DTC Briefing: As Allbirds plots wholesale expansion, the number of true direct-to-consumer brands is dwindling

Allbirds’ shift is indicative of an industry-wide realization. So-called DTC startups are increasingly expanding to wholesale in search of better margins and access to a wider customer base. There’s still a few notable holdouts, ranging from newly-public companies like Warby Parker and Figs, as well as Away, Everlane and Article. But the number of startups that are able to build $100 million-plus businesses while remaining direct-to-consumer is getting smaller. 

In the early 2010s, many venture-backed DTC startups, such as Dollar Shave Club, Warby Parker and Casper, were able to generate tens of millions of dollars in revenue in just a few years by selling entirely online, while e-commerce was still nascent. But over the years, traditional brick-and-mortar retailers have gotten savvier. Walmart has experimented with launching its own online-only brands, while Target has increasingly sought to emulate the branding of popular-digitally-native startups like Away in its private-label lines. 

This increased competition has led to industry headwinds. Take Allbirds for example — the company’s revenue growth has slowed over the past several years, reporting 54%  sales growth between 2019 and 2020, and 13% sales growth the following year as the company battled store closures during Covid. In 2021, year-over-year sales growth crawled back up to 27%. 

But by partnering with more retailers, DTC brands like Allbirds are able to get access to customers, more cheaply. Allbirds co-founder Joey Zwillinger said during the company’s fourth-quarter earnings call that the company’s aided brand awareness was still only 11% in the U.S. By launching wholesale, the company hopes to get that number up.

For the few brands that are still purely DTC, there are a few commonalities. Either they are in a category where there are not many retailers they can work with, or they are staying direct-to-consumer so that they can offer some unique experience on top of the products they sell. 

“What is fueling our growth is understanding our customers,” Figs co-CEO Trina Spear told me in a phone interview about why her company, which sells scrubs and apparel for health-care professionals, wanted to stay direct-to-consumer. Figs reported 120% revenue growth between 2019 and 2020, and 62% revenue growth between 2020 and 2021 in preliminary fourth-quarter sales results, with 98% of sales coming from its website.

Figs has a launch story similar to that of many direct-to-consumer brands; Spear and co-founder Heather Hasson wanted to disrupt a tired industry. “It was a wholesale, broken industry where health care professionals were subjected to going to these mom-and-pop medical supply stores in strip malls where you would walk in, and there were racks and racks of scrubs next to bed pans and knee braces,” Spear said.

Another big difference between the space Figs operates in and that of many other industries, is that so far incumbents haven’t caught up; there’s no major scrubs player with hundreds of thousands of stores that’s been able to catch up to Figs by becoming more digitally savvy. Whereas in, say, mattresses, hundreds of startups — as well as traditional brands and retailers ranging from Serta to Walmart — have tried to emulate Casper’s early success by marketing like direct-to-consumer players and focusing on digital.

Figs has been selling on Amazon for years, but less than 2% of Figs’ sales come from the e-commerce giant. That’s because on Amazon, Figs carries a very limited range of styles and colors. Part of what drives Figs’ success is customers are eager to get access to the most popular styles and patterns, as the company drops new colors weekly. More than 60% of Figs’ sales came from repeat customers in 2020.  

Furniture brand Article provides another case study of a brand that’s been able to grow quickly while remaining direct-to-consumer. The company reported in the spring of last year that it had delivered its 1 millionth order since being founded in 2013; 400,000 of those orders came in 2020, during peak pandemic-induced online shopping.

Article has yet to open its own stores or sell its product through another retailer, so 100% of its sales come through its own website. 

“A big part of the value that we provide to customers is the fulfillment process,” Article svp of marketing Duncan Blair told me. In 2019, Article furniture launched its own in-house delivery program. More than half of Article’s orders are now delivered through its in-house program. 

“If we were to take our products and sell them wholesale, [customers] would miss out on that — that is the big advantage for us,” Blair added. As a result, he said that he doesn’t foresee Article expanding to wholesale anytime soon.

Despite other brands rushing to ramp up wholesale partnerships with major retailers, the brands that are staying DTC are adamant that it’s their secret sauce, that will help them grow more quickly.

“I think people think it [wholesale is] a brand awareness play and they’re able to get to more people,” Figs’ Spear said. “But I think in the future, over the next 10 years, the most authentic brands will be fundamentally direct.” 

As more brands go DTC, wholesale retailers are left scrambling

Despite the fact that many consumer startups run into limitations by staying direct-to-consumer, brands that have long relied on third-party retailers are finding the opposite; they want to build up a bigger DTC business of their own. In turn, the wholesale retailers that have long relied on these brands to drive loyalty are trying to build up DTC muscles of their own.

That dynamic became more evident last week when Foot Locker reported its fourth-quarter earnings on Friday. Foot Locker’s biggest vendor, Nike has been saying for the past couple of years that it wants to generate more sales through Nike-owned properties. In 2021, DTC made up close to 40% of Nike’s sales.

Nike is making up a smaller percentage of Foot Locker’s sales — and in turn, Foot Locker expects sales to decline in 2022. Foot Locker CEO Richard Johnson said during the call on Friday that the company expects Nike to make up 60% of sales in 2022, down from 75% in 2020. Foot Locker said that it expects total sales to decline 4% to 6% in 2022, though the company attributed the decline to multiple factors — including the fact that U.S. consumers aren’t receiving a stimulus check this year as they did in the beginning of 2022.

“Over the long term, a broader vendor base may be beneficial to Foot Locker but, it will be painful as the proverbial band-aid gets ripped off the wound,” Wedbush Securities analyst Tom Nikic wrote in a research note.

Foot Locker tried to keep the outlook positive by pointing to the double-digit sales growth reported by some of the other popular brands it carries, including Puma, New Balance, Timberland, UGG and Crocs. The shoe retailer has also tried to build out more of a direct-to-consumer sensibility of its own over the past couple of years, including by investing in digitally-native startups like Rockets of Awesome and Goat, and building out some own private label lines. But all these investments weren’t enough to withstand the impact of a company with as powerful of a following as Nike shifting more sales to its own website.

What I’m reading

• Kimberly-Clark acquired a majority stake in period care brand Thinx last week. Terms of the deal were not disclosed. 
• Ultra-fast delivery startup Gorillas has quietly tweaked the language on its marketing to ease pressure on its delivery couriers, Business Insider reported. Now, instead of offering 10-minute delivery, Gorillas offers “delivery within minutes,” Insider reported.
• Klarna announced a partnership with Brookfield Properties to offer its buy now, pay later services at more than 150 U.S. shopping centers. 

What we’ve covered 

• Food52 CEO Amanda Hesser spoke with Modern Retail about her company’s plans to launch more products within the home category, after acquiring two brands within the past year. 
• Small businesses are taking off on TikTok, garnering millions of likes and views before they’ve even  reached their first six figures in revenue. 
• Early subscription box pioneers like Bark, Stitch Fix and Birchbox are continuing to launch more non-subscription services and products, as they realize they can reach more customers through a one-off purchase model.