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 →
Direct-to-consumer startups face a tough task for the remainder of the year: growing their businesses, profitably, while inflation remains sky high and capital is harder to come by.
That was the underlying sentiment at the Commerce Summit, a gathering of more than 150 e-commerce leaders and investment bankers hosted in New York City last week. The event was indicative of just how the direct-to-consumer startup space has evolved over the past few years.
Rather than painting a magical picture of how building a direct relationship with customers can lead to exponential growth, many of the sessions at the event took a more grounded tone. A session on raising capital discussed how investors, who for the longest time valued revenue growth, are now more closely scrutinizing how profitability improves in line with growth. In a session on growth, e-commerce executives discussed how they have adapted to an inflationary environment in which consumer demand can vary wildly from season to season.
As one attendee put it to me, DTC brands — who used to endlessly espouse digital marketing buzzwords like CAC and LTV — are now sounding more like regular businesses, talking more about metrics like gross margin and EBITDA.
But the last few years have also been marked by an unprecedented amount of volatility — ranging from the pandemic to inflation to IOS changes — that also makes it difficult for DTC brands to figure out what the market wants from them. Even this past Memorial Day weekend, a big sales period for brands, was marked with uncertainty about whether Congress would reach a deal with the White House to raise the debt ceiling.
“If you think about the last three or four years there’s been no ‘normal time’ or ‘normal year,'” Kevin Gould, another attendee and the founder of beauty holding company Kombo Ventures told me. “And I think we can’t anticipate there will ever be a normal time again.” He added, “it is certain that there will be uncertainty going forward — it is on us to continue to adapt when things come up.”
Below are my three biggest takeaways from the event about how the operating environment has changed for DTC startups.
Demand planning has gotten more complicated
Changing demand was one of the biggest issues discussed at a session on growth, featuring executives from True Classics, Mejuri and more. After all, how much inventory a brand has on hand dictates how much they can grow. Ben Yahalom, president of apparel brand True Classics, said the key theme his company is thinking about is, “how do we build flexibility into every single thing we do, from sourcing to ops?”
“We are in a commodity-based business so whenever there is macroeconomic issues — gold price goes up and our margin gets squeezed — so the past couple of years I would say have been challenging, from a demand standpoint, from a cost structure standpoint,” Noura Sakkijha, cofounder of jewelry brand Mejuri said.
The way that many brands have dealt with that, as Yahalom acknowledged, is to try to build more flexibility into every area of the business — especially purchase orders — so that a company doesn’t get screwed if, say, it experiences a huge unexpected spike in demand for one product or waning interest in a former best seller.
David Ghiyam, president of vitamin brand MaryRuth Organics, said he started to implement weekly sessions during the pandemic — now, they are only monthly — “reassessing every vulnerability in the business, from every aspect, and finding a way to bulletproof the business.”
Investors take a different tone
Both founders and investors alike noted how much the funding market has shifted over the past year.
“The market valued growth for the longest time, and all of a sudden, it is all about bottom line, and so you have to make a huge shift in how you are thinking about efficiencies,” Mejuri’s Sakkijha said.
Romitha Mally, an investment banker who helped orchestrate Dollar Shave Club’s sale to Unilever, said that in the heyday of the direct-to-consumer boom, “the metrics used to measure success were all revenue based. And so I think founders and companies were really [incentivized] to grow their revenue at any cost, because they felt like the month over month growth rates were really key to get the funding.”
That resulted in some heavily-funded startups trying to enter new categories quickly — think Casper trying to become the Nike of sleep and Allbirds getting into apparel. “I think as a result, businesses got too complex, and then when the pendulum shifted toward profitability, it became way too difficult to manage,” Mally said.
Ultimately, much of the discussion centered around how the best DTC brands are able to use their direct relationships with their customers to improve efficiencies in their production and operations. And, how gross margin sets the one for how much a business is able to grow profitably.
“Companies that are really going to distinguish themselves in the space are the ones that can really figure out how to improve their gross margin,” Mally said. “At the end of the day, if you have a 20% gross margin business or a 25% gross margin business, it just doesn’t leave enough to invest in your brand and grow it.”
Channel diversification is necessary – but companies are still trying to figure out the right mix
Mally added that over time, what more people in the industry have realized is that the DTC channel, “is an important channel, but it is one of many channels that’s important.”
In turn, DTC isn’t the sole or even primary sales channel for today’s e-commerce startup. Instead, every company is still trying to figure out what the right sales mix looks like for them depending on their category, and younger brands may even be course-correcting too much.
Take Kombo Ventures. The holding company owns three beauty brands — Glamnetic, Wakeheart and Insert Name Here Hair. When Glamnetic, which sells magnetic eyelashes and press-on nails, first launched in 2019 it was DTC only. Today, 20% of the brand’s sales come from Amazon, according to Gould, while the remainder comes from DTC and retail partners like Target and Sephora.
“For us, I feel like that is a really great mix — ideally, you are not more than 25% or 30% Amazon, and then on retail and DTC ideally you have a pretty consistent split,” Gould said.
But Gould said that what he is seeing is that among brands that launched in the last 18 months — after the iOS 14 update wrecked havoc on new customer acquisition — is that “there’s a lot of really well-known brands that are now 90% to 95% retail, because they can’t build on DTC.”
Gould said it could be a case for these brands where the strategy works, until it doesn’t. “They are actually going to have the reverse risk of — if for whatever reason, retail stops working for them and they don’t have diversification the other way across DTC or Amazon, I could see that becoming a future potential issue.”
What I’m reading
- Canada Goose is opening three new U.S. stores in the next month, as it is on a quest to grow its DTC business.
- Bloomberg has a deep dive into the ongoing fallout from Adidas’ and Yeezy’s breakup.
- Kizik, which sells a hands-free, slip-on shoe recently opened its first brick-and-mortar store in Salt Lake City. Here’s how the company is rethinking what a typical shoe store should look like.