Source丨 Cross-Border Table Talk (ID:crossasean)
Author 丨 Wang Lei
The popularity of an article titled "Arming The Rebels of The Future" in 2021 made Shopify CEO Tobias Lutke an invisible leader against giant Amazon.
This year's shopify development seems to prove this, in June Shopify supported the total traffic of e-commerce websites surpassed Amazon for the first time, in the 2pml statistics of the top 200 DTC brands, more than half of the standalone solutions use the services provided by Shopify. Throughout the year, the GMV generated by the Shopify ecosystem is also close to 50% of Amazon's, and the vision of "arming the rebels against the e-commerce giants" seems to be really within reach.
For the "rebels", "the world is bitter Amazon" for a long time, whether it is the seller on the platform or the franchisee of the fulfillment service, the monopoly of customer resources, the squeeze of ecological profits, the strength of the cooperation terms, the weakness and helplessness of all aspects have made the combination of independent stations, social media advertising and related services a more feasible development path for digital native brands.
In fact, this is a road that has existed for more than 10 years, whether it is Warby Parker, which began in 2010 or Casper, which started in 2014, a group of DTC brands that rely on social media to spread word of mouth have successfully cut into the market monopolized by traditional brands in the past through independent stations, got rid of the passive platform selling goods, embarked on the road of capital, and finally "blossomed" in these two years and went public.
However, both Shopify and DTC, after briefly ushering in the peak of the industry, seem to be immediately knocked down by the ruthless stock price and market capitalization. Shopify fell from a peak of $1762 to more than $700 recently, with a low of even $510; Warby Parker went from a high of $64 on the list to a low of $23, most recently back near $33. And people like Peloton, FIGS, Casper, etc. all fell 50% or more from their highest points.
In fact, since 2022 (March, Allbirds shares have fallen by more than 60%, Stitch Fix and Warby Parker have fallen by more than 50%, DTC sector as a whole has fallen by more than 20%, and S&P has fallen by about 7%.
Why has this industry been able to rise, and what challenges have it encountered so far, causing it to seem to be in a dilemma, and where is the future development path? Where will the investment go? Perhaps we can get some tips through the development of the DTC brand and their armed force Shopify.
Dream of DTC
Let's start with a brief review of a few typical listed DTC brands:
Warby Parker, originally founded in 2010 by four Wharton students, creatively sold glasses directly through the website, eventually going public in September 2021. We can call it one of the originators of the DTC model. Although sales have risen year by year and offline stores have expanded, losses are also expanding.
Casper was one of the first brands to sell mattresses online, allowing consumers to return and exchange them within 90 days. It shattered the impression that the category had to be pre-experienced as a purchasing decision. Casper, which started in 2014, went public in 2020. Also in the context of rising sales, we have entered the line, and at the same time, losses are also expanding.
Allbirds went public in November 2021 with sustainable, unpretentious, affordable sneakers that resonate with consumers (against the so-called cool high-tech gorgeous big sports brands) as an entry point. The financial report released after the listing also allowed all investors to see the common story of the DTC brand: offline layout, rising sales, and expanding losses.
Before we turn our attention to the plight of DTC brands, let's first review why they have been able to rise rapidly over the past 10 years, gaining the favor of the capital markets to complete a series of financings and go public.
There are countless experts and articles on the market who have analyzed them, and we will not repeat them here, in short:
The spread of new technologies on the Internet, mobile Internet, and cloud computing over the past 20 years, as well as the high penetration rate around the world, have laid the foundation for digital and online business life;
The rise of social media over the past 10 years, from Facebook to Instagram to TikTok and even Discord, on the one hand, traffic and attention have been constantly redistributed, and on the other hand, the power of communities and communities has been continuously strengthened;
In the United States, baby boomer gives way to millennials, and then to today's Generation Z, consumption habits and consumer psychology are also showing stronger generational differences due to the rapid changes in the growth environment;
Under the background of globalization, Chinese manufacturing has accumulated huge industrial advantages and become a world factory in the true sense, and then China's e-commerce boom has provided profit margins for DTC to break the traditional brand premium;
Under the digital channel, advertisers can quantitatively track and measure the delivery effect for the first time, and reduce the delivery threshold to a minimum;
The e-commerce ecological service represented by Shopify has lowered the threshold of brand e-commerce, and the huge IT department has been replaced by various SaaS and Shopify plug-ins.
