A once-bustling group of companies, backed by billions in venture capital funding, saw a record year for IPOs in 2021. Now, three years later, most of those direct-to-consumer, or DTC, companies still struggle with profitability.
“It’s that profitability angle now that demarcates the winners in DTC from the losers,” said GlobalData Retail’s managing director, Neil Saunders. “One of the problems with a lot of direct-to-consumer companies is they’re not profitable and a number of them don’t really have a convincing pathway to profitability. And that’s when investors get very nervous, especially in the current market where capital is expensive.”
Allbirds, Warby Parker, Rent the Runway, ThredUp and others once represented a new era of retail. These digital-first, ultra-modern companies rose to prominence in the 2010s, boosted by the rising tide of social media ads and online shopping. With the cohort came a huge wave of venture capital funding, propped up by low interest rates.
In just under a decade, venture capital funding exploded, from $60 billion in 2012 to an eye-watering $643 billion in 2021. Thirty percent of that funding was funneled into retail brands, and more than $5 billion went specifically to companies that intersected e-commerce and consumer products. As the Covid-19 pandemic moved most shopping online, venture capital funds were all-in on digital native direct-to-consumer companies.
According to a CNBC analysis of 22 publicly traded DTC companies, more than half have seen a decline of 50% or more in their stock price since they went public. Notable companies in the space, such as SmileDirectClub, which went public in 2019, and Winc, a wine subscription box, have declared bankruptcy. Casper, a direct-to-consumer mattress company, announced it was going private in late 2021 after a lackluster year-and-a-half of trading. Most recently meal kit subscription service Blue Apron exited the U.S. stock market after being acquired by Wonder Group.
Now many of these so-called DTC darlings are being forced to reevaluate their business model to survive a shifting consumer landscape.
Watch the video above to find out what happened to the DTC darlings of the 2010s and how the direct-to-consumer cohort is pivoting in the new decade.
Wells Fargo Securities is officially out with its 2024 stock market forecast.
Chris Harvey, the firm’s head of equity strategy, sees a volatile path to his S&P 500 to 4,625 year-end target.
“It’s really hard to get excited. If we have better [economic] growth, then the Fed doesn’t do anything,” he told CNBC’s “Fast Money” on Monday. “If we have worse growth, then numbers are going to come down and then the Fed will eventually cut. The second half will be better, but the first half is going to be really, really sloppy.”
Harvey’s target is just 75 points above Monday’s S&P 500’s close.
“Can we go higher from here? Sure, we can go a little bit higher. But I just don’t think you can go a ton higher,” he said. “People have talked about 5,000. I don’t see how you get to that level.”
In his official 2024 outlook note, Harvey told clients to brace for a “trader’s market” instead of a “buy-and-hold situation.” His early year strategy: Start with a risk-averse stance.
“The VIX [CBOE Volatility Index] is up 13. Every time we’ve gone into a new year with the VIX at 13, we’ve seen spikes. We’ve seen the equity market pull back, and it’s just not a great setup into 2024,” Harvey added.
He warns the higher cost of capital is an additional market problem because it prevents multiples from going higher.
“As long as the cost of capital stays higher, it’s really hard for me to get to a much higher price target,” Harvey said.
Yet, he still sees opportunities for investors.
“What we want to do is we want to go to the places that are oversold. We just upgraded utilities today. We upgraded health care,” Harvey noted. “Those are areas that have good valuations, decent fundamentals and most people really aren’t there at this point.”
“If you look at the alternatives, there are things that are pretty attractive. And, I hate to say that as being head of equity strategy, but you can park money at the front of the curve and make a pretty good rate of return and not put on a whole lot of risk,” said Harvey.
His 2023 S&P target is 4,420 — which implies a three percent drop from Monday’s close.
In a brown shingled beach house tucked behind stalks of reed grass, J. Crew customers encounter a new shopping experience.
Just beyond a set of wood steps and a wraparound porch, shoppers can explore a series of white-paneled rooms, a boathouse and a secret lighthouse that highlight the brand’s history and some of its most popular apparel.
Inside the rooms, shoppers can browse barn jackets, rollneck sweaters and rugby shirts. Outside on the porch, bathing suits are displayed on a clothesline.
While customers can select and purchase items as they would in any J. Crew store, the beach house comes with one key difference: It’s entirely virtual.
To mark J. Crew’s 40th anniversary, the brand is launching its first immersive shopping experience Friday with e-commerce platform Obsess, which creates 3D, virtual stores for retailers that customers can access from their phones or laptops.
