The direct-to-consumer (D2C) business has been remade by COVID-19. Anytime a startup like Scalefast can take $22 million off the venture capital table in the middle of a pandemic, things are changing. Scalefast’s sole reason to exist is based on its ability to make it easier for companies big and small to create DTC eCommerce sites. Its funding is indicative of its business model and the changing fortunes of the DTC category.
Now the new face of DTC will start to remake the rest of retailing. How? Welcome to the new digital intermediaries. More about them after some scenario planning.
Consider the following scenario(s). The direct-to-consumer category continues to grow with startups and early-stage companies looking to capitalize on the digital shift. The Fortune 500 looks at Pepsi and GM and starts their own entries into the space. And finally, retail hybrid brands like Brooks Brothers are bought up by licensing firms who like retail as long as it makes money, but they like fashion brands and their IP a lot better. That’s three distinct areas that look like safe bets to fuel the category. In fact, the effect of these three expansions might be underrated.
The scenario continues in the following manner. For the startups or early-stage companies, back-to-school sales (if relevant) go well because consumers want to buy online rather than return to the store. That desire will be fed by the lack of a COVID vaccine and surges either settling or just starting in some states. This group also leverages low social media ad rates to keep their connection with customers and this momentum slides into the holiday season. However, competition within this group and a tightening venture capital picture makes the momentum tough to maintain during the early part of 2021. This group starts to look for retail outlets and affiliate deals to move their products.
For the Fortune 500, DTC becomes the best thing about the board meeting for companies like Pepsi, P&G, Anheuser Busch and Constellation Brands. It’s a chance to report new growth with new products to a new group of consumers. Sales are so good that EVP of the direct-to-consumer business is the new hot executive title. Q4 is stellar for these brands and their new efforts. But these EVPs are ambitious and they start to grow impatient with the pace of the business. This group also looks for new outlets for DTC products, and they start to look at potential retail distribution.
This scenario so far has two groups looking for retail partners. And it will have a third, which are the hybrid retail-fashion brands like Lucky Brand and Brooks Brothers. If current trends continue, and to an extent they depend on the awful and inexorable progress of the virus, these brands will be better fashion concerns than retail concerns. So if a brand curation company like Authentic Brands buys Brooks Brothers, we have another DTC brand, or class of brand, for the category. Now, will this class work? Will consumers feel like a Brooks Brothers retains the cache that rates an eCommerce search and purchase? Maybe. But even if it does, it’s hard to believe that eCommerce makes enough revenue for these brands, even with the digital shift. So this group also needs a place to sell its wares.
Three groups, three compelling business models, three reasons that online and offline retail will eventually become important to the DTC space in 2021. This series of scenarios will need a new kind of intermediary retailer, both online and offline. As The Who sang, “meet the new boss, same as the old boss.” In other words, DTC will feed the old boss: department stores.
Here’s why it makes sense for each of the DTC categories. For the early-stage companies there’s a lack of retail leverage. If an early-stage athleisure company hits a static spot in 2021, it can’t run to Amazon or Walmart and expect a lot of attention, although the right product certainly could. But depending on the price point, that early-stage company could sure run to Macy’s, Nordstrom or Kohl’s. For the Fortune 500 group, it could get attention from most any retailer regardless of product category. It wouldn’t depend on department stores, but because they still anchor malls, department stores could provide the right kind of display space and advertising clout that would make them attractive.
For the licensed DTC group, department stores are a perfect fit because they can accommodate a store-within-a-store. Brooks Brothers, for example, could do well within Nordstrom, but not just as part of the Nordstrom Rack outlet stores. It can be displayed and promoted in a manner that fits the brand. Same for J.Crew, Guess and some of the other brands that have declared bankruptcy.
Here’s why the scenario makes sense for department stores. Most of them, Dillard’s on the West Coast excepted, are saddled with debt and bad real estate deals. DTC distribution won’t fix that. However, it does provide new suppliers and new credit lines when both are desperately needed. And it gives shoppers a reason to come to the store.
Online the scenarios are different. The Fortune 500 and licensed brands discussed here can hold their own online. The early-stage companies will need an intermediary and while it’s possible that department stores could fill that spot, they would need to change their business models. Most department stores have either ignored eCommerce or the pandemic has made it a loss leader. If a Macy’s wanted to become a home to DTC brands, it would need to make its website more oriented toward product attraction rather than price attraction. A DTC brand would afford that opportunity. Just ask the CEO of Scalefast.
“If you are really a fan, it isn’t about the price but the value you get,” Olivier Schott said, as quoted in Crunchbase. “We believe e-commerce is a matter of survival for brands because when customers buy through Amazon or Walmart, they can’t get to know their customers or give VIP service.”