The DTC market runs into problems

The direct-to-consumer (DTC) sector, which appeared to promise so much two years ago at the start of the pandemic, continues to attract investors but the business environment DTC brands now operate in is much changed. 

The Big Technology newsletter analysed public DTC companies with market caps of more than $800m, including the likes of Warby Parker and Allbirds, and found that almost all “are dealing with revenue contraction, shrinking margins, runaway losses, or a combination of all three”; so far, DTC stocks have fallen almost twice as fast as the S&P 500 during 2022.

What’s different 

• Digital advertising has been central to DTC brands’ marketing, but Facebook ad prices have soared as CPMs jumped from $6 to $18.
• Apple’s new iOS privacy policy has adversely affected brands’ ability to measure the effectiveness of their digital advertising – they can end up spending more for worse results. 
• Container shipping costs have rocketed, hitting brands sourcing their manufacturing overseas (many are dependent on China). 
• Investors are also looking at the impact of rising interest rates and questioning the addressable market for many DTC products. 

What next? 

Many legacy brands have also embraced a DTC approach but these have greater brand awareness and traditional distribution options to fall back on. Pure DTC players will need to rethink their digital advertising approach and their over-reliance on Facebook; they may also need to consider onshoring manufacturing.

Final thought 

“DTC was an insight 10 years ago. There’s still a lingering idea that DTC is innovative. That simply isn’t the case anymore…It’s about how you do it (DTC) that’s innovative” – Ben Lehrer, managing partner of venture capital firm Lerer Hippeau. 

Sourced from CNBC, CustomerThink [Image: Getty]