DTC Briefing: Buyers are becoming less enamored with DTC sales
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 →
Digitally-native brands are no longer leading pitch meetings with their impressive online sales.
It’s a sea change from five years ago when CPG darlings like Liquid Death and Fly by Jing were launching first as online-only direct-to-consumer brands and using their online presence to help them launch into retail. But as more startups have rushed into wholesale distribution over the past five years, founders say that the feedback they’re getting from buyers is that they aren’t necessarily seeing those DTC sales translate to on-shelf sell-through. According to online-first brands that are currently pitching buyers, more retailers are solely focused on seeing concrete data from on-shelf providers like Spins. Some founders say that DTC data can be useful, however, to paint a picture of shifting consumer trends.
It underscores the tough balancing act that CPG startups face today: they’re increasingly being tasked with growing wholesale and digital sales at once. It’s also indicative of just how much the CPG sector has soured on DTC in recent years, as expensive shipping costs have led some startups like Swoon to discontinue their DTC channel entirely.
“When we were hitting stores last year, [buyers] only wanted to see existing store data,” Breanna Golestani, co-founder of coconut spread brand Kokada. “The question is always: ‘how many units per store a week are you selling?’” Having to meet these expectations from prospective retailers, these brands say the key is to present their existing store sales in context with what each retailer and category expects from a new brand.
‘They don’t care about DTC at all‘
As Golestani explained, since launching in 2021, buyers have become less and less interested in the company’s digital revenue. In the past year in particular, Golestani said buyers mainly ask to see the most recent on-shelf sales. The brand currently sells in stores like Sprouts and Wegmans.
“Every time we pitch a buyer, if we don’t have Spins data on other retailers — ideally similar retailers — that’s a concern for them,” she said. This may not apply to all brands, Golestani said, and could be dependent on the category. For instance, she said, nut butter buyers often consider that the majority of people aren’t buying these products in bulk online. But for stores, they expect a certain volume sold for specialty products like Kokada’s spreads. This goes for both natural and conventional grocery chains, Golestani said.
Golestani said this expectation has spilled over to investors. When Kokada first fundraised in 2021, she said “the question was whether we’re doing DTC and what DTC sales we have.” In the latest round of investor pitching, VCs are also asking for brick-and-mortar data and a clear roadmap of which retailers the company is going after.
Indeed, some investors have stopped placing importance on online sales as omnichannel distribution becomes the standard.
Elly Truesdell, a partner at New Fare Partners, which has invested in Omsom and Actual Veggies, said the firm only invests in brands that already have some retail traction. “That can be small, like an early launch in independent stores or a smaller regional chain,” she said.
In the years leading up to the pandemic’s e-commerce boom, she said there was a lot of excitement from both retail buyers and investors who saw impressive growth from digitally-native brands. “At one point, there were so many buzzy brands buyers were willing to bring on because of FOMO,” Truesdell said. “They just assumed they’d perform well on-shelf, but that was many years ago and a harder reality has set in.”
Truesdell, a former buyer at Whole Foods, said she understands why buyers are less enamored by DTC sales than they were even a couple of years ago. The large volume of emerging startups that have entered national retailers has contributed to some disappointing performances, making buyers less excited about betting on new brands.
Due to the competition within certain categories, Truesdell said emerging brands have a small window of opportunity to prove they’re worthy of physical space. “Unfortunately, buyers are often not patient enough to see gradual growth play out,” she said.
For instance, she said, when a pet brand enters PetSmart, “you’re required to fill out four feet of space, and that’s very hard as a young brand when competing with national brands.”
Moreover, Truesdell said many retailers don’t have the capacity to support incremental growth and brand-building. “Back in the day, we had local foragers that ran [Whole Foods] programs to support early-stage brands — both financially and through marketing,” she said. “It’s so inefficient for larger retailers to have teams dedicated to that.”
Presenting on-shelf data
Having built its business primarily through DTC and Amazon since launching in 2017, better-for-you baking startup Supernatural faces a similar obstacle when presenting new retail partners with digital sales data. The brand’s products are sold at independent natural grocers and Whole Foods, with founder Carmel Hagen currently in talks with a few mass retailers interested in bringing Supernatural on.
Hagen understands why retailers care less about digital sales — digital shelves and retail shelves are hardly apples to apples. “Even product discoverability and sales between different digital shelves — like Target’s website and Amazon, for example — are hardly similar,” Hagen said. “So I understand why online sales data might not be contextualized in a way that is really actionable for buyers in the way that Spins data could be.”
Still, Hagen said Supernatural’s online sales should at least underscore for buyers the shifting preferences for cleaner ingredients in the baking aisle. “We are currently the number one natural decorating brand online, and rank top five overall on Amazon for decorating, against even the artificial products,” she said. “It’s absolute proof customers are choosing natural [decorations] more than they ever used to.”
Hagen added that the extent of each retailer’s interest in online sales seems arbitrary. For instance, all the natural channel buyers she’s met with mainly want to see data from competitors. But she said one big-box store she’s speaking with — she didn’t name the retailer — is “very much also looking at the online data as a factor.”
Truesdell said the fast expansion pace and expectations to go national have placed a lot of pressure on CPG startups to jump from DTC-only to quickly figuring out physical retail sales on a large scale. It’s why she now advises small CPG startups with little capital to focus on entering regional chains and growing those sales incrementally. “We’re reminding those brands to be patient,” she said, then taking that performance to buyers when the company is ready to expand its footprint.
Overall, repeat purchases and growing sales-per-location are the fundamental on-shelf metrics retailers look for, especially at this time when they’re risk-averse. “That’s all we wanted to see when I was a buyer,” Truesdell said.
This changing expectation has prompted brands like Kokada to pay upfront for on-shelf data.
“One of our biggest investments has been to buy a bigger Spins package than most startups our size do,” Kokada’s Golestani said. Higher Spins tiers allow access to more granular insights on SKU performances and exclusive data from specialty shops and natural food chains.
Golestani said it can be tricky to provide existing retail sales to a new buyer due to proprietary data and the need to put those figures in context. That’s because velocity expectations for specific categories can vary widely between different types of retailers, she added. “We don’t even show the specific units sold numbers, instead, we position our ranking relatively,” Golestani said. “For example, we point to being number eight in the alternative butter section during a given week.”
The days of young brands wooing buyers with DTC sales seem to be over. “What we hear from buyers we have relationships with is [that] they’re willing to take digitally-native brands that already have a huge online community,” Golestani said. For example: they have gone viral on social media or frequently get media coverage. She cited fast-growing brands like Fly by Jing and Coconut Cult as examples.
“Beyond that,” she said, “they don’t care about DTC sales at all in our experience.”
What I’m reading
- The Cut breaks down the “unbranding” of Abercrombie & Fitch and how the mall retailer managed to overhaul its image.
- Menswear brand Indochino is opening five stores across the country this summer.
- The Business of Fashion looked into the downfall of “unfiltered” TikTok content.