You can say that 2019 was the year of the direct-to-consumer (DTC) retail brand. With a huge influx of new funding and new scaling heights, we saw brands emerge trying to “own” categories ranging from mattresses to luggage to dental to shaving. But with all the hits there were definitely some misses as brands struggled to meet the valuation expectations set by unicorn status funding and failed to focus enough on early profitability. While I don’t foresee the DTC bubble bursting anytime soon, I do predict some shifts in terms of purchasing behavior and approaches to venture funding. Below are six areas where we can expect to see significant changes in the DTC industry in 2020.
1. DTC purgatory is about to get even more crowded
DTC brands such as Honest Company, Casper, Glossier, and Warby Parker are struggling to find liquidity events to satisfy the financial expectations of their venture backers as their revenue growth hits a wall and they remain too far from profitability to go public. Casper is about to brave the public markets, but the initial S-1 assessments are predicting a significantly lower offering price than the last round of funding — yikes! After seeing the public markets slaughter Casper, DTC brands will either take down rounds, seek lifeline financing, get rolled up by private investors or expand into tangential categories to evolve into a DTC holding company. Come on down to DTC purgatory, you’re in good company. There are plenty of “DTC Darlings” that can show you around.
2. Millennials will see through the overused modern DTC playbook
Much has been said of how millennials kill products and businesses with their propensity to be proactively critical in their product and brand judgment. In 2020, millennials will only become more jaded with the DTC playbook that’s been reused and recycled by emerging brands over the last several years: 1) Refresh branding with fresh sans serif fonts and pantone color palettes that pop. 2) Delight customers with a unique unboxing experience. 3) Change the world with a purposeful founder story. 4) Flood social media feeds with native ads. 5) Enlist the help of influencer clout to promote your products. As millennials grow increasingly savvy, they’ll be seeing –– more like side-eyeing –– right through these transparent and exhausted DTC tactics.
3. Millennial behavior is about to change as we know it
Millennials that used to prefer to spend money on experiences instead of on things will start acquiring more worldly objects than ever before. The HENRYs (High Earner Not Rich Yet) are already bucking the trend. Millennials that once prided themselves on avoiding mundane and wanton consumption are developing a taste for luxury. We’ve already seen this through the success of companies that make expensive assets rentable (Rent The Runway, Fernish, and Feather) or accessible secondhand (RealReal). DTC businesses will need to redefine how millennials perceive “ownership” of luxury through rental/resale offerings such that they embrace consumption based on quality over quantity.
4. Here come the innovative business models built for downturns
A downturn is a VC’s worst nightmare. New business models capitalizing on the predicted downturn will sprout up the same way that the Groupons and Gilt Groupes did during the Great Recession. Counter-cyclical businesses will offer an attractive area for the deployment of the record setting venture capital raised in 2019. Specifically, the time is right for businesses that help people monetize on underused assets through marketplaces (i.e. RealReal, AirBnB) and for innovative models that enable cost-efficient access to staples/commodities (i.e. CloudKitchens, Instacart). As for DTC brands, they must commit to expanding their product portfolios to maximize customer lifetime value and offer more essentials to demonstrate downturn-protected revenue streams.
5. Rise of venture capitalists in private equity clothing
Venture investors will deploy capital into their mid-stage companies to breathe life into their existing portfolio companies and prop up valuations (what’s up, Softbank?) to buy time for an exit. Get ready to see an alphabet of extended Series B, C, D, E, F, G bridge rounds. These megafunds are about to be deployed in a way far more familiar to what growth stage private equity investors have historically claimed as their bread-and-butter strategy. DTC brands should get well ahead of these challenges by committing to scaling with profitability at the point of the Series A fundraise. This will prevent earlier stage brands from getting stuck on the fundraising hamster wheel that Casper is desperately trying to get off of.
6. DNVBs will evolve into DTC holding companies
It wasn’t long ago that digitally-native, vertically-integrated brands (DNVBs) were the talk of the startup world. The challenge has been that DNVBs are raising a lot of venture capital and have struggled to find a purchase offer or IPO valuation that satisfies their investors’ return requirements. With more than 85% of acquisitions happening below $250 million, per Pitchbook, DNVBs are being more disciplined in scaling with a clear path towards profitability. In order to achieve profitability earlier in a company’s life cycle, there will be a much greater focus on operating efficiency and maximizing customer lifetime value through a diversified product offering. The DTC Holding Company model landscape is quickly taking shape. Glossier, for example, is dramatically expanding its product line to become a Consumer Beauty Conglomerate. And Pattern Brands, formerly the New York design agency Gin Lane, is building a portfolio of innovative household products from scratch.
As with most predictions, the only thing certain is that change is inevitable. The DTC industry is still young and can adapt more easily than legacy retail brands. This may ultimately leave DTC brands in a position of strength for 2020 and beyond.
Alex Song is CEO and Founder of Innovation Department.