Derek Yarbrough, the chief marketing officer of J. Crew and Madewell, told CNBC the company is planning a series of events to celebrate the brand’s anniversary. But they tend to be in places such as New York and Los Angeles, which limits the number of people who can attend, he said.
“With Obsess, we were really looking to have an exciting activation that we could execute for a larger audience and reach more of the people who love the brand in a bigger way,” Yarbrough said in an interview. “We really wanted this to be a passport to explore the world of J. Crew … and as the team brainstormed on it, it was a little bit of a no-brainer to take the form of a beach house.”
J. Crew virtual beach house.
Courtesy: J. Crew
Obsess was launched in 2017 by its CEO, Neha Singh, a former Google software engineer. It aims to transform traditional online shopping into something more immersive, so shoppers remain engaged rather than lose interest as they endlessly scroll for their next purchase.
In Obsess’ virtual storefronts, customers can create their own avatars. Depending on the retailer, they can also play games that can unlock more content, promotions or other bonuses that keep them in the virtual stores for longer, the company said.
“What our platform does is it enables brands to create that much richer and more immersive digital experience that borrows the interface from gaming,” said Singh. “Today, the experience is so generic. Other than font and color, there’s really no differentiation between brands’ digital presence, but their physical retail presence is so different. So how can we bring some of those elements into online?”
Many retailers saw the metaverse, a virtual world that offered another possible platform to sell products, as the hot new technology throughout last year. Many of those same companies have now largely forgotten it, as strides in artificial intelligence have surged to the top of business leaders’ minds a year later.
While the metaverse may be dead — for now — virtual storefronts are growing. Obsess is now powering more than 200 virtual stores that tens of millions of shoppers have visited and bought products in.
The company’s clients include American Girl, Elizabeth Arden, Dior, Ralph Lauren, Corona, Laneige, Crocs, Coach, Mattel, Maybelline, Johnson & Johnson and even NBCUniversal, among others.
The virtual storefronts allow retailers to bring a version of the metaverse to their customers, without the need for pricey headgear or other steep barriers to entry.
J. Crew virtual beach house.
Courtesy: J. Crew
“Technology never stops, and it’s going to keep progressing, but it has to be something that’s user-friendly, right? And parts of [the metaverse] are not user-friendly yet,” said Singh. “We launched the company before metaverse was a buzzy topic, and it really was just about: How can we use the latest technology to actually create a better customer experience?”
When e-commerce was born in the 1990s, Amazon led the way in its online bookstore, which featured a white background and icons of books with text describing them.
Since then, little has changed when it comes to the basic interface of online shopping.
“If you think about e-commerce, the typical sort of interface today, it’s a grid of thumbnails on a white background; whether you’re shopping for fashion, or beauty or home, it’s really all the same,” Singh said. “The interface looks like a database that really hasn’t changed in 25 years [since] it was first created.”
Shoppers headed to J. Crew’s virtual store can access a series of interactive games, including a scavenger hunt and a quiz on catalog covers, where customers will be asked to guess what year they were published.
Once they go through all the rooms and complete the quests, shoppers gain access to the secret lighthouse.
J. Crew virtual beach house.
Courtesy: J. Crew
“We see actually a 10-times-higher add-to-cart rate if people engage and complete the game. So typically now in all of our virtual stores there’s some element of gamification, and it’s very kind of naturally embedded into the flow of the store,” said Singh.
“The more interesting you can make the experience and keep people engaged and give them content and give them games, the more they shop,” she said.
Some companies offer discounts or promotions as a “prize” for completing a game, which could contribute to boosted checkout rates.
Obsess said one of its customers, a luxury jewelry brand, said the average order value in its virtual store was 111% higher than on its traditional e-commerce site.
However, J. Crew’s Yarbrough said he is most excited about how long the virtual store could keep customers engaged.
J. Crew virtual beach house.
Courtesy: J. Crew
For example, on American Girl’s virtual store, shoppers spend six to 10 minutes on average per session, which is 1,000% longer than the average time spent for all shoppers on the company’s website, Obsess said.
One luxury fashion brand said the amount of time people spent in its virtual store was 74% higher than time spent on its traditional e-commerce site, according to Obsess. Overall, introducing avatars increases time spent by an average 73%, and when customers create an avatar, they’re on average 184% more likely to proceed to checkout, Obsess said.
