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- [00:05]
A
What happened to the direct to consumer trend that was supposed to upend retail? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Travis Hoyam, joined today by Lou Whiteman and Rachel Warren. Today we want to dig into what happened to this direct to consumer retail trend. This was supposed to be the big thing. Thinking about companies like Allbirds, Casper Mattresses, Warby Parker, Peloton. Do you remember when Peloton was hot guys? Barely a little bit, five to 10 years ago. I mean, this was the hottest thing in venture capital. A lot of these companies went public and they did not work out well for investors. Some of that was the timing of coming public during 2020 or 2021, during the pandemic, when valuations were really high. But at the end of the day, their business models did not turn out to be as profitable as and as high growth as a lot of people thought they were going to be. So what is the story here, Rachel, with direct to consumers? Where did this business fail? And we'll get to, you know, what kind of survived in just a second. But I want to focus on the failures first because I think oftentimes that's the best place to learn for investors.
- [01:17]
B
Yeah, there were a few key issues here, and I think it's very notable that that initial direct to consumer playbook really relied on cheap and effective advertising, you know, on platforms like Facebook, meta platforms, Alphabets, Google. But quickly changed. Then there was this dynamic where more and more brands were adopting the direct to consumer model. They were then all competing for that same very finite digital ad space. And, you know, ad costs went up for everyone. You had updates like Apple's that restricted third party data tracking. That also actually made it much more difficult for brands to just practically target specific consumers and measure the effectiveness of their ads. And importantly, that direct to consumer model, it promised higher margins. But many brands really underestimated the logistical burden that they would take on trying to replace all of these different elements the traditional retailers typically embodied. And then of course, there was the pandemic, which I think really revealed a lot of the fragility of those supply chains. A lot of these brands were propped up by venture capital funding, as you noted. And that was a strategy that prioritized aggressive growth over profitability. And that became really untenable as the market changed. I mean, there's obviously some businesses that have been successful here, but that's a lot of the story behind it. And it's really changed over the years to now as we look at this model.
- [02:35]
A
Yeah, Lou, this almost seems like a case where the theory was, we'll take out this middleman. The wholesalers, the retailers will just go directly to the consumer. And what you ended up doing was sticking a different middleman, which was companies like Facebook and Google in. And they were much better at extracting the profits from this industry than the original middleman. You know, who they're still around. We'll get to where their role is in the future. But that almost seems like the death knell to a lot of these businesses.
- [03:02]
C
Yeah, I think that's fair. And I think we should take a step back, because the first thing we should say here is retail is really hard. It is hard for new brands to break through, period. And I don't think we should be surprised that most brands that attempt to break through, it doesn't go as planned. It's easier now just because of the Internet, because, you know, I mean, back in the day, Apple needed to do a Super bowl commercial or Nike had to, you know, really show itself with dramatic advertising. There are better ways to break through now, but at the end of the day, the failure rate's always going to be high. Rachel mentioned venture capital. I think it's worth noting that a lot of this came in an era of zero rates, where it didn't really matter if you were profitable, that the money was cheap enough that you could throw money at scale and not worry about profitability. I think a lot of what happened is as rates went up, as just the funding situation changed, profits became more important. And profits in retail is hard.
- [03:58]
A
Yeah, this seems like one of those businesses where there was not a winner take all market like Uber. The criticism of Uber was they were burning money forever, you know, powered by venture capital. But when they won, they could turn up that profitability crank. And there wasn't a crank like that with Allbirds.
- [04:12]
C
Yeah, I mean, look, fashion is different, right? And retail is different. I don't feel like a lemming if I'm taking Uber because of the network effects. Nobody wants to wear the same shoes or same pants or the same product as everybody else. So, yeah, you're never going to get a winner take all. And not to be that guy Travis, but the other big thing and Rachel kind of hit it is. But look, logistics is really hard, and in particular, retail logistics is really hard because you have to deal with returns and all of that. A lot of this is, is that, look, you know, a small retailers are not supposed to be national. They're not supposed to, because you need scale. You need all of these things to, to be direct to consumer, you can't just build that overnight. And for most of these companies you can't build it on their own. You can lean into Amazon if you want, but then you're giving up all your data. So it's just, it's a really hard model with really a fickle consumer base. And yeah, it's just, I hate to say it but yeah, I think it's more a surprise when these succeed over time than it is when they fail.
