Sharm Tank Vol. 34

Author

Nik Sharma
July 12, 2024

Happy Friday,

I’ve been thinking a lot about the current state of the DTC (direct-to-consumer) landscape, and I wanted to share some insights with you.

This newsletter is inspired by Anna Hensel's article "Zombie brands, fire sales & quiet closures are plaguing the DTC world.” Plus, I’ll be weaving in some key points from a recent post by Sean Frank, founder of Ridge, who has provided a sharp lens on what’s happening in the DTC world.

The Rise and Fall of DTC Giants

Remember when DTC brands like Blue Apron and Allbirds were the darlings of the retail world? 

These companies promised a revolution, cutting out the middleman and delivering high-quality products directly to consumers.

Blue Apron, for example, had a vision of transforming the food system, but things didn’t quite go as planned. Despite an ambitious start and a significant investment in marketing, Blue Apron’s IPO flopped, and the company struggled to turn a profit. Fast forward to today, Blue Apron has been acquired by Marc Lore’s Wonder Group at a fraction of its once $2 billion valuation.

Similarly, Allbirds, once valued at $4 billion, has seen its market cap plummet to $200 million, and it’s been grappling with net losses that have doubled year over year. This trend isn’t isolated. Brands like Casper, Winc, and Parade have faced similar trajectories, with some filing for bankruptcy or being sold off in fire sales.

Zombie Brands: Alive, but Barely

So, what exactly is a zombie brand? It’s a term that perfectly describes many of today’s DTC companies. These brands continue to operate and keep up appearances, but behind the scenes, they are mere shadows of their former selves. They’re often forced to outsource operational infrastructure, reducing their once distinctive qualities to just a brand veneer and intellectual property.

Take Stitch Fix, for example. Once a pioneer in the personalized fashion subscription space, it’s now shutting down facilities and trimming down operations. The RealReal, a luxury reseller, is closing stores and shedding inventory. And Allbirds? It’s moving from a vertically integrated model to relying heavily on third-party retailers.

The Impact of Overexpansion and the Fallacy of Acquisition

Many DTC brands have fallen victim to overexpansion and strategic missteps. Blue Apron’s ambitious acquisition of BN Ranch and its subsequent struggles post-IPO is a prime example. The initial move was aimed at vertical integration and improving supply chain control, but it ultimately contributed to financial strain when the IPO did not meet expectations.

A decade ago, many DTC brands justified high customer acquisition costs (CAC) with the expectation of long-term customer loyalty and repeat purchases.

However, as seen with companies like Casper and Winc, this assumption often did not hold true. The reliance on platforms like Facebook and Instagram for customer acquisition proved costly and unsustainable as competition increased and ad prices soared.

A Troubling Financial Landscape

The financial pressures on these companies are immense. Venture capital funding has significantly dried up, and many firms are now focused on cutting costs rather than pursuing aggressive growth. This has led to what Taryn Jones Laeben of IRL Ventures calls a “structural reshuffling” of the DTC space.

Sean Frank, founder of Ridge, highlighted some critical points about the financial realities in his recent post:

  1. If you raised money in 2021/2022 and haven't grown 300%, your valuation is down.

  2. If you own equity in a business based on 2021 marks, that equity is probably underwater.

  3. Brands are valued at 10x EBITDA at best, and they need to be hitting the rule of 40.

  4. No profit? Doesn’t matter what the growth is, investors aren’t interested.

  5. No one is selling off revenue.

  6. Don’t invest in DTC rounds in 2024 unless it is based on a trailing 12 months profit multiple.

  7. Great brands are selling for less than inventory value.

  8. You can’t sell for a higher multiple than what public companies are trading for.

  9. Most founders/execs from this era own equity worth zero because of liquidation preferences.

  10. This had to happen and will be a good thing for the brands that survive.

Stagnation or Innovation?

Despite the bleak outlook for many, there are still success stories. Brands like Skims, led by Kim Kardashian, leverage their founder’s star power to drive growth. Similarly, Nom Nom, a maker of personalized pet meals, sold to Mars for $1 billion thanks to its proprietary manufacturing process.

Innovation and a strong understanding of customer data are key. DTC brands that can pivot, adapt, and find new ways to connect with their audience are more likely to survive and even thrive. For instance, Fairing’s CEO, Matt Bahr, notes that younger DTC startups are being smarter with their cash and focusing on profitability.

What’s Next for DTC?

It’s clear that the DTC landscape is undergoing a major transformation. Founders are forced to reassess their business models, cut costs, and find new growth avenues. Many are also considering exits, selling their brands to larger companies that can provide the necessary resources to keep them afloat.

For consumers, this means we might see fewer flashy DTC startups making headlines, but those that do will likely be more resilient and better prepared to navigate the challenges of the modern retail environment.

The DTC space is at a crossroads. While many brands are struggling to stay afloat, there are still opportunities for those willing to innovate and adapt.

As always, we’ll be keeping a close eye on these developments and sharing insights with you.

Now, let’s get into some fun stuff…

Yotpo Crushes B2B Marketing with #Walkaway Campaign

Yotpo’s new #Walkaway campaign offers a fresh, engaging way to rethink your email provider. The campaign encourages businesses to switch to Yotpo Email, highlighting benefits like fair pricing based on actual usage, hassle-free migration, and 24/7 expert support. To make the transition even more appealing, Yotpo is giving away 100 pairs of custom WalkAway shoes to demo requesters.

This innovative approach not only showcases Yotpo’s dedication to customer satisfaction but also creates memorable experiences that resonate with their audience. Don’t miss out on this chance to walk away to a better email solution—request your demo today!

How Dr Pepper Overtook Pepsi to Become America’s No. 2 Soft Drink

Dr Pepper has officially surpassed Pepsi to become America’s second-favorite soft drink, trailing only Coca-Cola. This remarkable rise is attributed to a blend of clever marketing, unique flavor, and a growing appeal among younger consumers.

While Pepsi has shifted focus towards healthier, sugar-free options, Dr Pepper has captured the hearts of Gen Z and millennials with its quirky, distinctive taste and engaging ad campaigns. This strategic positioning has allowed Dr Pepper to outpace its larger competitor, securing a significant spot in the competitive soft drink market.

Bringing Gen Z Back to the Big Screen

"Inside Out 2" became Pixar's top-grossing title by surpassing $1.25 billion at the worldwide box office. Disney's innovative marketing strategy played a pivotal role in this success, particularly by engaging Gen Z and moms through strategic brand partnerships.

Collaborations with popular Gen Z brands like Bubble Skincare and Uber Teen, along with unique experiences like the Airbnb recreation of the movie's headquarters, created an immersive, buzz-worthy campaign. This multifaceted approach ensured "Inside Out 2" became a cultural event, drawing audiences back to theaters and setting a new standard for movie marketing.

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