Member Exclusive   //   July 15, 2020

DTC brands are giving up on the storefront — for now

This is part of a special package from Digiday Media about what comes next, looking to the other side of the current crisis to explore the lasting changes that are coming about.

In April, Canadian direct-to-consumer sneaker brand Vessi was ready to open its first permanent store in Vancouver. The two-and-a-half year old company had already done three pop-ups in Vancouver, so Vessi was confident that it was ready for a full-time store, according to co-founder Mikaella Go. Vessi had already designed the interior of the store, and was starting to hire staff, when in March, the company decided to pull out of its lease. 

“We have a factory in Taiwan, so we were lucky enough to have the foresight to say, you know, [the coronavirus] is a thing that is going to hit North America,” Go says. 

Vessi still plans to open brick-and-mortar stores, Go says, just not this year. “The main reason why we want to open stores is to get to know our customers [better] — we wanted to be able to chat with them when they walk in, and we want to get feedback that way,” she says. 

Before the coronavirus pandemic, opening more stores was crucial to helping direct-to-consumer brands hit their customer acquisition targets. Now, the coronavirus has upended conventional wisdom, including that around the benefits of brick-and-mortar. As DTC startups have lost money from being forced to shutter their stores for several months, many of them have subsequently seen an unexpected boost in their online business. Go says, for example, that Vessi’s sales have been up 3X since the start of the coronavirus outbreak in the U.S. in March. 

That leaves brands like Vessi with a few choices: do they continue to invest more in their online business, and bet that even after the pandemic their customers will still be more inclined to visit their website than a store? Or, do they move forward with their brick-and-mortar expansion plans, and try to sign some leases now in the hopes that they will be able to get good deals from landlords? 

Despite companies like Everlane famously saying they would never open stores, many venture-backed direct-to-consumer brands like Away, Brooklinen, and Allbirds, had announced plans to open dozens more stores over the next several years. (Everlane, in fact, opened stores too.)

“[Brick and mortar] was more important for more mature companies who had really started to diversify their acquisition strategies away from digital,” says Andrea Hippeau, principal at Lerer Hippeau. “And most of these companies saw great performance from their [stores] so there was no reason not to double down on that strategy.” 

Digiday previously reported that many DTC brands were seeing a boost in online sales in cities where they opened stores, and that these stores were profitable. Thus, opening more stores was one way that DTC brands could hope to acquire customers more profitably, at a time when advertising costs on platforms like Facebook and Google were rising more dramatically. 

Those plans are now on hold, as it’s unclear — even after stores can fully reopen — how long it will take for them to start receiving the same foot traffic that they did before the pandemic. Philip Turley, a partner at retail real estate development firm and tech platform Uppercase, estimates that the brands Uppercase works with had about 70 combined store openings planned over the  next year. Now, he believes only about a quarter of them will happen. 

“A lot of the focus for the next year will be holding onto capital, so looking at lower-cost investments and executions [like pop-ups],” says Turley, who has worked with DTC brands like Brooklinen and Food52 to open stores.

But for many of the companies who are still bullish on brick-and-mortar, the purpose of those stores have changed. For companies like Vessi, who have yet to open a permanent store, many of them are still itching to open a store as soon as they are able to again. 

For more DTC companies that already have a handful of stores, a few things have become clear. Turley predicts that DTC brands will focus more on utilizing their stores as fulfillment centers. “That is something that has been on the roadmap, but has been lower priority because customer conversion rates have always been so high,” he says. That means better enabling services like buy online, pickup in-store, even after stores can fully reopen. 

Ashley Merrill, CEO of Lunya, previously told Modern Retail that going forward, she is going to look at her stores more as marketing expenses. “I’m driving 50% to 70% of my brick and mortar traffic into stores from online. There’s no reason I should be paying top dollar for a physical retail location,” she said on the Modern Retail podcast in May. 

“The brands that have stores — or have a good fleet of stores — have been focused on taking advantage of markets where we didn’t think we could get in,” Turley says. Landlords, he explains, are offering concessions like free rent, operating on a revenue share basis or pledging to only collect a percentage of the rent on the first six to twelve months of a lease. 

Still, few brands are willing to say whether or not they plan to cut back the total number of stores they plan to open long-term. “No one wants to make too drastic of a strategy change right now,” Hippeau says. She adds that among Lerer Hippeau’s portfolio companies, many of them are waiting to see how long their digital sales continue to grow, as well as whether customer acquisition costs will remain low. If that trend holds, the brands may then decide that brick and mortar isn’t as critical to their future — at least not for the next year.

“If digital can work profitably, it is a better channel because you don’t have to have a lease on a building and store associates and all of that,” Hippeau says. “But what everyone is waiting to see is if this a permanent shift or is this a sign of the times.”