Can DTC Businesses Survive an Economic Slowdown?
Heard the news about internet darling and direct-to-consumer (DTC) aperitif brand Haus? After their Series A funding fell through, they’re selling for scraps.
In a series of tweets on August 8, Haus’s CEO and Co-founder, Helena Price Hambrecht shared the news that has left many in the industry reeling.
After all, it is hard to believe – the brand had a larger-than-life bull run. Launched in 2019, the brand quickly received $17 million in funding. With 64.3K Instagram followers, the brand was a forerunner in the low alcohol-by-volume (ABV) category, a vertical projected to grow by over 30% by the middle of this decade. What’s more, the brand had just announced that they’d crossed $10 million in revenue earlier this year, with a national distribution channel with Winebow in the offing.
But with Constellation Brands backing out of their upfront commitment to the company’s Series A round, Haus has no option but to undergo a voluntary, 30-day ABC (Assignment for Benefit of Creditors) period. For little reason other than ‘timing’.
Close on the heels of this shakedown comes the news about jewelry startup Blue Nile selling at less than 70% of its revenue for 2021.
So what went wrong?
And why are DTC businesses falling like a pack of cards?
An Economic Slowdown on the Cards?
Whether or not we believe we’re in the middle of a recession, the signs of a slowdown are clear. And this is especially evident in the eCommerce industry.
While there are specific problems that plagued Haus and Blue Nile (alcohol and jewelry are both difficult segments to fund/sustain), the current trends are not reassuring.
eCommerce Adoption is Dropping to Pre-Pandemic Levels
First, the context. From the start of the pandemic in March 2020, to the end of 2021, eCommerce adoption accelerated to projections that were supposed to to have been reached in 5 to 10 years.
But things are changing, and quickly. In addition to people going back to shop from physical stores, there are other factors at play. The war in Ukraine, combined with inflation and the resulting Fed-hiked interest rates, have all led to a decrease in discretionary spending.
Then there are the changes that Apple’s ATT (App Tracking Transparency) framework have introduced to upset the media buying landscape. Gone are the days when you can throw up any ad and customers will rain. The customer acquisition cost via ads has skyrocketed and a lot of brands are struggling to maintain profitability (be economically viable?).
This has meant a return to pre-pandemic adoption rates in eCommerce, with things coming to head with Shopify’s CEO letting go of 10% of his staff. Things aren’t much better for Meta, Google or even Amazon, with all seeing slower growth than expected and revising down their quarterly projections.
And the same is true across multiple industries — advertising, technology, SaaS, shipping, logistics, etc.
What can DTC Brands do to Survive?
Is there a way out? And how long do businesses have to weather the winds?
According to ‘The DTC Guy’ Nik Sharma, Q4 may provide some respite for eCommerce brands, but he expects a sluggish 2023, with recovery possible towards its last quarter.
So what should you do in the meanwhile? And what are your options if your business needs a lifeline?
We’ve put together a cheatsheet with some of the best advice out there.
Some solid strategies you can follow NOW:
- Trim the fat and negotiate: Let go of what’s not working – layoffs, marketing budgets, unprofitable or good-to-have-apps. None of these decisions are easy, but they are essential to survival. Also negotiate better terms with long-term partners – you’re a valued customer and it’s never a bad idea to ask.
- Look for under-utilized channels: Research and test channels where it may be cheaper to acquire new customers. Take advantage of lower CPAs when fewer users are advertising on a platform.
- Focus on retention and offer value: Optimize customer experience for your returning users or introduce new products/ways to add value to them. Trust us, this is game-changing!
- This is a good time to get your targeting right: A recession is a good time to strengthen your branding. Write down the single person you’re selling to and double down on how your brand should make this person feel.
And what happens if you need more cash? Here are Nik’s top tips:
- Fund your business with alternative cash: Raising capital is quite hard for a business that's already launched. If you raised a pre-launch round of funding and can't raise another round, use a funding partner like Wayflyer that offers non-dilutive terms and a quick response time.
- Sell your brand: Sell your business to OpenStore — An aggregator-like business that acquires Shopify brands from founders. The advantage of selling to them over individual investors is that they’ll give you a non-binding offer within minutes and a cash payout in as early as 24 hours!
Want to read more? This issue of Alex Greifeld’s newsletter and Nik Sharma’s newsletter on Workweek are some of our top recommendations.