DTC Briefing: Recent earnings indicate a bleak forecast for startups in 2023
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. To receive it in your inbox every week, sign up here. More from the series →
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. To receive it in your inbox every week, sign up here.
Recent earnings reports from publicly-traded DTC startups indicate that once-hot brands are now struggling with severely slowing growth rates.
Allbirds’ results posted last week were perhaps the direst. The apparel and footwear brand reported during its fourth-quarter earnings on Thursday that sales declined 13.4% year-over-year. The company also forecasted that revenue would decline by as much as 20% to 28% compared to the first quarter of 2022.
But the forecasts that other publicly-traded brands have released over the past month don’t look that much better. Companies including Figs, Solo Brands, and Warby Parker are projecting, at worst, less than 1% year-over-year revenue growth in 2023, and 10%, at best. That’s a far cry from the more than 20% revenue growth many of them reported last year. The results indicate that publicly-traded DTC startups are now struggling with many of the same challenges as traditional retail brands: finding new ways to reconnect with their core customers, and adapting to more people shifting more of their shopping back to stores.
“We became enamored with a selling channel as a business identity,” Simeon Siegel, a managing director and senior analyst at BMO Capital Markets said.
He added: “Understanding direct-to-consumer business models are critical because that is one way to reach a consumer. But [the direct-to-consumer model] should not be their identity, I think is what we have realized.”
Running into challenges with product launches
The challenges that publicly-traded DTC brands face right now fit into one of a few buckets. Allbirds – which faces one of the most challenging outlooks – is struggling with the fact that its core customers have not responded enthusiastically to its new product launches over the past year and a half.
“This is something you see a lot of direct-to-consumer brands do: go into adjacent categories to try and expand that acquirable market,” Tiffany Hogan, a director of retail insights at Kantar said.
But the result is that “we overemphasized products that extended beyond our core DNA,” Allbirds Co-Founder and Co-CEO Joey Zwillinger said during Allbirds’ fourth quarter conference call. The company, for example, launched an activewear line ahead of its IPO. But it decided to pull back on some products – for example, getting rid of leggings – after finding that customers preferred “classic, seasonless items,” Co-Founder and Co-CEO Tim Brown said at the time.
Another misstep was its running shoes, the Flyers. “That was a product that was really marketed with heavy orientation around the technical running performance that that item delivers,” Zwillinger said during the earnings call. “We just found out that the customers that were – that are really in our sweet spot, aren’t resonating with a core, technical performance messaging.”
As a result, “because we were spending significant time and resources on these new products that did not resonate well, we underinvested in our core consumers’ favorite products,” Zwillinger said.
Hogan said that this is a common mistake startups can make when expanding into new categories. When startups try to enter into a market that is too saturated – like say, athleisure – they discover “they didn’t have the right to win as much as they thought they do.”
Readjusting growth tactics
For other publicly-traded DTC startups, many of their challenges boil down to the fact that online sales growth is slowing, and people are cutting back on discretionary spending. In turn, they are finding that they can’t rely on some of the same tactics they used to for growth – especially during 2020 and 2021, when people were doing more of their shopping online, and had more discretionary income to spend.
Trina Spear, co-CEO of direct-to-consumer scrubs brand Figs, said for example during her company’s fourth-quarter earnings at the end of February that new color launches “did not perform to the elevated levels we saw last year.” Figs’ revenue still grew more than 20% year-over-year during the fourth quarter, but the company is projecting mid single-digit revenue growth this year.
That’s partially because, as Chief Financial Officer Daniella Turenshine outlined, Figs is turning to more promotional activity to get rid of excess inventory. But also because, “We expect [repeat purchase] rates to continue to be impacted by macro uncertainty and high inflation rates.”
In turn, Figs is turning to many of the tactics that have been embraced by other DTC startups to juice growth. So far, Figs has been an outlier among DTC brands in that it has yet to open any physical stores. But that will change when Figs builds its first store in Century City, due to open this fall.
Similarly, Warby Parker is also betting on store growth to fuel its revenue growth next year. Warby Parker plans to increase its store footprint by 20% in 2023, ending the year with 240 stores. But, the company is projecting revenue growth of between 8% to 10% next year — slightly below the 10.6% growth recorded in 2022.
