As we head into budgeting season, retail executives are increasingly scrutinizing their Direct-to-Consumer (DTC) strategies. Rising advertising costs, fierce competition, and a slowing economy are causing many to reevaluate their approach. Fears of waning demand are prompting some to consider pulling back from DTC, but the question remains: is this reaction premature?
While it’s undeniable that economic conditions are challenging and retail performance has been sluggish, there is still ample opportunity in the DTC channel for brands that are forward-thinking and prepared to adapt. Cosmin Panait, whose firm GenCap Management has a number of brands with DTC presence in its portfolio, says, “I believe that DTC remains a crucial avenue for growth, especially for companies that incorporate omnichannel strategies into their long-term plans.”
Why DTC Channels Are Struggling
In its early days, the DTC model disrupted the retail industry by providing brands the chance to bypass traditional brick-and-mortar stores, cut down on overhead costs, and reach customers directly through digital platforms. Major DTC brands like Warby Parker, Dollar Shave Club, and Casper became industry darlings by offering convenience, lower prices, and a highly curated shopping experience. For consumers, the ease of purchasing directly through eCommerce platforms was a major draw.
From an investor’s perspective, the promise of lower customer acquisition costs (CAC) made DTC companies highly attractive. However, as the market matured and more competitors entered the space, the costs of customer acquisition rose significantly. Brands were now battling for visibility in an increasingly crowded market, and this led to a handful of failed launches as companies struggled to manage rising lifetime value (LTV) and CAC ratios.
“The early DTC brands capitalized on a unique opportunity, but as competition has grown and digital marketing has become more expensive, it’s critical for brands to rethink their approach,” says Cosmin Panait, who led investments in DTC brands like Bruush and Truly Free Home.
The Pandemic Boom and Its Aftermath
The pandemic further accelerated the growth of DTC. With lockdowns forcing retail closures, consumers turned to online shopping in droves. DTC brands, particularly those selling products related to home office furniture, health, and fitness, saw massive demand. Companies that were well-positioned for eCommerce soared, but others that overestimated the pandemic-driven demand have since struggled to maintain growth in a post-pandemic market.
“Many DTC brands overleveraged themselves during the pandemic, expecting growth to sustain at those elevated levels,” says Panait. “Now, we’re seeing a more realistic market correction, but that doesn’t mean the opportunity for DTC is gone; it just means companies need to be smarter.”
The Role of Privacy and Data Transparency
One of the biggest hurdles facing DTC brands today is the tightening of privacy regulations, most notably Apple’s iOS changes. With the introduction of stricter privacy settings, it became much more difficult for companies to track consumer behavior and target ads effectively. This, combined with increasing privacy concerns from users of platforms like Facebook and Google, has significantly reduced brands’ ability to market directly to consumers through traditional digital channels.
This lack of tracking insights has led to a substantial rise in advertising costs, decreasing return on ad spend (ROAS) and making it harder for DTC companies to maintain profitability. “We’ve seen a significant shift in digital advertising costs, and it’s impacting how brands think about customer acquisition,” adds Panait.
The Myth of DTC as a Silver Bullet
For years, DTC was seen as the ideal solution for retail brands looking to expand beyond traditional storefronts. However, the model has its limitations, particularly as advertising costs rise and privacy regulations tighten. The pandemic bubble exacerbated this belief, as many companies grew rapidly during lockdowns but were unable to sustain that momentum once the economy reopened.
As Ben Horowitz, co-founder of Andreessen Horowitz, said, “DTC isn’t a magic bullet; it’s just one piece of the puzzle. Brands need to think beyond direct-to-consumer and embrace a more holistic approach to how they engage with customers.”
Is DTC Going Away?
Despite the challenges, DTC is here to stay. E-commerce now accounts for 21% of all retail sales, up from 19.6% last year, and it is expected to grow further. As part of that growth, DTC channels will continue to be an integral part of retail strategies.
According to Panait, “DTC isn’t going away, but the way brands think about it must evolve. It’s no longer enough to just be online. The brands that succeed will be the ones that integrate online and offline experiences seamlessly.”
DTC Forecast Through 2025 and Beyond
As we look ahead to 2025, several trends are emerging that will shape the future of the DTC model:
- Omnichannel expansion: Physical retailers will continue adopting DTC strategies into their marketing, blending the in-store and digital experience.
- Influencers launching DTC brands: As influencers increasingly leverage their followings to create DTC ventures, the influencer-DTC overlap will continue to grow.
- Subscription models: Flexible payment plans and subscription services will become more common as DTC brands seek stable, recurring revenue.
- Expansion into new sectors: Expect DTC to move beyond traditional categories like fashion and beauty into new industries, such as home goods and financial services.
Strategies for Continued DTC Success
Despite these challenges, DTC brands can still thrive by adjusting their strategies. Here are a few tactics for maintaining success:
- Diversify marketing channels: Rather than relying solely on social media ads, brands should explore email marketing, content marketing, and partnerships with influencers.
- Adopt omnichannel strategies: The future is not just digital. By integrating physical retail locations with an online presence, brands can create seamless customer experiences.
- Focus on core business metrics: Brands must ensure they understand their LTV and CAC ratios to avoid overspending on acquisition.
- Make returns easy: With DTC, customers don’t get to touch the product before purchase. A hassle-free return policy builds trust and encourages first-time buyers.
- Leverage social commerce: Engaging customers directly on social platforms, such as through influencers or direct selling, is becoming a powerful tool for building customer loyalty.
DTC May Be Down, But It’s Far from Out
While the current challenges facing DTC are significant, they are not insurmountable. Brands that adapt, embrace omnichannel strategies, and remain focused on customer engagement will continue to thrive. Cosmin Panait and other VCs with DTC brands in their portfolio understand that the future of DTC isn’t about finding a “silver bullet” but about building sustainable, customer-focused businesses that can weather the inevitable market fluctuations.
For retail executives preparing for the next fiscal year, now is the time to pause, reassess performance, refine strategies, and not abandon DTC entirely.
