The Year Ahead: The DTC Reckoning Is Coming For Fashion
Mounting digital marketing costs and e-commerce readjustments have put the viability of pure direct-to-consumer business models into question. The State of Fashion 2023 reveals that most brands will need to diversify their channel mix beyond DTC to generate growth.
Unprecedented e-commerce growth rates are normalising. E-commerce sales are expected to grow at a CAGR of 10 percent in the US and 11 percent in Europe between 2022 and 2025, far slower than the 30 percent growth seen from 2019 to 2020, and more in line with the pre-pandemic rates of 15 percent and 14 percent from 2016 to 2019.
Profitability in the online DTC channel is suffering, as digital marketing costs grow alongside online return rates — costing brands between $21 and $46 per returned product on average.
Brands are doubling down on physical touchpoints, from monobrand stores to concessions at multi-brand retailers. In 2022, physical store openings in the US outpaced closures for the first time in over three years.
Founder Michael Preysman and his investors are back in growth mode after implementing cost cuts and changes to the product mix last year. Whether Everlane can find a new leader to make it the sales juggernaut it's always dreamt of being will be a test case for whether late-stage start-ups can escape the direct-to-consumer curse.
The cost to advertise on Meta — once digital brands’ primary marketing channel — has finally come down. But start-ups will continue to decrease their reliance on social media, including investing more in offline advertising and in targeting customers on Google, where the intent to buy is higher.
While the DTC landscape’s turbulence isn’t completely over for brands, the prospect of a better economy in 2024 is encouraging profitable brands that shied away from M&A last year to start preparing for an exit.