Member Exclusive   //   January 2, 2024

DTC Briefing: Why some brands are still holding off on wholesale

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 →

In the direct-to-consumer world, a small number of brands remain wholesale holdouts. 

The DTC boom came in the mid-2010s, with a group of online-only brands claiming that their direct sales channel made for better margins and more efficient marketing. But over the years, most brands defected away from this model in the name of growth; so-called DTC startups increasing describe expanding to Walmart and Target as a major milestone, not antithetical to the business model. Many are even entering Amazon, a move once anathema to most DTC brands.

But there are still some DTC holdouts that say that despite growing pressure to enter physical retail – they’re sticking to their current model for as long as possible. Along with more established players like Warby Parker and Everlane, some startups still maintain that a DTC-only business model has continued to work.

Here’s how two brands have been able to remain DTC holdouts — and even reached profitability.

Finding the right category
Beauty brand Prose, known for its subscription custom hair products, is holding fast to its DTC-only model — largely due to its data-driven model. Prose’s products are made-to-order and shipped to each customer based on their hair type and need. And while competitor Function of Beauty has created a way to translate the concept into retail, Prose isn’t ready to create a special line for retailers. 

Prose CEO Arnaud Plas told Modern Retail that despite recent challenges like high marketing costs, “we’re still growing double digits, year-over-year even though we had a deceleration after Covid.”

Much of Prose’s model is predicated on first-party data, with an AI algorithm that determines a customer’s product formulas and treatment program. New customers start by taking a quiz asking for details on the condition of their hair or skin type, like texture, color treatment and environmental factors. The results then determine which product Prose recommends as part of a subscription. “As soon as you go to a wholesaler you lose that direct line to customers to personalize their products,” Plas said.

During the past two years, Prose pulled growth levers that helped it become profitable without entering physical retail. In 2022, the company launched internationally, starting with Canada. In 2023, the company also launched skincare, which Plas said helped fuel its most recent wave of customer growth. Plas confirmed the company turned a profit in May. “Q3 was our first quarter being profitable, in the mid single digits without doing wholesale,” he said. “So the units work for us.” 

Then there are the brands going exclusively DTC out of necessity. For example, cannabis brand The High Confectionary tried to go into physical dispensaries soon after launching in 2021. However, after a series of legal roadblocks, founder Jenna Goldring decided this past September to switch to direct-to-consumer only. While retail isn’t completely off the table, Goldring said growing a small brand in this category is much easier online at the moment.

Building the fundamentals before expanding
Cleaning brand Branch Basics, launched in 2017, still strictly sells its surface cleaning concentrates through its website despite many companies in this category striking retail partnerships.

CEO Tim Murphy told Modern Retail that Branch Basics got a big boost during the pandemic lockdown. But after most retail stores reopened, Murphy has been focused on testing out new marketing strategies alongside nailing retention among its niche customer base. Those two tasks put together have helped the company stay afloat — and even reach profitability.

“If I’m honest, going into retail will be the biggest risk the company ever takes,” Murphy said. Retail distribution, while an investment in growing the brand’s physical presence, isn’t cheap. Not only do small businesses have to burn cash to fulfill big orders upfront, chain retailers also expect them to promote themselves and drive customers to its shelves. On top of all of that, brands still have to maintain a strong DTC business to keep revenue streams diverse. 

Despite refusing to expand into retail, Branch Basics has still been able to grow. “For the last couple of years, we’ve grown at 50% year-over-year,” Murphy said. “And that’s all direct-to-consumer, no marketplace, no Amazon or retail.” This trajectory is a big reason why the company hasn’t gone into wholesale yet, and allows the brand to keep its higher margins – which made DTC attractive in the first place during the last decade’s boom. 

Customer acquisition is a big piece of that puzzle, Murphy said, which has become incrasingly difficult for DTC-only brands – namely due to the iOS changes that impacted advertising Meta. This is why Branch Basics is leaning more into influencers and its own blog for educational content and organic social media presence, in which the founders have become somewhat of micro influencers. Through social media and email customer service, the brand answers customers’ questions and concerns about non-toxic products, ranging from baby food to bedding. 

Retention is the big challenge for keeping this customer after acquiring them. Thus far, Murphy said Branch Basics has built a price-insensitive customer base. “Our consumers tend to be on the coast and have disposable income, and care a lot about their health,” he said. It also helps that the brand has focused on growing its recurring business — close to 40% of Branch Basics’ business is subscriptions, with over 52,000 subscribers.

As such, the company has avoided the retail expansion headache. (Branch Basics does sell at one Neighborhood Goods location in Austin, but Murphy considers that channel mainly a marketing play.) There is a lot to juggle when trying to successfully do DTC and wholesale simultaneously, Murphy said. “The longer we can wait, the more brand awareness we can have and financial resources to assure success in retail — because you only get one shot,” he said.

For the cleaning supply category in particular, Murphy said the big-box store is still a difficult place to sell surface cleaner concentrates. “You’re sitting next to a ready-to-use that’s $3.99, so it’s going to take some more customer education,” he said. Brands in this category like Grove Collaborative and Blueland, have rapidly expanded into retailers like Target and Costco, respectively. “I don’t see our competitors doing the concentrate model in retail and blowing the doors off.” 

For the first five years in operation, Murphy said the company stuck with a core line of non-toxic cleaning concentrates by building a subscription business around it. In November, the brand launched a scent-free gel hand soap. Murphy described the category expansion as phase two for the company. 

Phase three, still a few years out, will be going into retail. But Murphy is content with the current state of the business.

“No company is assured retail success, and we’re seeing what happens when you take too much money and go wholesale too early,” Murphy said. “We’re just trying to be patient and disciplined.” 

What I’m reading

  • Unilever continues to reshape its beauty portfolio with its latest acquisition of biotech-based hair care company K18. The exit comes about three years after the brand launched in 2020.
  • In other M&A news, WSJ reported that troubled brand Something Navy is being sold off due to mounting debts.
  • Mejuri is the latest jewelry brand getting into the lab-grown diamonds trend. The company says it wants to make luxury pieces more affordable to its customers. 

What we’ve covered

  • So-called dad shoes — like Hoka and On — were all the rage this past year. We looked into why.
  • Brands like Mother Denim and Spanx are launching new products that cater to petite shoppers.
  • How brands like Caraway and Mack Weldon are promoting buy more, save more bundle deals this holiday season.