Unprofitable Direct-to-Consumer Brands May Not Last Through 2023

Early-stage direct-to-consumer (D2C) brands that rely on investor funding will have a difficult year ahead.

This, as macroeconomic conditions worsen and venture capitalists get more conservative with their investments and expectations. Brands that are producing short-term losses in the hopes of building a business that will be profitable down the line may find that they never make it that far.

“[D2Cs] need to be profitable already,” Victor Tam, co-founder and CEO of D2C travel and luggage brand Monos, predicted in an interview with PYMNTS. “Any company that stopped [being] profitable today is not going to make it next year. There’s going to be less capital to give them that runway to operate.”

Consumers, for their part, are already making changes in response to a recession that hasn’t even officially been declared yet. According to last month’s edition of PYMNTS’ Consumer Inflation Sentiment study, “Consumer Inflation Sentiment: Inflation’s Long Consumer Spending Shadow,” which drew from a survey of more than 2,400 U.S. consumers, 65% of Americans said they believe a recession is imminent, and 26% said they believe it is already here.

Indeed, venture capitalists are adjusting their strategies accordingly. Take, for instance, the European market. A PitchBook report showed that total European deal value dropped 36.1% in the third quarter as compared to the same period last year.

The world’s largest public companies are seeing their stock fall amid this economic slowdown. Over the course of the year, Apple, Microsoft, Amazon and many others have all seen downturns.

The declining investor confidence comes as consumers rein in their spending. Findings from the October edition of the Consumer Inflation Sentiment study, “Consumer Inflation Sentiment: Consumers Buckle Down on Belt-Tightening,” for which PYMNTS surveyed more than 2,600 U.S. consumers in September, revealed that 66% are cutting down on nonessential retail purchasing.

Over time, Tam said he expects that this period in which many startups will fold will be a benefit to D2C brands that are already profitable, thinning out the competition, despite ongoing consumer hesitation.

“When you kind of mix in less competition with still some hesitancy in the consumer confidence, I think it’ll balance out for companies that are financially healthy,” Tam said.

Beyond this drying up of venture capital, he noted that different D2C categories have experienced the aftermath of the pandemic in very different ways. For instance, Monos, with its focus on travel goods, has been riding the tailwind of consumers’ return to lives away from home, while the kinds of brands that fared especially well during lockdown have been facing a more difficult couple of years.

Tam said that while categories such as furniture, loungewear and décor got a boost in 2020 and 2021, they have been seeing eCommerce sales decline with consumers feeling “the hangover from a lot of the home stuff,” while travel and outdoor equipment have been on the rise.

“In 2020, 2021, you’ve got a massive amount of consumers that are just buying [home goods] online because they were at home,” he said. “This year, you’ve got the inverse.”