We can see that in fact, digital technology has brought about a reduction in the entry threshold of the entire industry, which is commonplace in the era of Internet entrepreneurship. In 2005, Paul Graham mentioned in his "Hackers and Painters" that the biggest effect of technological progress is not to immediately improve the efficiency of the whole industry or the whole society, but to reduce the cost of innovation and make mistakes, which in turn makes more people more opportunities to try and make mistakes. When a small probability occurs a sufficient number of times, the number of successes increases greatly.
When the general environment supports an upward trend of the industry, then there will always be "lucky ones" who will benefit from the dividends created by low costs, and when society can bear enough trial and error, there will always be someone to open up a reasonable path from it.
Therefore, the success of the DTC brand is largely a continuation of business innovation in the turbulent environment of the past 20 years (mobile) Internet, following the basic logic of technological change to create social value.
The fatigue of DTC growth
Through the development of these DTC brands, we can often see several common characteristics:
Revenue growth was strong at first, then weak, accompanied by increased losses. Tough profitability;
Brands are gradually moving offline, breaking consumers' inherent impression of DTC "pure" online;
Competition in the same category is gradually intensifying.
Why is that? We believe that there are 2 inevitable phenomena that plague the development of dtc brands:
1. Brand construction lags behind the reach of customers
Thanks to the reduction of trial and error costs, many DTC brands do not follow the so-called traditional brand approach, such as the start-up story of Dollal Shave Club and Warby Parker, due to the convenient and low access channels provided by Internet technology to directly contact network customers, coupled with the very competitive price compared to traditional brands (compared to Gillette in the chart below) (in the early days, even only to help Asian manufacturers sell inventory), Without the need for large-scale investment in brand strategy and channel strategy, you can immediately acquire a group of online customers.
The brand story of these DTCs is actually the story of the "rebels", the story of opposing all traditional brand practices. This caters to the psychological and practical needs of a group of consumers, but the limited success of online customers is not enough to make them reach a larger mainstream consumer group, let alone simply build their own brand by establishing an anti-traditional brand. Once the DTC brand grows and requires them to leapfrog this initial group of customers, things get complicated. If you're familiar with Moore's curves, this group of customers is likely not your most important customers in the future.
As far as the retail channel is concerned, consumers need to understand, see, learn, buy a product through different channels, and experience the goods-related services. However, DTC brands with limited resources will inevitably choose to take a shortcut to start, and push products directly in front of users through innovative business models, such as Warby Parker sending consumers 5 pairs of glasses at a time to choose from, or Casper letting consumers return and exchange goods within 90 days. However, not all target consumers are happy to accept this "tailored" consumer experience. Especially for the extremely mature retail formats in the European and American markets, the challenge of expanding the consumer audience is the challenge of covering more retail channels.
How to manage different channels and formats in the expansion stage, how to plan the brand's communication and experience of users with different characteristics in different channels, this is a challenge that DTC brands are not good at. We have seen these DTC brand companies work hard to broaden their channels and increase their investment, and the actual effect is that while revenue is growing, costs and losses have risen in a larger proportion. Bombarded by the complex superposition of information from various channels, do they really understand their most valuable customer base? Maybe even they themselves don't know that well.
Technology reduces the cost of trial and error to create conditions for entrepreneurs to cut corners, but the consequence of relying too much on shortcuts is often only to move the original front cost backwards.
