Retail Revolution   /   March 26, 2019

The end of DTC: Digitally native brands are acting like normal brands

Purple’s quirky Kickstarter marketing video, released with the brand’s campaign launch in 2015, hit on all the direct-to-consumer brand tropes: It called out the outdated mattress industry for its awkward shopping experience, and pointed a finger at mattress manufacturers for charging premiums for just OK products. Using a mustachioed narrator wearing a purple baseball hat, the video’s goal was to convince potential customers that Purple’s mattresses, which are delivered to customers’ doorsteps in a cylinder tube in the brand’s signature shade, are superior to the dozens of other mattresses available online.

The video viewed 82,000 times, and Purple raised a modest $2 million in equity crowdfunding from the campaign.

Purple’s launch story is a familiar DTC narrative. But over the last four years, the brand made two distinctly non-DTC decisions that CEO Joe Megibow says reshaped the company’s trajectory: It sold to shell company Global Partner Acquisition Corp. in 2017 for $1.1 billion, a move that took Purple public overnight just two years in, without the formal IPO process. And, in 2018, Purple mattresses began selling at Mattress Firm — the very mattress retailer that filed for bankruptcy that same year due, in part, to the pressure of the DTC mattress brand cohort led online by Purple competitor Casper. Purple is now sold in nearly 500 Mattress Firm stores in the U.S., as well as some Macy’s, Furniture Row and Bed Bath & Beyond locations.

As digital brands grow up, direct-to-consumer retail is looking more like a launch strategy than a business model. There was a period of time when online growth seemed infinite: launch an e-commerce site, spend some money on Facebook, collect data on customers in order to acquire more. But maturation for these brands means spending ad dollars on direct mail and TV spots instead of digital campaigns and partnering with retail middlemen they initially cut out. Harry’s and Casper sell at Target, while Allbirds and Everlane have sold at Nordstrom. Even Amazon isn’t off the table: mattress brand Tuft & Needle made a lower-priced bed to be sold exclusively on Amazon, while bedding brand Buffy, indie beauty brand Pour Moi and other digitally born brands sell on the marketplace or are figuring out their strategies.

It can also mean selling out. To get returns on money they’ve raised, brands have sold to corporations (Dollar Shave Club to Unilever, Bevel to P&G, Bonobos to Walmart), or have continued to raise VC funding and drive up valuations to drive more business, and — if they’re not there yet, which many aren’t — reach profitability. Few have gone public.

“Going public, we had to grow up and be a real business. There’s a bootstrappy, startup phase that all businesses go through, but there has to be a point of maturation in how you manage cash, investments, resources, growth and scale, and build strategy around that,” says Megibow. “As for [offline] retail, we’re in a house of brands. It has the same effect. That’s a great place to be — in front of customers, where a lot of people still go to buy mattresses.”

Last year, Purple hit $300 million in revenue. Megibow didn’t say how much of Purple’s sales now come through its wholesale partners, but said the majority of the business is still direct.

As more brands continue to weigh their options, gauging investor returns against business longevity, it’s an interesting turning point for an era of modern brand building that largely relied on entrepreneurial hubris: The retail industry is broken; we can fix it. But instead of setting fire to traditional retail, the new class of digital brands will behave more like fuel for conglomerates and retailers they partner with.

“What we’re seeing unfold now is Darwinian. As retailers struggle, DTC brands are only becoming more valuable,” says Michael Duda, managing partner at Bullish Inc., a hybrid digital agency and venture capital fund that is invested in Casper, Warby Parker and others. “But DTC is just an avenue, where companies can build their businesses from the ground up based on what customers need and want. If they do it well enough, they will be not a DTC business anymore.”

The end of pureplay
When Greats founder Ryan Babenzien started selling his sneakers at Nordstrom, he arranged a typical wholesale agreement with regular inventory deliveries that Nordstrom paid for. He says that wholesale retail was never off the table for the brand, but that a DTC-to-start model let the brand establish its customer base and supply chain so it could go into a wholesale deal with sturdier legs to stand on. As to why a wholesale partner was right for Greats, Babenzien says that the proximity to high-end shoe brands puts Greats’ promise of quality to the test, and that sales at Nordstrom drive direct e-commerce sales. In 2018, the brand expanded its presence in Nordstrom from eight stores to 40.

