Direct-to-consumer (DTC) came of age in 2020. The COVID-19 pandemic accelerated ecommerce growth – far more quickly than anyone expected – and DTC brands already trading successfully online capitalised on the surge in online spending. Yet despite this being the biggest trend in retail today, it is proving difficult for investors to make money from this secular shift.

The share price performances of the eleven Direct-to-Consumer stocks that have listed on AIM or the main market to end September have been disappointing (with only CMO Group trading materially ahead). And it has not been much better for the DTC companies that listed prior to this year with the share prices of THG, boohoo, ASOS and AO World all enduring a torrid time this autumn.

No doubt the onset of Black Friday and Cyber Monday will provide their yearly booster to the retail industry, and it will be interesting to see how DTC sales compare to last year. But with these milestone events for ecommerce top of mind, it is an opportune moment to explore the biggest challenges and opportunities facing DTC.

The coming of age moment

E-commerce boomed during the pandemic

The COVID pandemic and the prolonged closure of ‘non-essential’ retail drove a dramatic surge in online spending by consumers; this shift had been accelerating over the past decade. The internet has democratised the tools needed to start and scale a business and allowed a stream of new companies to challenge the consumer giants. The unique advantage of DTC brands arises from their ability to have one-to-one direct relationships with their customers rather than relying on a legacy retailer, while capturing valuable data that would be impossible to extract through traditional retail channels. Typically, DTC companies are founded by entrepreneurs eager to turn a burning idea into reality. A credible idea can quickly develop an evangelical following where the early customers effectively become a large ‘focus group’, which allows the entrepreneur to fast track their idea to commercial viability. DTC brands control a consumer’s complete path from awareness to purchase and then, the Holy Grail, regular repeat purchases. Without a middleman, a consumer’s journey down the sales funnel is quicker and the data collected is valuable for retention strategies.

COVID fast-tracked growth

The COVID pandemic fast-tracked perhaps as much as a decade of growth in 18 months and pushed DTC companies into the mainstream of consumer consciousness. M&S estimated that the crisis squeezed eight years of online growth into eight months, and supermarkets said they enjoyed 12 years of online grocery sales in the first three months of the crisis alone. John Lewis expects online sales to remain at 60% to 70% of its business from now on. In January 2021, e-commerce sales accounted for 36.3% of total UK retail sales, the highest on record, just ahead of 36.2% in November 2020 and 32.8% in May 2020. In 2019 only 19% of retail spending was online. While it took seven years to get to 19% from 9% in 2012, it took only four months to get to 33% from 19%. However, the massive increase in the online share also coincided with a record decline in retail spending.

The next rite of passage

Trends are now ‘normalising’; DTC still enjoys a greater share of consumer expenditure and a much larger and more receptive customer base to target. Selling direct enables brands to take real ownership of the customer relationship and leverage user and behavioural data to enhance the retail experience and provide a more personalised consumer journey.

DTC companies all follow similar trajectories from inception but, quickly, they must decide whether they are a brand or a retailer. This is a key milestone in the rite of passage for DTC companies. If the company is the brand owner then, ultimately, it will become channel agnostic, wanting merely to be close to customers when they are near to making purchase decisions. If a company is a retailer then, ultimately, it will want customers to come to its website first and the products become secondary. Their end-destination is to become a marketplace of choice for a defined target audience. When DTC companies have made their choice at this crossroad, then innovation and new product development, omni-channel commerce, and personalisation all fit into the right sequence.

Regardless of route, central to all DTC investment propositions is their ability to attract and retain new customers. DTC companies need to stay close to their customers and potential customers when they are thinking of making a purchase decision and they need to anticipate changing consumer tastes.