Digital-native D2C brands shift gears as their ecommerce growth stalls

The trend: With their online customer acquisition costs rising and ecommerce sales decelerating, digitally native direct-to-consumer (D2C) brands are looking elsewhere for growth, including opening stores and selling wholesale to other merchants.

• Many digitally native retailers are opening physical stores, with several, including Madison Reed, Studs, and Facegym, featuring in-store services such as haircare, ear piercing, and facials.
• Another group of merchants such as Allbirds are trading higher margins to expand their reach selling wholesale.

How we got here: Digitally native brands such as Warby Parker, Dollar Shave Club, and Casper built their businesses by leveraging low-cost digital ads to reach consumers with a message that by cutting out retailers and selling directly to shoppers, they could sell goods at lower prices.

• But amid an economic slowdown, growing competition, and rising digital ad costs, the model no longer works as well. That’s why we estimate digitally native brand D2C ecommerce sales will slow to 17.5% this year, which is down 40.0% from just two years ago.
• Going offline, either via their own physical store or by selling in others, is a logical place to turn given that it is where the vast majority of retail sales take place.

A broader reach: Physical stores serve as a billboard for digitally native brands, enable shoppers to touch merchandise, and provide an opportunity for in-store staff to build connections with customers.

• Those that offer in-store services add to those benefits by providing more reasons for consumers to visit. And customers who visit those retailers’ stores for a facial treatment or an eye exam typically spend more on products than other customers, per the Business of Fashion.
• For example, Warby Parker stores that employ an eye doctor have a higher conversion rate than other stores, and they also sell a larger share of progressive and anti-fatigue lenses, said Steve Miller, chief financial officer, during the retailer’s Q2 earnings call.
• Meanwhile, those selling wholesale are doing so to expand their reach in ways that aren’t feasible on their own. While Allbirds operates 55 brick-and-mortar stores, its wholesale relationships with retailers such as Dick’s Sporting Goods-owned Public Lands and REI are helping it build brand awareness and reach new customers, co-CEO Joey Zwillinger told Retail Dive.

The big takeaway: Building out an offline presence is expensive and success is far from guaranteed. That presents a particular challenge at a time when rising interest rates and slowing economic growth are causing many retailers to focus on their bottom lines.

• There are also fewer available locations to place a store as the US retail vacancy rate fell to its lowest level in at least 15 years, per Cushman & Wakefield data reported in The Wall Street Journal. That’s pushed up rent prices. For example, asking rents for US shopping centers in Q2 were 16% higher than five years ago.
• As a result, retailers should take a conservative or collaborative approach as they look to expand offline.

Go further: For more on D2C strategies, read our report here.

This article originally appeared in Insider Intelligence's Retail & Ecommerce Briefing—a daily recap of top stories reshaping the retail industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.

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