Direct lines
Many direct to consumer (DTC) brands have enjoyed accelerated growth through the pandemic, but what other factors have driven their success, and are they now moving offline, too?
Brands such as Casper, Harry's and Bonobos were the trailblazers in the mid-2010s, who all started by selling one product (one mattress, one razor, one pair of trousers) but many different DTC models have emerged since, from DNVBs (Digitally Native Vertical Businesses) to traditional brands supplementing their wholesale channel.
Whilst consumers might not be aware of the term DTC, Diffusion's 2021 Direct to Consumer Purchase Intent Index highlights that 43% of Americans are aware of DTC brands, and 69% purchased at least one brand in 2020, with 52% saying that 20% or more of their 2021 purchases will be DTC.
To exemplify the wide mix of brands in the space, examples include:
Traditional FMCG brands going DTC (e.g. Gillette On Demand, PepsiCo launching PantryShop.com and Snacks.com)
Subscription models, such as Hello Fresh and Stitch Fix continue to grow in popularity, with 45% of Londoners signed up to at least one
DTC brands opening bricks and mortar presences, including Allbirds and Made.com
DTC brands entering partnerships with retailers, with the likes of Graze and Huel widely available in supermarkets to help them scale
Retail brands accelerating their DTC strategy by exiting wholesale contracts. For example, Under Armor's DTC revenue increased by 17% last year, a boost of over 50% in e-commerce sales, while Nike is a prime example of a brand that grew its DTC share of sales from 15% in 2010 to 35% in 2020.
Why has DTC been so successful?
DTC brands are often digitally native and grow by creating differentiation around a hero product or a limited range, then gaining exposure through aggressive marketing and partnerships with complementary brands.
This focus on marketing and customer dialogue allows brands to maintain total control of their data, giving the brands complete ownership of the customer relationship, as well as being able to listen and react to key trends important to the target audience, from sustainability to Black Lives Matter. This is particularly important to younger audiences.
Furthermore, DTC brands have few bricks and mortar stores, making them less exposed to physical restrictions or events such as Covid.
DTCs moving offline
The appeal of physical stores however is growing, with high degrees of competition for online advertising driving up prices for pure players. Marketing is key to drive online traffic, yet the myriad of brands has led to exploding marketing costs, with Casper's sales and marketing expenses reaching $154.6 million in 2019, a 22.5% increase from the prior year, and Wayfair's advertising expenses hit $1.1 billion in 2019, up 41.5% year on year.
As such, stores are becoming increasingly recognised as channels with unique spaces and experiences which are impossible to recreate online.
Opening a store creates an additional marketing channel, becoming a brand-building location. For that reason they need to be in high-traffic, high density markets of the target population. In the US, New York is the top destination for first permanent bricks and mortar destinations (41%), followed by LA and San Francisco (12% each). Whilst this appears to indicate that secondary cities and high streets are unlikely to attract DTC brands, different brands are at different levels of maturity with different strategies. For example, Nike's new locations are notably off the high street and in more local communities, to not only help compensate for the closing of wholesale doors by providing a place for shoppers to see products, but also to help build communities with loyal customers. In the same way many DTC brands view their stores as marketing channels more than just revenue opportunities.
DTC brands tend to differ from traditional shops. The footprint tends to be smaller (few and smaller stores), with low inventory or even inventory-free showrooming models (c.15% of physical stores run by digital retailers are completely inventory free) not uncommon to allow customers to try out the products before ordering online.
We believe that DTC brands provide a great opportunity to revitalise key shopping locations, but they will require smaller units and will not settle for anything but the perfect location for their strategy, be that proximity to target customers or a physical outpost to create an online halo effect. As such, landlords need to be able to provide key data to help the brands’ location strategies.
Christina Roseler