The story is similar for other direct-to-consumer brands that have gone wholesale — a move that dilutes the DTC brand positioning. Quip, Harry’s, Flamingo, Native Deodorant, Casper, Oars & Alps and Bark sell at Target, products of the company’s push to bring more digitally native brands to its shelves. Meng Li, Native Deodorant’s vp of marketing, says that the team at Target “prioritizes brands,” which made the company — which sells online through a subscription-replenishment model — feel like it wasn’t going to get crowded out in the crush of competing brands on Target’s shelves.

“Target shared their strategy and objectives with us, and they wanted to extend their natural deodorant assortment. We felt comfortable that we were in a category that could grow in their space,” says Li. “Then it came down to the conversations we had around the level of support that we could get from Target — in-store merchandising, display space, marketing vehicles — so we knew they were going to help make the launch a success.”

Target and Nordstrom are setting the standard for how legacy retailers can rope attractive online brands into stores to jazz up inventory and drive foot traffic. Physical retailers need new, interesting product selection in stores as much as digital brands need new outlets to acquire customers more efficiently and affordably than through Facebook and Google’s saturated and expensive online channels. In the crowded mattress category, for example, cost-per-click for a hot search term like “best mattress” has reached $15, according to mattress brand Saatva’s CMO Joe McCambley. Wholesale partnerships can lead to closer business ties: In 2017, Target nearly acquired Casper before the deal fell through. Two years later, Casper has raised more funding.

“There’s too much money in retail to have it be as simple as: The legacy companies are screwed, and the new brands are going to win,” says Duda. “They’re going to play off of each other. There are not going to be a ton of $30-billion DTC brands — there may not even be one. But there’s nothing wrong with that. It’s less about being direct, and more about being a valuable brand. For big and evolving companies, like P&G, DTC is a way of doing business operationally, and it’s easier to buy that.”

The fallout
The DTC era of retail is one that will make all of retail — even the old players — stronger. Of course, some are doomed. Bankruptcies have plagued Sears, Payless and Gymboree. But the legacy retailers that evolve and survive will be the ones that identify the power and popularity of digital brands and how they can flex their own muscles to get in on that.

It’s not just strategy for the Walmarts and Targets of the world either. Foot Locker’s recent investment binge has centered around digital retailers it sees value in, and the feeling is mutual. When Foot Locker announced it was investing $12.5 million in kids apparel brand Rockets of Awesome at the end of February, it was also announced that Rockets of Awesome would be setting up mini-shops in some Foot Locker stores. Rockets of Awesome CEO Rachel Blumenthal says that the idea was not just to drive in-store sales but to also learn from Foot Locker about how to operate a retail-store network and manage physical inventory.

“A great product isn’t a company and customer acquisition online isn’t sustainable,” says Shlomo Chopp, managing partner at Case Property Services, a real estate advisory firm. “So you have these DTC brands that said we don’t need Macy’s, we don’t need Target, looking there for growth. Meanwhile, stores aren’t making up for falling foot traffic online. They need new assets.”

The innumerable direct-to-consumer brands that have launched online are essentially being viewed by traditional retailers as growth and innovations engines. Big corporations have struggled to figure out in-house innovation; digital brands are doing the work to build a customer base, rethink a category without navigating red tape and bring out-of-the-box ideas to sleepy businesses on their own. It’s not to say that all digital brands will end up cogs in a corporate machine. But retailers want to reap those benefits by giving these brands a payout and an exit as investor expectations loom.

“For a long time, VCs have been happy to get a return on hype, if not investment. But they’re starting to look for profitability, so brands are weighing their options,” says Duda. “If they have 100,000 customers but are struggling to turn a profit at scale, another retail company can help. DTC brands can bring some heat to a legacy brand and more companies are adopting DTC thinking. When it comes to ‘pure DTC’ or not, who gives a shit? It’s going to eventually be only about who is going to best serve the customers, make more money and more profit.”

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