In 2020, direct-to-consumer brands experienced a rapid burst in growth, with US digitally native D2C ecommerce sales surging 40% to $27.2 billion. D2C’s digital-first business model was perfect for shoppers who were hesitant to shop in-person at the onset of the coronavirus pandemic. But now, the great D2C shift to retail is upon us. Direct to consumer retail is the new path forward for many D2C brands looking to improve customer acquisition costs and avoid supply chain woes.
In this article, follow the journey of D2C over the past few years to feed your understanding of where it’s been, where it is now, and where it’s headed.
The D2C Backstory
In the years leading up to the COVID-19 pandemic, direct-to-consumer businesses were thriving as an appealing, low-friction purchasing option for consumers and a low-cost advertising opportunity for brands.
Direct to consumer (D2C or DTC): A business model in which a brand sells products straight to shoppers online, bypassing third-party retailers.
The business model proved to be highly efficient and profitable because it bypassed middlemen to send products right to the customer. On top of that, profitable growth was made easier by the low cost to advertise on Facebook at the time.
But since surging in 2020, direct-to-consumer brand growth has been on the decline. While sales are still going up, the rate is not nearly as high. In 2021, year-over-year growth shrunk to just 19.8% – less than half of what was seen the year before. Growth is expected to hover around 16-17% each year through 2024.
In 2024, D2C sales are expected to grow 15.9% year-over-year – much less than 2020’s 40% jump in growth.
Of course, slowdowns in growth are to be expected after such massive increases due to an unexpected event like the pandemic. Those kinds of increases typically can’t be maintained.
However, lots of other factors are brewing to create the perfect storm for additional D2C declines.
D2C Is Facing a Dilemma
In the second half of 2022, D2C brands started to feel stress from a confluence of multiple market forces that were building over the course of the past year or more. Rising inflation rates, Apple’s iOS 14.5 update, higher advertising costs on Meta and Google, and supply chain strain are all contributing to the strain that D2C brands are feeling right now.
In previous years, D2C brands relied heavily on Facebook advertising for its low cost to get in front of consumers without having a physical storefront or inventory on retail shelves. But being such a great opportunity, Facebook advertising became a key strategy for many D2C brands – and this higher demand has led to increased competition and much higher costs to advertise.
Within the past two years, the cost to advertise to 1,000 users on Facebook has tripled from $6 to as much as $18.
On top of higher costs due to more competition, iOS 14.5 introduced changes that have hurt advertisers’ ability to attribute sales across all of the Meta platforms. The iOS 14.5 update means that costs to advertise on Facebook are higher and tracking can’t be relied on to be accurate. With the update, brands also started to need to spend more to get the same impact since the ads were less effective, which further contributed to the cost increases. Outside of Facebook, global supply chain issues, shipping delays, and higher fulfillment costs have also put significant strain on D2C brands. In fact, US freight rates were up 28% year-over-year in July 2022.
One of the biggest implications of the supply chain issues has been the increase in shipping rates from USPS, UPS, and FedEx. Over the past several years, these major carriers have implemented significant shipping rate hikes that aren’t expected to slow down any time soon. Around the beginning of 2022, UPS and FedEx shipping rates increased by 5.9%. Various USPS shipping offerings also increased between 2.9% and 8.8%.
More hikes in cost are planned for the beginning of 2023, too. FedEx and UPS rates will increase by 6.9%. USPS service prices will increase by an average of 6.6%.
The increases in shipping prices will put further strain on D2C brands. Shipping costs have always been one of the biggest budget sinkers for D2C brands. One solution is to increase product prices, but with inflation already higher and customers feeling more wary about opening their wallets, this isn’t a viable solution for increasing sales. Some of the biggest D2C brands like Allbirds, Peloton, StitchFix, Warby Parker, and Casper have all faced declines in profit due to these issues. And with increasing interest rates, investors are less likely to want to fund these businesses.
The D2C Shift to Retail
D2C brands now have to shift their marketing strategy in order to navigate this more complicated landscape.
“In 2023, brands that have historically focused on growing their direct-to-consumer business may shift resources to expand their retail and marketplace channels. D2C shipping costs remain high, and in response to economic uncertainty, consumers may narrow the scope of their shopping to retailers that offer an assortment of goods at a lower cost. Major players like Amazon, Walmart, and Target are expanding their retail media platforms, introducing more ways for brands to get in front of new shoppers.” – Chase Traywick, Director of Product Feeds and Retail Media
The biggest opportunities for D2C brands trying to find their footing in this new landscape lie in retail and marketplace channels. Many digitally native D2C businesses are now moving into online retail platforms and physical stores.
Allbirds shoes are now available at Nordstrom, Peloton bikes are on Amazon, and Quip electric toothbrushes are available at Walmart.
Why is retail such a viable option for struggling D2C brands? On Amazon, wholesale and FBA offer highly efficient logistics, relieving some of the supply chain strain that many D2C brands have been feeling. On top of that, retail media channels offer more measurable attribution opportunities than channels like Facebook, providing brands with an accurate picture of their ROAS. It also lessens brands’ dependence on paid advertising to drive traffic.
Wholesale and retail channels also give D2C brands the opportunity to drive more brand awareness outside of digital ads. Partnering with a retailer enables brands to acquire more customers at a lower cost, especially because there’s no need to manage your their own storefronts.
The overall ecommerce landscape is shifting to a more omnichannel approach. As customers adjust to a “post-pandemic” lifestyle, in-person shopping is becoming normalized again – but online shopping isn’t going anywhere soon. The brands that can thrive through both ecommerce and brick-and-mortar are likely to see the most success.
As Facebook advertising costs rise, D2C brands can no longer count on inexpensive social media ads to drive awareness and growth. Many businesses are shifting Facebook ad dollars to TikTok to advertise to highly targeted audiences at a lower cost. Influencer marketing, which thrives on TikTok, is a great low-cost opportunity for D2C brands to reach new customers.
Tying It All Together: Opportunities From the D2C Shift to Retail
Throughout the digital marketing industry, businesses are having to shift their strategy to align with changing buying habits, a fluctuating economy, and other unexpected issues that will inevitably crop up. D2C’s shift to retail marks another shift toward giving customers an omnichannel buying experience, with the combination of in-store and online shopping thriving as we move away from the pandemic.
The retail media and ecommerce experts at ROI Revolution are dedicated to keeping up with the latest developments in digital marketing so that you can always be at the top of your game. Send a message to our team today to explore the untapped growth opportunities that we can discover for your brand.
We’re well equipped to help D2C brands grow, no matter the climate. We helped Hydro Flask grow revenue from their D2C site 247% with powerful geotargeting and strategic upper-funnel brand awareness campaigns. Explore the story here.
Sources
- CNBC, The direct-to-consumer craze is slamming into reality.
- Statista, Direct-to-consumer (D2C) e-commerce sales in the United States from 2019 to 2024.
- Insider Intelligence, Digital-native retailers struggle to turn a profit.
