“A Reckoning.” The Direct To Consumer Craze Is Slamming Into Reality.
An industry built on cheap Facebook ad space and low cost shipping is crashing with no bottom in sight.
Big Technology is a weekly newsletter dedicated to covering the tech world with honest, nuanced reporting. Join the 12,000+ subscribers who tune into Big Technology for tech news without the spin. Here’s an easy way to subscribe:
They were the hottest names in tech. Brands like Warby Parker, Stitch Fix, FIGS, and Allbirds pioneered a new form of retail, one that went “direct to consumer” — via the internet — instead of selling through established outlets. Riding the promise of low overhead, no middlemen, and a seemingly infinite pool of customers, these companies’ valuations soared well into the billions. They appeared unstoppable. But today, they’re crashing hard with no bottom in sight.
A gloomy confluence of rising Facebook ad prices, worsening ad measurement, soaring shipping costs, newly-sober public markets, and smaller-than-anticipated customer bases are dealing “DTC” companies a harsh blow. A Big Technology analysis of public DTC companies with market caps of more than $800 million found nearly every one of these companies are dealing with revenue contraction, shrinking margins, runaway losses, or a combination of all three. Together, they’ve lost billions in market cap in 2022, drastically underperforming the market in an already bad year.
“There's certainly a reckoning happening,” said Orchid Bertelsen, COO of Common Thread Collective, an ecommerce agency that works with DTC companies. “The environment is much more unforgiving.”
Skyrocketing Facebook ad prices have done the most damage to the DTC industry so far. These companies have long relied on affordable Facebook advertising for growth, a precarious bet that’s now coming due. Operating largely without physical storefronts, they’ve used Facebook to reach customers who may otherwise have walked into a real-world shop. Nearly all DTC companies have low name recognition — Warby Parker went public with just 13% brand awareness — so reaching thousands of people for a few dollars on Facebook helped them compensate. But the plan’s stopped working.
Facebook ad prices have skyrocketed in recent years due to rising demand — and in some cases, contracting supply — leaving DTC companies in a bind. “In two years, it's basically doubled to tripled,’ said David Herrman, a social media ad buyer, of the cost to advertise on Facebook. In the U.S. the cost to reach 1,000 people on Facebook jumped from $6 to as much as $18 within the past two years, Herrman said.
As prices rise, Apple’s iOS privacy changes have added yet another obstacle, harming DTC companies’ ability to measure whether their social media ads are working. “The iOS 14 privacy changes affected everything,” Herrman said. “The internal metrics and mechanisms that Meta uses for attribution are off somewhere around 30, 40, or 50%.” Unable to optimize effectively, DTC companies are now spending more for worse results, eating into their margins.
Then there’s the supply chain. As the pandemic settled in, the cost to import containers from China exploded, in some cases by a factor of 10. This added yet another cost to the DTC balance sheet. And given how reliant they are on imports, the cost’s been difficult to make up for in pricing or volume.
“The supply chain is destroying a lot of these DTC brands,” said Eric Bandholz, founder of Beardbrand, a DTC company. “They're so heavily dependent on China for their products, and shipping costs of bulk containers have gone up astronomically.” The price to ship one container from China to the U.S. jumped from $2,000 pre-pandemic to $15,000, Big Technology reported last May. Multiple DTC sources said the price is even higher today. Beardbrand is working to move its entire operation to North America, Bandholz said.
In this environment, Allbirds, Hims and Hers, Peloton, Revolve, StitchFix, Warby Parker, and Wayfair have all posted either significant losses, margin contraction, or both, in earnings reports over the past year. Wayfair, for instance, lost $78 million in the third quarter of 2021 after posting $173 million in net income the year before. Warby Parker, partially due to stock compensation, lost $91 million the same quarter. Revolve’s gross margin dropped from 56.0% in Q4 2020 to 54.8% in Q4 2021. Hims & Hers’ gross margin dropped from 77% in Q4 2020 to 73% in Q4 2021. The list goes on.
The timing couldn’t be worse with rising interest rates on the horizon, as investors are much less interested in companies that struggle to turn profits, even if there’s future growth on the horizon. Some investors are also asking whether these companies merited their valuations given that the addressable market for their products — faux-fancy glasses from Warby Parker or expensive medical scrubs from FIGS — may not be limitless.
DTC stocks are therefore taking a beating, and it’s unclear where it will end. Allbirds has dropped 63% in 2022. Stitch Fix and Warby Parker are down more than 40%. All other companies in the category are down at least 19% this year. The S&P 500, by contrast, is down 11% in a terrible year.
It is still too early to write off the DTC industry. Some companies will diversify from Facebook to other platforms like TikTok and figure out how to return to low-cost social media advertising. Others, like Chewy, will find a sweet spot where the costs are worth it due to their customers’ high lifetime value. (“That's a 14-year commitment,” said Arjun Kapur, a VC at Forecast Labs. “The average lifespan of a puppy.”) And VC money is still coming into the space, with a total of $1.05 billion invested so far in 2022, per Pitchbook. Still, for an industry with so much promise, the reality bites. And it doesn’t look like it’ll get better anytime soon.
Together with LEX
LEX has created a new way to invest in real estate. LEX turns individual buildings into public stocks via IPO. Now you can invest, trade, and manage your own portfolio of high-quality commercial real estate.
Any US investor can open a LEX account, browse assets, and buy shares of individual buildings. LEX opens up direct and tax advantaged ownership in an asset class that has previously been inaccessible to most investors.
Explore LEX’s live assets in New York City and upcoming IPO in Seattle. Sign up for free and get a $50 bonus when you deposit at least $500.
What Else I’m Reading
A former Uber exec goes to Ukraine. TikTok struggles with war content. Sheryl Sandberg says social media is bad for dictators. China’s state media buys pro-Russia ads on Facebook. Brad Stone on Bezos. The cashless economy hits tipped workers hard. An ex-Goldman Sachs banker sent fake emails for years posing as his ex-wife. Columbia math professor proves its U.S. News ranking is bullcrap.
Number Of The Week
Blue Apron stock over the past five years.
Quote Of The Week
“Trump is not Hitler and Putin is not Hitler. Modern Russia can barely manage to lord over the old Soviet countries in its midst.”
— Journalist Ross Barkan on the war.
Advertise with Big Technology?
Advertising with Big Technology gets your product, service, or cause in front of the tech world’s top decision-makers. To reach this group of 12,000+ plugged-in tech insiders, please reply to this email.
This Week On Big Technology Podcast: Russia and The Information War — With Miriam Elder
Miriam Elder is the executive editor at Vanity Fair Hive and former Moscow correspondent at The Guardian. She joins Big Technology Podcast to discuss Russia's information war, which the Kremlin is running alongside its physical war in Ukraine. Russia's supposedly formidable social media power seems to be falling flat, and Miriam explains why — and what's to come. Stick around for the second half where we discuss the impact of sanctions and why Bitcoin is failing to capitalize on this moment.
Thanks again for reading. Please share Big Technology if you like it! Also, click the heart on this thing if you feel smarter now that you’ve read it till the end (thank you!).
Questions? Email me by responding to this email, or by writing firstname.lastname@example.org
News tips? Find me on Signal at 516-695-8680
See you next Thursday!