‘The term DTC is a misnomer’: Brands recalibrate strategies as direct businesses become more complex

Casper, a direct-to-consumer mattress brand, toying with an IPO
and valued at $1 billion, sells products in Target and is plotting
an owned retail strategy. Dollar Shave Club, which launched in 2011
with a business model that shipped razors directly to customers, is
now owned by Unilever, the exact company it set out to disrupt.
Bonobos, a menswear brand that sparked the inventory-free showroom
store model, is a Walmart brand. When Harry’s, a
direct-to-consumer razor brand, was
acquired
by razor company Edgewell, the most controversial
piece of news that came out of the announcement was that at the
time of the acquisition, 80% of the brand’s sales were offline,
largely driven through Harry’s partnership with Target.

As the direct-to-consumer category’s most defining brands are
selling through wholesale channels and to big corporations, they no
longer fit neatly into the DTC box. Direct-to-consumer retail, as a
result, is facing an existential crisis.

It’s something that younger brands are grappling with as they
formulate strategies. Zak Normandin, the founder of beverage brand
Dirty Lemon, recalculated the brand’s future roadmap and formed
Iris Nova, a consumer tech platform to launch new brands faster and
set them up with retail partnerships. In December, the company
received a $15 investment round led by Coca-Cola.

“Omnichannel is the path moving forward, at least for now. But
there’s no playbook for how to build a DTC brand in this current
time because things are changing so dramatically fast,” said
Normandin. “We have to be market-driven and react to the things
that are happening, rather than stay the course of a specific
strategy because that’s how we launched.”

A few forces have contributed to the shift in strategy. The taps
of secured revenue growth from the sources of a sleek e-commerce
store and paid social media marketing haven’t quite run dry, but
ground-up momentum to be gained has slowed as categories bloat with
crowding and brands compete over the same audiences across
once-reliable sources like Facebook, Instagram and Google.

For brands launching in today’s direct-to-consumer retail
makeup, assuaging the cost of customer acquisition and raising
awareness in a crowded market, while still maintaining first-party
data and feedback loops, is top of mind. Under the weight of the
category, and increasingly complex business models, the
direct-to-consumer label is cracking in its purity, but startup
brands still have a similar mission in mind as they navigate their
categories: Build sustainable businesses by any means possible
(even if that means wholesale) while keeping customer wants and
needs firmly rooted in the center of that strategy.

“Everyone’s confused as to what’s going
on”

Scrutiny of the DTC category typically stems from founders who
don’t want their brands to be labeled DTC at all.

“The term ‘DTC’ is a misnomer. If I had my choice, I would
call them digitally native brands — not even digitally native
vertical brands, because a lot of them are not,” said Web Smith,
the co-founder of men’s brand Mizzen + Main and founder of 2pm
Inc., an e-commerce research and consultancy firm. “These brands
have the DNA of a digital-first retailer; that’s the only
demarcation you can consider now as brands are being spread across
these lines.”

New brands have to meet a much higher barrier of entry now that
the early-days sheen of a direct-to-consumer strategy has worn off.
That effect is particularly apparent in conversations with venture
capitalists. That’s not to say investor funding has dried up in
the consumer category — CB Insights
reported
that in 2018, venture capital for consumer brands
exceeded $1.5 billion, compared to $426 million spent in 2013 —
but the Instagram-brand gold rush has come to an end.

“We look for entrepreneurs now who can clearly articulate the
proper strategy for customer acquisition or distribution for their
market, and that’s going to be different for a beverage brand vs.
an apparel brand,” said Henry McNamara, general partner at Great
Oaks Venture Capital, who has invested in brands like Allbirds and
Away. “There’s no magic bullet in a direct-to-consumer category
that gives you a bigger opportunity than a traditional
brand.”

Brand founders have said that the most notable difference in
current conversations with investors is that they now send mixed
messages regarding the best path to growth. Six years ago, VCs were
enamored by any DTC-style strategy, according to Sarah Paiji Yoo,
the founder of cleaning supplies company Blueland, which launched
earlier this year and raised a $3 million seed round. Yoo
previously held the position of CMO at M.Gemi and Rockets of
Awesome between 2014 and 2017.

“Pitching those brands, we were in a different period of time
where the customer acquisition unit economics were more attractive.
Today, we’ve had investors that came out on both sides on
questions around topics like distribution,” said Yoo. “Some
want you to own the customer and get the higher margins. Others
saying DTC marketing is too expensive so just be anywhere,
everywhere, which is how you get more massive scale. There used to
be a clear-cut approach coming from investors, but not
anymore.”

Go-to-market strategy for figuring out distribution and
marketing mix is shifting from a clear and defined
direct-to-consumer roadmap to something far less linear. Forks in
the road have formed, and founders have to choose what’s best for
their businesses.

“We’re much later in the cycle now of DTC, and everyone’s
confused as to what’s going on,” said Rana Argenio, the founder
of 10 Grove, a new direct-to-consumer bedding brand that launched
in May.

“There’s no magic bullet in a direct-to-consumer category
that gives you a bigger opportunity than a traditional
brand.”

