A Blog by Jonathan Low

 

Aug 26, 2020

How Covid Altered Direct-to-Consumer Brands' Flirtation With Building Stores

Profitability is a serious problem for DTC brands because the cost of acquiring and retaining customers online has become prohibitive. Opening stores was a relatively inexpensive means of securing new customers - and their data - while the retail locations themselves often turned a profit relatively quickly.

And while more people are shopping from home than ever due to Covid, the cost of customer data continues to rise, making profitability even more elusive but with the prospect of retail-driven relief less achievable. JL

Caroline Jansen reports in Retail Dive:

At the top of the year, digitally native brands were in expansion mode. What started with bigger players like Warby Parker and Bonobos opening shops, stretched across the sector. Fast forward to March and brands are reevaluating brick and mortar. For brands that operate mainly - or exclusively - online, the cost to acquire customers became prohibitive. It has become difficult for brands to stand out. Storefronts can help provide an extra marketing channel. (Stores)
won't provide relief to brands that have struggled to turn a profit.
At the top of the year, many digitally native brands were in expansion mode. 
Rent the Runway launched a new tier to its subscription services, online plant brand Bloomscape forged a deal with West Elm, and Casper, a so-called darling in the direct-to-consumer space, made its public debut in February. In its IPO plans, the company reiterated its intent to open some 200 stores in North America. 
While Casper's expansion seems lofty, it follows a trend in the sector. What started with bigger players in the space like Warby Parker and Bonobos opening up shop, has now stretched across the sector. Online lingerie brand Adore Me announced in 2018 plans to open up some 300 stores over the next five years and hair color brand Madison Reed said last September it aims to open 600 stores by 2024. A late 2018 report from commercial real estate firm JLL said e-commerce retailers were set to open 850 stores over the next few years.
Fast forward to March of this year and suddenly stores were forced to temporarily shutter their doors, putting any immediate plans on ice.
As a result, brands are having to reevaluate not only what their relationship with brick and mortar looks like now, but in the months and years to come.

What's the point of a store for DTC anyway?

While DTC brands planted their roots online — and in some cases swore they would never diverge from the channel — many are increasingly seeing the value in a physical presence.
Storefronts grant consumers those touch-and-feel experiences, like trying on apparel, but they also give brands the opportunity to form relationships with their customer base.
Direct-to-consumer brands recognized that opening stores "provided additional connectivity with a customer so that it wasn't simply transactional," Matthew Katz, a managing partner and Retail & Consumer practice lead at SSA & Company, said. "It was more of a relationship development opportunity."
But more than that, for many of these brands that operate mainly — or exclusively — online, the cost to acquire and retain customers can become prohibitively high. Online in recent years has become so saturated with competition that it has become increasingly difficult for brands to stand out from the rest. Storefronts can help provide an extra marketing channel.
Chewy spent $106 million on advertising in the first quarter, or 7% of total revenue, from $102 million in the year-ago period; Casper spent $38 million, or 33% of total revenue, from $30 million a year ago; and Wayfair spent $276 million, or 12% of direct retail net revenue, from $244 million a year prior.
"The main risk is that without physical stores it will be more difficult for some to build presence and win over new consumers. Online is a very crowded space and a physical presence can help cut through the noise and give a DTC brand more significance," GlobalData Retail Managing Director Neil Saunders said in an email, noting, though, that they won't necessarily provide immediate relief to brands that have struggled to turn a profit for years.
"While stores are often more profitable than online, it would be very difficult for a DTC brand like Wayfair to push themselves into the black simply by opening new shops — mainly because they would have to open so many to offset the losses online and they'd also have to completely change their business model to [fulfill] more orders from stores," he added. "In the short term such a move would likely erode profitability further because of all the capital and set-up costs."

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