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They were the hottest names in technology. Brands like Warby Parker, Stitch Fix, FIGS and Allbirds pioneered a new form of retail, which went “direct to consumer” – via the internet – instead of selling through established outlets. With the promise of low overhead, no middlemen and a seemingly endless pool of customers, valuations of these companies have soared into the billions. They seemed unstoppable. But today they are crashing hard with no bottom in sight.
A grim confluence of rising Facebook ad prices, worsening ad measurement, soaring shipping costs, newly sober procurement markets and smaller-than-expected customer bases deal a blow to DTC companies. A Big Technology analysis of public DTC companies with market capitalizations over $800 million found that nearly every one of these companies is facing shrinking revenue, shrinking margins, runaway losses, or some combination of the three. Together they lost billions in market capitalization in 2022, significantly underperforming the market in an already bad year.
“There’s definitely accountability,” said Orchid Bertelsen, COO of Common Thread Collective, an e-commerce agency that works with DTC companies. “The environment is much more unforgiving.”
Soaring Facebook ad prices have done the most damage to the DTC industry so far. These companies have long relied on affordable Facebook advertising for their growth, a precarious bet that is now coming to an end. Operating largely without a physical storefront, they used Facebook to reach customers who might otherwise walk into a real-world store. Almost all DTC companies have low brand awareness – Warby Parker went public with just 13% brand awareness – so reaching thousands for a few dollars on Facebook has helped them make up for it. But the plan stopped working.
Ad prices on Facebook have skyrocketed in recent years due to growing demand – and in some cases shrinking supply – leaving DTC companies in a bind. “In two years, it’s practically doubled, even tripled,” David Herrman, a social media ad buyer, said of the cost of advertising on Facebook. In the United States, the cost to reach 1,000 people on Facebook has risen from $6 to $18 over the past two years, Herrman said.
As prices rise, Apple’s iOS privacy changes have added another hurdle, hurting DTC companies’ ability to measure whether their social media ads are working. “The iOS 14 privacy changes affected everything,” Herrman said. “The internal metrics and mechanisms that Meta uses for attribution are around 30, 40, or 50 percent.” Unable to optimize effectively, DTC companies are now spending more for worse results, eating away at their margins.
Then there is the supply chain. As the pandemic took hold, the cost of importing containers from China skyrocketed, in some cases by a factor of 10. This added yet another cost to the DTC’s balance sheet. And given their dependence on imports, the cost has been difficult to offset in terms of price or volume.
“The supply chain destroys a lot of these DTC brands,” said Eric Bandholz, founder of Beardbrand, a DTC company. “They are so dependent on China for their products, and bulk container shipping costs have gone up astronomically.” The price to ship a container from China to the United States has risen from $2,000 before the pandemic to $15,000, Big Technology reported last May. Several DTC sources said the price is even higher today. Beardbrand is working to move all of its operations to North America, Bandholz said.
In this environment, Allbirds, Hims and Hers, Peloton, Revolve, StitchFix, Warby Parker and Wayfair have all experienced significant losses, margin contraction or both in earnings reports over the past year. Wayfair, for example, lost $78 million in the third quarter of 2021 after posting a net profit of $173 million the previous year. Warby Parker, partly due to stock compensation, lost $91 million in the same quarter. Revolve’s gross margin decreased from 56.0% in the fourth quarter of 2020 to 54.8% in the fourth quarter of 2021. Hims and Hers gross margin decreased from 77% in the fourth quarter of 2020 to 73% in the fourth quarter of 2021. The list is long.
The timing couldn’t be worse with rising interest rates on the horizon as investors are far less interested in companies that are struggling to generate profits, even as future growth looms on the horizon. . Some investors also question whether these companies deserved their valuations given that the addressable market for their products — fancy glasses from Warby Parker or expensive medical scrubs from FIGS — may not be limitless.
DTC stocks are therefore taking a beating, and it is unclear where this will end. On Monday, Allbirds fell 64% in 2022. Stitch Fix and Warby Parker fell more than 40%. All other companies in the category are down at least 19% this year. The S&P 500, on the other hand, fell more than 11% in a terrible year.
It is still too early to write off the DTC industry. Some companies will branch out from Facebook to other platforms like TikTok and figure out how to get back to low-cost social media advertising. Others, like Chewy, will find a sweet spot where the costs are worth it due to the high lifetime value of their customers. (“That’s a 14-year commitment,” said Arjun Kapur, a VC at Forecast Labs. “The average lifespan of a puppy.”) And the VC money keeps pouring in, with a total of $1.05 billion invested so far in 2022, per Pitchbook. Yet for such a promising industry, reality bites. And it doesn’t look like it will get any better anytime soon.