CAC hacking
Even as DTC strategies diverge, there’s one truth that holds for
across brands: Building a business off of paid digital marketing
alone is not something that’s going to happen again.

“In these environments, there’s a moment early on where
there’s an arbitrage opportunity, but once that cat’s out of
the bag, efficient markets lead profits to zero,” said
McNamara.

Brands are still spending on Facebook, Instagram and Google,
because they still work. But the better they work, the more
expensive they become to see the same results. Brands are also

hesitant
to put so much dependence into digital platforms known
to shift strategies in favor of their own interests. As a result,
newly launched brands are building strategies around organic media
in order to cut acquisition spend. Kathryn Duryea, the founder and
CEO of the ceramics brand Year & Day, launched on Instagram not
with paid ads, but by getting products into the hands of
influencers and celebrities like Instagram’s fashion director Eva
Chen and Mandy Moore. “The press that followed from there enabled
us to raise a seed round of funding in May of last year,” said
Duryea.

Thanks to what Duryea called “organic brand building”
following press pushes (Year & Day is a client of PR
consultancy Azione) and the earned media from unpaid influencer
promotions, Year & Day’s paid media strategy has been able to
act as a supplement and is still unsophisticated, according to
Duryea.

“Word of mouth, influencers and press drove the bulk of sales
in our first two years, and that resonates with a strong group.
It’s the cornerstone of our growth,” she said, adding that
“it’s not a perfect strategy, but we think that great brands
are going to be shared.”

Companies are also looking to diversify spending by investing in
areas that are less saturated, including direct mail, podcasts,
out-of-home, radio, OTT video and TV, but the more channels and the
more mainstream the channel, the harder it is to track what’s
resonating.

ThirdLove, which had revenues of $100 million last year, has
most recently devoted marketing dollars to TV. There, reach is
unmatched, said CEO and co-founder Heidi Zak, and other companies
have caught on: The Video Advertising Bureau reported this week
that the top 125 digital brands spent $3.8 billion in TV
advertising in 2018, a 60% increase over the year before.

TV’s barrier-to-entry is higher than a social media
platform’s, and Zak said that the brand only considered it when
it had the money to do so. It’s riskier: unlike a Facebook
campaign, the brand can’t reroute spending in result to
customers’ real-time responses. But TV serves as the ultimate
validation of marketing, which makes the lack of traceability worth
it, according to Zak: Running TV ads simultaneously with Facebook
ads drives more people to conversion when they’re seeing the
brand across two familiar touch points.

“When DTC businesses started, it was almost a purist approach
to doing the opposite to everything that was traditional.”

“There’s something about being seen in multiple places
that’s important to building a brand,” said Zak. “Attribution
becomes harder, but the way we think about it is, who is our
customer, what media does she consume over her daily life or the
course of her life, and how do we want to play with those areas. To
put your customer at the center and go where she is, that’s the
goal.”

Throwing out the new playbook
Deep into the DTC era of retail, distribution strategies have
eventually led full circle: into the arms of the middlemen.

“When DTC businesses started, it was almost a purist approach
to doing the opposite to everything that was traditional — a
retail rebellion, you could call it. The attitude of physical
retail was, ‘Why would we do that? It’s broken,’” said JB
Osborne, CEO of marketing agency Red Antler that’s worked with
DTC brands like Casper and Keeps. “It was an idealist approach to
a new way of doing business.”

But swearing off wholesale is not a one-size-fits-all approach
for DTC brands: It makes more sense for CPG companies than it might
a new line of trendy dishes. So while Target and Walmart are
gunning after digital brands to attract the customers that they
appeal to, brands in other categories are thinking of new types of
middlemen. Year & Day’s products are used in The Wing and
Soho House, while Dirty Lemon will only be found at select
storefronts. “We’re in high-end coffee shops, not Dunkin’
Donuts,” said Normandin.

Not all brands are giving up on selling direct-only. After a
test at Bloomingdale’s, Zak pulled ThirdLove out of its only
retail partner because of a clash in customer experiences.

As distribution becomes more complex, maintaining the direct
customer relationships and first-party data insight that defines
the DTC category becomes more complicated. Yoo, the founder of
Blueland, said that she sees customers that choose to buy direct
over retail as the most loyal customers who can be tapped for
surveys and feedback, while retail customers are supplementary to
that core group.

Meanwhile, mutually beneficial relationships between retailers
and brands, as they play out, are going to contribute to which
retailers will stay relevant, and which brands can achieve a
certain scale.

“In hindsight, looking back at the last eight to 10 years, it
was a necessary moment to snap both the way people were thinking
about building businesses and the way consumers engaged with
brands, out of the entrenched behaviors and expectations,” said
Osborne. “What had to be reset was the dynamic of customers being
in charge, because it slipped into this place where retailers were.
Consumers have been empowered to demand more and are voting with
their dollars and who they want to engage with. Brands are
embracing that, and retailers have to in return. That’s a win for
the customer.”

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‘The term DTC is a misnomer’: Brands recalibrate strategies as
direct businesses become more complex
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Source: FS – _Marketing
‘The term DTC is a misnomer’: Brands recalibrate strategies as direct businesses become more complex