Media Startups

It’s Tough to be a DTC Brand Now

It seems everywhere you turn, DTC (direct to consumer online brands) are struggling. Between rising input costs and more expensive marketing, the economics of selling online continues to look bleak. Let’s break down the struggle.

Input costs – most DTC brands continue to face inflationary cost pressure across the board from raw materials to freight and logistics. This is a problem in itself, but while most brands have been able to raise prices to offset these increases, this has proved much more challenging for those who sell online. It’s much easier to price compare in a digital world where everything is accessible and there are entire sites dedicated to scouring the internet for coupon codes that lower an item’s cost. This makes it hard for online sellers to command premiums for their products and brands risk being seen as commodities. Comparison shopping is nothing new, it’s a feature of almost every category today, but businesses that purely sell online struggle because they don’t have an offline channel (i.e. bricks and mortar) to tell a different story. In 2010, when the DTC evolution took off in earnest, the main focus was luring consumers to online brands as an alternative to more expensive products sold in stores. The problem now is the fierce competition among online sellers who have relatively low barriers to entry and a variety of cloud based solutions to build their storefront (i.e. Shopify). 

Secondly, delivery costs are skyrocketing. I have two clients now that were told to expect another price increase from FedEx in January 2023. Shipping already represents around 10-15% of e-commerce brands sales according to Deutsche Bank. At some point the economics don’t work. Years ago when I was at Jarden (now Newell Brands) we often debated which brands of ours could sell online profitably – and that was back when shipping costs represented <5% of sales. Now, compare that with brands that sell in retail (and therefore are shipping pallets or large quantities via trucking services) where costs are on average 2-3% of sales. I’ve written before on the better overall operating margins for brands that sell in retail vs DTC. This stat continues to support that argument.  

Lastly, marketing costs continue to be elevated. The ad industry is not immune to inflationary pressure and online brands are seeing that in the cost they are paying for media. Meta, for example, has increased CPM’s (cost to reach 1000 people) by 61% y.o.y while TikTok is up 185%, according to BI. Online advertising works to drive website/app traffic – that’s indisputable, but with many online brands running in the red it’s hard to see how the model can scale. Many of these brands are spending 20-30% of sales on marketing alone. And with e-commerce as a percent of total retail slated to continue growing, don’t expect advertising costs to abate anytime in the near future.  The bright spot on the media front is a continued shift to spending on affiliates – which is a type of pay-for-performance model that overall is less costly. 

Inflation is all the noise nowadays especially for sellers, but for consumers, it’s a great time to be shopping online as prices haven’t risen nearly as fast as in other categories. In August, the price of online goods in the US were up only 0.4%, while overall inflation was 8.3%, according to Adobe’s Digital Price Index. 

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