- [05:13]
A
Would you say that this is part of the tension between something like venture capital funding and a business that isn't necessarily built to be a hundred billion dollar trillion dollar business? You know, I'm picking on allbirds here, but they're kind of the most stark example. If they would have just said hey, we're going to have this really great niche business and I think those still exist in the DTC space that may have been a really great place to be. But their venture capital investors are going hey wait a second, we gave you a billion dollar valuation. We're expecting you to be a $10 billion company or a $50 billion company, not just a billion dollar company. That's not what we do.
- [05:49]
C
Venture capital. And into the markets too, right? Because I mean Wall street does not pay for steady, stable, no growth. You need to generate growth either via margins as worry if you, if you, if you could be a low growth company with strong margins who can return that cash to shareholders or you can be a growth company. But one way or the other, venture and public markets, you just don't get the benefit if you are treading water. And a lot of these, at best we're going to tread water.
- [06:17]
A
It isn't as if direct to consumer is going away. These are, they're still very powerful businesses. I still buy a lot of my clothes online, Bomba socks, public rec pants for example. But it seems like Rachel, the opportunity for investors may have actually been in more picks and shovels plays. So Amazon, which plays a huge role depending on what a retailer wants but you have Shopify which was arming the rebels. These would be kind of the rebels. Meta and Google are going to be the advertising platforms. There are logistics companies that you know, Lou is kind of alluding to, is that going to trend going to continue? And maybe you know these brands are going to take a little bit different strategy but as investors we're just going to ride this wave of these markets are growing and those big companies are going to be the beneficiary. Is that kind of the right way to think about it?
- [07:04]
B
I think so. And you know, I think if you're an investor like myself and I wanting to capitalize on, you know, DTC brands, I do think you're doing it through these major platform companies like you were talking about, you know, the Amazons and Shopify or even, you know, the sort of advertising side of it through, through Meta or, or Google. I mean, there is still very much the reality that these DTC brands, they face intense competition, you'll rise in customer acquisition costs, and so they really do need to rely on the infrastructure that's provided by these larger players. And I do think that's where we as investors can kind of tap into the changing tide of the DTC space and the places that brands and third party sellers go to. I mean, you think about it, right? Consumers prioritize, for example, the convenience and speed of Amazon. And for many consumers, that's simply where they prefer to shop. You know, you were talking about some of these, you know, smaller direct to consumer brands that are successful, they're not publicly traded. A lot of them are built on the infrastructure of platforms like Shopify's. Right. And Shopify's Value has really evolved from simply providing a single storefront to being this very sophisticated platform that manages a brand's entire ecosystem. So I think what we're seeing right now in the direct to consumer space, the most successful brands are adapting their strategy rather than abandoning it. And a lot of these brands are also integrating online and offline channels to really meet customers where they are. And I think that's something that's really important to note as well.
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A
We're going to talk about those Omni channels as they're known in just a second. You're listening to Motley Fool Money.
- [08:34]
D
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- [09:36]
A
Welcome back to Motley Fool Money. Before the break, Rachel alluded to kind of the next topic that we're going to talk about here, which is brands that have multiple channels. If you want to buy a pair of on shoes, for example, you can buy them online, you can buy them at Dick's, you can buy that at a bunch of different retailers. So Rachel, I think the question here is what have the companies that have succeeded I mentioned on. But there's hoka, there's worry, there's a whole bunch of other brands that have not gone through this kind of failure mode that some of the companies that, that went public or you know, were then bought out again. I think Casper was an example of that. What have they done differently to leverage wholesale? And the other name that we should bring in here is the company that tried to go the opposite direction, which is Nike. They were the dominant company in wholesale for what, 30 years. And then they said during the pandemic, hey, you know what, let's do this DTC thing. And then they've kind of come backwards. So what has been the strategy that has worked for these companies? Because it seems like some mix of D2C, some mix of wholesale has been the magic there. But it's not always easy to find the right spot.
