The business landscape was upended overnight when a virus wreaked havoc on the world. Now, digitally native brands are trying to figure out how to operate in this new landscape. Before, there was a DTC guide many brands looked towards — following in the footsteps of other successful companies. It involved raising money and gaining as much traction as possible.
Now, that no longer works. The VC landscape has changed, as have the ways to get new customers. Meanwhile, brands are forced to think about profitability more than ever before.
In this report, Modern Retail details all the shifts that occurred over the last year. First, customer acquisition costs skyrocketed. Then came coronavirus. Now, brands are trying to figure out the best way forward. We detail:
- Exactly what has shifted and why
- The new strategies brands are taking to find customers
- How marketing budgets have shifted to attend to new consumer patterns
- How venture capitalists are approaching this brave new world
The DTC playbook before wasn’t perfect and now it’s completely outdated. Here’s what companies need to know in order to survive.
E-commerce has been around for decades, but over the last few years the channel has accelerated tremendously. On the platform side, players like Amazon grew to new heights. In 2019, Amazon held about 44% of the U.S. e-commerce marketshare, according to Bank of America. In 2018, the platform had 40%.
Amazon is certainly the most dominant online commerce platform out there; coming in second in terms of market share was Walmart with 7%. The other making up the rest of the pie are a few more platforms like eBay and Target, and then all of the individual businesses trying to forgo middle platforms.
It’s these individual players selling through their own channels that make up the direct-to-consumer industry. While most of these businesses are no longer just DTC — some have presences on Amazon, others have forged physical retail partnerships — their ascendance was due to a marketing strategy to acquired online customers cheaply and brought shoppers to their own websites.
A number of companies have grown from tiny online outposts to large digital commerce presences. They include Casper, Away and Harry’s. But much of their initial rises depended on cheap customer acquisition. Casper, for example, spent $423 million on marketing between January 2016 and September 2019, while remaining unprofitable.
This created an unfavorable, seemingly never-ending dynamic for many of these scaling companies. “Customer acquisition cost in the near future will surpass the cost of the actual products being sold,” said Shopify’s director of product Arpan Podduturi to Barron’s earlier this year, while discussing Casper’s IPO.
The problem was expectations: these companies raised money on promises of quick growth. Many were given valuations north of $1 billion, which they needed to somehow prove out that worth. The going idea was to acquire customers now, figure out profitability (or an exit) later. But businesses like Away and Casper became too big for an exit. Indeed, Harry’s proposed $1.4 billion acquisition by Edgewell was blocked by the FTC over antitrust concerns. The older, bigger companies had to create better unit economics to ultimately be put in the black, or they face the daunting task of trying to raise cash — either via public or private markets.
Meanwhile, younger companies watched. While brands like Casper and Peloton were forced to go public to continue to bankroll their businesses, others realized the need to focus on sustainability at an earlier stage. The dream to raise hundreds of millions of venture dollars no longer seemed ideal, if it meant cutting off exit opportunities. Brands became less interested in being the $1 billion or $500 million giant, and more interested in building a healthy business in the mid-tens of millions of dollars. Brands grew because of unhealthy market dynamics created by Facebook and Google ads. Those prices increased in 2019, which brought many businesses back down to the reality. “It is very challenging to grow,” said Zak Normandin, the founder and CEO of conversational commerce platform Iris Nova, at the beginning of 2019. “Next year is going to be very interesting,” he went on. DTC brands, “are going to find they can’t grow and sustain anymore.”
Now, problems that were thought to be years away have come to the forefront thanks to the coronavirus. Many businesses focused on growth first and sustainability second. But with a global pandemic in full swing, access to capital became scarce.
Meanwhile, channels that were once considered good ways to inch toward profitability — namely, brick and mortar retail — were completely shut down. Supply chains were thrown out of whack, with factories closed and shipments bottlenecked. Brands were forced to figure out how best to pivot while also making sure they were able to grow their digital presences.
Some companies decided to focus on the cash they had; they switched to pre-order only models to ensure they’d be able to stay afloat. Others sought out different supply chains so inventory didn’t get backed up. And sales forecasts went out the window.
