At the outset of the year, as one of the worst cost of living crises in recent memory was quickly taking hold, many predicted less than favourable outcomes for a number of industries.
Consumer, or direct-to-consumer (DTC), products were expected to be among the worst hit, as a tightening of consumers’ purse strings would no doubt see a hit to disposable income and a slashing back of unnecessary spending. Some even predicted ‘the death of DTC’, a result of the unimaginable lengths brands were now having to go to to acquire and retain customers.
In reality, 2023’s fortunes have been somewhat more mixed for consumer brands. There’s no doubt some levelling was overdue, particularly after the post-COVID DTC boom. But what is for sure is that the status quo has been shaken up. Brands once considered the darlings of DTC have fallen by the wayside, making way for a new generation able to battle against the odds to remain relevant to their customers.
Here’s our 2023 in review for the DTC category, and what founders can take into the new year.
Margins getting smaller—at what cost?
When you are selling physical products, unit economics are everything. There are many different ways to measure this, but broadly, this comes down to the amount of value (read—revenue) that you can derive on a per-unit basis.
One of the key benefits of going ‘direct to consumer’ is that you cut out any middle man, meaning that you command your margins and keep exactly the profits that you are able to carve out.
Costs, however, are sky-rocketing as a result of inflation—in particular operational costs. Gymshark, the flagship UK athleisure wear unicorn, reported their first dip in profits this year, despite revenues increasing. They reported a 39% decline, compared to last year, pointing to rising operational costs and having to lay off a number of staff in the US as a result.
In the past, subscription models have been a favoured method of enhancing your unit economics and increasing the lifetime value (LTV) you get from customers. It’s a strong way of getting repeat revenue and keeping customers engaged for longer. The difficulty is that this can give you even less wiggle room with margins, as you’ll need to convince customers at a price point that makes it preferable to a one-off purchase.
Smile Direct Club sadly found this out the hard way. At one time, shortly following its IPO, SDC was valued at just under $9 billion. But it had racked up around $900 million in debt and never managed to find profitability, and in early December, announced it would be shutting down global operations all together.
Fundraising prefers debt over equity
After record years in 2021 and 2022, any predictor could see the global venture capital market heading for turmoil as Q3 and Q4 2022 hit a downward spiral—and 2023 was certainly no different. Crunchbase records that in the US, just $130m has been invested so far this year into DTC businesses—down 97% from 2021.
As such, many DTC startups are rethinking their relationship with venture capital, instead turning to venture debt. Venture debt is essentially a type of loan offered to high growth companies. Rather than giving up equity, you commit to shorter repayment terms that are usually tied to the amount of revenue you are generating.
This is far more amenable to businesses who are not as comfortable with the high pressure growth demands that typically come from taking VC money, instead giving founders more space to find profitability. There are many platforms through which you can do this—Gilion is one of them, offering custom, long-term scaleup loans.
That’s not to mean that 2023 didn’t have its share of big VC raises. Butternut Box, the ‘HelloFresh for dog food’, raised £280m earlier this year—an anomaly in the wider VC market, not just the DTC landscape. Castore, the high-end athleisure brand that is taking the sports world by storm, raised £145m at a valuation of $1.3 billion.
To IPO or not to IPO?
Many brands continued to weigh up the potential benefits of launching on the public markets. DTCs in recent years have seen mixed success. For every company like Hims & Hers, who reaped modest success from IPOs, there are dozens of examples like Smile Direct Club, Warby Parker, and Allbirds which have been less fortunate.
German footwear brand Birkenstock went public earlier this year. It struggled initially, its share price tumbling in the days following with many calling it the worst IPO in a decade. But it has quickly recovered its value in recent weeks, now surging past its IPO price.
Huel, a standout member of DTC’s all star club, has been weighing up its IPO for some time now. Despite increasing profits and a strong valuation, CEO James McMaster has tapered back expectations for an impending IPO on the London Stock Exchange.
Conversely, fashion giant Shein has filed for IPO on the New York Stock Exchange. The business is already one of the most highly valued private companies in the world, and could be one of the biggest ever IPOs, targeting a reported $90 billion valuation when it does float.
The year of M&A, sales, and consolidation
With widespread IPO uncertainty, many predicted 2023 would be a strong year for M&A. This has indeed proved to be the case, with many DTC brands seemingly looking for exits or to consolidate with other similar brands.
One of the biggest sales of the year was Aesop’s $2.5 billion sale to L’Oreal by beauty and cosmetics group Natura & Co. The brand makes over $500m in revenue every year, with a private sale considered favourable to an IPO in the current market.
Similarly, Unilever has offloaded its ownership of Dollar Shave Club, the pioneering shaving and grooming brand, to US private equity firm Nexus Capital Management. Unilever paid a reported $1 billion in 2016 for the brand.
Other acquisitions may be on the horizon yet. Farfetch, the D2C clothing retailer, is exploring an acquisition of Yoox Net-a-Porter group—although that may be hitting a speed bump as the business is reportedly looking for $500m in funding to stave off potential bankruptcy proceedings.
Death of DTC 1.0?
While the doom-and-gloomers prediction of the ‘death of DTC’ may not have entirely transpired, they may have been getting at something all along. That, while the category itself is not dead, the category is we have known it—in pure DTC form—has changed to such an extent that we are now moving onto a new era.
Few brands are able to sustain a purely online presence any more. Bricks and mortar has regained popularity as a channel for brand awareness and customer acquisition, particularly in areas that are offering incentives to rejuvenate the high street. Gymshark, Castore, Warby Parker, and Allbirds all have flagship stores across major cities now—will more follow in their footsteps?
The other significant tide shift is around wholesale. This was typically considered anathema to DTC—you couldn’t command the same margins, nor could you retain control over your customer experience. But more and more brands, who have successfully built their customer base through DTC, are now selling to major retailers as a way to get their products in front of bigger audiences and build a stronger path to profitability. Only those whose margins can cope with the increased costs associated with scale might choose to remain purely DTC.
DTC’s post-COVID bubble has certainly burst. But what’s clear, going into 2024, is that there’s a strong way forward for brands with the resilience and the creativity to succeed and define the new category—DTC 2.0.
