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Are the glory days of direct to consumer brands over?

Direct-to-consumer (DTC) businesses sell directly to customers online, bypassing the “middlemen” of wholesalers and retailers. This allows them to control the user experience, collect first-party shopper data and increase margins. With customers and manufacturers now keen on interacting, we are seeing massive growth in D2C channels.

In part, the growth in D2C is interlinked with the growth in e-commerce experienced during the pandemic. Recent data suggest retail e-commerce grew by more than 26 per cent in 2020 and more than 16 per cent in 2021.

However, 2022 unravelled a new story and raises questions on the sustainability of these businesses going forward. 

Brutally battered on the wall street

Tech stocks were down 35-40 per cent in 2022, and DTC stocks were down 85-90 per cent. As a rule of thumb, valuations mechanically go down when interest rates rise.

Tech stocks are down because tech is a bet on future profit and cash flow growth that is largely impacted by the rise in interest rate, inflation and macro environment that thwarts its future cash flows. Utility stocks, for example, are only down 13 per cent from peak because they are mostly predictably generating profit today.

DTC companies are battered more than tech because they do not make money at present. Figs and HelloFresh are the only companies to have been (barely) profitable in 2022. Most companies’ net income margins were -10 per cent to -90 per cent.

Here’s a rundown of the performance of some representative brands:

  • All Birds: Net Income(NI) (2022):  -US$101Mn, Stock Price Down(⇣): ⇣ 96 per cent
  • Blue Apron: NI (2022): -US$110mm, Stock Price: ⇣ 99 per cent
  • Smile Direct:  NI (2022):  -US$86mm, Stock Price: ⇣ 98 per cent
  • Warby Parker: NI (2022): -US$110mm, Stock Price: ⇣ 82 per cent
  • Bark:  NI (2022):  NI (2022): -US$68mm, Stock Price: ⇣ 93 per cent
  • Honest: NI (2022): -US$49mm, Stock Price: ⇣ 92 per cent
  • FIGS: NI (2022): US$21mm, Stock Price: ⇣ 85 per cent
  • Stitchfix: NI (2022):  -US$207mm, Stock Price: ⇣ 95 per cent
  • Rent The Runway: NI (2022): -US$212mm, Stock Price:⇣ 95 per cent
  •  HelloFresh: NI (2022): US$127mm, Stock Price: ⇣78 per cent
  • Wayfair: NI (2022):  -US$1.3B, Stock Price: ⇣ 89 per cent

Also Read: Deciphering consumer sentiment: Understanding APAC consumers’ outlook for the year ahead

This also highlights the core issue that lay during the initial funding rounds of these companies. All of the above companies were venture-backed and rewarded for growth at all costs. With the rising interest rates when the markets flipped to rewarding profitability, these brands were caught flat-footed.

Selling a brand or a channel story

DTC companies are not businesses, they are a brand or a channel. They enjoyed a unique positioning as a brand, doing what brands always do, making consumers feel good. When companies can tell a real and affecting story about meaning and personal values, consumers are moved and that’s what they’re looking for now. It makes consumers buy, come back again, pay full price and tell their friends.

However, in recent times, creating a brand today is so much harder than ever before. The world now is noisier and more crowded with competitors. 

Secondly, DTC companies are a channel business, and as channels go, it’s a good channel, sometimes a great one, but the idea of DTC as a strategy was always a distraction. Companies that were successful in selling directly to consumers online are now pivoting to open stores and with good reason: that’s where the customers are.

Need to reinvent the narrative

When a DTC company is founded as a venture-backed business, profitability is rarely in the company’s DNA. Brands can’t pivot to profitability quickly or, in many cases, at all, because they never really had product market fit. This was hidden for years by a gusher of venture capital subsidies. The murky business positioning, and sacrificing profits for growth have led to an identity and growth crisis for these businesses. 

In essence, it was never about the brand or the channel, that was just a moment in time. It was always about the message, the product, the belonging and the values. And that’s where brands, DTC and otherwise, are going.

It will be interesting to see how these DTC businesses pull themselves out of the murky waters of a brand or a channel story to a crystal clear business story with a strong product market fit positioned for healthier profits.

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