Blog

Direct-To-Consumer (DTC) companies may have been a major factor in Mattress Firm’s recent bankruptcy.

Mattress Firm was in bankruptcy for 37 days in the fall of 2018. The company cited its “unprecedented growth” as a problem.  Mattress Firm grew from 700 to 3,500 locations in 5 years yet almost 43% of those stores were located within 1 mile of another Mattress Firm location.

But a growing number of consumers don’t want to visit a store to buy mattresses. They want a convenient, online shopping experience. And DTC mattress retailers like Casper are meeting that demand.

CNN Business writer Nathaniel Meyersohn wrote that Mattress Firm “failed to recognize that its marketplace was moving online until it was too late. It misjudged what shoppers demanded—convenience and low prices—and ignored the threat digital upstarts like Casper posed to its grip on the industry.”

Casper is one of over 100 DTC mattress startups that are disrupting the marketplace. We will explore the qualities of DTC companies, why they appeal to customers and ways to combat the DTC threat in this article.

Defining DTC

So what is a DTC company, anyway?

As the name implies, DTC brands sell products to the consumer rather than selling through a third party. DTC brands are known for selling affordable merchandise that stand for quality and innovation.

They tend to operate in bloated industries that have high margins and are dominated by a few major players. DTC brands operate in markets that have low barriers to entry and are easy to run digitally.

DTC companies solve “pain points” for consumers. DTC entrepreneurs find weaknesses in the marketplace and use their startups to solve them. Those problems include overwhelming product choice and not enough mid-price choices.  For example, DTC luggage company Away started after its founder noticed that luggage was either expensive or low-end with nothing in-between.

Historically, companies with supply chain dominance meant that they would have dominance over the market. However, sales are shifting away from traditional stores and migrating towards digital channels.  This opening is an opportunity for DTC companies.

DTC companies are known for possessing the following characteristics:

• Primary interactions, transactions and storytelling to consumers is over the Internet
• Digitally-native and multi-channel
• Focused on the customer experience
• Use content as a differentiator
• The mission is the brand’s story
• Offers highly differentiated products with high product margins
• They are in zero-sum markets (buying the DTC product means they stop buying the competitor’s products)
• DTC companies tend to choose categories where incumbents sell exclusively through retailers

DTC brands are disrupting many lifestyle categories, including apparel, beauty and home furnishings. There are over 400 DTC startups vying for a share of the modern consumer’s wallet.

From the seller’s perspective, the appeal of the DTC model are many factors. Selling directly to consumers online avoids high retail markups. This enables the DTC company to offer better quality services and lower prices, effectively cutting out the middleman. The DTC brand is better able to control its brand messaging and collect better customer data. The data gives the DTC what it needs to personalize and enhance its product, messaging and channel usage.

What do consumers like about DTC brands? Glad you asked…

DTC: The Consumer Appeal

There are a lot of reasons that DTC appeals to consumers.

The simplified product and experience that DTC provides is a stark contrast to the choice and information overload that consumers get at a traditional retail store.

Because the DTC model cuts out the middleman, DTC products lack the wholesaler mark-up. A wholesaler may buy a sofa from a manufacturer for $1,000. That wholesaler may then sell it to a retailer for $2,000. The retailer may then sell that same product to a shopper for $4,000. Eliminating the intermediary reduces costs, sofa DTC, BenchMade Modern Founder Edgar Blazona said in a media interview.

DTC companies tend to take a purpose-drive approach. DTC companies are built on trust, transparency and authenticity. This approach resonates with consumers who want to shop at companies that care about more than their bottom line.

DTC brands tend to explain who they are and what they are doing very well. They understand that business revolves around the customer, from providing a simple customer experience to fulfilling the customer’s unmet needs.

Combating the DTC Threat

The DTC approach is resonating with consumers. Web traffic to DTC brands has doubled from 2016 to 2018. And 40% of U.S. Internet users expect DTC brands to account for at least 40% of their purchases within the next 5 years.

Brands named DTC competitors as their biggest e-commerce challenge in a report that Feedvisor released earlier this year. Almost 3 in 10 people, or 27% of over 500 brands identified DTC competitors as their biggest challenge, trumping other issues like Amazon’s growing influence. DTC competitors “have become prevalent across nearly every niche and vertical,” Feedvisor wrote in its report.

DTC marketing is on digital platforms that resonate with digitally native shoppers. DTC tend to advertise on Facebook, Instagram and podcasts. However, as traditional companies turn to these same channels, advertising costs rise for everyone. This burdens DTC brands, which tend to have more limited funds than traditional brands.

But DTC isn’t just for new startup companies. 87% of brands plan to launch a DTC channel, nearly a quarter of which (23%) plan to do so within the next year. Nike is concentrating on growing its DTC channels by about 2.5 times by 2020, for example.

As dire as all this may sound, DTC brands are not surpassing traditional brands in everything. Just 9% of U.S. consumers said that DTC brands’ customer service is better than that of traditional brand and only 7% of U.S. consumers find the DTC brand return process easier than traditional brands.

How can traditional retailers combat the DTC threat? Take inspiration from the consumer-centric approach that DTC brands deploy. Leverage digital channels to reach digitally-native consumers to show them how your business can solve their pain points.