Our industry has been in these latest years in transition from being massively B2B oriented to introducing and growing DTC elements.
I randomly stumbled upon a CNBC deep dive on DTC business in the retail/fitness industry and was intrigued by how this scenario, even if with different dynamics, could have some good lesson learned for our current DTC focus.
Spoiler Alert, most of the innovative companies who started the DTC revolution in those sectors are not doing well and mostly had to either pivot, exit or close.
I have an optimistic view for our case, as the inherent online aspect of media consumption seems to be more well fitted for DTC, and for sport the mix of venue and online offer a good potential to grow the mix.
I am quite sure Mike Armstrong , Evan Shapīro, Matthew Entwistle Murray Barnett may have an opinion on that.
If you have time read the full story below and see what conclusions I have considered as lessons learned. Happy to get feedback from different voices in our industry.
The Rise and Fall (and Rise Again?) of Direct-to-Consumer
In the 2010s, a new breed of retail emerged - direct-to-consumer (DTC) brands selling directly to customers online, bypassing traditional wholesale retailers. By cutting out middlemen, they offered prices 20-50% below competitors.
Initially, the DTC model was a massive success. Backed by venture capital and fueled by social media marketing, companies like Warby Parker, Casper and Peloton became household names. At their peak, they had billions in sales and multi-billion dollar valuations. It seemed DTC would dominate the future of retail.
But in the last few years, the fortunes of many DTC darlings took a turn. Increased digital ad prices, overhead costs and other headwinds left companies struggling to achieve profitability. Some filed for bankruptcy, others were sold off at fire sale prices.
So what went wrong? And what are the key takeaways for DTC companies looking to thrive in this market?
Chapter 1 - The DTC Gold Rush
In the 2010s, three key factors created the perfect environment for direct-to-consumer companies to explode in popularity:
Venture Capital Funding
Flush with cash from pension funds and endowments, VC firms poured money into DTC startups pursuing rapid growth over profits. Funding grew 10x from $60B in 2012 to over $643B in 2021.
"Zero interest rate environments made everybody a venture capitalist for the direct to consumer space."
Social Media Marketing
Platforms like Facebook and Instagram enabled startups to target customers digitally at a fraction of the cost of traditional advertising. User growth was exponential.
"Selling direct to consumer is storytelling...a better photograph, a better 59 second video setting yourself up on Shopify digital marketing."
Changing Consumer Preferences
Consumers, especially millennials, increasingly wanted to support startups over big box retailers. And they didn't mind buying online only.
Empowered by these tailwinds, DTC brands made a land grab for market share, seizing the opportunity to disrupt aging industries. Investors cheered them on.
But many failed to put sufficient focus on the one thing VCs care most about - profitability.
Chapter 2 - Struggles with Scale
While the DTC model worked fantastically for early adopters, cracks began showing as companies tried achieving mass market scale. Several intertwined issues arose:
Increased Competition
Every new DTC success birthed 10 copycats. Previously open social media lanes became congested, forcing more spending for fewer eyeballs and sales.
"It's a lot more difficult for brands in DTC to make a noise and create visibility for themselves these days. And part of that is down to advertising."
Diminishing Marketing Returns
More than mere competition, each additional marketing dollar had reduced impact as markets became saturated. As opposed to TV or print advertising with fixed costs, Internet marketing suffers declining efficiency with scale.
Higher Customer Acquisition Costs
As digital ad prices climbed from $6 to $18 per 1000 impressions, the cost to acquire a customer soared 60% from 2017-2022, reaching ~$70. This crushed margins.
"It takes two or three sales to actually have the brand start making money from acquiring a customer digitally."
Fickle Customer Loyalty
Unlike brands selling razors or diapers that lend themselves to subscriptions, much DTC merchandise like couches and mattresses are one-off purchases. This required constant marketing spend to find new customers.
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Product Limitations
Some product categories offered less differentiation, lower margins or difficulty securing recurring purchases. Not every industry was right for standalone DTC disruption.
"Pretty quickly, we recognized that having a physical offering in addition to our online and digital tools was going to be really important for our brand."
These factors combined into a perfect storm making profitable growth almost impossible, especially with VC investors demanding hockey stick metrics.
Chapter 3 - Adapt or Die
Faced with harsh realities, DTC companies adapted in one of four ways:
1. Add Wholesale Channels
Many retailers sacrificed their direct only doctrine to sell through resellers like Amazon or big box stores. This opened new revenue streams often at higher margins.
"What we're finding out is the middleman serves a purpose."
2. Open Physical Stores
Following Warby Parker's lead, retailers like Allbirds and Glossier launched brick-and-mortar stores. This provided new marketing exposure and higher lifetime value per customer.
"Stores are not only great opportunities to...offer eye exams...but they also serve as billboards."
3. Get Acquired
Unprofitable firms like Dollar Shave Club accepted buyouts from big CPG companies, valuing distribution over stand-alone success. Investors salvaged decent returns.
4. Go Bankrupt
Some struggled to adapt their model and simply went under, like DTC darling Madison Reed. Investors were wiped out.
For DTC 2.0 to work, companies must blend digital and analog channels to maximize reach, margins and loyalty. Pure direct sales models simply don't work at scale for most categories.
The question now is which emerging brands can synthesize online and offline capabilities amidst economic uncertainty? History favors the nimble.
Key Takeaways
For Investors
For Entrepreneurs
For Consumers
While the road ahead remains challenging, the dream of reinventing CPG categories is still very much alive through creative, adaptable business models. DTC isn't dead, but it certainly looks much different than just a few years ago. Winning brands will be those embracing both digital and analog channels to profitability.
Lessons Learned
Here are 5 key lessons learned for the media, entertainment, gaming and sports sector in relation to direct-to-consumer models:
The DTC hype initially promised these industries the world - the ability to own the full value chain from content production to distribution, building direct relationships with fans. But reality proved different. Customer acquisition costs skyrocketed while loyalty wavered.
Lesson 1: Marketing costs will likely overwhelm margins at scale in pureplay models. Multi-channel distribution is essential.
Lesson 2: Super-serve niche audiences rather than chase mass general audiences. Deliver differentiated value to core fans willing to pay.
Lesson 3: Explore free, ad-supported model alternatives. If unwilling to use ads, evaluate subscription bundling options.
Lesson 4: Invest heavily in engagement platforms, community building and exclusives to increase stickiness. Don't assume one-off purchases.
Lesson 5: Prepare contingency plans for the next economic downturn. Have clear path to reduce spending to core operations. Assume funding could evaporate quickly.
The key is crafting an economical blended model tailored to each product, team or personality - leveraging digital + real world, free + paid, advertising + subscription and niche + mass reach. One size will not fit all.
