Direct to Consumer: What does it mean for startups and consumers alike? - Clean Beauty Insiders (2023)

•Direct to Consumer•

In EP11 of Clean Beauty Insiders the Podcast, Dominika and Elsie dive into the world of Direct to Consumer (DTC). As a beauty startup, what can we learn from DTC heroes such as Glossier, Allbirds and Warby Parker? What are the challenges with DTC and what are the benefits of wholesale?

Elsie Hi everyone, welcome back to Clean Beauty Insider’s the podcast!

Dominika We are so excited to be back and in our professional recording studio. We’ve decided that it’s worth investing in some professional recording space, so we’re very excited.

Elsie Welcome back to episode eleven, where we are changing things up a little bit. Some of you may be digesting this content in other forms that isn’t a podcast.

Dominika We listened to the feedback that podcasts aren’t always the perfect medium to engage with long form content and there is space for the written word and video. Starting with this episode, we will transcribe and video every podcast to cater for those who want to take in the information in different formats! Both will be posted on Clean Beauty Insiders as well as YouTube.

Elsie Today we’re going to be focusing on Direct to Consumer or DTC. But first, let’s have our normal weekly catch up! What’s been going on in your world Dominika?

Dominika It’s been busy but last week we treated ourselves to a Sunday Riley facial at Hershesons, which was just epic. Elsie’s getting married soon and so I’m just jumping on her pre-wedding, beauty treatment bandwagon. I have to say I was absolutely blown away by the facial. I haven’t gotten a facial in ages but this is actually where my love of beauty comes from; I am such a fiend for spas and people massaging my face! This is actually where Clean Beauty Insiders came from for me.

The facial was hugely efficacious, leaving my skin feeling plumped, moisturized and hydrated. The surface of your skin goes down below 20 degrees which blew my mind!

I took away the Sunday Riley UFO serum, which is an oil based formula with 1.5% salicylic acid, tea tree black cumin (an anti-bacterial active, which we use in swipe clean as well) and cucumber and milk thistle (to counteract the strong stripping of of salicylic acid). It has just completely cleared my congestion! As you can see with shiny my forehead, if you’re watching on YouTube. I highly rated the facial and I am really keen to try more of Sunday Riley’s products. Although, I have been using their Lunar Retinal Serum as well, which hasn’t been as efficacious. The facialist did explain that you have to use it for four to six weeks to see results, which I found surprising as our Bakuchiol Booster was pitched as a longer product when compared to retinol with its overnight success.

Elsie The Sunday Riley Creo Facial at Hershesons is the only facial that Sunday Riley holds globally. I was also really impressed with the facialist that we had, she’s even performed the facial Sunday Riley herself! Even if it was a bit uncomfortable at times with the brain freeze, I just really enjoyed it.

Dominika It was so good I booked in again.

Elsie I’m getting married in October and my plan is to try different facial around London every four weeks, but I’ve only only got five months (to the day!) and I now just want to go back to Sunday Riley. I also want to a Sarah Chapman facial and return to Face Gym.

Dominika How was your week? I hear you are thinking of bringing back the Root Diaries? The globally famous Root Diaries!

Elsie Yes! I thought it would be worth doing a Root Diaries update, which is a series I wrote for Clean Beauty Insiders where I documented the growth of my previous platinum blonde hair.

I dye my hair at Glasshouse Salon, who use organic colour systems which are a more gentle way of colouring your hair (although it is not chemical free or 100% natural, because that doesn’t exist!). Platinum blonde hair was really fun for six months, but to keep it looking great I would’ve had to dye it every 6 weeks due to regrowth and its bright blonde colour, which ended up taking its toll on my hair. I managed to grow it about six inches but it was basically my brown natural hair roots then really yellow ends. I tried to rock that look, but it was quite a specific look and not very me. So as an update: I’m sorry to say that I did start highlighting it again and got it cut super short to get rid of as much of the blonde as possible!

Dominika I’m really liking your hair at the moment!

So from The Roots Diaries to Direct to Consumer (DTC)! Our topic for today’s discussion is all about the pros and cons of growing a Direct to Consumer brand.

