Direct-to-consumer (D2C) commerce surged in the early stages of the Covid-19 pandemic, as new brands benefited from the shift to online shopping and mainstream brands – like Nike and Levi’s – doubled down on their direct sales channels.
Two years later, with physical retail regaining its footing and broader issues like inflation, online ad pricing and tracking issues come into play – how can D2C brands stay competitive? I recently spoke to Polly Wong, President of Marketing Strategist Belardi Wong, to discuss the topic.
D2C brands need more distribution channels
“We’ve seen a shift back to retail despite the pandemic – I think right now in terms of total retail sales in the US, 78% is still in stock,” explains Wong.
“As digital becomes more expensive, competitive, saturated and promotional, D2C brands need more distribution channels,” she said. “Not only are they opening their own stores, they’re also selling at Nordstrom, a wholesale company, and even considering selling on Amazon, aren’t they? You have to be where your customers are – you can’t just have your own website and think you can scale from there.”
Wong acknowledges that broader changes in the industry are hampering brands’ potential long-term growth.
“The affluent consumer was stuck at home spending a lot of money online [during the pandemic] – spend a lot on house and sporting goods and gardening and many other things. These companies have had tremendous double or triple digit growth for two consecutive years. Now you have huge numbers to grow on,” she said.
“Marketing costs are increasing in all channels, the cost of goods is increasing, the cost of distribution is increasing. In addition, the financing market has really dried up. I know many of our customers, emerging DTC brands, are finding it difficult to raise funds for the next chapter of growth.”
A broader product range and more marketing channels are the key to growth
So how do DTC brands go about it when growth is a big challenge to attract new customers?
Wong says her company, Belardi Wong, sees its clients focus on three key growth strategies.
“The first is to expand distribution channels, that is, to sell your product in the Nordstrom space. Wholesale is a tremendous growth opportunity.” Additionally, she says, “Basically, strategy number two is to activate more marketing channels. We see customers leaning towards CTV, towards TikTok and towards print.”
The third option for customer acquisition is the expansion of the product range.
“A lot of D2C brands made you think you could just have one product or five products and suddenly go big, right? But there’s a reason Stance and Bombas aren’t just selling socks anymore. They sell t-shirts and underwear. Same goes for Allbirds,” she explained. “The best way to increase response rates is to offer a range of products across all categories and price ranges. The more products you have, the more likely someone is to buy from you. They also increase your downstream lifetime value, which means you can spend more on customer acquisition.”
Of course, even the best strategy does not guarantee success in today’s retail landscape, where consumer priorities are constantly evolving. However, authenticity remains a key factor, says Wong, especially for affluent, urban consumers.
“We see that consumers are willing to pay more for sustainability and when the brand gives back,” she said. “I always say a millennial can spot a manufactured brand from a mile away and I think authenticity is definitely very important.”
H2 to see more discounts
While the growth rate could slow, Wong says D2C brands are still seeing year-over-year growth, just 10% to 15% instead of 85%.
However, Wong predicts that promotions will come to the fore in retail for the remainder of the year as inflation continues to impact consumer behavior, with D2C brands – which are typically not very promotional – also offering discounts.
“Because you’re competing for more wallets – consumers buy from both premium brands and Target, you see – the competition from the big retailers will result in more discounts in the second half than we’ve seen historically,” she explained.
“Also, everyone from small brands to big brands has additional inventory and I think we’re going to see a pretty advertising landscape.”
While it’s often thought that deep discounts erode consumer perceptions (especially of luxury brands), Wong says this is no longer a problem as consumers value value for money across the board.
“People used to think less about a brand… When you were in a mall, you didn’t want to be at the Sears end of the mall, you wanted to be at the Nordstrom end. It was the same with discounts. In the past, if you were a big promotional discount brand, you weren’t a good quality brand. But I think the consumer no longer has that perspective at all. I think the consumer just wants value for money and it doesn’t change the perception of the quality of the product or the quality of the brand.”
High costs impact social investment
“[Clients are] continue to rely on social commerce and spend money on it, but the challenges at this point with tracking and measurement combined with the super high CPMs – it’s extremely expensive,” says Wong.
As a result, Wong says that in June, Belardi Wong customers reduced their social media spend by 27% compared to the same month last year.
“It is a challenging time for society. There is actually less advertising inventory because less free time is available. So when consumers start traveling and entertaining and becoming distracted, less free time means fewer ad impressions, driving up the cost of impressions. But at the same time the marketing and the measurement and tracking isn’t what it used to be and so you see a drop in results.”
Negative consumer sentiment leads to cautious spending
Along with rising costs across the board, Wong says increasing competition — not just from big retailers, but also from experiences and services — is becoming a challenge for D2C retail brands.
“Q1 was very strong for the most part and results really started to slow down in March and April. It’s spring break season and people are getting out into the world now,” Wong explained.
“And frankly, I have to believe that consumer sentiment in the US is absolutely rock bottom. We don’t see younger generations reacting so strongly in their spending just because of consumer sentiment. But in any case, we have a million data points that tell us that when consumer sentiment is low, older consumers become very reluctant to spend.”
When asked how the retail industry will fare over the next 18 months, Wong was surprisingly upbeat – despite ongoing problems related to inflation and distribution.
“You know, most people say if we have a recession it’s going to be short and mild,” she said. “And so I think I probably expect by next spring that things will settle down.”
“I also think it depends on the category and the consumer you’re targeting — is it a low-ticket consumer or a high-ticket consumer?”
“Also, if you’re in the sporting goods, gardening, or home decorating industries, you’re going to have a hard time growing. But like I said, we see strength in apparel, accessories and fashion. People haven’t bought new clothes for fall yet, have they? We’re still going to see that demand, and I’m a little half full…”
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