The calculus between venture capitalists (VCs) and Direct-to-Consumer (or DTC) companies is changing. We’ve seen some not-so-great exits for Peloton, Casper, and Harry’s – as well as slowing growth in categories such as DNA testing kits. There has been a corresponding slowdown in VC funding. Brands are going to have to be profitable far sooner than they may have planned, as investors are questioning a trend wherein DTC brands scale first and adjusts business model later.
Of course, companies are making the necessary adjustments. Large venture capital investments are not the answer for a number of DTC brands. We’re seeing an increase in the use of alternative investment vehicles, as well as debt that is targeted for a company’s specific needs. Some middle-market or early-stage DTC companies already recognize the changing landscape. Many we work with have adjusted their plans and are looking for partners that can add value beyond the basic Statement of Work. There are a number of partners that can offer accretive value beyond the basic ask. Investors, marketing partners, and supply chain partners should be able to provide “value-adds,” like contacts, expertise, advise and funding options that help a growing DTC reach profitability sooner than previously projected.
What are some of the headwinds your vendors should help your DTC organization overcome?
- For one thing, the cost of new customer acquisition keeps increasing, and that needs to be managed. Pureplay retailers can no longer simply “Facebook and forget it.” More detailed strategies have to be in play to win and keep new customers. Additionally, privacy and tracking regulations like CCPA are reducing the amount of data marketers can use, and subsequently driving up the cost of acquisition for new customers.
- Thinner margins at scale also make profitability a challenge. It’s not a new problem, but it’s still a problem and it needs to be overcome if DTC brands want to continue their growth. Similarly, inventory costs money – and scale does not reduce those costs. This is a problem for everyone not selling software, apps or SaaS solutions.
- The problems that plague brick and mortar retailers can be just as – or even more – problematic for DTC brands. Customer returns almost always require return shipping, in addition to inventory that may not be in a condition to resell. Last year, Statistaestimated return deliveries will cost $550 billion by 2020. That’s 75.2 percent more than it was four years ago. It’s a double-edge sword, though. “Hassle-free” returns are a big incentive for consumers to choose one online retailer over another. Ending the practice could be a costly mistake.
- Slow moving inventorynot only means that inventory is not generating revenue – it also means it’s costing warehouse space. As Maria Haggerty of Dotcom Distributers told Multichannel Merchant, “The longer inventory sits, the more expensive it will be for you. You also really run the risk of that inventory becoming obsolete.”
There are options for direct-to-consumer brands to consider to become profitable faster – and keep investors interested and happy. Net Trade has provided our retail clients with alternative funding vehicles for the past decade. We help retail brands acquire new customers using their unwanted assets, slow-moving inventory, or unwanted capacity. Those goods taking up space in your warehouse can be used to pay for advertising media – and our expert team can put that media to work, winning you new customers.