That’s largely because Warby Parker projects e-commerce revenue to come down in the first half of 2023, before rebounding in the second half of 2023. Warby Parker expects e-commerce revenue to decline as it cuts back on marketing spending. During the pandemic, Warby Parker spent a larger percentage of its revenue on marketing, to take advantage of the fact that more people were shopping online; but now, the company says it plans to go back to its pre-pandemic spending percentages.
As Hogan noted, many digitally-native brands benefited from the fact that more people were shopping online during the pandemic, and had better e-commerce operations compared to some traditional brands.
But now, as people are going back to shopping in stores, “they have probably seen their competition increase from brands that have wider distribution in department stores… and other retailers [people] might be shopping from a bit more often.”
These forecasts from Warby Parker, Allbirds, Figs and more are a harbinger for things to come for DTC brands in 2023: that they can no longer derive surefire revenue growth from launching more products or new colors or by acquiring more customers online.
Or, as Siegel noted, DTC startups are facing the same challenges as nearly every other retailer right now. It’s just that during the pandemic, some of these challenges were masked by the fact that more people were shopping online.
“I think it is time we stop looking at DTC businesses as different businesses,” Siegel said. “I don’t think they face different challenges than the rest of retail.”
Founders breathe a sigh of relief as they regain access to SVB funds
It’s been a stressful few days for DTC founders who had money in Silicon Valley Bank. While the e-commerce industry wasn’t as reliant on Silicon Valley Bank compared to other tech sectors, the institution was still the bank of choice for nearly half of U.S. venture-backed startups in the U.S.
In turn, more than a few e-commerce founders found themselves wondering if they would be able to make payroll on Friday when it was announced that California regulators were taking over Silicon Valley Bank. You can read more about what led to the collapse of Silicon Valley Bank here.
Thankfully, a plan was announced on Sunday night to give depositors back all of their money starting on Monday.
Founders of companies that previously banked with SVB – Omsom and Ghia – told me that they were indeed able to access their funds starting on mid-Monday. However, they were waiting for the wires to go through to officially transfer their money to other institutions.
“It was a very long weekend to say the least,” Melanie Masarin, founder of non-alcoholic aperitif startup Ghia told me in an email. On Friday, she created a Google doc of resources for other founders who were impacted by the Silicon Valley Bank collapse as many of them struggled to figure out where they should quickly open a new bank account, and how to access emergency lines of funding if they weren’t able to access their money in Silicon Valley Bank come Monday.
“Mass misinformation creates panic, and when I realized there was so little information available, I decided to create a centralized place with information for our founder community,” Masarin said.
Impacted founders spent much of the weekend making contingency plans in case plans to make Silicon Valley Bank depositors whole were not made public by Monday morning. Omsom, which sells Asian meal starters, took to Instagram for example to explain to its customers how the brand was being impacted by the Silicon Valley Bank collapse. And, to encourage them to keep shopping from Omsom. “Our community has shown up for us in a way that we could not have imagined – it’s been incredibly heartening,” Omsom co-founder Vanessa Pham said in an email.
But, the work for companies impacted by this recent bank failure isn’t over. Pham said that Omsom is talking with its founders and investors to figure out the best plan for storing its funds going forward — “this will include working with established, reputable banks and diversifying where we’re storing funds,” she said.
“Our focus now is how can we prevent this in the future and how can we continue to show up for our amazing community, our ride or dies,” Pham added.
What I’m reading
- As they prepare for a volatile year, footwear brands like Allbirds, Adidas and Sperry are coalescing around similar talking points, Footwear News reports: They’re all re-focusing on their core products.
- Cuup has secured its first wholesale partnership with Bloomingdale’s. The direct-to-consumer lingerie brand’s products will be available for sale through Bloomingdale’s website, and at its flagship store, where Cuup’s “fit therapists” will be available to guide shoppers.
- Menswear brand Mizzen + Main has redesigned its flagship store in Dallas, after the company underwent a brand refresh in 2022.
What we’ve covered
- Inside the 48 hours of chaos that led to the collapse of Silicon Valley Bank, and consumed the e-commerce startup world.
- Six months after Misfits Market announced it was acquiring Imperfect Foods, here’s how the two brands are faring at combining operations.
- How Patagonia Provisions is building out its product assortment after acquiring cracker brand Moonshot.
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