“In today’s landscape, it’s so hard to not only get but keep people’s attention — you usually get a few seconds,” Yarbrough said. “So, if I can actually get someone to engage with an experience for several minutes or even longer, oh my God, that’s such a rich opportunity to really get someone hooked.”
Disclosure: NBCUniversal is the parent company of CNBC.
Opinions expressed by Entrepreneur contributors are their own.
I co-founded an ecommerce site for women-owned businesses in the spring of 2020. Like most people, I saw daily news about how the pandemic disproportionately affected women. Women were leaving or losing their jobs as schools and businesses closed, and the world moved to online shopping. I knew that I had to be proactive, and there had to be a place for women to start, pivot or grow their businesses through ecommerce.
“I can launch my ecommerce business for as little as $19.00 a month and start making sales immediately.”
“People will find my website and start buying my products as soon as it’s launched.”
“Launching your ecommerce site will net you immediate income!”
Like many others, I believed these quotes and launched my business online. As I looked more deeply and learned the reality of starting an online business, I felt I had to share what I had learned. I want to save entrepreneurs focused on building and running their businesses from costly mistakes. The claims of easy, cost-effective and immediate sales do not reflect reality. Launching and maintaining an ecommerce business is complex, expensive and time-consuming.
Nearly three years later, here is what I’ve learned:
Myth #1: I can launch my ecommerce business for as little as $19.00 a month and start making sales right away
Many ecommerce services simplify and streamline creating and maintaining your online shop. The initial fees for these services can be very low, ranging from $0 to $10 per month. But once you add in website hosting, paying for your domain name, ensuring your site (and your customer data) are secure, purchasing or upgrading the theme for your store, selecting a payment gateway to process credit cards, and any number of optional extensions to improve the look and shopability of your site, and then add in extensions to enhance discovery through search engine optimization (SEO) it all adds up to an average of between $600 to $5,000 annually. And that doesn’t include even a penny of marketing.
Myth #2: People will find my website and purchase my products once I have launched my online store
I hear this often from new entrepreneurs, and it sounds very reasonable. We are ALWAYS online and connected. There is a constant stream of shopping opportunities, so it seems it is just a matter of getting your products in front of people to buy. In ecommerce terms, this is “driving traffic,” and driving traffic can be expensive, time-consuming and prohibitively expensive. But how else will customers find you?
If you have a large social media following, you can tell your community that you are selling products and that they should check it out. But if you are growing your social media presence along with your business, you probably need to purchase advertising on those social platforms so you can be found. This is expensive and time-consuming and has no guaranteed results. I know of established brands spending tens of thousands of dollars monthly to drive site traffic.
Breaking through the noise of advertising on the internet to attract customers to your site probably is the most challenging part of ecommerce. For small businesses, the cost of social media or other online advertising is prohibitive; building a following takes time and money. Most entrepreneurs don’t have this time to spend while also trying to produce the product or service at the center of their businesses.
Myth #3: Launching your ecommerce site will net you immediate income
If only this were the case. It sounds simple enough, but see myths 1 and 2. You are in business because you are passionate about the product or service you deliver and good at it. Taking the focus away from your primary business is risky, and learning to master ecommerce can be a steep learning curve. The time you spend learning SEO, setting up search engine ads, creating digital marketing assets and troubleshooting that miracle app you bought from the online store is time you are not focused on your core business.
Online is increasingly the way consumers shop, and it is crowded. Breaking through the noise online is not fast, easy or cheap. Finding a community and resources to support your transition to ecommerce or online growth is necessary for small businesses. There are several sales channels and marketplaces that can be a great starting place. You pay commissions on sales, membership and promotional fees and become part of a larger organization that offers an online structure, domain, security, a payment gateway and marketing support and opportunities to promote or be featured to a larger audience.
Every channel or marketplace has nuances, and it’s critical that you look at all the details to ensure you find the best match for your products, budget, time and brand. Customer traffic to your products may come at a very high cost in time, money and margin. More to come on that.
The bottom line is that, yes, technically, you can launch a website leveraging online tools for about $20.00 a month. But to sell your products or services on your website, to be found by customers outside your immediate network, and to grow your business? This takes an investment of learning, time and money. Your job as a business owner is to do your research before deciding what, when and how is the best channel for your brand to grow online.
Nobody understands better than an entrepreneur that nothing in business is simple, inexpensive and “overnight.” Despite the hype, this may be doubly true for ecommerce. So again, do your homework, research and make sure that your business is ready for the challenges of ecommerce.
