In the early 2010s, millennials seemingly couldn’t get enough of the direct-to-consumer 1.0 cohort of brands, which included Allbirds, Outdoor Voices, Glossier, Away and Casper, among others. They were popular as millennials came of age, and grew with an influx of venture capital funding and cheap, effective ads on Facebook and Instagram.
But a decade later, both Allbirds and Outdoor Voices are closing large swaths of their standalone stores—many of which were opened to diversify customer acquisition strategies after Apple’s anti-tracking measures in 2021 affected marketers’ abilities to target consumers on apps such as Facebook and Instagram.
Experts expect other DTC 1.0 members — or e-commerce and social media native brands that emerged in the early stages of DTC — to follow suit in closing some of their stores, and predict a marketing shift toward experiential. Future marketing from these brands could include more pop-up shops and ephemeral physical activations with more budget flexibility than physical retail, experts say.
How DTC brands got to this point
In early March, Allbirds announced plans to close 10 to 15 of its 60 physical retail stores, meaning it could shutter up to 25% of its locations. Athleisure brand Outdoor Voices closed all of its 16 retail stores in the middle of March. DTC mattress brand Purple expects to slow retail expansion. Allbirds, Outdoor Voices and Purple did not immediately respond to Ad Age’s requests for comments on this story.
Not every DTC 1.0 brand has their retail business on life support, though. Eyeglass company Warby Parker, for example, doesn’t seem to be closing stores any time soon — it added 40 new stores to its retail footprint last year and just last month, announced plans to open another 40 stores in 2024.
“Any company that is not doing well—their desire to stay in business should push them to close stores and stay in business by any means,” said James Famularo, president of retail leasing at a brokerage called Meridian, in a recent interview. “They’d be crazy not to. If they don’t close stores it’s a big expense on their books, [and] they’ll go out of business a lot quicker,” he continued. (It’s worth noting that DTC brands don’t exactly have a history of performing well in the public markets — Allbirds stock, for instance, has been below $1 per share for months now.)
Retail experts agree that more DTC brands will likely close stores in the coming months to maximize profitability, and some argue that the trend is specific to a certain type of DTC brand. Rebekah Kondrat, founder of Rekon Retail, an agency that builds stores and expands retail channels for DTC brands, noted that “there are a cohort of brands … Allbirds, Outdoor Voices, … the Aways of the world … that I’m going to call DTC 1.0,” that started to open more and more of their own physical retail stores as Meta ads and influencers became increasingly expensive.
Facing a decline in performance from traditional retailers such as Macy’s and Neiman Marcus, retail landlords were excited to try something new with DTC brands and gave these companies favorable lease terms to enter their spaces, according to Kondrat. But brands including Allbirds and Outdoor Voices hadn’t performed as well as landlords hoped, so landlords renewed leases with fewer discounts than the original terms.
“Retail was such an important part of these brands’ growth that they kind of wanted to continue to push forward and be really hopeful about their ability to meet profitability under new lease terms that are more expensive,” Kondrat said in an interview. But when those brands didn’t achieve profitability under those new terms, the only option was to “chop off a limb” to cut costs. The limb many of them have chosen is retail, said Kondrat, who previously worked at multiple DTC 1.0 brands, including Warby Parker and Outdoor Voices.
More expensive and rigid lease terms aren’t the only reasons that these stores weren’t able to scale long-term. DTC 1.0 brands including Outdoor Voices and Allbirds are still primarily popular with millennials rather than Gen Alpha, a younger generation that is fairly interested in retail shopping, Kondrat said. Millennials, she added, are more likely to shop online than go to an Outdoor Voices store to buy leggings and join one of their once-popular community events.
“The audience has aged and their priorities have shifted,” Kondrat added. In 2023, for example, over 27% of millennials planned to spend “significantly more” money shopping online and less in-store, according to a survey from global DTC commerce solution company ESW.
What’s ahead
As millennial-favorite DTC 1.0 brands continue to close stores, their marketing efforts will naturally evolve around their updated business models. And chief among concerns for these brands could be customer acquisition costs.
“The landscape to acquire customers digitally has just become much, much tougher for a variety of reasons,” said Michael Duda, managing partner at creative agency and investment firm Bullish, pointing to frustrating algorithm changes at Meta and Google, for instance.
As a result, marketers working with brands that have both digital and physical retail presences believe that DTC brands closing stores will likely revert to ephemeral experiential marketing to preserve that brick-and-mortar halo more economically.
“If there is interest in using brick and mortar as a marketing tool, it should really be done in a limited way, with all stakeholders aligned that the locations are meant to serve a clearly defined, likely experiential, purpose that is accretive to the brand,” Anna Harman, co-founder and CEO at piercing brand Studs, wrote in an email.
“There’s a real difference between building a small number of stores for marketing purposes and building a true fleet as a growth lever, and that difference can become stark especially if retail isn’t the core competency of the business,” Harman continued.
Studs, for instance, has “Studs on Wheels,” a mobile version of its Claire’s-like physical retail stores and piercing studios, that travels to places where the Studs consumer will be, such as Bravocon.
DTC 1.0 brands can no longer count on large amounts of VC funding and favorable lease terms. As a result, some will likely pivot to experiential activations instead, which allow more marketing budget flexibility.
Bedding brand Parachute, for instance, recently doubled its experiential marketing budget after the success of its Holiday Market experiential activation last year. Parachute Founder Ariel Kaye recently told Ad Age that, as Parachute views “long-term profitability of our business as a priority,” the brand is continually evaluating “the financial health of every business initiative, including each retail location.”
Parachute is evaluating each of its 26 stores “to ensure we are both prioritizing profitability across the business and amplifying the efforts we know our customers look for from Parachute,” she said.
“I think businesses need to be really ruthless about being okay walking away from retail to prioritize shorter-term and faster-impact experiential,” said Grace Clarke, founder of marketing and growth consultancy GGC Consulting. “Brands in DTC 1.0 are getting more comfortable walking away from that.”
Kondrat has noticed the experiential marketing trend among DTC brands that have said they’re going to close permanent retail locations. These companies plan to “keep some form of IRL activation” such as short-term pop-up shops, she said.
“Just because you don’t have four walls, doesn’t mean you can’t have some sort of physical presence that doesn’t have the same expense profile of a physical store,” Harman said.
This article originally appeared in Ad Age.
Phoebe Bain, Ad Age , 2024-04-01 16:33:03
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