2. The assumptions of the unit economic model lack extensibility
So there's another awkward problem lurking here, namely Moore's curve, where the earliest fans of the DTC brand may not be enough to support a truly successful modern, or digital-age retail brand. Because almost every DTC company has something about CAC
However, if we look at traditional marketing, it is often the case that the budget is planned in advance for all costs. Based on these figures, as well as the profit margins of the product itself, the marketing leader of a brand will know what kind of timeline to sell at least how many products to sell in order to cover the cost and generate profits. Once the number of products to be sold is determined to break even, it is natural to know the market share that your products need to achieve, as well as the efforts and costs of marketing.
The traditional approach seems too rigid and inflexible, but with a stronger grasp of the overall situation and strategy, while the marketing logic of the DTC brand is more "Internet thinking", that is, the LTV and CAC we mentioned, which is naturally not wrong, but there are some extremely important assumptions that are taken as fait accompli by the industry:
Assumptions about customer acquisition costs;
Assumptions about the length of the customer's relationship with the brand;
Assumptions about how often a customer buys an item.
When the DTC brand is in its infancy, these assumptions are relatively simple and intuitive, and the early fans on the Moore curve have longer LTVs and lower CAC, and the cost of customer acquisition in the general environment is reduced due to technology, this model is becoming more and more feasible. As long as it seems that LTV leaves enough room, it seems reasonable to invest in the upfront scale.
But all three assumptions of this formula will change dramatically as brands enter new phases of growth and the environment changes.
The first is the cost of customer acquisition, as the competition of DTC itself intensifies and traditional brands begin to master the DTC gameplay, the cost of channels such as social media is rising. The reduction of effects such as FB after Apple's new privacy policy actually further increased CAC;
Secondly, for the assumption of the continued relationship between customers and brands, when brands come out of the enthusiasm of early fans and enter new user groups and new product lines, they face completely different competition, LTV and frequency will decrease with the brand's weakening grasp of audiences and channels, and ltV and frequency will almost certainly decline.
At this point, when we look at the formula again, its establishment may not be so logical. When the company believes that LTV > CAC has been established and can be scaled, expanding channels and expanding SKUs will inevitably bring about the above problems. In fact, what we can see now is that the higher the DTC brand revenue, the more serious the loss, and for investors, such environmental changes make it more difficult to measure the "indicator" of DTC.
What is even more frightening is that if we add logistics costs, geopolitical disturbances to economic and trade exchanges (tariffs), inflation, etc., this simple but fragile assumption will be even more vulnerable in the event of an era of turmoil.
Perhaps we can attribute the troubles of dtc brands at this stage to channels, because in the early days of a single DTC online brand model, brands are channels, channels are brands, the so-called "success is also Xiao He, defeat is also Xiao He". When channels become complex, when user minds become complex, when brand delivery becomes complex, sustainable business models begin to move away from these DTC brands.
Awkward Shopify
Back to Shopify, which once vowed to arm the rebels to fight the dragon, in the past 20 years, it has helped small and medium-sized independent businesses solve almost all problems, including supply, logistics fulfillment, finance, internal management and a series of technical challenges, that is to say, Shopify helped the DTC brand to reduce the threshold and cost of establishing a complete set of online retail closed loops, so that a brand entrepreneur does not need to raise an expensive and complete IT team to support the retail business.
However, it is the most critical and fatal problem it does not really face: channel traffic.
Perhaps because of its own ideology of having Amazon as a "sworn enemy", Shopify seems to have difficulty devoting itself to building a traffic channel that can compete with Amazon, and instead chooses to rely on platforms like Facebook to coexist, allowing developers to use plugins to connect Shopify with traffic to various platforms. Unfortunately, as strong as Facebook is subject to people, which May not have been expected by Tobias.
What's even more embarrassing is that once dtc brands exceed a certain volume, they are more inclined to leave Shopify, such as Away, MVMT, Ritual, Manscaped, etc., which does not effectively support the next stage of the battle of these brands.
We can even say that Shopify has also struggled a little in terms of traffic, such as its cooperation with Roku, its opening of offline space in New York, and its development of Shop App, but these seem to belong to "Too Little Too Late" today, and the channel + traffic + cost problem is the Achilles heel that it needs to bear with many DTC brands.
