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How Will DTC Fare During The Pandemic?

What the last recession can tell us about this one…

The Covid-19 virus has stressed – with a few notable exceptions – all retailers. Over the last decade, Direct-to-Consumer (DTC) brands were heralded as successful disruption stories that lay bare the inadequacies of stale legacy retailers. But in the last year, the frailties of DTC brands came to light. Ironically, both Casper’s IPO and Brandless’s bankruptcy showcased the same challenges; high customer acquisition costs, financial and operational difficulties managing returns and the difficulty of bringing digital intimacy to the physical store front.

These “blocking and tackling” challenges are exacerbated by a lack of differentiation within the DTC cohort. As multiple brands chase the same category, the founder story of graduating from business school and starting an authentic company in an apartment is only exciting so many times. The indistinguishable look and feel of these brands does not help.

Every Font Tells a Story, Associated Press

Writing in Adage, Erik Spooner pointed out that DTC companies share a similar fingerprint. Whether hawking khakis, libido-enhancing medicines or mattresses, their hallmarks include “product photography where the object of desire is shot isometrically askew; solid background colors that are predominantly neutral; copy that has an ironically familiar tone—and is nearly always set in that eerily similar, playfully bold, geometrically designed sans-serif typeface.”

Already facing these challenges, what will Covid-19 do to DTC brands?

At first blush, DTC retailers could see opportunity. E-commerce channels remain open for business. Browsing is a go-to for boredom. And digital customer acquisition costs may drop as businesses sprint to reduce their advertising budgets.

A look back at past recessions provides additional insight – and some hope. In 2008 and 2009, spend on categories that often include a strong DTC presence in 2020 – such as beauty and pet care – grew. Unfortunately, categories with the DTC stalwarts of apparel and home furnishing shrank.

With DTC brands predominantly single category players, the performance in the last recession provides a clue for this recession.

But all is not lost for the apparel and home furnishings brands. Peeling back another layer of sector performance shows hope for apparel – and indeed most – DTC brands. The recession of 2008 and 2009 gave an early indication of the struggles mid-tier retailers would face in the future. Discount was an unsurprising winner, but premium apparel and luxury retailers also outperformed the mid-tier.

The extremes won in apparel; the struggles of mass predicted the future.

Amazingly, premium even outperformed both discount and mass in food and grocery.

Premium food retailers and brands maintained a strong growth trajectory.

According to a 2019 Forrester study, the DTC consumer skews to higher income, 18-35 year-old males in urban centers. While the gender skew and 18-24 year old cohort could be questioned, the higher-earner characterization certainly applies. And if premium categories did well in 2008, then there is more hope for DTC in 2020.

Yet for all of the comparison to previous recessions, Covid-19 has created behavior changes that were previously unheard of – and will leave all retailers wondering “what next?” Early indicators – such as waits of up to five weeks for delivery at Peleton or “join the waitlist” for Concept II rowing machines – say that home fitness and corresponding fitness accessories are beneficiaries. More broadly, self-care – including the home furnishings market – may be stronger than the previous recession.

But these consumer trends – normally a strong indicator of which retailers win and which lose – are insignificant compared to cash-on-hand and access to capital. If those levels were already low, then Covid-19 will drown even the brands that had their consumer clearly in their sight. News that Purple, Everlane, Cuyana and more are laying off or furloughing workers indicate this is already happening.

David Weiss

David Weiss

dweiss@mdretail.com

David is an accomplished retail executive bringing nearly 20 years of industry experience to each client project. David has worked for multi-billion dollar global companies, venture-funded start-ups and private-equity owned turnarounds. He is known for identifying opportunities, creating focus, and building cohesive business strategies.

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