Do DTC's have a path to scale profitably?

by Shlomo Chopp and Ryan Wolfe

In light of the recent news of DTC brands having issues squeezing profitability out of tried and true growth strategies, isn't it high time that we re-framed the customer acquisition journey?

Looking at their methods, one may argue that the tactic has been to convert clicks into carts into transactions, when in fact they have been really trying to convert the shopper. Sure, the answer was content marketing and now it's easy to toss stores out as a solution – just as some will claim that the answer is community. However the how and what are often left to flail in the wind.

A key question relates to the nature of these stores. Some have suggested that it is a media play - with that thinking why not just buy a Superbowl ad? Where do you stop? It's imperative to not think as stores as an abstract billboard but to see it in quantifiable terms just as a digital marketer can interpret online metrics.

We know stores are about sales and visibility. But how do we distill it down to data points that are apples to apples in a cross-channel fashion?

• Foot traffic is impressions. Impressions that do not individually cost you anything.
• Retail visits are the immersive or AR experiences that tomorrows technology can hopefully provide.
• Sales are two thirds of the time the first step in a customer’s loyalty to your brand.
• Best of all – as rent is a fixed cost, the moment the store itself is profitable, your CAC is $0!

Stores are the purest possible manifestation of localized fulfillment. The product actually sits in very close proximity to the shopper and the shopper picks the product. Yet, how do you translate that proximity to e-commerce? By using the store as a fulfillment center for online orders as well, or if that store is part of a localized network that includes a last mile fulfillment center, brands are able to bring even the ecommerce product closer to the shopper cutting costs further.

The problem with store, well they are very costly to get off the ground. If a brand wanted to open eight stores in the top markets it would probably cost them between $3-$5MM. This relates to the buildout of the space as well as support infrastructure. Furthermore, prime space is usually too large for an emerging brand's limited product line. Another challenge with a brand opening its own store is attracting shoppers, which means they locate near other exciting brands in the most expensive of retail real estate locations.

So, brands end up investing significant capital into a store that is too large, in a location that is too expensive, and they are often unable to efficiently keep the shelves stocked with product for sale.

Suppose retail store location was more of a complementary cross channel endeavor with strong data. Sure, the locations would remain top-notch but store sizes would reflect the brands product mix. Perhaps 100 sq. ft. instead of 2,000? What if that store actually had product on the shelf to purchase and take home - which would make the store individually profitable and therefore not only a $0 CAC, but with savings of CAC that would alternatively be $600,000 or more?

Then if you layer in a way to reduce legacy ecommerce costs, say by cutting logistics expenditures while speeding up transportation time - we believe a $5 million DTC brand can potentially profitably scale by 40% or more with no real up-front cost.

If 40% growth at no up front cost and a nimble and scalable logistics infrastructure does not seem compelling enough- consider this:

1. We haven't made any assumptions around LTV growth - we just use the standard 3.0x ratio.
2. We haven't discussed the competitive edge a store provides from a service perspective.
3. We haven't addressed the ability to capture market share as other DTC brands and retailers lose market share.
4. We haven't touched on the additional growth and penetration that will arise from opening 8 stores (as opposed to the 1 in this model) in each market to provide greater penetration.
5. We have not addressed the competitive advantage arising from the rapid rollout with superior and agile infrastructure.

We have only used a set of limited data points that are less open to interpretation - feel free to view and edit them here and draw your own conclusions.

Please feel free to take a look at the underlying data assumptions, as well as to visit our other thought leadership pieces, The Future of DTC Brands. Seven Contemporary Business Case Scenarios. and 12 Rules for Retail as a Service Success.