- [10:45]
B
I think that's right. And I think what we've seen the last few years is Omnichannel is the more sustainable path. That's what consumers seem to want. You know, we had this conversation, right, a few years ago where there was this idea that maybe consumers are going to entirely, you know, stop shopping in person, for example, and are going to only shop online. That's not the reality. No. Whether it's shopping online in store through third party DTC brands and otherwise have really had to contend with this. And I think it's worth noting, I mean these business is especially the direct to consumer side. They aren't dead. You know, you look at Warby Parker, for example, Glossier, which is a private company. Both of these have expanded beyond a purely online model. Right. So Warby Parker, they've expanded their physical store presence. They have their in store sales that now comprise a really significant portion of their revenue. Glossier, which is, you know, private. But they've, they've partnered with major retailers like Sephora to broaden Their reach. And then Lululemon is, I think, a really great example of a company that has been very effective at, you know, the DTC strategy, but also just more broadly, that omnich channel approach. You know, they built their community brand through their stores, you know, offering classes and events. And that was before the e commerce business grew significantly. And I think you're right. Nike is an excellent example of an idea where DTC alone doesn't work. And I think it also proves that just having that infrastructure in place for a really solid business also isn't enough to make that DTC strategy work. You know, they wrongly assumed that customers would switch from some of their preferred retail partners to Nike's own websites or stores, and that turned out not to be an effective approach. So I think it shows there's a lot of holes in that model. Whether you are a startup or a really established brand like Nike.
- [12:21]
A
Do you think that the way that some of these companies are thinking about their own retail strategy. I remember writing about this probably a decade ago. I'm not far from the Mall of America. And you go through the Mall of America and it's just a showroom. That is the way that I sort of look at you don't even need to buy anything there. And I don't think brands like Puma are really selling a whole lot there. It's more, hey, let's get this brand out there. Let's get somebody to figure out what size shoe am I, what, you know, size shirt, do I like the way that this product feels, and then maybe I'll go buy it online. Is that part of that retail strategy too? Because then they also end up in other retailers.
- [12:58]
B
Yeah, I think that's a huge part of it. And I think again, it goes back to that omnichannel approach. And look, not every retailer is going to win. I mean, we have seen some of the most established of companies struggle in a changing retail environment the last few years. And there's a lot of reasons for that. But I think what we have seen is that DTC model hasn't proven to be effective over the long run. It just doesn't resonate with consumers in the same way. And I think that's the key takeaway here.
- [13:21]
A
Lou, I'll give you the last word here. What are you looking for in some of these retail companies? Whether it's a brand or whether it's a retailer themselves, that can be a sustainable differentiator.
- [13:31]
C
So as an investor, yeah, you got to get distribution.
- [13:34]
A
Right.
- [13:34]
C
But the model, I think matters. Is the economic one, not the distribution one. I think if you get the economics right, distribution, you could do what you want.
- [13:42]
A
And what do you mean by that? Are you looking for high margins?
- [13:44]
C
So I'll tell you exactly what I'm looking right now. The trend is it's a barbell consumer. We will pay through the nose for certain items, but we want rock bottom for everything else. And the things we pay for tend to be fleeting, it tends to be trendy, it tends to be what's real. So if you want a sustainable business, you hope to get that high end, but you better be able to survive. You better have a business that works on the low end, because inevitably, I think Lululemon's a great example of this and maybe they can get it back. But for now, lul and what they're fighting through is, is that their business is getting commoditized and they either need to figure out how to get people to want to pay more for their version of this product again, or how do we make money in a market where we have to bring prices down to compete? The best businesses are the ones that, yes, they can exploit when their products are premium, but they can survive when they're not. Again, if you figure that out, distribution is part of that. But distribution, I think distribution, you can have almost any distribution model if the economics are right and you have a business that it can at least survive when you're simply just out of favor.
- [14:54]
A
How these companies survive may change in the future. We're going to bring artificial intelligence and AI agents shopping for us into the conversation in a moment. You're listening to Motley Fool Money.
- [15:04]
B
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C
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B
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- [16:05]
A
Welcome back to MLE. Fool Money. We have to bring artificial intelligence into this. Last week Alphabet announced, or Google, I guess, announced that they are going to be working with PayPal to bring AI shopping agents to the market. Part of that is to be done within the Chrome browser. So in theory you could be you could just go to Gemini and say, hey, I really like this pair of pants. Tell me when it's it's $50. You know, maybe they're $75 right now. Tell me when that price comes down a little bit. That was actually the example that they gave made me think that these retailers or these brand companies are going to be under even more pressure from big tech. But Lou, how does AI shopping agents change this market, if it does at all?
- [16:46]
C
I think you're right that retailers should be worried. I. I'm just going to reject the idea that AI does my shopping for me.
- [16:54]
A
Maybe it should, Lou.
