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Shakedown of Direct to Consumer (DTC) brands: $21 Billion in value eroded

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In today’s post, we explore the mega trend of e-Commerce, specifically looking at the value erosion we see in Direct-to-Consumer (DTC) brands

The post is structured in three sections as follows:

  • Visualization on 6 popular DTC brands, and main observations

  • Underlying drivers explaining the decline in value

  • Implication for investors & parting thoughts

Remember when we were told that DTC brands like Allbirds and Warby Parker were supposed to revolutionize retail? Dollar Shave Club’s CEO went into internet folklore with his viral youtube video (it’s actually great) and sold the company for $1 Billion in cash to Unilever in 2016 (PS: Unilever offloaded the company to a private equity firm in 2023. Companies usually don’t do that with successful business lines).

VCs got excited, and poured billions of dollars into thousands of DTC brands. And we got thousands of copycat brands selling all kinds of daily-use products (shoes, apparel, mattresses etc.) directly to consumers, bypassing the traditional middlemen of wholesalers and big box retailers.

However, the current reality is lot more sober - with many of these storied brands facing a harsh reality check. That’s what we explore further in today’s post.

Main Observations

  • Collectively, the 6 brands shown in the chart have lost $21.5 Billion in market cap in little over 2 years, a staggering 87% loss in value.

  • There have been main other failures not shown here, e.g: Casper Mattresses was sold to private equity in 2021, less than two years after its IPO and after losing 70% of value from IPO day. I have already mentioned Dollar Shave Club divestment earlier.

I had to really look hard for success stories, but HIMS seems to stand out. It is a telehealth company selling products for conditions like sexual wellness and hair growth to consumers. I suspect its success is partly to do with bundling personalized service (online consultations with doctors) with selling products, which is harder to replicate easily in a traditional retailer. However, there could be more here. HIMS stock is up 227% in the last 3 years.

  • Its notable that these DTC stocks are underperforming no matter the product category. We see significant value loss across apparel, pet products, baby care products, shoes, eyewear etc. (for the various brands shown in the chart).

  • VC’s are also pulling back from funding DTC startups - According to Crunchbase, number of VC-led leads in DTC startups dropped 67% from 2018 and 2023 (87% drop in total amount raised).

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What are the underlying drivers behind this value erosion in DTC companies and what implications does it have for Investors?

Keep reading further to find out:

Underlying Drivers

So why are DTC brands going out of favour by investors? There are 3 main drivers here:

  • Unsustainable model: E-Commerce is hard. There are lots of moving parts to manage, you’ve to get the product manufactured, manage inventory/liquidation, stand out via marketing in a crowded landscape, ship products cheaply, manage returns and worry about changing consumer trends. It is hard to make any money in this business, at scale. Even Amazon is still unprofitable outside of US. There is a reason many brands in the past bypassed a lot of the work by selling directly to wholesalers/retailers (offline but also with online retailers like Amazon). You lose gross margins but also don’t have to spend on customer acquisition as much and shipping. Most of the brands listed on the chart have never made a profit - Only Figs (brand selling scrubs to medical professionals) made a tiny profit of 4% (~$22 million) in 2023.

  • Traditional Retailers/Brands caught up: Most of DTC’s brand’s main value proposition was to cut the middleman (retailers/wholesalers) and pass on the savings on margin via cheaper prices to consumers. And do all that while looking good on Social Media. Well traditional brands/retailers responded by building their own DTC channels (online, and also physical stores). e.g. In 2023, Nike sold ~44% of its products directly to consumers (online and owned stores) vs. only ~18% in 2013.

  • Competition from other DTC brands: Consumer preferences are varied and fickle. There isn’t any customer lock-in you can build via switching costs, like in Software and there isn’t a network effect that you can build by spending VC money (like in marketplaces). So it became easy to spin up DTC brands (specially as technology providers like Shopify abstracted away the complexity of setting up webstores). DTC brands exploded resulting in a tonne of competition. Competition impacts everything but most notably it shows up on customer acquisition cost. At one point, in 2019, there were 175 DTC companies (big and small) selling mattresses online, directly to consumers. Unsurprisingly, customer acquisition costs has been soaring. Warby Park co-founder captures the wider point well in his quote below:

“It’s never been cheaper to start a business, although I think it’s never been harder to scale a business.”

Neil Blumenthal, a co-founder of Warby Parker

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Implications for Investors

DTC model is going through significant evolution. Here are some trends that I think is worth paying attention to:

  1. Brands can’t be DTC only: A lot of these brands have realized that they can’t be digital only or “DTC only”. They have to be wherever their customers are. They also need to find ways to reach those customers cheaply enough. That means they have to look beyond direct channels and look for more established channels in retail aka digital / offline retailers. Brand have started to realize this. In 2023, Allbirds operated 50 stores and sold via its online website. However, in 2024 it partnered with Amazon to sell its shoes with the online retailer and is now lining up distributors in various markets globally, e.g. In-Sport in Canada. They capture this change in strategy in their strategic transformation plan

  2. Industry consolidation: Expect to see consolidation in the sector with M&A between brands, big Consumer companies acquiring smaller brands, or even private equity companies picking up big brands for throwaway prices. This has been happening and will continue to play out in coming years.

  3. E-Commerce Enablement Tech: Shopify was a big beneficiary of the first DTC boom, providing tools for all kinds of DTC brands. As brands use multiple sales channel (wholesale/ own stores, digital/offline), they will need software and technology to enable brands to manage customer expectations seamlessly across channels. Expect continuing investment in this space. E.g. according to BCG, in-store tech investments have 4x, $2.4 billion in 2017 to $10.7 billion from $2024.

Parting thoughts

e-Commerce is a mega trend (globally and in US). If you have any doubt, just look at this chart below. e-Commerce as a % of retail sales in US has increased from ~1% in 2000 to 16% by the end of 2023. And it still has room to increase further, considering benchmarks from other countries.

So I’m not worried about the e-Commerce industry in general. However, the DTC shakeout signals a necessary correction in the e-commerce space.

I have no doubt that there will be DTC brands/companies who will weather this difficult period and come out on top. However, I’d be more keen in looking for opportunities in companies that power the continued evolution of DTC industry as a whole (e.g. Shopify, Klaviyo and others like them) rather than any particular DTC brands. These technology companies have higher odds of succeeding and becoming big, compared to their customers (i.e. the DTC brands).

Favour Needed

I've been experimenting with more detailed posts recently, providing deeper analysis of trends, underlying drivers, and future implications beyond just the visualizations.

I'd love your feedback to help me create the most valuable content for you.

Which format do you prefer? Your feedback is highly appreciated.

That’s all for this week. Thanks for reading! 👋


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