Smaller DTCs still have to perform on the big stage.
While many of today’s retailing headlines are devoted to doom and gloom, one standout category continues to be associated with growth and positive buzz. These are the direct-to-consumer (DTC) brands. And many, such as Warby Parker, Bonobos, and Casper were digital natives, meaning they were formulated and incubated online. Many of these brands found avid followings, not because of what they were selling, but how.
During a time when virtually every other retail category was slipping, sliding, and succumbing to over-storing, undifferentiated offerings and price-cutting commoditization, the DTCs were popping up amidst the retail rubble. One key to their destiny lies in their very name. While the convulsing categories (department stores, discounters, and general and specialty merchandisers) were by definition “product-centric”, the new kids were “consumer-centric”.
Retailers are by their very nature product pushers. And too many of them evolved during the “we can sell anything to anyone” days of retail. They’re over. The DTC formula is premised on a marketing void, a keen understanding of a specific consumer’s need, and fulfilling that need in a unique and dynamic way.
Many digital native brands that emerged and flourished did so by knowing their core customer’s pain points, even better than the legacy categories they slipped into. They were able to start a conversation with their new customer, employing meaningful storytelling, and a high-value proposition that didn’t previously exist.
Given that these digital natives were already web-based, they had an innate understanding of the power that data collection plays. Their ability to combine that with effective social media marketing enabled them to gain traction and supercharge early growth. It also didn’t hurt that money, in the form of venture capital, soon found the DTC prodigies, and as they say, the rest is history.
Brushing Up on an Old Story
Children of the 50s and 60s will have a strong recollection of midcentury direct-to-consumer marketers whose presence was part of the popular culture of the period. Both the Fuller Brush man and the Avon representative (“ding-dong, Avon Calling”) were regaled in commercials and even movies of the period.
Founded in 1906 by Alfred Fuller, the Fuller Brush company’s success drew heavily on a highly trained staff of “door-to-door” salesmen equipped with suitcases full of the latest and greatest housekeeping aides for the busy post-war homemaker.
The counterpart to the popular brush man was the Avon lady. The 130+ year-old company hit its stride in the mid-1950s with its iconic Ding Dong television campaign featuring the “Avon Lady” in her pillbox hat and white gloves. She would visit homes nationwide with the latest lipsticks and lotions, as well as each customer’s regular favorites.
Both of these door-to-door midcentury marketers were immersed in the analog process of personalization that was the precursors for today’s artificial intelligence and machine learning employed by leading DTC brands.
From Popping Up to Settling In
Today there are over 1,700 retail outlets owned and operated by digital natives. They include names like Warby Parker, Shinola, Allbirds, Bonobos, Away, Thirdlove, Untuckit, Casper, and more. According to JLL Research, digital-native brands are expected to open another 850 stores by 2023.
Another factor leading to the success of these brands graduating from online to offline was their informed and methodical means of getting there. Most of these players tested the waters by opening pop-ups, once they had established online traction. Their motivation was as much about getting consumer facetime and building brand awareness as pushing product. Also, the location selections for the pop-ups were informed by online customer activity and data collection.
The lessons that these digital-first brands were learning underscored the new truths of “unified commerce” (aka omnichannel). That is, the customer expects the brand to be anywhere and everywhere that they are. The other discovery was that the offline brand’s embodiment complemented, rather than undermined the online, and the other way around. Pop-up shops would strengthen online sales in the area, with both existing customers and new brand advocates.
And while brands like Casper were beginning to take up permanent residence in chains like Target, the other digital stars began a very strategic roll-out of leased shops.
Bedding on an Unlikely Category
One of the least intuitive categories to proliferate in the DTC arena has been bedding, with the seismic growth of brands like Casper, Leesa, Purple, and others. Their DTC channel now accounts for 21% of bedding sales according to Furniture Today. Compare that to a paltry 2% of DTC’s penetration in the eyeglass market, of which Warby Parker represents half.
