DTC Is Rarely A Good Scale Platform in CPG

The big financial problem for DTC is that this channel is very slow to reach lower cost-to-service rates per unit, due to your initial reliance on dropshippers, much slower than your freight costs decline with Kehe or McLane. As a small company, shipping five boxes at a time per zip code via FedEx is very expensive compared to entering that zip code via a chain retailer, at least on a freight-to-shipping comparison basis. Grabbing spare space on a Kehe truck for a pallet of your stuff is not as expensive per unit as dropshipping. This is partly why the retailer marks up your product 80-100% from the distributor’s price. They need to finance their distribution network.

This high initial cost-to-service immediately raises the stakes of DTC channel for all but the lightest weight (and flat) products early on. Raising money to cover the initial loss is risky because it assumes you have lots of cheaper-to-serve ‘retail households’ leftover down the line after you gather up the easy, proactive adopters online. You may. You may not. Liquid Death had those households because it was just selling water in a can. The market of households was ginormous. But not all products that get initial traction via DTC have a lot of households who will ever try…like ever, ever.

Early in the life of consumer brand, DTC can make sense as a break-even or barely profitable service to heavy users of your brand in a defined region close to your point of manufacturing (i.e. usually your home region). It becomes your private Club channel of sorts years before you can get into Club or finance the inventory necessary to enter Club. It is also a great way to jumpstart an e-mail list full of fans from whom you can learn and spread the word.

DTC has been in the headlines from 2010-2022 for scaling consumer brands wildly fast. Warby Parker. Harry’s shaving. Doctor Squatch Soap company. It seemed for years that this was some ‘easy’ channel to scale, easier than brick retail with its huge delays just getting a buyer meeting, the infrequency of shelf set resets, the fees and the overall length of the line of brands. The allure of direct response social media ads appealed to venture capitalists because the effectiveness of marketing seemed easier to measure in real time, making the variable cost more palatable than $10M TV ad campaigns.

Thousands of DTC companies scaled in 2020 into the seven figures because of Covid-19 subsidies and decreased consumer spending overall. And, now we know that this was a massive false positive for the sector. The cost of social media click-through had already been rising well before Apple’s privacy rules reduced the effective reachable audience on all platforms. It was bound to happen as ad platforms mature and they become more expensive in absolute terms. It became more and more expensive to acquire customers unless you had unicorn ads like those of Doctor Squatch Soap. For the other 99% of brands, acquiring customers is expensive and yields profit months later, if they repeat purchase. IF.

Interested in hearing more specifics? Click here to listen to Podcast #108, DTC is for Scaling in Really Tiny, Frequently Ordering Niches You Would Never Find in Retail.

Dr. James Richardson

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