Online-only DTC brands were expected to transform retail a few short years ago, but recent struggles have raised questions about their long-term viability. Does the model have a future?

It has been a difficult few years for the once-hyped DTC wunderkinds that excited private investors so much over the past decade.

From Outdoor Voices in the US to Eve Sleep in the UK, job cuts and disappointing stock market debuts have characterised the experience of brands that many thought would soon be knocking on the doors of the industry’s established titans.

It doesn’t help that in 2022 the market is rebalancing back towards physical shopping after the huge digital gains made during the pandemic.

Eve Sleep

Eve Sleep has seen a slump in share price, with DTC sales orders down 14% in the UK

Stalwart pureplay operators such as Asos have felt the impact – in June, the retailer issued a profit warning, saying profits could slide to £20m this year from £190m last year.

Even Amazon hasn’t been immune, reporting in July that online retail sales had fallen by 4% year on year.

The changes for DTC are more fundamental than the post-pandemic rebalancing, however. Eve Sleep’s 2017 stock market debut, for instance – coming just two years after the brand was founded in 2015 – followed extraordinary monthly average growth of 35% in year one and 25% in year two.

Fast-forward five years and shares in the brand plunged as the business warned it would need fresh investment in a matter of weeks if a takeover offer fails to emerge. DTC sales orders for the brand are down 14% in the UK and Ireland over July and August, and 16% in France.

Rising costs

So what happened to change the dynamics of the DTC market? Sucharita Kodali, vice-president and principal analyst at Forrester, says private investors got overexcited, acting with an enthusiasm that has not been replicated on the public stock markets when brands were listed.

“There was just too much investment going into them,” she says. “There were a lot of people who know nothing about retail, primarily tech investors, thinking it’s easy to buy Google ads and magically create the next Gap in the form of Everlane.

“I don’t think they fully understood the challenges of customer acquisition and the fact that customer acquisition prices go up.”

This is the underlying problem, she adds – the increasing cost of doing business on the internet. Ten years ago, advertising and customer acquisition were significantly cheaper than they are now; today, an influx of competitors as a result of the channel’s low barriers to entry mean costs have rocketed.

“You have to pay for traffic and it’s getting more expensive as more competitors come,” Kodali says.

This hits DTC brands where it hurts because many of the early examples – from Dollar Shave Club to eyewear brand Warby Parker – challenged traditional market leaders with high-quality products at a significantly lower cost.

“These entrepreneurs are fabulous salespeople and they do a great job exaggerating the success of their business. But I struggle to find even one DTC that’s a true success”

Sucharita Kodali, Forrester

It’s a dynamic that has certainly been noted by Warby Parker founder Neil Blumenthal, who said to The New York Times in 2020: “It’s never been cheaper to start a business, although I think it’s never been harder to scale a business.”

This was compounded by those enthusiastic investors, whose cash did buy many DTC digital-native retailers significant levels of brand recognition. But it also meant sky-high growth expectations in a market where brand recognition does not necessarily translate into sales.

“A lot of the big ones took venture capital and they struggled with their growth plans,” says Kodali. “They probably spent a lot more on customer acquisition than they ultimately acquired consumers.”

She adds that it is hard to think of a single DTC digital-native brand that’s a “real home run”, pointing out that many are still privately owned.

“These entrepreneurs are fabulous salespeople, and they do a great job exaggerating the success of their business. But I struggle to find even one DTC that’s a true success. They all have their ups and downs. These companies are always laying people off.”

More than skin deep

Tropic Beauty founder Susie Ma

Susia Ma founded Tropic in 2004

Founded in 2004 by Susie Ma, skincare brand Tropic was more formally launched after Sir Alan Sugar invested in the company in 2011, following Ma’s runner-up position on series seven of The Apprentice.

Since then, it has grown without further investment and with a social selling model – whereby brand ambassadors sell to their networks – sitting alongside DTC sales.

Profits have been reinvested into the business, which now has 400 employees at its headquarters in Surrey, where between 4,000 and 5,000 packages are sent out every day.

The company is also B-Corp-certified and double-offsets all carbon emissions. The strategy for future growth is centred around a focus on product, with lines expanding significantly since launching.  

Embracing multichannel

So what’s next for the DTC model? If the plans of today’s fast-growth new brands are anything to go by, it’s a departure from the online-only approach and the embracing of a wider range of channels that support long-term growth.

For Lick, a high-end paint brand founded in 2020, this means retail partnerships and stores. The brand says revenue grew 400% in 2021 – bolstered by consumers’ lockdown DIY projects – and it has raised £23.65m in investment.