All this to say: the traditional brand playbook went out the window once the coronavirus reared its head.
The old guard of DTC brands made a few strategic missteps that became very clear over the last year. For one, they raised too much venture capital too quickly. While businesses need money to grow and survive, VC cash comes with promises and strings attached. A once-modest brand needs to become a lifestyle destination if it raises a Series A or above.
A number of companies began doing their best to forgo venture capital. Brands like Dagne Dover opted to grow by bootstrapping rather than tie themselves down to VC expectations. “Retail is not a VC-fundable proposition, in my opinion,” proclaimed 2pm Inc founder Web Smith last year.
The big reason was the economics. More businesses realized it was better to approach growth slow and steady rather than quick and dirty. Even VCs began to change their tunes. Multiple investors told Modern Retail that the big questions they asked potential retail portfolio brands is to describe their path to profitability as well as their plans to go beyond e-commerce.
The VCs realized that the successful companies were the ones with diversified revenue streams and good economics to keep them afloat. There has been a reduction in investor appetite for “businesses where there is high level of cash burn prior to profitability,” said Jason Stoffer.
But all of that was before coronavirus. While many onlookers said VC funding was beginning to dry up, that wasn’t entirely the case. The changing landscape was around what successful businesses were.
Coefficient Capital, for example, has begun to think about the world — and what it invests in — three phases. The first is the initial crisis related to coronavirus, the second stage is the normalization after the crisis before a vaccine appears and the third is dependent on if a treatment is found to eradicate the virus. The second stage is principal Franklin Isacson’s focus. “We believe that for the next 18 months or so, things are definitely going to be different,” he said. “That’s what we really spend most of our time thinking about.” That is, consumers’ habits have shifted and — and are focused more on necessities and less on frivolous activities. The companies seeing real growth are the ones that graft onto these big shifts.
Luxury-oriented brands were getting a lot of attention in 2019. Now, VCs are seeing a back to basics. “I’ve been very interested in CPG, specifically fresh packaged goods or coffee or other things like that,” said Jesse Derris, also adding that both household products and telemedicine companies are of interest to his fund right now. Indeed, everyday products are services are top of mind; Instacart raised $325 million since May.
For other VCs, the focus has been one business fundamentals and sustainability. ““Strong balance sheets ignite more options,” said Bullish’s Mike Duda.
Beginning in March, everything was upended. Many of the big changes were accelerations of phenomena already in motion; brands said they were working toward profitability, but few thought such a dramatic disruption could happen so quickly.
The first wave of damage involved supply chains. While the coronavirus spread through Asia, factories throughout the continent were shut down. Businesses that relied on manufacturing in Asia either had to wait until facilities reopened or found new places from which to source. Under Armour, at the time, predicted it would lose $60 million in sales in the first quarter due to supply chain disruptions. Other brands that relied on sourcing from there were forced to wait until cities opened back up.
In the United States, retailers braced for the impact. A Modern Retail survey of top retail executives in March found 82% saying that product launches would be hindered by the viruses spread. 54% were already seeing a decrease in physical store sales. And 39% foresaw furloughs or layoffs happening on the horizon.
When cases began to spike in the U.S., things got much realer. Over the course of a few weeks, the widespread impact became clear. Dozens of brands shut down their stores and furloughed staff. Big companies like Away announced that it was laying off 10% of its staff and that sales had sunk nearly 90%. “While almost all companies have been impacted by this global crisis, our company—with equal footing in the travel and retail spaces—is facing unprecedented challenges with no clear timeline for recovery,” a spokesperson told Modern Retail.
The numbers piled up: Everlane laid off 290 employees; Rent the Runway let go all of its retail workers; Casper furloughed all of its store employees; lingerie brand ThirdLove laid off 30% of its staff. In a statement to Modern Retail, Everlane said revenue projections in April were down as much as 25%. What began as overseas headaches involving manufacturing and logistics, expanded to all physical retail realms. Supplies were tied up, stores had to close and demand inverted.
One of the big lessons founders learned was how to handle things quickly and with agility. The nutritional supplement brands WellPath, for example, was forced to completely rethink its operations, supply chain and logistics program over the course of a few days.