How the DTC will evolve
Attach media attributes or bring your own traffic and community attributes
While Apple's New Privacy Deal puts most DTC brands in a customer acquisition cost dilemma, it's "back and forth" for another type of DTC company, such as Sage x Fenty, which was blessed by Rihanna, and Skims, which was blessed by Kim Kardashian. Both brands were born in 2018 and have never cared about the placement of social media advertisements, relying on the strong social media influence of celebrities to promote the brand to reach consumers. The former, which has raised a total of $310 million, is planning an IPO next year.
There is a trend here: first, even in the heyday of digital marketing and precision delivery, top influence is still the most important for brands, celebrity endorsement is the eternal "truth", but this is a scarce resource; second, if there is no top influence, then how to incorporate more and more accurate local influence into their brand system, how to help customers close first-hand customer resources, such as Hubspot's acquisition of The Hustle, Business Insider's parent company acquires Morning Brew.
The importance of first-hand customers and first-hand data in the post-Apple New Deal era is self-evident. When brands face the challenge of social media delivery, Martech faces the problem of data traceability, either has more first-hand data or returns to the pre-digital media era, which in turn means that the advantages of being a digital native generation company are lost. Therefore, content production and community operation have returned to the brand's own circle of ability, and can no longer rely on tripartite data and delivery to solve.
In this sense, platforms like TikTok, Substract, and Discord will rise further, as influential individuals, content, and organizations may all emerge from these platforms in the future.
Omnichannel
The role of the pure online model for growth may be limited, its sustainability does not seem to be as strong as originally thought, and even a few OF THE FEW DTC companies listed have been able to achieve profitability. For many categories, the offline experience will actually be better. When the cost of online channels continues to rise, on the contrary, the offline cost performance may become feasible again, simply put, it is to open direct stores offline, the brand directly controls the channel, such costs are relatively higher, but it is also a more effective way to obtain new customers, in addition to CAC, we must pay more attention to LTV.
The DTC companies in our impression must be online brand companies, which are characterized by pure online, social media-driven, and no middlemen to earn the difference. However, the D in the DTC does not refer to Digital, but to Direct. Directly facing customers, improving customer experience, responding to customer feedback instantly, and improving products and experiences quickly is actually the most important thing, as to whether it is social media-driven, whether it is purely online, depends on the input-output ratio of different channels, not dogma.
However, going offline also has challenges for DTC, that is, offline supply and service capabilities, which seems to be back to the battlefield where traditional brand owners are good at. Therefore, in the past, DTC companies had to make significant changes in management structure and overall marketing strategy to a certain stage of development. This undoubtedly exacerbates the risk of the subsequent development of DTC companies.
Resident, a mattress DTC brand that started two years behind Casper, now has more than 1,000 offline stores in the United States. Warby Parker, Allbirds, etc. have also entered the line. Amazon's opening of the store and Walmart's listing may be the sign of the "maturity" of a DTC brand in the future. At this point, even the Direct in DTC may no longer be so "pure".
New traffic platform (TikTok/Metaverse/NFT)
TikTok's e-commerce attempts are already unfolding globally, and TikTok traffic and influence have long been exploited by DTC platforms and brands, including Shein. Compared to the high price and difficult to measure results of Facebook's fierce competition, TikTok's price-performance ratio is becoming more and more attractive.
Of course, the delivery efficiency of social networks is no longer the secret and dividend of emerging brands, all brands have been "educated" by the first batch of listed DTC brands, which also means that the first opportunity of any category or channel may disappear quickly, in this case, many brands have begun to pay attention to metaverse and Web3.0.
Nike, Visa, Coca-Cola, the NBA, etc. have begun to try to understand and establish new brand positions by participating in NFT and metaversic projects in 2021. NFT gives the creation of new and different incentive models, while Web 3.0 gives new vitality to the organizational mechanism of the community, in this trend, brand + NFT (Discord community) + MarTech (tool), customer loyalty as the entry point is a new path? Is the real landing of Web3.0 from the combination of brands in the real business world? This is an interesting topic. At least for now, we can see Shopify actively embracing the world of NFT and Web 3.0, and Discord is even more rumored to be planning to go public.
