The state of DTC—how the category has shifted, what is working and what’s ahead

Fifteen years ago, a new breed of brand began to take root in retail. Companies touting single products, like the “best” eyeglasses—Warby Parker—the “best” mattress—Casper—the “best” paring knife—Misen—began to pop up, selling their wares directly to consumers via their own thoughtfully designed e-commerce sites. They promised lower prices by eliminating “middleman” fees in their direct selling structures. Consumers were intrigued, venture capitalists were impressed, and the dollars started flowing, ballooning valuations as investors and shoppers alike recognized the value, and innovation, in these direct-to-consumer, digitally native brands. During the pandemic, the rise of influencer culture and social platforms like TikTok, coupled with homebound customers eager to shop online, helped hasten DTC’s growth. Yet after COVID lockdowns, the bubble began to burst; many brands such as Allbirds, Casper and yoga clothier Outdoor Voices had downsized or shuttered. “Looking back, those DTC brands, those digitally native brands, it was a novelty—it was new, the idea that you could buy something direct with maybe better product design, maybe lower cost—those were such novel ideas,” said Rachel Ramaswamy, managing director at Work & Co, part of Accenture Song. “After COVID, there was less money to go around; growth has a cap and that is real in any business.” NextGen Marketing Summit Join us for a crash course on Gen Z, DTC marketing and the creator economy Register today Few categories have seen such sharp upheaval as DTC. Still, even with a plethora of ups and downs, the number of brands selling direct has skyrocketed in the last decade. Today, there are roughly 100 times more brands with their own e-commerce site than a decade ago, one consultant estimated. Experts say there is no one-size-fits all formula for success, but everyone agrees a direct model alone is not enough even as established direct players such as Nike tried adopting some of the newer group of brand’s selling strategies. Brands such as beauty purveyor Glossier and Apothékary, which sells wellness tinctures, have embraced wholesaling at larger retailers such as Sephora and Ulta Beauty. Similarly, brands cannot solely sell online—many have stores or pop-ups, but they now recognize that full fleets of hundreds of locations oversaturates the marketplace and hurts the bottom line. Marketing also needs to be varied beyond digital channels to include traditional media such as direct mail and out-of-home. More than anything else, DTC brands need to give consumers a reason to buy—with specialty products, exclusives or loyalty rewards. “You need a marketing mix across online and offline channels—it can’t be all Google and Meta,” said Polly Wong, president of direct marketing agency Belardi Wong, noting that many brands are now investing in catalogs and connected TV. “Channel distribution and also expansion in terms of where you actually sell.” More DTC news: How Rothy’s uses its community as a focus group Many factors have contributed to the recent shifts away from DTC. Along with a decline in venture capital dollars, DTC players have faced increased competition from larger traditional retailers that finally got their e-commerce operations in shape during the pandemic. Unlike DTC newcomers, these larger retailers have already scaled their businesses and enjoy mainstream awareness. Initially, venture capitalists had been eager to pony up money to what at the time appeared to be an innovative premise; despite initial company losses, investors believed scale would come and turn them to profitability, but that did not happen. “They ran out of investment and people began to realize that DTC is not all it’s cracked up to be,” said Simeon Siegel, managing director and senior analyst at BMO Capital Markets, who published a controversial report about the category’s pitfalls in 2021. “People thought we were completely mistaken because most people believed if you cut out the middle person you make more money,” Siegel said. “But you don’t eliminate the middle person—you become the middle person and you absorb all their costs.” Nike’s course reverse Indeed, in the last two years, DTC brands have belatedly recognized the value in wholesale. Nike is perhaps the most notable of the bunch. After moving away from wholesale to focus on DTC a few years ago, the sportswear giant acknowledged the flaws of the decision last year, with executives admitting the need for “adjustments” following sales declines and struggles across the business. In December, Elliott Hill, Nike’s new president and CEO, stressed the importance of “earning the trust” of wholesale partners such as Dick’s Sporting Goods, Foot Locker and JD Sports. “Some partners and channels feel we’ve turned our back on them and we’ve stopped engaging consistently,” Hill said on the company’s fiscal second-quarter earnings call with analysts, noting a renewed focus moving forward. Like Nike, other brands have begun to appreciate the value of strategic partners to help them reach larger awareness. “This notion of wholesale may not be a dirty word, but you have to make sure you have the right partnership—plenty of brands should sell in Macy’s, but plenty of brands shouldn’t,” said Siegel. Even Warby Parker is experimenting with retail partners. Last