Less talked about but no less important a factor in the growth of DTC storefronts has to do with the increased costs of digital advertising on platforms like Facebook and Instagram, a once cheap commodity. As the number of DTC brands proliferated, the flooding of ads on social media feeds caused costs to skyrocket. Statista reports that Facebook CPM (cost per thousand, also called cost per mille) has more than doubled (122%) between January of 2017 and 2018. And, at the same time that costs of customer acquisition increased, so did the “noise”.
When Heidi Zak started her bra company ThirdLove in 2012, she was adamantly against brick-and-mortar. “I always said we’d never open a store. No woman wants to bra shop, but we had to listen to our customers,” she told Forbes in an interview. After opening her first pop-up in New York she made a key hire to lead a nationwide brick-and-mortar expansion. She attributes more expensive online advertising as a component of her decision.
The culture of DTC businesses is also influencing many other aspects of advertising and customer acquisition. Additionally, DTCs are investing in more advanced tech such as AI-driven personalization, programmatic ad buying, and using software to purchase digital advertising, which is seen as less cumbersome than old-school ad buying.
Surprisingly, DTCs are not just committed to online and social media marketing and advertising but are increasingly spending big on television. It’s been reported that in 2019, DTC brands have already spent $2.3 billion on television advertising. And given the plethora of data that the DTCs have on their customers, they are able to make very targeted ad buys. Data shows that many of them are getting a tremendous return—and TV networks are using that as a marketing tool.
The Big Brands Take Note
I first reported on the “Big to Small” movement in my 2014 book Retail Schmetail, and the beat goes on. At the end of 2019, the giant Express brand announced the launch of UpWest, a new digitally native, DTC fashion and lifestyle brand. The spinoff appears uniquely formulated to hit all of the millennial and Gen Z high notes, emphasizing wellness, health, brand transparency, and sustainability.
They are taking a very “experiential approach” by initiating a pop-up tour of an UpWest Cabin featuring relaxation focused yoga and meditation. On the important sustainability front, the brand announced the creation of the UpWest Foundation which will donate 1% of sales, up to $1 million, to selected charitable organizations. Their offering mimics GAP’s DTC brand Hill City and Urban Outfitters spinoff brand Nuuly, focusing on clothing rentals.
Like many phenomena that caused disruption in retailing, the DTC movement is probably going to become so ubiquitous in brand genre that it will likely become invisible. Brian Trunzo of PROJECT and MAGIC trade shows predicts that no one will use the term DTC in a few, short years. “In my mind, legacy brands moving quickly and mimicking DTC are being smart and developing high-margin, exclusive private labels for their own distribution channels,” Trunzo said. He believes that anyone not selling direct is losing margin, and anyone only selling direct will be spending too much on marketing and customer acquisition costs. I think he’s right.
From DTC to ITC
The newest kid on the block is the influencer marketing industry. According to The Influencer Marketing research report from Business Insider Intelligence, influencer marketing is growing at a faster rate than DTC marketing and is expected to be worth up to $15 billion by 2022.
In the past year, many of these extremely well-paid influencers have progressed from collaborations to collections, to ultimately launch their own influencer-to-consumer (ITC) brands. Glossier is a perfect example. The company originally started as a blog called The Gloss by Glossier’s founder, Emily Weiss. The brand now has a $1.2 billion valuation.
Ask any group of Gen Z pre-teens what they want to be when they grow up, and I suspect at least half will tell you “a social media influencer”. That will begin to provide a gauge for where things are going.
In summary, I believe the DTC movement is part of a continuing fragmentation of a formerly homogeneous retailing industry. In most cases, the new products or services being offered by these DTCs are not completely new, but represent a void in the marketplace, generally one overlooked by legacy retailers. And because future success in retailing will not come from meeting the needs of masses, but by creating a loyal and enthusiastic following of a specific group or tribe, you can bet that the future will be flush with new DTC offerings.