WellPath sells supplements, and historically relied on Amazon for most of its sales. While it had other onlines channels — its own website as well as other platforms like Walmart — the company was able to grow thanks to Amazon’s search algorithm. When people searched for health supplements, they would most likely find one of WellPath’s products in the top results.
When coronavirus hit, WellPath experienced two big changes. Some of its suppliers got delayed, so he had to figure out new ways to source raw material. The brand also noticed consumers were stocking up on immune health products, and so he stocked up on products to ensure he would be able to have enough products to ride out the demand. But the company spent days figuring out new raw product suppliers as many of its go-tos were shut down. Getting these ingredients, said CEO Colin Darretta, “has never been harder.”
Then another curveball came: Amazon stopped accepting shipments into its fulfillment warehouses from brands it considered non-essential. This meant that Prime shipping times on WellPath’s products were increased to as long as a month, when before they were only a few days. This significantly impacted the company’s Amazon sales.
Darretta responded by quickly moving his fulfillment to third party fulfillment networks (3PLs). It took over a week to call up new partners and have stock sent over to them, but once in place, the company was able to offer quicker delivery options by circumventing Amazon’s Prime program.
While seeing the chips fall, Darretta spent days building out redundancies — figuring out new 3PLs to work with, stocking up on raw materials making sure his brand had enough label makers (which quickly became in short supply). The overall play was making sure that if one avenue unexpectedly shut down, he would be able to quickly seize another to not slow down production. Overall, Wellpath saw a 30% increase in all of its SKUs — much more for the immune-focused products that featured ingredients like Elderberry.
Times of crisis are when you call in favors and build a long list of alternatives. “Go with someone you know will weather the storm and be a partner,” said Darretta.
One of the big lessons brands learned was that it is no longer wise to rely on only one channel. As WellPath’s example shows, brands that sold big on Amazon but were considered non-essential likely lost out on millions of dollars of sales because of backed up inventory. But that wasn’t the biggest revenue stream impact: many online brands were investing in physical retail at the beginning of the year and they all had to close up shop instantly.
It wasn’t only brands that had stores either, but also companies that relied heavily on wholesale. The high-end back company Peak Design, for example, relied on wholesale for two-thirds of its overall sales and most of that disappeared when retail partners like Best Buy weren’t able to sell products in stores.
The reaction to the disruption was quick. Brands realized they needed to grow sales on any channels that were still able to work. Birkenstock, for example, was a shoe brand that long avoided being sold on Amazon. When coronavirus hit, the company gave permission to Zappos to sell its shoes on the website. WellPath, conversely, began focusing on non-Amazon channels to have a more diversified stream. It focused on selling products directly on its own website while shipping times lagged on the e-commerce platform.
Meanwhile, even big players began to realize they had to change the channel mix. PepsiCo, for example, launched its own DTC websites so consumers could buy its snacks. And CocaCola announced that 25% of its global volume had shrunk, mostly as a result of wholesale channels being completely shut off. The conversations in both big and small companies was how to offset sales losses by looking into new revenue streams. “Everyone is talking digital,” said Barb Renner vice chairman of consumer products at Deloitte.
The e-commerce platforms benefitted. Shopify, for example, saw revenue grow 97% year-over-year in its second quarter 2020 earnings. New stores grew 71% during that same period too. Even smaller players like Wix recorded 3.2 million new user registrations in April.
Many digital brands were founded on the simple idea of what you see is what you get. With that, some businesses avoided what they believed to be cheap acquisition tricks, like discounts. While some companies grew thanks to having customers input their email addresses and then a few minutes later receive a coupon, others decided to forgo that strategy to avoid brand dilution.
Mack Weldon, for example, has usually avoided discounts and ThirdLove over the last year began relying on them less. Brands like Peak Design too have long avoided giving out unnecessary discounts. Most argue that customers will or will not make the purchase with or without a coupon — and that there are other ways to attract customers, namely through loyalty promotions and other perks.
But when all of retail got shaken up last March, brands had to make quick and dirty decisions. And some of them realized that discounts were one way to make sure they were able to sell their products.
