New DTC toolkit   //   January 4, 2021

The DTC boom got a lifeline in 2020

At the beginning of 2020, many direct-to-consumer startups were anticipating that they would hit a revenue wall if they continued to sell their products only or primarily through their websites. So, they quickly rolled out plans to open more stores, sell more of their products through other retailers’ stores or websites, and launch into new categories.

Then, the coronavirus pandemic threw a wrench in those plans — but not necessarily for the worst.

The DTC bubble was supposed to pop in 2020; Instead, it became even more inflated. Fears that the pandemic would lead to a dip in consumer spending never panned out for most DTC startups, as the people most likely to be their customers — young professionals working from home — subsequently spent more of their money shopping online. Over the course of the year, companies in a variety of categories reported astronomical sales growth, even as stores were ordered shut. For example, as of August, personalized hair care startup Prose said it was on track to do $50 million in revenue this year, more than triple last year’s number, while bedding brand Brooklinen’s revenue has more than doubled this year, CEO Rich Fulop told Modern Retail.

Now, going into 2021, direct-to-consumer startups are trying to figure out how to best capitalize on the growth they saw this year. “2021 will really bear out who has the better propositions,” said Mike Duda, managing partner at hybrid accelerator agency and venture capital firm Bullish.

Unsustainable growth plans
Five-plus years ago, the term “direct-to-consumer” was often synonymous with online-only thanks to some DTC startups like Everlane infamously declaring they would never open stores. But for the past several years, DTC startups have been opening more of their own stores earlier on — as well as striking wholesale deals with huge brick-and-mortar chains like Target, Walmart and Walgreens.

There were a few reasons for this shift. For one, DTC startups increasingly found that there would be a limit to how much they could grow sales if they only sold their items through one place — their website. Later-stage brands like Harry’s and Casper were able to grow to hundreds of millions in revenue once they added wholesale partners like Target and Walmart.

Second, customer acquisition costs on Facebook started to increase more quickly. DTC beverage brand Iris Nova, for example reported that its customer acquisition costs on Facebook and Instagram tripled between 2017 and 2018. some DTC startups bet they could more profitably acquire customers through brick-and-mortar, where costs were less variable.

As a result, many DTC startups had trouble finding a path to sustainability. The risks of placing profitability on the back burner to focus on digital customer acquisition became evident at the beginning of this year, thanks to the lackluster response to Casper’s IPO. which went public with a market capitalization of $377.9 million, after being privately valued at $1.1 billion. Casper’s S-1 revealed that in 2018, it spent $157.8 million on marketing, on revenue of $357.9 million — resulting in a loss of $92 million.

In 2020, DTC businesses were prepared to diversify
All of these factors led DTC brands to start 2020 with a new playbook. Home goods startup Brooklinen announced it had raised a fresh $50 million funding round, in part to open more stores. “We thought it was the proper moment to do that based on the size that our core DTC/e-commerce business has grown to,” said Rich Fulop, whose startup was profitable three of its first five years in business. Brooklinen opened its first permanent store in Williamsburg last January, and was planning to open two more stores in 2020. 

Zak Normandin, founder of direct-to-consumer beverage portfolio company Iris Nova, had previously told Modern Retail that his number one focus in 2020 was to become profitable. To do so, Iris Nova had shut off Facebook and Instagram advertising at the end of 2018. And, Iris Nova expanded its physical retail presence, selling its products through Equinox, and Nordstrom, as well as its own chain of mini-stores called The Drug store, the first of which opened in 2018. In February, Iris Nova And, in February, the company announced it would begin selling its Dirty Lemon beverage through Walmart stores.

As Normandin described it in a December interview with Modern Retail, Iris Nova wanted to sell its products “in the places that our consumers lived, worked and played.” But as the coronavirus pandemic hit the U.S., offices and gyms were no longer the gathering spots they once were. Instead, Iris’ Nova’s customers — and customers of nearly every other retail brand — lived, worked and played at home. 

Iris Nova took a hit as some of its wholesale partners struggled. Most recently fast-casual chain By Chloe, a long-time wholesale partner of Iris Nova, filed for bankruptcy in December. But, Iris Nova was also buoyed by the Walmart partnership — Walmart has reported double-digit sales increases each quarter this year, thanks to being declared an essential retailer — and an increase in e-commerce sales.

Zak Normandin said earlier this month that Iris Nova turned a small profit for the month of September, with the expectation that the company will be fully profitably in 2021. He declined to share exact revenue figures.

Meanwhile, while Brooklinen had to shelve its plans to open two new stores this year, the company’s sales still grew by more than 100% year-over-year. “We were in kind of the right place at the right time in terms of what categories we participate in,” said Fulop. Brooklinen launched loungewear in 2019, which Fulop said the company “found great success with” this year as people shifted their spending from workwear to comfortable clothes. And, sales of Brooklinen’s other products like bedding and towels remained strong, as people spent more money on redecorating their homes. 

The new growth plan
The question going into 2021 is just how long will the e-commerce boom last. According to data from eMarketer, nearly every retail category reported higher year-over-year e-commerce sales growth this year compared to 2019, as people were forced to shift nearly all of their purchases online. Food and beverage reported the highest year-over-year increase in e-commerce sales at 74%, while e-commerce apparel sales grew just 22.2% as apparel sales overall declined.

All of the categories this year had such elevated rates this year, they have to come down,” said Andrew Lipsman, e-commerce analyst at eMarketer. 

Brooklinen’s Fulop said that he still thinks opening brick-and-mortar stores is key to maintaining sustainable growth. Fulop said that Brooklinen still intends to open the same amount of stores over time as it did before the pandemic, with the goal now being to open two stores in 2021. But, the pandemic has changed the type of store experience customers want.

“Places like malls — I’m not sure if people in the short term will go there on a Sunday [to kill time],” said Fulop. But, he thinks that people who want the convenience of picking up their order today will still want to visit stores again. To accommodate those shoppers, Brooklinen will have buy online, pickup in-store enabled at all of its stores going forward. “It wasn’t planned before necessarily, but it’s a certainty now,” said Fulop.

“I’m probably maybe an outlier in this thought process, but I think the impact of Covid is going to be felt for a long time,” said Iris Nova’s Normandin. “They say it takes six weeks to create a new habit, and there’s been a lot of new habits that have been created for this working generation over the past year.”

What’s going to stay the same, at least through the next year, is that people will continue to work remotely and spend more time at home, according to Normandin. And Normandin thinks big-box retailers are increasingly going to be a place for consumers to discover new products, especially as people make fewer shopping trips.

As people continue to do more of their shopping online, Normandin said that he is focused on acquiring and retaining new customers by improving ease of ordering through Iris Nova’s text-to-order platform, and getting other beverage brands to use its tech platform.

Despite the boom e-commerce sales have gotten in 2020, he doesn’t want to increase his marketing budget while sacrificing profitability, remaining cognizant of the trouble DTC brands ran into before the pandemic. Selling through multiple channels — whether that be wholesale or a company’s own stores — is still how many brands plan to get to profitability, and take control of their own destiny.

“Being dependent upon venture capital and additional financing all the time — that’s unsustainable,” said Normandin.