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What’s in Store: The state of the direct-to-consumer market

Retail Retold: What's in Store - The state of the direct-to-consumer market
Episode #: 274
What's in Store: The state of the direct-to-consumer market

Guest: Karly Iacono
Topics: DTC, Omnichannel, Retail

In this week’s episode, “What’s in Store: The state of the direct-to-consumer market,” Chris and Karly Iacono, Senior Vice President of Investment Properties at CBRE, hit us with their top three takes on what’s happening in the DTC market.

What You’ll Learn

  1. What are the challenges in funding direct-to-consumer products?
  2. What’s driving consumer spending habits?
  3. What are the challenges to scaling DTC brands?

About Retail Retold

The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa and new guests weekly for amazing insights and thought-provoking stories.


Iacono  00:06

Welcome, everybody, to “What’s in Store,” the show where we cover hot topics at the cross-section of retail in real estate. I’m Karly Iacono. And I’m joined by my co-host, Chris Ressa. Chris, great to see you; how’s life today?

Ressa  00:21

Life is good. Been on a traveling tear and back now. So been all over.

Iacono  00:27

So you’re actually in the office getting deals done now instead of just visiting friends, right? Because I know that’s all you were doing. Right? Galavanting around.

Ressa  00:36

I had I had one where I was in six airports and three days!

Iacono  00:40

That’s actually borderline miserable. That was way too much. Was it productive?

Ressa  00:46

Super productive.

Iacono  00:47

Okay. So then it’s worth it. Good. Well, welcome back. Glad to have you in the Northeast again. And glad the trips were productive,

Ressa  00:56

I brought the rain.

Iacono  00:59
Alright, so then you could leave and come back again. Let’s try that again. If that’s the case, because that is no good. And you are not wrong. It’s been raining for like a week straight. Everybody not in New Jersey, or New York, you can officially feel bad for us. But we’re gonna get through builds character. So they say.

So today we’re talking about something we really haven’t touched on in a while. And that is kind of the state of the direct-to-consumer or DTC market. And it’s funny because you don’t really think as a consumer, you don’t think, Oh, this is a DTC brand, or this is a conglomerate, you just think I like this product. But the way brands come to be, is really very interesting. And DTC is something that had, I would say, a moment, a pretty big moment, right after the pandemic or during the pandemic, and it is now kind of shifting how that we just part of retail looks and how brands are being funded and how they’re coming to, to existence. So we wanted to take a moment and just give you our thoughts to our wonderful listeners, we appreciate our kind of perception on where the DCCC market is today. And some of the challenges and benefits we think are ahead in the near future.

So, let’s jump right in. We’re going to start with the state of funding for direct-to-consumer products, because, as we all know, funding is what makes the world go round. And there’s been a few changes. So Chris, why don’t you kick us off with your thoughts on DTC funding.

Ressa  02:34

Yeah, I think it’s really challenging. Now, I think the stat I saw is that at the end of last year funding through the venture capital route, or an any type of funding was down 97% from 2021, for any brand at the intersection of consumer products and e-commerce. So I think that just tells a story that there’s a lot less institutional dollars chasing these types of investments anymore. It when I say investments, I mean investing into these companies. Like their work.

Iacono  02:39

That number, I believe, is from CrunchBase, and it was $5 billion in 2021 and 130 million in 2023. So those are real, real numbers. Right? That’s a very significant shift.

Ressa  03:32

Yes, super significant shift. And I think, I think one obviously, it’s clearer, it’s just the cost of capital is a lot higher. So the companies willing to invest number one are looking for a return that was greater than before, that money for these startups is, you know, more costly, I think, to just based on 2010 to now, the entire, you know, digital-first or digital-only businesses. That raised all this money, and the path to profitability has been concerning for a lot of investors for some of these brands that just tried to gobble up market share. And the costs to scale is that the cause of that? One of the causes of that I think, has really put the pause button for some of the institutional investors venture capital that were investing in a lot of these businesses.

