Encouraged by record revenue growth, a wave of direct-to-consumer startups went public this year — but their longterm growth prospects remain unclear.
Before the pandemic, digital marketing costs were only getting steeper, and DTC brands were having trouble meeting investor growth expectations. For many companies, growth was dependent on spending increasingly more money on paid marketing. Casper, for example, in its S-1 published in January 2020 disclosed that it spent $123.5 million on sales and marketing expenses atop $157.8 million in cost of goods sold in 2018.
Then, everything changed. A pandemic gripped the world and people began ordering most of their items online. What’s more, digital marketing costs nosedived. According to one account from April 2020, CPMs (cost per thousand clicks) decreased by as much as 26%. As a result, brands were given a lifeline — and many startups reported huge sales growth.
Encouraged by this industry-wide revenue spike a few of these startups decided to go public, following the moves of a few predecessors like Casper (which just went private) and Peloton. Warby Parker, Hims and Figs — all of which reported huge pandemic-led sales growth — went public in 2021.
While these moves are indicative of a distinct shift in DTC growth strategies, their most recent earnings reports now present us with a never-before-seen look behind the curtain. For most of the companies, revenue is still growing — yet profits are elusive. Meanwhile, customer acquisition in on the tip of every founder’s tongue, yet marketing costs continue to rise. For older brands like Warby Parker, this means they are reporting net losses, despite claiming years ago they were in the black. And other brands, like Peloton, are starting to report mounting losses after a promising 2020 — which are giving many investors pause. Here is a dive into the recent financial performance of some of these startups, and what it means for the DTC business model.
Revenue: $137.7 million, up 32% YoY
Loss: $91.1 million, up 123% YoY
Active customers: 2.15 million, up 23% YoY
Ad position: web_incontent_pos1
Revenue: $102.7 million, up 34% YoY
Profit: $6.95 million, down 64% YoY
Active customers: 1.7 million, up 58% YoY
Revenue: $74.2 million, up 79% YoY
Loss: $15.9 million, up 172% YoY
Customers (subscriptions): 551,000, up 49% YoY
Revenue: $805.1 million, up 6% YoY
Loss: $376 million, up 643%
Customers (subscriptions): 2.49 million, up 87% YoY
Ad position: web_incontent_pos2
Revenue: $156.5 million, up 27% YoY
Loss: $25.3 million, up 59% YoY
What it all means
In the early days, customer acquisition was the primary focus for all growing brands. But as costs grew, profitability became more of an emphasis. Nowadays, the playbook is an uncomfortable oscillation between the two.
All of the public DTC brands, despite some being over a decade old, are still figuring out how to acquire — and retain — customers at a sustainable pace. Warby Parker, for example, makes up only 1% of the United State’s annual optical sales. Even given its status as a legacy digital brand, it still needs to grow — and fast. “When your business is not even a billion dollars, you are still very much in customer acquisition mode,” Forrester analyst Sucharita Kodali previously told Modern Retail.
This has created a difficult reality for these newly public DTC startups. They are spending more money — on both marketing and other expenses (especially given the supply chain crisis) — and, as a result, their losses are widening. Warby Parker, for example, disclosed during its quarterly earnings report earlier this month that losses continue to grow — up $91.1 million from $41.6 million the year before. This is a continuing problem for the company — despite disclosing in 2017 that it achieved profitability on an EBITDA basis, Warby Parker has yet to find solid footing in this regard.
That story extends to other DTC brands as well. Peloton’s losses grew so much that its stock price fell by 35% — it is currently at a year low, at a little over $43, compared to more than $167 this past January.
In the worst-case scenario, accumulating losses are forcing these brands to go private once again, which is what happened with Casper. Business Insider reported earlier this month that despite revenue growth, the company needed to raise more money to account for mounting losses. As a result, Casper sold itself to Durational Capital Management in a deal that valued the company at 94% of its most recent public market valuation.
Another way to look at the past quarter is that the best-performing public companies are the ones that have firmer control of their brand positioning and loyalty. “The DTC brands that seem to be performing better are the ones with the really strong brands,” said eMarketer principal analyst Andrew Lipsman. “The brand part is the more important part than the DTC part.” The ones that are struggling most, he said, “are more reliant on paid money.” As a result, “it’s squeezing their bottom line.” He pointed to Casper as a primary example, as well as other public companies like Wayfair — which reported a 19% year-over-year dip in revenue this past quarter.
Conversely, a brand like Figs — or even Warby Parker — has a strong brand name and was able to leverage it over the past year.
But even the strongest brands still have a ways to go. Indeed, Neil Blumenthal, Warby Parker’s co-CEO said at the latest earnings report, “as we look ahead, we remain laser-focused on executing against our growth strategies by increasing our active customer base, expanding our retail footprint and delivering innovative products and services.”
Even Figs, which recorded a profit, warned that things may change. In its earnings release the company wrote: “Our success depends in large part upon widespread adoption of our products by healthcare professionals. In order to attract new customers and continue to expand our customer base, we must appeal to and attract healthcare professionals who identify with our products.” If it fails to do so, the company said later on, “we may not be able to maintain or increase our sales and profitability.”
Obscured behind this all may be another more important element: a resetting of growth expectations. “With rare exceptions…these are not technology companies,” said Lipsman. “They don’t deserve technology multiples.” It’s an issue of margins. Selling consumer goods costs more than selling lines of code.
And that problem becomes more acute post-pandemic. “When these digital advertising costs skyrocket 20%, 30% year-over-year,” said Lipsman, “it’s going to squeeze you.”