Direct-to-consumer brands have been all the buzz over the past few years. Cutting out third-party retailers and building brand relationships directly with customers has been an attractive business strategy for a range of consumer brands. Warby Parker, currently valued at $1.75 billion, has become one of the most recognizable eye wear brands by breaking into the eye-exam market and leveraging their “virtual try-on” technology to make the glasses buying experience better. Casper has done $100M in sales in less than two years by re-imagining the customer experience of buying a mattress and actually reducing their consumers’ choices to a single one size fits all mattress.
The successes of a select group of DTC brands have influenced sectors and businesses of all sizes and for a while funding poured in for new entrants looking to be DTC disruptors. But why then are many of these DTC businesses now selling their products through the conventional retailers they once made fun of, or selling their companies to larger corporations? The brands Harrys and Bonobos can now be found at Target and Nordstrom retail shops, respectively. Dollar Shave Club was bought by Unilever, while Tuft & Needle sold to Serta Simmons and Joybird to La-Z-Boy.
So, apart from the generous price tag (Harry’s was bought for $1.37 billion), why are so many of these DTC brands choosing to “sell-out”? One reason could be that the business model isn’t a long-term business strategy, but rather an intermediate tactic to launch new consumer brands. When these brands launched, they could focus primarily on customer acquisition and experience. A great example is luggage manufacturer and retailer Away, who launched with a well-designed, Instagram-friendly suitcase, whose brand injects fun and energy into a category of staid look-a-like black rolling suitcase. The company narrative is appealing – they have lots of celebrity endorsements, and a passionate group of followers. However, once these brands grow and gain traction, they have to focus on more nuanced challenges like distribution, acquiring and converting mass market customers, and future product growth – areas that have been challenging for many of these brands. This is where selling to a larger parent company can help. For example, since the Walmart acquisition of Bonobos in the summer of 2017, their November revenue was up 74% from August of last year, and up 34% from the previous year.
Another argument is that these brands have failed to build meaningful customer experiences because interacting directly with consumers is a lot harder than anticipated. Previously, retailers absorbed most of the risk when products didn’t meet customer expectations and handled customer service and exchange policies. Though consumer comfort with e-commerce continues to increase and expand to categories such as fashion and groceries, many consumers actually prefer physical retail stores where they can see goods and services, which is why we see many DTC brands opening physical stores as soon as they get a certain degree of traction. Brands aren’t bringing customers to their websites as organically as they once did either – according to a report, 47% of DTC brands say they are increasing their ad spend in 2019 and that SEO is their second highest acquisition channel. What was a lower cost customer acquisition channel is rapidly rivaling the cost of a storefront.
Finally, as the business strategy has become increasingly popular, it has become less unique. Packaging, retail spaces and branding for many of these brands are starting to look the same and are having a hard time separating themselves from the pack. Even many major corporations have started to catch up. The first DTC brand was novel, but the tenth seems exhausted as consumers quickly move on to the new thing. Related to this is the issue of subscription fatigue. While subscribing to a product you use regularly but don’t want to spend too much time thinking about (i.e., dishwasher soap, razor blades and batteries) makes sense, at some point consumers do the math and assess if they really need that skincare product or vitamin shipped monthly, or if they could just buy it as needed—or better yet, buy it all together at a larger online retailer.
Incumbents and DTC brands alike need to look to new suites of products and services beyond their core to compete with disruptors. Pfizer Consumer Health (PCH) is an example of an incumbent that acknowledged the emerging presence of startups and DTC brands, and with the help of frog, used human-centered design to find new ways to grow their core business. Through an initial set of exploration territories (Healthy Aging, Better Breathing, Vitality and Wellbeing), the frog-Pfizer team generated forty wide-ranging concepts, then developed and refined these through research, experience prototyping and down-selection to ultimately deliver six well-refined product concepts for further development and commercialization. Drawing on frog’s Venture Design approach and our experience with startups and entrepreneurs, the team developed a set of principles that would guide PCH in creating, developing and ultimately bringing to market new businesses that are well outside of their current wheelhouse.
For businesses to succeed in this era, it takes a solid growth strategy coupled with innovation to succeed. But we know that designing a great product or service, wrapping it in a meaningful customer experience, and building a scalable business all at once is hard. The challenge for DTC brands is to go beyond that initial great product or service to build a suite of products and services that can serve their customers’ needs, and to service more than the dedicated initial fans. Only then can DTC brands become viable, successful businesses. In the meantime, we expect to continue to see consolidation as incumbents acquire or respond to challenges to their market dominance. The DTC brands have done a great service to consumers across multiple categories by bringing a fresh mindset and trigger a new round of innovation and competition with the incumbents.