Direct-to-consumer start-ups once looked poised to take America by storm. This new breed of retailer takes an everyday product, makes a nicer version of it and sells it directly to shoppers via the internet at a lower price. Riding on the promise of low overheads and no middlemen, and backed by canny marketing and plenty of venture capital funding, at one point they appeared unstoppable.
The high point for DTC came in 2021, with eyewear purveyor Warby Parker, medical scrubs maker Figs, wool-sneaker company Allbirds and online wine club Winc all making big, splashy debuts on the public markets. Established brands took note. That also happened to be the year sneaker giant Nike initiated a significant pullback from wholesale distribution in order to build up its DTC channel.
These days, the DTC boom is looking more like a bust. Winc and SmileDirectClub, which sells clear teeth aligners directly to consumers, have filed for bankruptcy. Warby Parker, whose share price peaked at more than $58 is currently trading at less than half of that. Allbirds, once the go-to shoe of tech elites, has shed nearly 99 per cent of its value after peaking above $520 a share. Figs shares are down 85 per cent from their 2021 highs. Casper, a DTC mattress business, was taken private after its shares slumped. Meanwhile, Nike is pivoting back to wholesale retail after its DTC strategy failed to gain traction.
Why has the DTC model run into a wall? One reason is that, while these companies don’t have the same overheads as brick-and-mortar retailers, they do have to spend heavily on advertising to acquire customers. At Allbirds and Warby Parker, marketing spend was equal to about 28 per cent of revenue in the first six months of this year. Ecommerce fulfilment costs also add up. Shipping thousands of small orders directly to consumers is far less efficient than bulk wholesale shipments. Lastly, customer acquisition costs on social media are rising amid increased competition. At Meta the average price per ad rose 10 per cent last year.
Meanwhile, traditional brick and mortar rivals have upped their ecommerce game. In response, DTC companies have expanded into physical stores to boost sales. But that comes with its own drawback, namely higher operating costs. Neither Allbirds nor Warby Parker are profitable. Gross margins fell at both companies in their most recent quarter. Allbirds, which is facing competition from copycat products, has recently decided to close some of its stores and shift to a wholesale distribution model for some overseas markets.
All this points to the fact that retail business models are converging. Broadly speaking, there is no longer a neat distinction between those pursuing physical and online sales, or wholesale and own-store distribution. That leaves the DTC set shopping around for transformational ideas.