Buzzy DTC Brands Are Getting a Major Reality Check
Record inflation, supply chain woes, and shifting consumer priorities have thrown a wrench in the overzealous growth plans of viral direct-to-consumer brands like Peloton. Have these factors sounded the death knell?
Leading up to the pandemic, it seemed a new direct-to-consumer (DTC) brand was popping up almost every day, taking over our Instagram feeds with flashy promises to disrupt the status quo. Their hyper-curated grids and paid influencer marketing touted sexy, zeitgeisty wares as a refreshing alternative to old-school, aesthetically uninspired retailers, presenting an aspirational vision of product as lifestyle. This attracted consumers newly conscious of their online image, propelling organic engagement with brands to unprecedented heights. Investors took note of early success stories like Warby Parker, Casper, Glossier, and Allbirds—all DTC brands hell-bent on steering their own ship and not splitting revenue with middleman retailers. These new companies’ valuations soared into the billions and provoked a new wave of entrepreneurs eager to get in on the action.
When the pandemic shuttered physical retail and everyone was stuck at home, DTC brands experienced sharp upticks in business and charged into full growth mode. Interest in Peloton’s stationary home exercise bikes surged thanks to strong digital content and a fitness-meets-gaming option that resonated with customers desperate to forge human connections during quarantine. Though Peloton was heralded as a pandemic darling, sales floundered as life returned to normal and gyms reopened. The company reported a $1.2 billion quarterly loss in August—its sixth in a row—spelling financial woes and a major restructuring that eliminated 3,600 jobs, shuttered showrooms amid a pivot to selling on Amazon, and saw excess inventory pile up in warehouses. Now, customers are struggling to offload their dusty bikes on Facebook Marketplace, reporting losses of up to $2,000 each.
Peloton is by no means the only DTC brand grappling with shifting consumer habits. Glossier, Allbirds, and Warby Parker all laid off employees within weeks of each other as revenues flattened across the board. Wayfair and Article, two major home design e-commerce retailers that flourished as demand for new furniture ballooned during the pandemic, recently cut staff to regain their financial footing. “We were seeing the tailwinds of the pandemic accelerate the adoption of e-commerce shopping, and I personally pushed hard to hire a strong team to support that growth,” wrote Wayfair CEO Niraj Shah in a letter to employees. “This year, that growth has not materialized as we had anticipated. Our team is too large for the environment we are now in, and unfortunately we need to adjust.”
Record inflation is partially to blame, with consumers reducing budgets for “nice to haves”—a new foam mattress, athletic shoes, and, yes, stationary bikes—in favor of essentials like groceries and healthcare. Supply chain woes are only making matters worse. The cost to import from China has skyrocketed, eating further into the margins of brands that rely on offshore production. Big Technology recently reported the price to ship one container from China to the U.S. jumped from $2,000 pre-pandemic to a staggering $15,000.
These consumer-facing brands once leaned on investors as a financial lifeline during periods of slow sales, but lately investors are focusing on prospects with better margins. “It’s no longer sufficient business model innovation to be direct-to-consumer,” Jason Bornstein, principal of Forerunner Ventures, said on the Modern Retail Podcast. “That was true ten years ago, maybe seven years ago, but it’s just not true today.” Profitability is now key to attracting investors, spurring tactical strategy changes that prioritize customer loyalty and retention.
But that’s becoming more difficult as the social media landscape evolves. Pouring marketing budgets into Facebook ads became less feasible after Apple’s iOS privacy changes gave users the option to prevent advertisers from tracking their every move. Because of this, digital-native brands that once tossed Facebook a few dollars to target thousands of potential customers are finding it hard to measure performance. Couple this with skyrocketing ad prices—the cost to reach 1,000 users on Facebook tripled from $6 to $18 in the past two years—and a once-reliable strategy has become a risky spend. “The iOS 14 privacy changes affected everything,” David Herrman, a social media ad buyer, told CNBC. “The internal metrics and mechanisms that Meta uses for attribution are off around 30, 40, or 50 percent.”
As a result, more brands are relying on conventional retailers—Allbirds can be found at Nordstrom, and Raymour & Flanigan stocks Casper—where they’re not responsible for advertising or foot traffic. Legacy brands have also caught on to what made these newcomers so alluring. Sportswear mainstays like Nike and Adidas pivoted their strategies to invest in social media and e-commerce channels, with Under Armour exiting 2,000 wholesale deals to do so. A recent report by Diffusion, which tracks spending habits, suggests priorities are shifting away from brand recognition and toward lower prices and reliable customer service, which DTC brands often lack the infrastructure to provide.
Will these factors seal the fate of DTC brands? “Only time can tell,” Diffusion founder Kate Ryan writes for Fortune. “Legacy brands have caught up and caught on to what consumers were loving about these barrier-breaking brands, so the best DTC brands who want to convince customers of their value again will continue to evolve, bringing a fun, fresh twist to the omnichannel experience that we haven’t seen from traditional brands.” Brands with the most longevity will keep up with the times and understand how to appeal to buyers on all platforms, whether through Instagrammable in-store experiences, a YouTube ad that viewers don’t immediately think about skipping, or an NFT launch, though those have been yielding mixed results. For brands eager to experiment, we suggest reading up on the live shopping revolution.