Iacono  04:38

You also have a much less favorable IPO market. I think we had four or five big DTC IPOs at the end of last year and I think all but one are trading significantly below their IPO price. Now, when you get enough data points like that, I think it makes people wary is probably a soft way to say it right quite for You’re full that maybe this isn’t a good time to IPO. And if you’re not taking that route, what does the exit look like? And how easy is that? And in that time when everyone’s a little more risk-averse and capital is at a premium, that’s a tricky path. So if not IPO, what is it? What is the exit look like?

Ressa  05:20

Yeah, and I think one of the reasons, another reason, you know, that there’s some challenging this funding is that the majority of these DTC brands are very lifestyle-esque and discretionary spending for the consumer. And so I think, you know, as these big companies that make these investments have a lot of information and data at their fingertips, and they’re looking at spending habits of people and, you know, potentially a slowdown in discretionary, it’s concerning.

Iacono  06:01

Right. And it’s a difficult time to not only launch, but scale something when the consumer is pulling back if your whole model is we need new consumers, we need new eyes, and we need a share of their wallet for something that’s discretionary. Like, yeah, I think that’s the market timing stuff.

Ressa  06:19

I think, you know, never count out the American consumer, it’s amazing how resilient the American consumer is. I would, I would say is I think they’re shifting their spending to more, you know, needs based in value decisions versus, you know, really discretionary items that too, you know, that’s how I would think about it. But the long story short, is, if there’s less discretionary, and a lot of the DTC brands or discretionary things to be hard for that, I think, you know, if you’re in the board room, the startup and the founders need a really good position as it relates to, to that comment.

Iacono  07:06

And I think it’s an interesting distinction that discretionary spending is not stopping, but it’s going to be difficult to lure new consumers, right. So if you have an X amount of budget, and you know, the kids need the Lululemon, or the Apple products, or the standard whatever the hot items that are already kind of entrenched in consumers lives to like it or not, that that money I think would be spent there first, instead of saying, you know, I’m also I’m just gonna go try this brand new product, no one’s heard of right with my free, free cash flow. So I think pulling consumers to a new brand as they’re starting to pull back spending overall is even more difficult even if they still have some money to spend.

Ressa  07:49

Agreed. Are your kids on the Stanley kick?

Iacono  07:54

Forget about it. Of course. We don’t know anyone that’s not. They spill they leak. It’s insane.

Ressa  08:01

Wow, I It’s fascinating. The Stanley kick to me. It’s fascinating. How I got to give this company is fascinating that they were able to penetrate all these demographics. Like when you were a kid, did you care like what type of bottle you drank out of?

Iacono  08:19

I didn’t even have a water bottle. I think it was like you passed by a water fountain every once in a while. And you’re like, all right. Yeah.

Ressa  08:26

and like, I was happy with the hose like, right.

Iacono  08:30

Is amazing marketing. I think Stanley oh, we’re getting on a tangent here. Sorry, everyone. But I think Stanley started in like the construction industry, right with thermoses and like, really tough products. And here we are, you know, every middle schooler needs three different colors and little Stanley toppers. And it’s amazing, great marketing, Stanley, really great marketing.

Anyway, so I think to our point, get back on track, it is hard to pull people away from brands they love if they’re tightening the purse strings a little bit, so just an additional layer of challenge. And then if we’re have any concerns about profitability, the lenders who are more risk adverse, everyone from the banks to venture capital are going to be a little more hesitant, which was the challenge today. Let’s move on to point two, which is this kind of shift in our thought on selling channel. So for years, I don’t know, five, six, maybe even longer. Maybe we’re getting close to 10 years, we have had an obsession with discussing the right selling channel, right? Should this be bricks and mortar? Should it be online only should it be omni channel where what is the right winning way to sell products? And I think that we’re moving away from that into there’s a lot of right answers and it depends on the product. And maybe there’s not just one right way. So tell me what you’ve seen in the shift and channel and what that means for DTC.

Ressa  10:09

Yeah, that was a great summation of it. I think. For years, we had this simple model, which is like you like had a product. And you wanted to get out there and you went to these major retailers and you tried to pitch to get it on the shelves, they buy it from you, and then they sell it because they’re good at the retailing portion, which is very different than, you know, the part of the business that they were that wholesale, you know, that product companies were good at.

