The CQ: Why Are DTC Brands Pursuing Traditional Retail?
Moving from digitally-native to retail makes sense only if it's strategic.
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Buzzing at the Forerunner Office…
How Does a Digital Brand Know When to Enter Retail?
Q: “The original disruptive DTC model cut out the retailer, but today, DTC e-commerce brands are being hailed for showing up in CVS, Target, and other legacy retailers/ distributors. How do you keep disrupting to avoid becoming the model you wanted to disrupt?”
A: Forerunner has long believed in the power of retail distribution, whether through successful wholesale partnerships like Sunday and Walmart (and now Lowe’s) or Hims & Hers and Target (and now Walmart), or building a store footprint to provide offline points-of-sale and experiences like Warby Parker and Glossier. For most brands, the transition from digital to retail can represent a meaningful “we’ve made it'' statement in the market and internally amongst the team. And as traditional as retail distribution may sound, ~80% of consumer spend still occurs in the store – the channel provides a path for brands to meet customers where they are at and to diversify their business beyond paid digital channels–which are especially challenging today.
The significance of starting as a digital-first brand cannot be understated, though—it gives teams a direct relationship with their consumers and more flexibility and control over their business than if they started as a retail brand that’s beholden to retail distributor influence and contracts as the primary source of revenue. This is exactly why Bobbi Brown created Jones Road Beauty after selling her namesake brand to Estée Lauder in 1995, in fact–she wanted to talk to her customers directly and control margins. In a commerce environment where so many retailers are burning cash due to overstock issues, digital-first brands have the power to expand their reach on their own terms. Likewise, in starting as a digital brand, retail distribution can be a high-value opportunity to leverage the work that teams would be doing to sell online either way, and profitably bring that to offline channels.
To boil it down, Forerunner believes that founders should start intentionally, own the trajectory of their brand, and put consumers first. Starting digital empowers founders to be in the driver’s seat of their own business. But we also believe that as brands grow, iterate, and build relationships with their consumers, they should diversify their distribution to show up where their consumer will be shopping—be it online, on social media, at retailers, or at owned physical retail stores. All brands, depending on category and the dynamics of the market, reach a ceiling of online sales. Allow retail distribution to serve as a hedge when navigating e-commerce headwinds and wait until there is a pull in the market for the brand to expand into the channel. To support a successful retail rollout, look to have the following:
Make sure you have the right margin structure to support retail as well as the supply chain and marketing budget to support the launch and expansion.
Build an integrated strategy that the entire team is invested in. A brand will be one of many on store shelves, and simply striking a distribution deal does not ensure cutting through the noise.
Find a buyer-advocate. Ideally, look for a buyer at the retailer that will champion the brand. This buyer will ideally come inbound, and will be prepared to fight for the product’s success if things don’t go exactly as planned.
Be thoughtful about how your product appears in the store. End caps and reimagined sections may seem attractive, but they also may put your product in a slightly different place than consumers expect.
Hire strategically for the business. People from traditional retail backgrounds can provide structure and level up the organization, but be mindful to not over-rotate there. Keep the digital heart of the business at the core of the people who are hired.
When I worked at Bonobos in the early days of DTC, there was a $100M unofficial ceiling on our digital revenue and only a handful of employees running the wholesale business—which reached a meaningful portion of our revenue. We also scaled to dozens of Guideshop showroom stores once we learned that the Guideshop customers were orders-of-magnitude higher value than online customers. While we faced significant challenges as a pioneering digital brand, we were capital efficient when it came to offline distribution, because we were leveraging our online efforts.
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This Week’s Best Consumer Insights
The Fed moves to increase interest rates by 75 basis points in response to last week’s University of Michigan consumer sentiment report showing Americans are worried about inflation. Fed Chair Jerome Powell anticipates a similar increase in July to curb rapidly rising prices.
That red-hot real estate market is finally cooling. This week, mortgage rates reach 5.78% for the first time since the 2008 housing market crash.
Consumers are feeling the effects of higher prices at stores, during travel, and at the gas pump… and they’re cutting back. Retail sales finally flipped negative in May, dropping 0.3% for the month, after rising 0.7% in April.
A new survey shows 41% of American workers are living paycheck to paycheck. Workers living paycheck to paycheck are also twice as likely to quit their job and start a new job for just a 5% wage increase.
Job-seekers are demanding more compensation information to empower themselves, and employers are starting to become more transparent. LinkedIn job listings with salary info are up 44% YOY, and around one quarter of listings on the platform now include compensation details.
Employee values are changing with the times. According to 2022 data, the top job consideration for Gen Z candidates is higher pay. By contrast, back in 2011, millennials cited career progression and personal growth as their top work values.
The crypto market has lost over $2 trillion in value since last year, and Coinbase is preparing for a recession and “crypto winter” by laying off 18% of its workforce. Consumers have historically traded less on the platform during economic downturns, according to CEO Brian Armstrong—and trading accounts for the largest source of Coinbase’s revenue.
Revlon files for bankruptcy, citing supply chain issues, inflation pressures, and slumping sales during the pandemic that the company has yet to recover from.
Cilantro-lime cauliflower rice is a big hit for Chipotle: 20% of people that order a dish made with the veggie-based ingredient is trying the restaurant chain for the very first time. Chipotle will soon add a Mexican-inspired cauliflower rice to 60 restaurant menus to further test The Cauliflower Effect.
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Ahead of Faire’s new office opening in Toronto, Kirsten shares why Forerunner chose to invest in the company early. “I immediately saw that this team recognized the opportunity to create a bundled offering to make the whole proposition more compelling for both parties… Their original vision is very much what they’re executing to today.” Read the rest in Canada’s The Globe and Mail.
Forerunner is proud to back Kinly, an inclusive financial services company aiming to meet the unique needs of the Black community and it allies. Eurie and KJ published a case study on why Forerunner was so motivated to lead Kinly’s $15M Series A; Axios has more on the team’s mission here.
Jet.com founder Marc Lore’s new food-delivery company Wonder announced a $350M Series B this week, valuing the company at $3.5B. The startup hopes to have a national footprint with its curbside, chef-created cuisines by 2035.
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