"DTC Doesn't Work Anymore." So What Is The Future of CPG Startups?

Scaling a brand has never been harder. Getting funding for a DTC (direct to consumer) company? Harder. Recently, a number of DTC brands have taken steps to diversify their distribution and increase the number of consumer touchpoints, but why, and what does the future of DTC look like?

Direct to consumer is when a brand or manufacturer sells its own products to its end users/customers, without the help of retailers or wholesalers. These brands are fully in control of the entire customer relationship through introduction, communication, and packing and shipping the product.

In the early days of the internet, Amazon proved that direct-to-consumer, non-diversified distribution could be done successfully. This meant lower costs, higher margin, greater profits. Entrepreneurs found themselves following the model, and until now, DTC was the easiest way to validate, scale, and sustain a business. Don’t get me wrong, it’s still a booming business. DTC sales are expected to reach $161.22 billion by 2024, with digitally native DTC business expected to grow to $51.9B by 2024.

DTC is powerful because consumers could be fully immersed in a brand’s feel, with personalized experiences and consistent branded touchpoints across site, CRM, social and anywhere else. Brands utilize their full marketing control, leveraging personal touches on shipments, collecting consumer data for insights, and the ability to build websites that are fully branded that cross-sell products endlessly.

However, when people have access to the same resources for starting, scaling, and sustaining a business, competition gets harder. Especially when all the branding starts to blend together - think Casper, Flamingo, Away, quip, Billie. (There’s only so many combinations of sans-serif fonts and colors!)

Given the competition, we’re seeing more of digitally-native brands like Glossier, Kylie Cosmetics, Skims, Allbirds and Casper all make moves to diversify their distribution, selling their products in retailers like Sephora, Ulta, Nordstrom, and Best Buy. Given economic changes, consumers want rewards points and discounts from retailers, prioritizing that value over the experience of shopping directly with the brand. CAC is high and profitability is more important when it comes to brand awareness (thinking of Solo Stove’s debacle earlier this year).

Some brands like On Running, are diversifying by expanding their number of stores as opposed to increasing their wholesale/retailer business. They’ve been strategic about their store locations placing them in cities with strong retail hubs and connecting with running and movement communities that embrace their store’s presence.

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So, given all of this, I have 2 questions and some thoughts. I’m still learning about venture capital and the environment surrounding it and so these questions are always open for discussion! Shoot me an email and let’s set up time to talk.

How will startups diversify from the start and get the capital to do so? If they’re not diversifying from the start, what’s the threshold?

I think we’ll a decrease in the number of CPG startups receiving funding at the seed stage, and see them really start to win in funding rounds by setting themselves apart based on their distribution and customer acquisition strategies. We’ll also see a lot of current brands be more creative about how they build and retain customer relationships through retailers. If not diversifying from the start and validating through D2C ecomm, I think new CPG companies will have to work to build collaborations for pop-ups and in-store collaborations to help build buzz and generate some data that lends support to need for a physical presence.

Will there be a move to stronger in-house marketing teams that can leverage a brand and creatively develop more effective touchpoints as brands have to release some branding control to diversify?

I think we’ve seen this from Solo Stove for sure, but brands will have to start building stronger in-house marketing teams that are much more familiar with the brand and can move quickly to leverage important moments for the growth of the brand. Agency work requires a longer timeline which is far from the agility required to scale a brand quickly now.

Let me know your thoughts and what you think the future of CPG startups are.