I think one is, you know, Procter and Gamble is like the biggest example I could give, which, you know, they have companies like Pampers. That was like the first across $10 billion. I think Pampers would be a Fortune 500 company if it were a standalone. And last time I checked, I don’t know, there, there, there aren’t actually Pampers stores. Right, right. If I want Pampers, I go to Walmart. If I want, you know, Pampers, I go to Target. And that was a proven model, and then we have disruption. And the disruption was, you know, can we eliminate the middleman? And can we sell it just online to save costs? And I think what’s happened is, you know, and Simeon Segal from BMO says this all the time is like the middleman is one, not as expensive as we thought.

And two, is pretty efficient at doing this. And so it was, you know, it was this whole push to, to go and eliminate the middleman. And I think today, you know, there’s some things that like, if it’s not broke, don’t fix it, I think. And I think that DTC has a really a place and a strong place. Right, there are some really successful DTC brands. But I think that doesn’t mean we should eliminate the wholesale lock channel. And, you know, now a bunch of brands are talking about doing both right. And there’s, there’s something to be said, right? If you’re this brand, that has such cache, and people will drive to you, and people will seek you out. And because you’re the only place that has this product.

Okay, right, Nike has made a big shift to a portion of their business to be DTC. But you can still buy Nikes at Dick’s Sporting Goods, it’s a major partner of theirs, you can still buy Nike’s at other places. And so I think this whole concept of, you know, we’re going to eliminate the middleman has proven out to be really tough. And then you take the second piece of that if you eliminate that, that channel, and you want to do it all yourself, you want to make the product, you want to eliminate the wholesaler fight, and then you want to sell it. And then by the way, you only want to do it digitally. That cost to scale is really expensive. The customer acquisition cost is really expensive, you know, why not leverage the brands of Target and Walmart, who have spend all this money in marketing, and leverage that to be on their shelves. And instead, you want to start from scratch. They spent billions and getting to where they are, and you want to start from scratch. I think it’s really tough to get to scale. I think the part that’s probably more achievable. Sorry, is to be small. be small, if you want to be small and do a million dollars in revenue. And that’s why I’m not pooh-poohing that it’s great. It’s, you can do it. In a way it’s so scrappy, but you want to start to scale and get to $100 million. The cost to do that is significant.

Iacono  14:20

I think it really does depend on the product, right?

Personally, I think it would be exhausting. If we had to order every product from an individual retailer, go to an individual store for everything that we want it right your pampers example is is a great one, right? You don’t want to have to make a whole other separate order or stop just for that one item. So it really has to be a specialty item. And then you are cutting out all of the benefits of these other partners. And in your point, the middleman is a great way to distributed scale for an efficient cost.

And we’ve seen a few other expressions of this, which is not really wholesale laying but more brand partnerships. So even if you’re not doing a traditional pampers to Walmart model, I think we’re seeing more of the brand partnerships to take advantage of the physical locations. And I guess digital as well, and scale that the established retailers have like glossier and Sephora, Madison Reed. I think they’re in Walmart, right? Yes. So those are another way that the channels are kind of blending. And we’re really realizing there’s not just one right way, there’s potentially a place for both, and the savings of doing it all yourself, or not necessarily there. Yep, I think is the the end story there, for sure.

Now, the third thing that we’re going to touch on and just kind of a shift in perception here is that the model was going back to the do it all yourself, create this product that you think is wonderful, get funding, throw up an e-commerce website, and they will come. As we’ve seen with a lot of companies, that is not necessarily the case. So I think now the the thought process is shifting in the reverse, that maybe all along the better method was physical-first, physical stores first, and then you add the ecommerce, then you become omni channel as you grow. And you already have an established presence because we’ve talked on and on about how productive and efficient physical retail is, as compared to e-commerce in terms of customer acquisition costs, advertising, all these things. So maybe the really the model should be what it started out so long ago, which is physical retail first, and then you scale into e-commerce. What are your thoughts on that?