The only other time the 9-year-old brand Peak Design held a site-wide discount beyond big events like Black Friday was when its founder received an emergency appendectomy and needed money fast. In late March, the company decided to do it again as part of a new product launch. The thinking was straightforward: sales were down as a result of channel upheaval: both Amazon and wholesale sales were spiking downward as the virus spread.
The brand decided to run a site-wide discount, explaining clearly to customers that it’s because the entire world is facing some weird and uncharted times. Every product was marked down anywhere from 20% to 40%.
The company also used marketing tricks it generally relegates for splashy promotions. For example, for the week the so-called weird times site-wide discount was in play, Peak had a countdown clock showcasing how finite the opportunity was. These aren’t new widgets; travel websites and mass retailers love to implore people to act fast using dwindling time as a psychological factor. But the company needed to revive old tactics to create a new promotional playbook.
The efforts worked. The sale was the most successful one the company had ever seen, given it a helpful cash infusion to try and ride out the uncertainty. The entire concept was devised and executed over the course of a few days. Peak realized it needed something drastic to both bring in new customers and remind existing ones to help keep it afloat. It’s part of an industry-wide realization that brands won’t be able to rely on old tricks, at least not this year. “Brands are really needing to pivot on a dime,” said Laura Stude, co-founder of the agency Surefoot that helped launch Peak’s ‘weird times’ campaign.
Companies are also working together to figure out the best way forward. A number of businesses have sprung up showcasing collaborations in the form of marketing efforts. The sexual wellness brand Maude, for example, launched a digital publication called Staycation that featured many different brands’ content.
The idea was to create a digital guide about how to comfortably stay inside, and dozens of brands contributed content to fill out the project. The concept rallies around cheaper customer acquisition. Customers can discover multiple brands in fewer places. While digital marketing costs have been going, brands are trying to act more conservatively to conserve funds. Working together and sharing lists is one way to cheaply increase the customer pool.
According to Maude, Staycation received 2,500 unique views on launch day, as well as email newsletter sign ups to date. Given that it was free for brands to sign on to, this was one simple way to hopefully find new eyeballs.
Most people haven’t ventured outside for quite a while, so the splashy marketing campaigns of the past don’t hold as much weight as before. The most obvious example of this is out of home advertising. Many DTC brands would invest hundreds of thousands of dollars to have their ads in New York City subway cars. Now such a campaign would be a fool’s errand.
As a result, DTC brands have been either cutting back on their marketing efforts or focusing it on digital channels. Prices for ads on Google and Facebook dropped dramatically when the coronavirus hit — according to one pet food brand, as low as 40% — and so it made sense to try and increase acquisition while prices were low.
For those companies still testing out of home strategies, many focused on highly-trafficked areas like grocery stores and digital signage, making it possible to change a promotion’s messaging quickly and easily. At the end of March, digital advertising companies focused on interior spaces were seeing an influx of demand, according to agency sources.
Meanwhile, TV advertising is also becoming more popular among smaller players. While people can’t walk outside as carefree as before, they certainly can binge television. The telehealth company Ro decided to capitalize on that in late April. It ran its first TV ad showcasing its new skincare line.
In the company’s eyes, TV was a way to springboard what was already in motion. Ro had been seeing an influx in interest; Google search traffic for all its brands — Rory, Rory and Zero — was up by 30% between March and April. To capitalize on more people seeking out at-home healthcare companies, the brand decided to market nationally.
“Given the traction that we’ve seen with Rory, and the growth we’ve seen month over month, TV is a natural next step when it comes to channel mix,” said Rob Schutz, the company’s chief growth officer.
Meanwhile, others began to look into new channels. One digital agency that predominantly focuses on Amazon, for example, began noticing brands having more success advertising on Facebook’s Marketplace. This destination has traditionally been considered a Craigslist-like kitchen sink of a website. But while some channels like Amazon have been clogged with demand — and therefore fulfillment delays — some companies have taken to advertising and selling products on lesser known
“One of the [platforms] that I’m most bullish on is Facebook Marketplace,” said Chris Palmer, founder of the e-commerce consultancy SupplyKick. One baby clothing brand that spoke with Modern Retail witnessed a distinct bump in sales on Facebook Marketplace, seeing a 30% month-over-month increase since earlier in the year.
