Member Exclusive   //   June 21, 2022

DTC Briefing: For founders, recession fears have become ‘more real’

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 →

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. To receive it in your inbox every week, sign up here.

Founders of e-commerce startups are used to economic conditions swinging wildly over the past two years. But talk of a potential recession has recently started to pick up at a rate that many founders hadn’t seen since the early days of the pandemic. 

“For me, I think it became really more real in the past few weeks,” Ju Rhyu, founder of Hero Cosmetics told me. She said this was due to a few events happening in rapid succession: Target and Walmart reporting lower-than-expected profits in their latest quarterly earnings, inflation hitting a 40-year-high in March, and the Fed finally raising interest rates. That, she said, “really started making me hit sort of the alarm button, in terms of reevaluating our strategy,” for the second half of the year. 

Like Rhyu, more founders say they are spending more time thinking about how to prepare for a potential recession in the coming months. These conversations look different depending on the size and stage of the business; some venture-backed startups are considering raising a round earlier than they initially anticipated, and are considering layoffs as competitors do the same. Others aren’t making any drastic changes to their operations, but are instead starting to rethink what products and marketing messaging might perform best as people become more price-conscious. 

Deepa Gandhi, COO and co-founder of bag brand Dagne Dover, said she is finding the conversation among founders to be very “bifurcated,” regarding a potential recession. “There are people in the camp of like, lock everything down… let’s get to zero cost budgeting to preserve cash,” Gandhi said. At her company, she said the market conditions have more served as a reminder “that we have to be really prudent with the decisions we’re making.” For example, she said that Dagne Dover is “re-looking at how we’re flowing our inventory to make sure we’re investing in the items that people buy year-round.” 

During the height of the pandemic, Gandhi said that Dagne Dover’s diaper bag remained one of the company’s best sellers. “People were having kids, they still need to buy that product,” she said. As a result, she anticipates that product might also perform well during a potential recession. 

Many of the founders I spoke with said that much of the conversations they are having right now revolve around making sure that they both have enough of the right products as customers become more price-conscious, and not over-ordering in the wrong areas. 

“I think the biggest thing is ordering inventory really conservatively right now — because that’s what puts businesses that make things out of business,” Steven Borelli, founder of self-described workleisure brand Cuts Clothing said. Borelli said his company has started pushing polos in recent months as more people return to the office. He predicted that officewear will continue to be in demand.

Rhyu, meanwhile said that she believes Hero Cosmetics may actually benefit from people starting to “trade down” in Hero’s category of acne care. All of Hero Cosmetics’ products cost under $20, and are carried by a variety of mass-market retailers including Target and Walmart. 

“I’m telling the team to really look at the data to see if we see any activity that shows that people are trading down, though we’re not right now,” she said. 

Still, a recession is far from a guarantee, and most of the founders I spoke with aren’t hitting the panic button just yet. Given that the Fed just announced on Wednesday that it was raising interest rates to combat inflation, it remains to be seen how that move will play out. 

The most high-profile cost-cutting initiatives right now are by unprofitable, venture-backed companies that are looking to get their financials under control as raising a new round of funding potentially becomes more difficult. One-click checkout startup Bolt, for example, laid off around a third of its staff a few weeks ago.

Borelli said that Cuts Clothing did lay off five employees earlier this year (the company has a headcount of around 60) to preserve some cash, but that the company is profitable. Hero Cosmetics’ Rhyu said that her company — which is also profitable — is still hiring right now, and has around seven open roles. 

“One thing that I’m hoping for actually is more slack in the talent pool,” Rhyu said, as more people look for jobs. “Because the past year or two, it has just been so tight out there.” 

But, the impending recession isn’t only the thing on startup founders’ minds. Over the past two years, direct-to-consumer startups have had to contend with everything getting more expensive, from the cost of acquiring new customers to raw materials getting more expensive. As a result, these companies are also trying to figure out how to keep prices down, even as customers become more price-conscious. A recession may help bring some of these prices down — but it’s unclear when that will happen.

Andrew Codispoti, co-founder of premium basics brand Goodlife, said that so far, his company has been able to avoid raising prices even as the costs of raw materials and transportation has gone up — which he believes will put his company in an opportune position as inflation worsens. “I think the biggest thing is people are trying to mitigate their shipping costs, their warehousing costs and…I’m sure people are just being cognizant of the marketing spend than ever before,” he said. 

No matter what happens in the coming months, many of the founders I spoke with said that there’s an overarching pressure to be more conservative with cash than ever before.

“I think [a recession] is coming. I don’t know if it will be as big of a doomsday as everyone says, but it’s coming,” Borelli said. 

What I’m reading

  • Cookware startup and Instagram favorite Our Place is taking steps to open its first stores. The company plans to open two locations in Los Angeles by the end of the year, and one in New York early next year. 
  • Eater has an interview with the head of Patagonia Provisions – yes, that Patagonia – about why the outdoor apparel stalwart has also built out a business selling tinned fish, jerky and other food.
  • Retail Brew has a profile of True Classic Tees, a t-shirt brand that grew to $150 million in revenue in just a few years and now says it spends $200,000 a day on advertising. 

What we’ve covered

  • Instant delivery service Jokr shut down delivery operations in the U.S. to focus on LATAM, where it says over 90% of its business comes from. 
  • After selling a majority stake to Unilever, Nutrafol hopes to launch more non-supplement products and expand its retail presence. 
  • Hair color startup Madison Reed is quickly expanding its physical retail presence, and plans to end the year with 80 combination salon-retail stores, up from 65 currently.