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The Debrief | Making Sense of the Direct-to-Consumer Reckoning

Mounting customer acquisition costs and a pressure to grow fast have made it hard to build a profitable DTC business. BoF deputy editor Brian Baskin and retail correspondent Cathaleen Chen join Lauren Sherman to analyse the past, present and future of the market.
Making Sense of the Direct-to-Consumer Reckoning

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Background:

About a decade ago, a number of flashy direct-to-consumer brands peddling premium products and promising to cut out retail’s middlemen emerged on the scene. Quickly, names like Warby Parker, Allbirds and Glossier attracted investor attention with battle cries of disruption, setting off a DTC boom. They managed to raise hundreds of millions of dollars, and garner valuations in the billions of dollars. However, the market as a whole has largely failed to live up to sky-high expectations. How does does the model need to change?

“Over the last year or so, investors are looking around and saying ‘wait a minute, you told us you’d get big enough and the profits would come. Where are the profits?’” said BoF deputy editor Brian Baskin. “Consumers have also looked around and said, ‘ok, I got my Allbirds sneakers — what else you got for me?’”

Key Insights:

  • The pandemic exposed a huge flaw in the DTC model: scaling ultra-fast without the support of multi brand retailers is tough — and often requires heavy spending on customer acquisition. In both private and public markets right now, investors have little patience for brands that aren’t profitable.
  • Today, DTC brands are embracing other distribution channels in order to scale, or choosing to grow more slowly.
  • Growing a profitable DTC brand can be done with tight control over spending, scrappiness and smart marketing. AYR — a basics brand that started in 2014 as a Bonobos subsidiary and was later taken over independently by its co-founders — is on track to hit $60 million in sales, having only taken around $6 million in funding.

Additional Resources:

  • Why the DTC Model Can Still Work: At a time when many online brands are pivoting to wholesale or opening stores, the womenswear label AYR sees a future in the old e-commerce model, with some key modifications.
  • The Direct-to-Consumer Reckoning: For fashion start-ups, raising money and growing sales came easily. But with costs rising and profits elusive, securing a happy ending for investors is proving much harder.
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