- [16:55]
C
It probably should in my case, definitely. But look, I mean the target for stitch fix, okay, because I my fashion sense is terrible and yet I haven't because I do like to buy my own clothes and I think looking at the problems they've had, I mean part of taste and part of style is wanting to express yourself. I doubt that we surrender that to AI. The part I can see doing is yeah, a race to the bottom for prices because you let me know when this is cheaper and I will buy it then. As a retailer you have to either give into that and accept lower margins or hold your ground. And hopefully your competitors don't. I think this makes the retail environment even tougher for the companies involved. I really don't see a Jetsons like world where AI is just picking out clothes and I'm just pleasantly surprised when it shows up anytime soon, at least for me.
- [17:48]
A
The other thing, Rachel, that I thought was interesting in some of these discussions is that one of the companies fighting AI agent shopping is Amazon. And that's because it doesn't behoove their business. They don't get that sweet Advertising revenue that they get from, you know, retailers paying to be at the top of your search results when you, when you search for something. So it seems like there's a lot of tension here, but what are your thoughts on AI kind of coming into this?
- [18:12]
B
Yeah, I think it's interesting and I, I do think there is a real tension there that we're seeing obviously from the big brands you mentioned like Amazon, but also, you know, smaller retailers, mom and pop brands that are sort of working to survive on these platforms. I think that the reality of AI agents as it pertains to retail, I don't think it's going to be so extreme as you know, there's an AI that's doing my shopping for me. So I agree with Lou on that. I think that we are a long way off from that and I don't even know exactly what the on ramps to customer adoption are there. But I do think that it is notable that you do have everyone from, you know, the Shopify of the World to Warby Parker for example, they are using AI agents and agentic AI to personalize the customer experience. Right. So you've got Warby Parker, they have an AI shopping assistant they launched called Advisor that uses AI to replicate, you know, an in store experience at home. And then there's very practical use cases for companies. Right. You know, you could have autonomous agents that could predict demand spikes and automate replenishment of orders, optimize logistics for businesses.
- [19:09]
A
So and inventory is really the huge challenge in retail.
- [19:12]
B
Huge.
- [19:12]
A
So maybe that does make this a little bit better.
- [19:15]
B
Yeah, I think actually the real value here is on the back end for these businesses, for the Amazons of the world and others. But that super kind of futuristic version of this, I still think that's a really long way off if that that happens at all.
- [19:28]
A
I want to get your thoughts on this quickly. Does this bring in new business models? You know and I'm thinking of Nike used to do those drops. Right. I always remember the, the Jordan drops. They would, something would come for sale at 6:00am and it'd be sold by, sold out by 6:05. Does that become more common if there is something like AI agents and then does the world of shopping just become kind of like ebay where the person who's willing to pay the most for the limited drop is going to be the winner? What do you think, Lou?
- [19:57]
C
I think that's the exception, not the rule. I think maybe it works. But again, I don't think most products, most brands are going to be able to do that for my dish soap. I don't think I'll get in on the limited edition, you know. No, no. You know, you know what I mean, though, for most things, I don't think it works. But yes, it could be a possibility for in demand items.
- [20:14]
A
Rachel, are new business models in the works?
- [20:16]
B
I'm sure there's someone thinking about it. You know, there's this idea where, for example, brands could set up this AI agent store for a new exclusive drop and you could have a customer's personal AI agen agent interact with the brand's AI agent to negotiate the best price. I, I think that that's where we go the way of the metaverse when we're estimating what AI agents are going to be doing in a way that resonates with consumers. But I do think there's a lot of value to the tech and I think companies like Amazon are seeing that.
- [20:40]
A
As somebody who doesn't like to do his own shopping and don't have a lot of fashion sense, I'll take the bullish side here. For AI shopping agents, I would be happy to have an AI that has a little bit better fashion sense pick out my clothes for me and I'll just happily pay for them and let them come to my door. But we'll see how this plays out. Definitely a topic. We will be covering more here. Speaking of topics, tomorrow, they are talking about the home building industry. They're going to do do a deep dive there, so be sure to tune in tomorrow. As always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows the Motley Fool's editorial standards and is not approved by advertising advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes for Lou Whiteman, Rachel Warren, Bart Shannon, behind the Glass, and the entire Motley fool team. I'm Travis Hoyam. Thanks for listening to Motley Fool Money. We'll see you here tomorrow.