Member Exclusive   //   March 26, 2024

DTC Briefing: Why startups are getting more precious with wholesale expansion

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 →

One of the ongoing challenges for any consumer startup is finding the right balance between wholesale and direct-to-consumer sales growth. 

Five years ago, startups were much more precious about staying DTC for as long as possible, with brands like Away infamously proclaiming that they had no plans to sell their products through other retail behemoths like Amazon anytime soon. Then, starting around 2021, more DTC brands started expanding into wholesale more quickly. Some were driven by a need — rather than a desire — to diversify their sales growth after customer acquisition costs through Facebook and Google became untenable. Parade, for example, launched in Target in March 2023, and had plans to launch on Amazon, before being acquired abruptly by Ariela & Associates in the summer. 

Now, the DTC startups that have been able to withstand the economic challenges over the past five years are trying to be much more strategic about how they approach wholesale. Very few DTC startups launch with the intention of staying DTC forever. However, some of the DTC founders I spoke with are being selective about when they choose to add a new wholesale partner. They are purposefully holding off on launching into multiple mass retailers, keeping their wholesale presence largely limited to a few retailers that serve a specific purpose, helping them reach a customer that is harder to reach through their DTC website. 

One exception is Amazon. Over the past five years, DTC brands have become much more willing to launch on Amazon earlier on, recognizing its importance as a channel where a significant portion of their customer is accustomed to doing their shopping. It is also a channel that DTC brands can approach more cost-effectively, as they can hire an Amazon agency to help them navigate the channel. The other commonality is that the DTC brands that are able to hold off for longer are those that still have a growing DTC channel with unit economics.

“Our direct-to-consumer channel is tied for, if not the most profitable channel,” Greg Davidson, co-founder and CEO of baby and toddler brand Lalo said. As such, Davidson said that Lalo — which sells high chairs, play kits and other products — has been able to hold off on launching into more wholesale channels because “we are still growing efficiently enough on DTC, and trying to think about what the right channels are that we have brand alignment before going there.”

Right now, Lalo sells its products through Amazon, Babylist, West Elm and Pottery Barn Kids, in addition to its own website. It also sells through a Canadian retailer called West Coast Kids.

Melissa Mash, CEO and co-founder of bag and accessories brand Dagne Dover, estimated that her company has only said yes to “about 2.5%” of all the wholesale requests it has gotten over the course of the company’s 10-year history. Dagne Dover’s products are currently available through Nordstrom, Shopbop, Crate & Kids, Zola, Maisonette and Goody. 

Much of Mash’s thinking around wholesale has been informed by her previous career in retail. Before launching Dagne Dover, she worked on wholesale efforts at Coach. She saw how businesses like Coach were hurt by being too dependent on wholesale, particularly during the 2008 recession.

Mash doesn’t want wholesale sales to ever account for more than 10% to 20% of Dagne Dover’s business. So, DTC sales growth dictates whether or not Dagne Dover can accommodate another wholesale partner. 

This year, Mash said that Dagne Dover is planning to add another one to two key wholesale partners. The focus is on adding retail partners who have a large presence in areas of the country that Dagne Dover wants to go after, like the South. Up until most of the physical places that Dagne Dover sells its products to have been largely concentrated in the Northeast. 

Mash said that at Dagne Dover, she thinks of wholesale as a customer acquisition tool rather than a sales channel. That is, each wholesale channel has to help Dagne Dover reach a specific type of customer, rather than simply drive sales. Maisonette and Babylist, for example, might help the company reach a customer who is not ready to buy a Dagne Dover diaper bag yet, but is looking to gift something to a friend and wants to weigh options from other brands. 

“[Wholesale] is meant to support the fact that we don’t want to, you know, shell out a bunch of money to be able to set up stores around the country where people can touch and feel our products,” Mash said. 

Matt Mullenax, co-founder and CEO of men’s skin care brand Huron, views wholesale as “a necessary piece of the pie.” But so far, his six-year-old company has largely held off on adding wholesale partnerships. Huron does sell through Amazon, and has some select partnerships with gyms. 

Mullenax said that he’s been cautious about launching into wholesale up until this point because of the fact that there’s a long checklist of things a brand needs to succeed in retail. “[It] doesn’t really look a lot like the DTC checklist,” he said. Brands need to understand shopper marketing and have the capital to support it. They have to be able to buy enough inventory necessary to support all of their wholesale partners. They need to have a sales team that can meet with retailers in the field.

So, Mullenax said he’s cautious about expanding into wholesale until he has a big enough team that can support that. But, he did feel confident about launching through Amazon last year because Huron could hire an agency that could help the company “navigate that channel. [It] felt a lot less risky than kind of going directly to physical shelves.” 

Overall, Mullenax said that over the past few years, he felt that some brands’ forays into wholesale have been “kind of a knee-jerk reaction to the iOS challenges.”

In turn, the DTC channel has gotten a bad rap to some in the industry as an unstable money pit. But, he thinks that over the past few years, “people are just getting much more familiar with the nuances and granularities of their own P&L.” Whereas five years ago, brands assumed that they could keep raising money to fund new growth initiatives and customer acquisition efforts, and didn’t have to worry as much about hitting first order profitability.

Now, he said, there’s much more thought given to how often a particular brand’s customers might come back to its website depending on the product category, and how high of an AOV and contribution margin is needed in order to make the unit economics for DTC work. In Mullenax’s case, “we know exactly where we need to be from a day zero ROAS perspective, and the propensity of that customer to come back over time.”

In turn, that impacts how Mullenax thinks about when Huron can invest more in advertising spending, or in new strategic initiatives like wholesale. While each brand’s approach to wholesale is going to look different depending on the category, the balance that many brands are striving for now is to have better unit economics on their DTC channels starting from day one. That way, they can expand into wholesale more slowly and strategically, and on their terms.

“The best case scenario to be in is you build a pretty sizable brand digitally, and then you bring all of that awareness to shelf,” Mullenax said. 

What I’m reading

  • Rhone has added two new board members: Tess Roering, the former chief commercial officer at CorePower Yoga and ESPN Chairman Jimmy Pitaro.
  • Athleisure juggernaut Lululemon’s growth is slowing as consumers continue to cut back on discretionary spending. Lululemon reported during its fourth quarter earnings that sales in North America were up 9% year-over-year, down from the 29% growth reported last year. 
  • Kendra Scott is the latest company to get into lab-grown diamonds

What we’ve covered

  • Super Coffee, which counts celebrities like Jennifer Lopez and Alex Rodriguez as investors, sought fresh cash last year that would cut its valuation in half.
  • How telehealth platforms like Ro, Hims & Hers and Knownwell are getting a boost from Ozempic and other weight loss drugs. 
  • Much to the chagrin of brands, more people are asking companies to supply their bachelorette parties with free product. But Lemon Perfect is embracing these requests.