week, it announced a deal with Target that includes Warby Parker shop-in-shops at select Target locations, beginning with five this year and staffed with the eyewear brand’s employees. The news pleased Warby Parker investors, who sent the stock up 6% last Thursday morning. View this post on Instagram A post shared by Apothékary™️ (@apothekary) After its founding as a DTC-only brand in 2019, Apothékary ventured into retail last September by rolling out to 400 Sprouts stores. More recently, the wellness brand, which has made a name for itself using plant-based medicines for health issues such as sleep and digestion, launched at Ulta.com and is in talks to also sell at the cosmetic chain’s brick-and-mortar locations. Theresa Bischoff, head of brand, noted that Apothékary is the first alcohol alternative brand to sell at Ulta. “Retail is going to be a big focus for us this year,” said Bischoff, adding that Apothékary is looking to expand into other retailers later this year. She noted the value of wholesale in boosting the brand’s awareness with new potential customers. “It’s opening us up to customers that aren’t familiar with us that are going into these retail locations—wholesale gives us a lot of shelf exposure.” Wholesale also provides an alternative to a brand operating a large number of its own stores, an expense few DTC brands can handle. For example, opening shops proved problematic for brands such as Allbirds, which expanded too quickly and closed locations last year. “Physical retail stores are really expensive,” said Wong. “Wholesale is the cheapest form of new customer acquisition.” Power of brick-and-mortar Of course, despite the cost, experts including Wong still agree that having at least one or two flagships makes financial sense for DTC brands that are looking to engage shoppers. Brands that have found success include Glossier, which opened its first flagship in New York in 2018 and now runs 13 of its own shops, and Warby Parker, which expanded into physical retail more than a decade ago after its 2010 founding. Some e-commerce brands overextended themselves into physical retail by opening too many locations—as many as 30 or 40 a year, Wong said, noting that such stores were often in less desirable or affluent shopping districts. “Consumers want to shop in store,” she said, but added that brands have pulled back to opening a half dozen stores a year rather than dozens to avoid the financial overextensions of the past. View this post on Instagram A post shared by Warby Parker (@warbyparker) With roughly 300 of its own stores, Warby Parker stands out as an anomaly; most of its locations also offer optometry services. The brand is constantly looking for ways to test new platforms and communicate with customers, said Neil Blumenthal, co-founder and co-CEO. One recent example resulted in more store visits. Last spring, the brand created eclipse viewers for Americans to watch the solar eclipse. Colored in Warby Parker’s signature light blue, the glasses were free to anyone who stopped into a store to get a pair. “Providing this public service of all these viewers available in stores, it drove people into the stores,” said Blumenthal. “It’s one of those things we have done over the last 15 years to build goodwill and affection for the brand.” For many digitally native brands, pop-ups have emerged as a valuable way to reach customers regularly without investing in regular store maintenance and operations. Draper James, the lifestyle brand founded by Reese Witherspoon a decade ago, has three standalone stores and has been ramping up its physical pop-ups in recent years, said Piper Parsley, VP of marketing and e-commerce. For example, the brand saw through its direct customer data that a large percentage of its shoppers are based in the South, so it teamed up with Graduate Hotels on a series of pajama party pop-ups at the hotelier’s locations during football season last fall. View this post on Instagram A post shared by Draper James (@draperjames) “It was wildly successful for us and it gave us an indication of what pop-ups could do in terms of customer expansion and brand awareness,” Parsley said, noting that the events are helping to determine where Draper James’ permanent shops could be located as well, based on attendance. “We’ve scheduled several more this year to celebrate 10 years,” she added. Beyond single products To reach longevity, DTC brands have also had to expand beyond a single “best” product offering to include a more diverse catalog of items. Having multiple products keeps consumers engaged and coming back for more, thereby strengthening those direct relationships, experts say. Such expansion also offers more revenue opportunities. However, it took a while for some brands to realize the importance of product expansion. “The brands that are still around today are the DTC brands that evolved by adopting traditional retailer-proven best practices,” said Wong. “You can’t just sell somebody one mattress or one shoe, you have to have several styles and colors.” For Draper James, investment company Consortium Brand Partners taking a majority ownership stake in 2023 has helped pave the way for category expansion beyond the printed dresses and accessories the brand became known for. The company now sells bedding, kids and home products, as well as pet items at Petco locations. “The Draper