Elsie I was on a panel recently at a great event marketing and retail event called FUTR at the Business Design Centre and was asked to talk about BYBI’s DTC strategy.

After putting some snippets of the panel talk onto our stories, a number of you DM’d us requesting a podcast on the DTC topic. So here it is!

I think it might be useful for us to firstly define DTC, for anybody that doesn’t run a business and doesn’t work in marketing. Then we’ll also dive into it from a business angle and talk through the pros and cons.

Dominika DTC stands for Direct to Consumer and can be defined as a brand selling to the consumer without a middle man. There’s no retailer, distributor or intermediary platform between the brand and who produces the product. For example, BYBI’s DTC business is purely online right now. When buying from BYBI, the product is shipped directly from our warehouse, in our packaging and we control all the communication. If you order from bybi.com, the whole process is dealt with by BYBI. For a consumer, there’s total transparency and benefit to ordering direct from the brand.

However, the downfall of DTC for consumers is the limitations to multi-brand purchases as it incurs more potential shipping costs and time. It also limits the benefits bulk buy benefits, discount and loyalty schemes that are offered by some retailers, for example ASOS and Amazon Prime. Also, from a sustainability perspective DTC isn’t always best for the carbon footprint, i.e. consumers purchasing DTC brands from all around the globe, incurring air freighted packages.

Glossier is a renowned DTC brand within the beauty industry, however beyond beauty there are loads of DTC brands. For example, Away, who sell suitcases, have just closed $100m funding round.

Elsie There’s so many! AllBirds for trainers, Waldo for contacts (a UK based Start-Up) and Warby Parker who are one of the originals of online DTC. But it’s worth remembering that DTC has existed for a long time. For example, if you were to buy a pair of Nikes, you could purchase from the flagship on Oxford Street or walk 5 minutes to John Lewis’s shoe hall. As a consumer, what are the benefits of you going in and getting the experience directly from Nike versus going to somewhere like John Lewis? More styles? Better deals? Why would you engage with the brand directly in that way? Online is definitely making DTC much easier for brands these days but DTC certainly isn’t a new thing.

Dominika I think that’s a really good point, DTC isn’t a new concept. In the beauty industry, the Body Shop is a heritage DTC brand that sell through their own bricks and mortar stores. DTC is seen as a revolutionary ‘buzzy’ thing at the moment as it cuts out the middleman, but as you said, DTC actually has existed for a really long time.

Elsie DTC within beauty is becoming increasingly weighted towards online but it is important to put yourself in your consumer’s shoes; as a consumer when can I go and try out your brand? Sometimes I want to just nip around to Tottenham Court Road and be able to quickly get a brand’s product into my hands. A lack of physical presence or scale can be a barrier for consumers.

From the business perspective, there has been a real focus on DTC because of the number of brands that are receiving billion dollar valuations and raising significant amounts of money, which is setting a high standard. There have been some DTC consumer brand heroes, who have set what now seems to be a DTC standard, specifically with investors.

Dominika Our favourite.

Elsie We’ve talked about our fund raisers on the podcast and both rounds have heavily featured and focused on the DTC conversation. It seemed like a deal breaker for investors and if there wasn’t an interesting and strong DTC strategy, their interest faltered.

Dominika We do a lot of reading, not just in the beauty industry, and it seems like a little spark of DTC is starting to deteriorate across the whole investment space. I’ve been noticing that a lot of these big funding rounds are coming to the point where people are looking for exits and there’s not many brands that have been able to exit. It’s one thing raising a lot of money and there’s one thing getting billion-dollar valuations from the investment community. But it’s another thing when a third party wants to buy that business in whatever shape or form that is, whether that’s IPO, merger or acquisition.

There’re only very few successes in the DTC space and what we don’t hear about is how many failures there have been in the space. It’s very easy to focus on the unicorns i.e. Glossier, and make the assumption that DTC is an easy strategy. But you have to look at the funding journey of many of these DTC heroes. The question is still – is a brand like Glossier raising over $180 million to scale a sustainable business model? Interestingly, the only recent DTC exits out of all the huge funding rounds, have been in male grooming. Harry’s (acquired by Schick) and Dollar Shave Club (acquired for $1billion by Unilever) both gaining $1B valuations.

