permanent CEO is hired.
- Period care brand August has hired its first vice president of marketing, Diane Lewis.
- Oddity’s stock popped 35% last week on the day it went public, a promising sign for other consumer startups hoping to go public soon.
What we’ve covered
- Shopify aggregator OpenStore shared how it scaled one of the brands it has acquired, Jack Archer, from $1 million to $10 million in sales.
- Roughly a year after the recall of one of its products, Daily Harvest has landed its first major wholesale deal with Kroger.
- Brooklinen co-founder Rich Fulop has stepped down as CEO eight years after launching the home goods brand. An active search for a permanent replacement is underway.