Data aggregation and attribution capabilities + overall marketing strategy capabilities
Although DTC's D refers to Direct, eventually it may point more to Digital. Whether it is the above-mentioned grasp of first-hand data, the operation of omni-channel in the digital era, or the rush of new traffic, the core ability still lies in the "data" ability of brands and service providers.
Apple's privacy policy undoubtedly catalyzes the entire industry's requirements to improve its own data capabilities, from data sources (omni-channel), to data integration, to data attribution capabilities, in the past Facebook assumed most of these functions, and then whether it is the DTC brand itself, Martech service providers or other traffic platforms, need to face and solve the lack of Facebook.
The entire industry will not be because of Apple's new deal and completely backwards to the era of product publicity that can only be understood but is difficult to measure, the transformation of technology into society is irreversible, combined with the strategic ability of traditional brands in multiple channels and categories and data collection, tracking, analysis and attribution capabilities, it will be a new round of promotion of the entire industry in the digital age.
Shopify can and should play a bigger role in this, after all, it supports so many DTC brands and sellers, and so much consumer data circulates between different merchants and service providers through its services. This is an opportunity for Shopify, an opportunity for many Shopify ecological plug-in service providers, and perhaps more store opening platform opportunities for Chinese cross-border sellers.
How to invest
So, for investment institutions, an interesting question arises, is DTC still worth investing in? Under the upward trend of the overall interest rate, in the face of the industry's dilemma, the doubts inherent in DTC, such as the problem of profitability, the size of the category segment (and the related scalability) will be highlighted. DTC and Shopify's significantly below-average performance in the phase II market also cast a shadow over the exit confidence of the primary market.
The rapid disappearance of the universal dividend may mean that the golden age of early investment in DTC companies in the European and American markets has ended, which probably means that the vast majority of European and American cross-border brands are no longer suitable for early investment, perhaps some small categories of opportunities can be cut, but the return expectation is difficult to be too high, which will undoubtedly gradually transmit to the valuation and financing amount of many projects. However, it should be noted that the keywords here are: "European and American DTC brands" and "early investment".
Of course, the fact that capital itself is diverse does not mean that sellers should follow the logic of "venture capital" to develop. Another type of capital, such as Thrasio, which we introduced last year, looks at market opportunities with different logics, and for many entrepreneurs who have certain supply chain advantages and have a certain grasp of consumers in the European and American markets, it is understandable to cut into the DTC concept.
For our investment team, which has been specifically oriented to cross-border e-commerce, or more generally, cross-border retail, in the face of the changes of the times, we will be particularly interested in the following opportunities, and welcome friends who are exploring in these directions to communicate with us:
Low-cost traffic platforms in emerging markets, Shopify-like services, or e-commerce ecosystems around TikTok (where all DTC brand dreams begin);
DTC platforms and brands in emerging markets (with The advantages of China's supply chain and in-depth knowledge of the local market);
Martech services for cross-border sellers and brands (customer journey/attribution, etc.);
Combining NFT, Discord's marketing and community attributes to provide technical services.
Resources
https://www.businessinsider.com/shopify-ceo-says-retail-changes-expected-2030-are-happening-today-2020-5
https://influencermarketinghub.com/direct-to-consumer-industry/
https://blakeir.medium.com/arming-the-rebels-of-the-future-d61b3fe30515
https://hbr.org/2021/11/how-direct-to-consumer-brands-can-continue-to-grow
https://www.barrons.com/articles/allbirds-bird-stock-revenue-growth-51638366436
https://www.wsj.com/articles/casper-created-a-popular-brand-not-a-profitable-business-11637074947
https://www.cnbc.com/2021/08/24/warby-parker-in-ipo-filing-reveals-rising-salesbut-also-widening-losses.html
https://2pml.com/2022/02/16/feedback/
https://2pml.com/2022/03/14/skims/
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