A lot of these well funded companies are coming up to five to six year mark post funding, which is the point where a lot of these investors are looking to recoup. I think the sparkle is starting to dissipate a little bit because there’s a lot of money but limited exits.

Elsie Harry’s is now in Boots as well, so it’s also not DTC only!

I think at this stage it’s worth us defining DTC versus wholesale and talk though the pros and cons of DTC coming from a business perspective. The alternative to DTC would be to sell through wholesale partners. For example, we sell our goods on the retailer ASOS who then sell it on behalf of us, which results in a wholesale revenue stream rather than a DTC.

So what are the pros? Where does the DTC sparkle come from? Why do the investors talk about it? Why does somebody like Glossier make the decision not to lean on a wholesale partner to acquire customers?

Dominika I think it’s to do with ownership and data, which we know is a commodity and has a resale value, which Facebook has illustrated. Social media and tech platforms have been able to build a business around owning data. As a DTC business, particularly online, you know every customer, how often and what they buy, how many times and where they engage with your brand before buying and where they’re based. This is such powerful, granular detail about their shopping habits that can shape a marketing strategy. Through wholesale you give stock and then they do a lot of customer acquisition piece for you, but you’re not given any insight whatsoever.

Elsie Another attractive piece of the puzzle with DTC is the fact that you have total control over your brand and how it is put out. For example, when we agreed to partner with ASOS we agreed to hand over the control; we can provide them assets and brand and production descriptions, but ultimately the way that they communicate our product and brand to their customers is down to them. The same applies to bricks and mortar stores, where these challenges are evven more present. We scaled up our UK distribution quite quickly last year with a large number of physical store presence, including places like Oliver Bonus, Anthropologie, Topshop, Urban Outfitters, Harvey Nichols and House of Fraser, most of which we are not working with anymore.

We excitedly visited a number of these stores – it was a real career highlight standing outside Harvey Nichols knowing our products were inside – but the reality was our products were on the bottom shelf gathering dust, mixed up and lacking testers. The minute that we hand over that stock to that retailer the power is all theirs to represent your brand, unless you invest in having store staff (which often not all stores let you do). There also isn’t the real estate for a brand message, unless you’re going into a much larger execution that allows for point of sale messaging, which even still is limited verus online or in your own store. It’s similar with online; ASOS for example ship items in ASOS’s plastic bags in the way they want to ship it to the consumer. Whereas within BYBI we ship our DTC products in our innovative grass paper boxes that we feel keep with our sustainability message.

Dominika They’re so pretty!

Elsie We found a company in Germany who figured out how to make paper from grass and it is up to 80% more sustainable. This is again something that should be considered when you’re approaching your wholesale partnerships, do they marry up with your wider brand values and do you think that your story can still be told on a shelf?

Dominika As a brand we toy with sustainability within the context of DTC versus wholesale: what is more sustainable?

• Is it more sustainable for us to choose our grass paper boxes, choose a carbon neutral courier and dispatch our products directly from our warehouse? Does that make sense internationally?
• Does shipping loads of product from the UK to another UK warehouse, for them to then distribute it, make sense?
• Does us air freighting a box the US make sense or does it make sense for us to ship a container vessel full of products to the US for that then to be locally distributed?

Those are the questions that we don’t actually have the answers to yet. We’re still figuring them out, but at BYBI, DTC is a piece of our sustainability puzzle. It’s not our primary distribution choice, we want to make it work for the values of the brand and also from an acquisition perspective. The big question is, once a business choses DTC as their strategy, how do you acquire customers?

Elsie Before we start going into the cons of DTC, we’ve missed the massive big pro which is margin. When you take on a relationship with a distributor or retail partner, they will require some of your product margin. This is a massive incentive to hold direct relationships with your customer, because you make much much more margin. Commercially, I think these appealing margins have caused this ‘buzz’ of DTC and why brands like Nike still have DTC outlets and don’t just sell in John Lewis.

