In a maturing market with greater interest from big CPG, remaining a direct-to-consumer brand is a dubious proposition
The Profitability Question
According to eMarketer, DTC sales are expected to grow 24% to $17.75 billion in 2020, twice the expected rate for total e-commerce sales. That growth rate is down significantly from 2016 to 2019, when DTC e-commerce grew at three to six times the rate of total e-commerce sales. According to eMarketer, the slowing growth is due to mounting competition and other more recent headwinds, including reduced demand for nice-to-have items and supply chain disruptions related to the coronavirus crisis.
Meanwhile, 90% of DTC companies say they became profitable within three years, according to an IAB report analyzing a recent Ipsos survey. The survey’s 203 respondents cited establishing a new category (31%) and opening brick-and-mortar locations (30%) as their strategic priorities – with only 15% naming acquisition as a key goal.
Industry experts are skeptical of some of those claims, however. “Making a profit in DTC has proven elusive, which is why Casper, Warby Parker and others have opened up stores,” says Joel Warady, who led marketing at Enjoy Life Foods before and after Mondelez International’s 2015 acquisition of the “free from” snack brand. Warady now advises emerging brands on digital strategy.
Profitability might change among different types of companies, adds Allan Peretz, president and co-founder of e-commerce marketing specialist Bold Strategies. “One group is the big ‘unicorns’ competing in the mattress or vision care spaces and spending incredible amounts of money acquiring customers in the hopes of achieving dominant market share,” he says. “Then you have innovative smaller companies that are funding DTC [through] their retail businesses – for example, food brands that have been selling at traditional retailers for years and are now starting to distribute through DTC channels for the first time.” According to Peretz, those “unicorns” spend freely because they have deep pockets enabled by venture capital – and they don’t expect to be profitable in the short term. “The smaller players don’t have those resources so they play the game differently and make more sustainable investments at the expense of speed,” he says. “They can afford to be more conservative because they’re only looking for a small piece of the market.”
As for that minimal interest in attracting an acquisition payday, Warady doesn’t buy it. “Every brand that launches as a DTC says, we’re going to be DTC only. I can tell you to a person that they’re not telling the truth,” he says. “There’s only a certain percentage of consumers who will continue to order razor blades only from a razor blade company – that just doesn’t make sense.
“They start out [as DTC] because that’s how they’re getting investors,” says Warady. But recently, growing concerns about profitability have caused investors to sour a bit on pure-play DTC opportunities. “No one is really proving how they can make a profit,” Warady insists. “The bloom is off the rose.”
“I think the strategy of ‘Let’s be highly disruptive, acquire customers at all costs, build a brand quickly, raise lots of capital and have an exit’ is clearly going to shift,” says Dubitsky, who continues to oversee Hello’s marketing as Colgate’s chief innovation strategist. “To me, the focus always needs to be on building better products, a more relevant brand and a complete offering, and to run the business like a business – which means to be profitable. There are some great DTC brands that are doing this, but it takes a lot of discipline.”
“At some point, people are no longer going to care where or how they get something. They will only care what that something is,” Dubitsky concludes. “The trick will be to make the experience more than just convenient.”