While it’s certainly not a widespread migration, it illustrates some of the pain points felt on the primary channels. For one, Amazon and Walmart both take a big cut from brands — about 15%. Comparatively, Facebook’s is only a 5% commission fee.
Meanwhile, brands are seeing an increased focus on building their own direct channels. One of the big focuses in late 2019 was to build more robust omnichannel strategies. It was no longer enough to acquire customers via digital marketing channels; in order for companies to grow, they needed to forge scalable partnerships. This could mean seeking out more sales via platforms like Amazon or inking wholesale distribution with big players like Walmart or Target.
Now, a reverse is starting to happen. Big CPG players, for example, are beginning to see the merits of fostering direct sales with customers. It’s not a scale play; there’s no way a global brand can achieve direct e-commerce scales anywhere near wholesale operations. Pepsi, for example, just launched two new websites allowing consumers to but certain portfolio products directly from the company. Before, PepsiCo’s products were available on e-commerce platforms like Amazon, but never directly from the company itself.
As PepsiCo’s global head of e-commerce Gibu Thomas told Modern Retail, the DTC play now is about getting better data. “Now, in these curated bundles [offered via new DTC channels], if we find signals that they resonate, we will make those bundles available available in our retail channels, because obviously our retail channel has much bigger scale,” he said.
This is representative of a strategy shift. Even the large players are realizing the importance of seeking out new ways to engage with customers. It’s a realization that now is not the time to precious — companies need to explore all potential avenues of growth. Shoe brand Birkenstock presents a great example; it, for years, avoided being available on Amazon.com. But in mid-March, it decided to change its tune.
“Zappos is a long-time partner of Birkenstock and I have extensive relations with their organization and we share mutual respect,” David Kahan, the US CEO of the company said to Vox.com. “[I]n times like this, smart people have to get creative with new approaches to the business.”
As eMarketer principal analyst Andrew Lipsman told Modern Retail, this may be the beginning of an overall shift. Brands can’t be picky anymore. “What options do you have if brick and mortar is eroded?” he said. Likely, “a lot more DTCs moving onto Amazon.” Why? “That’s the easiest path to growing sales,” he said.
For now, the focus is on figuring out what trends are going to stick. There was a quick and unprecedented shift to digital, but it’s certainly not permanent. For example, many stores were closed for a long period of time, but they are beginning to reopen. And the future for brands that operate with stores is that they’ll have to operate with continued uncertainty.
Neighborhood Goods presents a good example. Its physical locations feature a suite of digitally native brands, attempting to revamp the department store concept. But when all of its stores closed, it had to figure out how stay afloat. It shifted all of its operations to digital, and worked with its portfolio brands about the best way to support them. Now, stores are slowly reopening, and the company is able to use the lessons it learned from being online-only for three months. Looking at customer data, the company sees some shifts in shopping behaviors. For example, while foot traffic is down, conversions are up. “People are coming in with real purpose, really shopping,” CEO Matt Alexander told Modern Retail.
Similarly, brands are rethinking their overall marketing strategies in an attempt to stay current with consumer shifts. Startup beverage brand United Sodas, for example, halted an out-of-home New York City subway campaign and is instead looking into other media that meets the customer where they are — namely, on the streets. The company is launching a campaign with digital kiosks via LinkNYC and seeing whether or not they resonate with customers. “We’ll have to see how they perform before shifting dollars between units,” founder Maris Zupan said.
All this put together shows brands realizing they can’t rely on one channel, nor can they use only certain types of marketing media. During coronavirus, for example, customer acquisition costs on Facebook and Google went down, but that wasn’t a permanent occurrence. Brands were able to get cheaper placement and increased ROAS, but that didn’t amount to a long-term strategy.
Instead, these companies are figuring out how to cut costs while trying to find new ways to find customers given their new shopping patterns.
It’s unclear if things will ever return back to normal, but the DTC model of raising money to grow at all costs is out the window. Instead, brands must think strategically about their balance sheet, where their customers are and how they are shopping. It’s not a one-size-fits-all approach, but it’s the only way for companies to survive — for now.