Member Exclusive   //   August 24, 2021

DTC Briefing: What’s fueling consumer disillusionment with digitally-native brands

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

It’s not news to most industry insiders that many direct-to-consumer startups only have a handful of employees and don’t produce their own products. But that information has come as a shock to some customers.

In June, Business Insider reported that six employees of cookware startup Great Jones resigned in protest last September after they alleged that cofounder Maddy Moelis was pushed out. This catalyzed a series of follow-up pieces at other media outlets that essentially asked, ‘wait, this company that’s all over Instagram, only has six employees?’

Underpinning these pieces is a growing consumer realization. After years of scooting by on beautiful aesthetics, some startups are feeling the ripple effects of DTC disillusionment. That is, customers (and high-profile writers) are increasingly expressing remorse after spending a premium to buy beautiful cookware or bedding from a startup that they think is more ethical than traditional retailers. Often, this remorse comes after the startup is the subject of an expose about its alleged toxic workplace (in the case of Great Jones).

This is giving rise to another realization: The understanding that some of these startups aren’t selling products that are all that different from ones that can be found at other retailers.

“The difference between DTC startups and their more established competitors was primarily aesthetic,” Kyle Chayka wrote in the New Yorker, adding that he now feels a “little embarrassed” by his Away suitcase after that company was also the subject to accusations of a toxic workplace. “As more such startups reveal themselves to be hollow or exploitative, the stylistic hallmarks that were once ubiquitous online may become associated with flimsiness and datedness,” he wrote.

Part of the reason why more DTC startups are getting called out now is simply one of the side effects of maturation. As more DTC startups launch, more of them are going to grow to a large enough size that they will be criticized for bad business practices.

Another contributing factor is a lack of understanding about how retail works. Defector described Great Jones’  business model as a company that “buys cheap consumer goods, and then sells them at a markup,” given that it doesn’t manufacture the products itself, nor does it handle some of the other services in-house like fulfillment.

Of course, most retailers and brands don’t own their own factories. “It is very rare that the brands would own the complete vertical integration,” said Thingtesting founder Jenny Gyllander, whose site reviews products from new brands. “it may be surprising to many that they don’t own [the factory] but to me, that is a quite unfair expectation to be having on small brands.”

But in speaking with a few people who hold various positions in the e-commerce space about what is fueling this growing backlash against the DTC business model, a few common themes emerged. Namely, that startups can no longer rely on beautiful branding or design to convince consumers why they should buy from their particular brand. As the competition grows, and as consumers get savvier, brands are increasingly revamping their pitches to consumers about what makes them unique.

Beautiful branding can make a company seem bigger than they actually are
Gyllander said that from her perspective, many DTC startups, “have decided very often to invest quite a bit of resources in order to look and feel like potentially slightly larger companies than what they are.” That includes posting Instagram photos from beautiful locations, or partnering with high-profile influencers in fields like travel and cooking.

But Gyllander thinks that some startups could be better served by embracing more small business messaging. Venture capitalists, of course, aren’t going to back a small business. But Gyllander thinks the small business messaging could be helpful when it comes to managing customer expectations, and building a loyal following — she said many of the users who have joined Thingtesting have reported doing so because they want to support small businesses.

Startups have to do more to justify premium prices
Aaron Luo, co-founder and CEO of luxury bag brand Caraa, runs one of the few direct-to-consumer companies that does own its own factory — something that he continually tries to tout as a competitive advantage.

But he thinks that one of the challenges many DTC startups as the space has matured is that it has gotten more difficult for startups to tout their products as truly unique. Not only do they have dozens of other startups to compete with in their respective categories now, but mass-market retailers (most notably Target) are also trying to build brands that at least aesthetically, emulate some of the most popular consumer startups.

That makes it harder for DTC brands to justify charging a premium if there are so many other similar products on the market. “If I am getting a product that’s no different than what I could get on Amazon, or what I could get on Walmart, or what I could get as a white label…you bet I’m going to complain, because I’m like why did pay a premium for this?” he said.

Gyllander said that in surveying her Thingtesting user base, she has heard from other consumers who are willing to pay a premium if that means supporting a cause or value that is important to them — such as supporting a women or minority-led business.

Consumers are doing more research
Gone are the days when consumers could bet solely on a giving component or promoting using recycled materials to build goodwill among consumers. That’s partially because some models that DTC startups previously used to establish uniqueness — such as a one-to-one giving model — have become less original, and because some companies that have previously built their brand on treating workers well, such as Everlane, have been criticized by former workers that the brand isn’t all that it’s cracked up to be.

Michelle Silverstein, co-founder and COO of values-driven marketplace the Verticale said that the shift she’s seen in consumer behavior over the past few years is that “they are looking more into the brand stories — not just what the product is and how it’s made, but who is behind the product.”

Ultimately, however, beyond the storytelling and the aesthetic presentation, the biggest factor that drives buyer remorse among customers of DTC brands is product quality. Gyllander said that one of the biggest pieces of feedback she hears on Thingtesting from people reviewing products is “I really wanted to like this brand because it’s so beautiful, but you know ultimately the product quality or something in the product wasn’t for me.”

Kids clothing and accessories brand Monica + Andy launches in Target

Monica + Andy joins the rush of DTC brands launching in Target, announcing this week that it’s launching an exclusive collection, available for sale through Target’s website, as well as in roughly 300 of its stores.

Founder Monica Royer said that it’s the company’s first major wholesale partnership with a mass-market retailer, outside of a “small” wholesale partnership with Nordstrom. Monica + Andy was founded in 2012.“We really wanted to get the direct-to-consumer business right, “Royer said, before expanding into wholesale.

She added that during the company’s early days, “it was hard to even keep it [product] stock at the time, that we really wanted to make sure from a production, sourcing and scale perspective, that we were really poised to deliver an excellent experience for a really large retailer like Target.”

Monica + Andy’s line at Target contains nursery essentials, like a swaddle blanket and crib bedding, featuring prints designed exclusively for Target. Royer said that she was interested in partnering with Target in part because it’s a popular place for baby registries, and because of its past track record of being willing to partner with startups.

 “I now have gone to Target to discover new brands,” she said which speaks to just how much Target has become a go-to-partner for DTC brands.

What I’m reading

  • College students are turning to TikTok for dorm decor inspiration, spurring some design and home goods businesses that serve Gen Z to invest heavily in the social media app.
  • Asian-inspired sparkling water brand Sanzo is partnering with Marvel to produce limited-edition cans to promote the studio’s new film,  Shang-Chi and The Legend of The Ten Rings.
  • Given the success of Crocs over the past year, the Wall Street Journal has declared that “ugly shoes won” — and that brands are responding with colorful, outlandish designs.

What we’ve covered

  • Drybar is gearing up for expansion, after selling its franchising rights to WellBiz Brands in February. Now, the firm is unveiling its franchising plans for Drybar, with the goal of reaching 500 locations in five years.
  • Concession stands are going digital, with the help of startups like Cheq and FanFood. As many movie theaters and sports stadiums are preparing to fully reopen, they are betting that customers will still want to stick to digital ordering even after the pandemic ends.
  • Lotteries are also getting an e-commerce makeover, as a number of states including New York and New Jersey have passed legislation allowing for online vendors to sell lottery tickets, paving the way for new startups to enter the market.