“Investments have transitioned us from being DTC to multichannel. I wouldn’t be surprised if DTC is overtaken by other channels”

Lucas London, Lick

John-Pallagi-Farmison_7_INDEX

John Pallagi says Farmison & Co has focused on sustained, steady growth

But two years in and despite starting online, the brand is all about steady multichannel growth. “We’ve spent a lot of the year investing in things that will drive medium and long-term growth rather than short-term,” says co-founder Lucas London.

This has meant its first store in Battersea, London, and a retail partnership with DIY trade retailer Screwfix, which launched in August 2022.

“These investments have transitioned us from being DTC to multichannel. It’s hard to say what [percentage of sales] DTC will account for in the coming year. I wouldn’t be surprised if it’s overtaken by other channels.”

For others, slow sustainable growth has long been the goal. Farmison & Co, an online food delivery company that specialises in rare-breed meat, was founded in 2011. Its co-founders, John Pallagi and Lee Simmonds, have spent the past 11 years building both its online customer base and its supply chain direct with UK farmers.

“The future will be about collaboration. We should be working with other great British brands”

John Pallagi, Farmison & Co

Pallagi says the business built its online following and the brand’s authority steadily. “In 2011, no one was searching online for ‘Highland steak 45 days dry aged’,” he says. “As the market matures, it becomes more fascinating. I wouldn’t want to be starting a meat company 12 months ago because of people like us who are ahead of the game.”

For Farmison, too, the long-term goal is not pure ecommerce. “Pureplay is great, but to extend the brand you need places with footfall and people going into different environments,” says Pallagi.

Farmison is talking to department stores about a concession model and sees a future in a more collaborative approach online.

“The future will be about collaboration. We should be working with other great British brands that complement [our offer],” he says, adding that a customer’s basket could travel between brands with a need for couriers to help develop this offer.

Fighting fit

GymShark_United_We_Flow_prospects_profile

Gymshark doubled its revenue in 2021 and is expanding into physical retail and events

Gymshark is one of the UK’s original DTC success stories; its most recent published results showed a doubling of revenue in 2021, no doubt bolstered by the pandemic consumer’s love of loungewear and activewear.

Reporting in May 2022, it said sales grew 68% in the year to July 31, 2021, reaching £437.6m, while profits reached £48.9m, up from £24.4m in 2020.

Its new Regent Street London flagship was due to open in September 2022 and the business has indicated its intention to expand its DTC model.

In November 2021, founder Ben Francis dampened talk of an expected IPO, instead saying the brand is focusing on US growth – now its biggest sales market.

While Gymshark has taken on significant amounts of investment, it has so far avoided most of the challenges faced by its fellow DTC brands, partly by using an extensive network of influencers that have helped it manage its customer acquisition costs.

DTC successes

While a digital-only DTC model looks unlikely to create the next billion-dollar brand any time soon, that does not mean the model is defunct.

For a start, many smaller brands can and do exist purely online with a growing understanding that sustainable growth tends to be slower, lower-budget and organic – and may not involve large influxes of early investment.

Womenswear brand AYR, for example, was founded in 2016 with $2m (£1.76m) of family-and-friends funding and has taken on just $6m (£5.29m) since.

The brand is reportedly on track to meet $60m (£52.9m) of sales in 2022 and has grown more slowly – with less media attention – than the likes of Everlane and Outdoor Voices.

AYR says it generates 97% of sales on its own website and is about to expand into menswear. Co-founder Maggie Winter told The Business of Fashion in August 2022: “Our mantra is healthy growth… there’s a real beauty to staying small.”

Kodali points out that today’s superbrands with sizeable DTC operations weren’t built in a day, either.

Lick

High-end paint brand Lick opened a store in London’s Battersea this year

“Brands like Nike grew more organically over decades,” she says. “These brands were trying to come out of the gate and get the brand recognition of a Nike, but they’re nowhere near that from a sales standpoint.”

Nike has itself been growing its DTC arm for the past few years, although there are those who question the margins and success of this move. Simeon Siegel, managing director at analyst firm BMO Capital Markets, for instance, told Yahoo Finance: “For all companies, not Nike-specific, brand DTC is not all it’s cracked up to be.”

For newer brands especially, scaling beyond a certain revenue via an online-only approach is challenging – not least, Kodali says, because digital marketing does not have the reach and cannot achieve the mass awareness other channels such as TV can.

Both investors and retailers have learned from the experiences of the past decade. Having raised £23m in investment capital, Lick’s London says the fast growth experienced during the pandemic enabled the brand to more than meet investors’ hopes for growth.

However, the brand’s long-term goal is slower and steadier – and his investors agree. “We don’t want to build a business that’s constantly needing capital and funding to grow,” he says. “We want to grow margin. And we’re all on the same page.”

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