James customer doesn’t just want to wear Draper James, she wants her entertainment, homewares and tabletop to match the dress,” said Parsley. Courting the super fans While the majority of DTC brands seeing growth have embraced wholesale to boost awareness, they’re still investing in their own direct channels. Several brands, including Rare Beauty, Glossier and Gatorade, offer more products on their websites than shoppers might find at retail partners, for example. Such items are exclusively available DTC, and some limited-edition items quickly sell out. “You need to give customers a reason to shop direct,” said Ramaswamy, pointing to scarcity models and the idea of using “social currency” to court brand fans who want to be seen wearing hard-to-find merchandise from certain labels. “Now, when customers have so many options to shop elsewhere, you want to give them a reason to shop direct and also a reason to do things they’re not trained to do, like pay for shipping.” Glossier only sells its signature pink hoodie much coveted by Gen Zers at its stores and on its website; Rare Beauty offers branded T-shirts, sweatshirts and, most recently, hair clips. View this post on Instagram A post shared by Rare Beauty by Selena Gomez (@rarebeauty) Regular drops of such hard-to-find merchandise also give brands opportunities to talk to their customers on social media or through text messaging as they promote the new items, thereby helping to cultivate a sense of brand community. Katie Welch, chief marketing officer at Rare Beauty, said shoppers who buy the company’s branded wares are “like a walking billboard” advertising the marketer. “It’s a reason to go to our dot-com,” she said. “The people who shop our dot-com are the superfans and they love the merch.” Encouraging these direct buyers also allows DTC brands to learn about them and gather data to better inform personalized marketing efforts. Ramaswamy noted that her more traditional retail clients had often envied the direct relationship DTC brands had with customers. “That’s the holy grail, the loyalty,” she said. Some brands have gotten smarter about chasing such loyalty by rewarding shoppers who accumulate points with specialty items, she noted. For example, on its website, Gatorade sells a bottle that customers can customize using generative AI by redeeming their earned loyalty points. “Loyalty is a really important rock that every brand has to unlock somehow because you want customers to come direct,” said Ramaswamy. More from Ad Age: Loyalty program marketing that worked While many of these DTC brands are digitally native, several are finding that more traditional marketing methods than just digital channels resonate with today’s customer. This is particularly true as Meta’s ad costs rise. For last year’s holiday season, Draper James dipped a toe into catalogs, sending out direct mailers to shoppers with product highlights around Witherspoon’s favorite things as well as recipes for holiday baking. It was the first time the brand had tried print marketing. “We were able to gain a whole new customer base from that direct mail piece—we had an opportunity to story-tell and connect,” said Parsley, noting that Draper James plans to invest in at least three more catalog mailings this year. Many of the brands focused on younger consumers are walking a fine line between authenticity and product promotion in their marketing, a balance not all get right. When Rare Beauty debuted its first global brand campaign last October, the brand strove to adopt an authentic tone to best connect with its Gen Z customers. One scene in the “Every Side of You” spot, which Gomez narrated and starred in, shows a group of friends sitting together in a bedroom applying makeup. Welch noted that to make the scene authentic, she had to envision herself in it. “If there are ways that you can create moments where people can see themselves in the creative, in the brand, that’s important,” she said. However, she also stressed the importance of subtly making sure the brand’s signature bottle tops were visible in the makeup scenes. “It’s still a brand piece, so we had to have the product in it.” The next category ripe for disruption The last decade saw newer challenger brands such as Warby Parker and Glossier disrupt existing retail. Now, the next cohort of brands is focused on health care, experts say. Already, digital-first brands such as Hims & Hers and Ro have popped up in recent years; those brands are making waves as they try to disrupt established pharmaceutical players, specifically in the growing field of GLP-1 weight loss drugs. Newer wellness brands promoting women’s health in particular are emerging, promising solutions for formerly taboo medical topics such as perimenopause and menopause as Generation X ages. Such startups, including Alloy Women’s Health, are normalizing health conversations. “DTC is synonymous with disruption,” said Ramaswamy. “The first iteration of DTC was unpacking retail— maybe the next iteration is unpacking these legacy industries.” Become an All Access subscriber Get access to exclusive resources including Leading National Advertisers, World’s Largest Advertisers, Agency Report, Agency Review Tracker and TV Pricing Report. Click here

The state of DTC—how the category has shifted, what is working and what’s ahead

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