The Downfall of Direct-to-Consumer
12 February 2020
Author: Jasmine Waters
The beginning steps of a fashion start-up often raise concerns of how best to raise money alongside managing to successfully grow sales. Many new companies have decided to raise capital and growth rates at any cost, cutting out middleman retailers and undercutting the price-points of their ancestors. Investors tolerated years of losses for a strategy that worked for a limited number of years, resulting in D2C (direct-to-consumer) companies now being trapped. Can brands find their way back from the brink, or will they have to face even more tough choices?
What has happened with D2Cs?
Before the boom in D2C popularity, the goal was simple – secure a big enough share of the marker, avoid wholesale and drive down costs to maximise profit. This way of thinking has subsequently remade the fashion industry itself, with more traditional retailers opting to improve online services and offer more ‘relevant’ products. Many D2C brands chose to raise capital through rigorous rounds of valuations, using funds to boost marketing to acquire new customers through digital ad prices. A large number of these investors in these companies are looking for an exit, but no paths look particularly promising. Acquisitions from larger retailers are few and far between and trying to replicate D2C success in-house can prove to be a slow burning strategy. Is there a point of no return? Many seem to think we are beyond that already. Arguments are also often made concerning the impact the D2C ‘boom’ has had on the entirety of consumer culture, possibly contributing to the closure of thousands of stores and increasing the demands and expectations of the modern shopper.
So what to do now?
If a D2C company finds itself unprofitable, it must face a lot of tough choices. This most frequently means either taking on more debt or accepting investment at a considerably lower valuation. Success could now mean spending years improving the bottom line, but in a culture that values top-line growth other everything else, managing it could require cutting fixed costs, or considering being open to wholesale routes. Despite this, there is still some hope left at the end of the very long, very narrow tunnel. Brands that can build awareness and loyalty over a long-term period have a much better shot at survival than those pursing a ‘quick rush’. The best option for most is to focus on profitability instead of growth. The more start-ups generated, the more they learn from the mistakes of their predecessors. There are extremely positive ramifications to being able to raise money conservatively and keep a focus on building a sustainable business. The channel itself is maturing too, many naturally finding themselves expanding into wholesale as a next step to creating cash flow. There may well be a ‘reckoning’ of the D2C channel, but that doesn’t mean there isn’t a place for venture capital. As the industry continues to evolve, there will always be innovative concepts that need – and will be wanted by – investment.
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