Ressa  16:45

Yeah, I think it’s a great point. I would say that if I opened up a physical store today, and I only had one, I’d probably still have a website, right? And I tried to figure out how to be able to sell through that. However, there was this concept of you do e-commerce, you get to a size, and we start opening stores. But I would take some of the brands that we don’t put in DTC, but they’re largely and I don’t know if they don’t want to be labeled into this. But, and maybe that’s why but we don’t talk about Lulu and Bath and Bodyworks as DTC and some of the brands like American Eagle, and some of these stores that started as physical stores, then they, because of online retailing growth, they were they ended up wanting to meet their consumers. So they they opened up websites. But if we look at some of the success of some of these, you know, brands of scale, where some of these DTC startups would like to get to, they had, they were either in stores as wholesale, or they were DTC seeing their product through physical well, before they ever DTC their product online. And that wasn’t the new that that wasn’t, you know, they might not have had a choice. But nonetheless, because, you know, e-commerce wasn’t around when Bath and Body you know, or wasn’t prevalent when Bath and Body and, you know, Lulu, and these companies started but it worked. They’re still, you know, you know, at scale today.

Iacono  18:16

So the old concept is now becoming new again, because it’s been proven.

Ressa  18:21

History repeats itself.

I think, I think we’re gonna see, you know, the whole, the the E-commerce thing is fast, right? That’s the thing: e-commerce is fast, and people love this. Go fast, it’s just speed cost a lot of money. And maybe, we’re about to see, someone creates a new product. And we’re gonna go back to how it was done. And let me open up a store to sell that. Let me see if I can get into Target or Walmart or whomever Neiman Marcus, whatever lane you’re in. And then let me start open up some more my stores. And, you know, probably have a website the same time, but I think you’d have less of let’s open up just this website. Let’s try to hit a home run online. And then we’ll fill in the stores later because at the end of the day, some of the brands that are these DTC startups that like took off. There are millions and millions of online websites. And there are only a couple of unicorns that we talk about. Maybe there’s 20.

So like, everyone’s chasing this, like, unicorn scenario, that’s really hard. Like, how many times not just in, in, you know, the retail e-commerce space have we heard, like, some business is trying to be the Uber of like, it’s hard. It’s hard to do that like to like disrupt and be this new thing and do it the way they did. Whereas on the other side, side you have all these a much larger number of like proven winners where maybe you can’t do it fast and getting the scale would be slower, but a little bit more proven.

Iacono  20:14

And I I think it’s important to note we’re not saying that disruption is not possible, we’re not saying new brands are not coming because there’s so many interesting concepts out there and some of them will be DTC, right. And some of them will be wholesale and some will be omni channel and some will be store within a store and brand partnerships. There’s a lot of tremendous innovation, a lot of money will be made. But I think the message is really, this as the the way to launch in the fast way to profitability as just sold, DTC is not necessarily true. And there’s more to the story, more channels, more ways to sell. And there are real challenges to being a standalone DTC brand, trying to start from nothing. And I think that’s what we really want to shed light on.

Ressa  21:00

I think the food space is pretty interesting. Like restaurant business, we know is really hard, right? The failure rate in restaurants is been talked about for years and years and years. We went through this whole like ghost kitchen, you know, online phase, right? It’s a word was last time you like heard someone really like talking up a ghost kitchen. It’s been a minute, right? Yours? Yeah, in a minute, right?

Iacono  21:23

We’re so excited about that, too, because it was a brand new idea. And then it just poof, completely got

Ressa  21:28

like if you were opening a restaurant today. Would you start with a physical location? Or would you start like online and ghost kitchens? Such

Iacono  21:36

A great example, I would definitely start with a physical location and probably a website to try, but you would never start with Okay, goes kitchen. Do you want to order from here?

Ressa  21:47

I think it’s really hard to do that.

Iacono  21:50 That is a great example. Yeah. Well, I think we have wrapped it up. Those were very interesting thoughts on DTC, the state of that part of the retail market, and some of the changes we might see ahead and 24. Two everyone listening, that was what’s in store with Carly and Chris. We’re so happy you tuned in, and we look forward to seeing you again next month. Have a great day, everyone.

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