This is the first installment of a weekly new column about the big changes and challenges facing direct-to-consumer startups. Join Modern Retail+ to get access to this and all articles, research and more.
The reckoning was a while in coming. It just wasn’t expected to come like this.
After all, people on Twitter, that favorite platform of the direct-to-consumer startup community — and plenty of articles on this site as well — love to talk about one of a few things: If there’s a direct-to-consumer ceiling; the best way to acquire customers, and the inevitable slowdown and burst of the DTC bubble as unprofitable businesses are due to run out of cash, with no investors left to fund them.
And thanks to the coronavirus outbreak, that last one seems to have accelerated.
“The coronavirus outbreak notwithstanding, there were a lot of issues that were spread out through the rest of the DTC ecosystem going into the first-quarter of this year,” said Jeremy Cai, founder of Italic, which sells luxury bedding, apparel and handbags. “I feel like we are settling into a new normal in many ways of being conservative,” he said.
Even for companies that are seeing any temporary improvement in sales comes with another one or two major headaches. And the understanding is things may change at any points.
At paint company Backdrop, co-founder Caleb Ebel, said that while DTC sales have gone up, they’ve had to temporarily shutter entirely the service side of the business.
And while some e-commerce sales, particularly of essential goods like food, beverage and beauty are likely to continue to rise, few are betting their business on the fact that that will be enough.
As Shoaib Kabani, co-founder of bedding brand Buffy told me: “We are bracing for [the fact that] it is still early in this kind of crisis and we are planning for potential downturns in our sales.”
In a twist, the exact insularity of the DTC community that many point to as a problem has also helped. As founders brace for the fact that the worst is likely still to come, they’re turning to one another to try to figure out how to get their businesses through this crisis. Twitter may be filled with flexes of companies posting about their best sales day, or thankful emails they receive from customers, but Kabani said that in his text messages with founders is focused on practical steps.
The big questions: Understanding the Small Business Administration’s guidelines around the Paycheck Protection Program and whether or not their business qualifies for it (our own Cale Weissman has more on that here). Others: Disruption in their warehouse or fulfillment operations, as well as questions on where to pull media spend, as well as how to take advantage of the fact that advertising costs are falling on platforms like Facebook as other companies pull back their advertising spend.
It can be other issues too: Aishwarya Iyer, founder of olive oil company Brightland, told me that she’s on two different email chains with female founders where many of them are sharing work from home tips, as well as how to balance work while at home with family and kids. Cai said that he is sharing tips with other companies on how to renegotiate things like software contracts.
Pre-pandemic, the fact that the DTC community is so insular can sometimes be viewed as a disadvantage, especially if the discussion entered echo chamber territory. But now when everyone is in uncharted territory and no one knows exactly how consumer spending will shift and which businesses will survive, having a lot of other founders to use as sounding boards is comforting.
“We’re not all necessarily competitors, but at some point we’re all fighting for the same space and attention, but it’s great to see that people are willing to share advice whenever possible,” Kabani said.
But the one question that nobody wants to be the first to answer, is which DTC businesses won’t make it through the coronavirus outbreak. New data that just came out yesterday from eMarketer projects that online sales from direct-to-consumer startups is already slowing.
Founders all agree that the businesses that won’t survive are the ones that have taken on too much venture capital funding and aren’t bringing in enough money to justify that valuation. But everyone says their fundamentals are strong until suddenly, they aren’t.
Brightland sells its olive oil both direct-to-consumer, as well as through some non-traditional wholesale partners including Goop and Nordstrom. Some of its wholesale partners’ stores are closed due-to-shelter in place orders, but founder Aishwara Iyer said that one interesting new trend the company is seeing is that some restaurants in California have expressed interest in recent weeks in selling Brightland. That’s because while their dine-in service remains closed, they are looking to carry more pantry staples to increase the value of their takeout orders. That could be another way for food and beverage brands to grow sales during this time period.
Stat of the week
EMarketer is projecting that online sales from direct-to-consumer startups in 2020 will reach $17.75 billion, up from $14.28 billion last year. Last year, that constituted 2.26% of all U.S. e-commerce sales. The big question though, is whether that number will come in above projections, as more consumers do their shopping online and remain hesitant to return to stores even when they are open, or below the mark as more consumers tighten up their wallet.
Quote of the Week
“This is a pandemic. This is not a business model.” — Blue Apron CEO Linda Findley Kozlowski on the uptick in demand the company has seen recently.