Dominika Let’s not forget that retailers taking those margins are for a reason! When working with retailers with bricks and mortar stores, your business will have to pay for staff, fit up costs and marketing costs. With an online retailer, like ASOS, they have immense distribution and users coming through the site that we don’t have. It is commercial sense that you pay to tap into their audience and infrastructure which does come at a cost.

Elsie Absolutely. We decided to launch into wholesale last year because we completely recognized the value of the incremental reach that we could achieve. The audience of a 6 month old brand versus ASOS’ made giving away that margin worth it. It allowed us to reach new audiences that would otherwise be very challenging.

So what are the cons of DTC?

Dominika DTC faces a lot of challenges. Launching on ASOS isn’t easy and it doesn’t mean you’re going to be a success just by selling on ASOS. But I think that the situation that we’re in in 2019, which wasn’t around in 2015, is that it’s increasingly difficult to acquire customers. You cannot simply do it through Facebook, Instagram and Google as it lacks longevity. Those customers tend to be really transient, because if a consumer’s converting off a Facebook ad that they’ve seen once or twice, they don’t know the brand. They see a couple of products that you think are relevant to them based on the demographic data that Facebook provides, imagine how easily they can be swayed to the next brand that gets in front of them because you have reached out your frequency cap that month on that customer. I think that the customers that are coming through social and paid digital marketing these days aren’t as loyal as one would hope. Also, the cost from a business perspective to break even or make a profit on those consumers is becoming increasingly challenging, whilst the cost of Facebook advertising is going up.

Elsie Compared to five years ago when Facebook advertising was novel and flying, it is incredibly cluttered and competitive now. Businesses were able to acquire customers for much cheaper with little competition. Also, I think there is a bit of numbness and lack of engagement with brands on Facebook and Instagram now because they have such a heavy presence, which is making it much more expensive. We were discussing earlier today – can you name a brand that you discovered through an ad on Facebook or Instagram that you bought something from and you’re still buying from now? I cannot.

Dominika I remember some from 2014 and 2015, I bought Skinny Tan.

Elsie Oh yeah, I bought Boo Tea! I didn’t buy that again though.

Dominika I almost bought WunderBrow and then I looked at the ingredients and chose against it. I got conned by the China fashion brands as well.

But I never purchased from any of them ever again. I think the golden days of Facebook advertising were a result of the barrier that to run the ads required a certain level of sophisticated understanding of digital marketing. That meant that it was exclusive to brands that either had the expertise to afford it or were able to operate in that space. The smaller players or those who weren’t interested in investing just didn’t partake. Facebook have made it super accessible with nothing getting in the way of a business and its consumers, with no high barrier to entry or minimum cost. I’ve even seen influencers on ads recently.

However, it is just one form of advertising. With the complexity of the marketing funnel, you’d be crazy to invest all of your marketing spend into one channel; you wouldn’t throw all of your budget at classified ads at the back of a magazine, for example. It’s risky business for brands to put all of their budget into one stream as it will inevitably underpin all of their revenue and they will become reliant on it.

Elsie Yes, very interesting. So it’s clear that a challenge with DTC is that acquiring the customer lies in the brands hand, because you’re not relying on any retailer to do it for you. Now it has become increasingly more difficult through Facebook and Google advertising, where does that leave you? How do brands acquire customers as a consumer brand? The golden question, that we don’t have the answer for! I’m sorry.

Dominika We’re still trying to figure it out.

Elsie This is an interesting topic and is often where the conversation leads with our investors, for example. Everybody is interested in new and exciting ways to acquire customers that doesn’t rely on old and outdated channels. I think examples of good DTC strategies, are brands who are doing interesting things with bricks and mortar space alongside online. Glossier is a really good example. I’m sure a large majority of their revenue comes through their site sales, but they now have four or five stores across the U.S. with geographical themes that match their location. They’ve just launched in Miami and the store is super Miami!

Dominika Very pink flamingo!

Elsie They recognize that one size does not fit all and localize the store experience, which is a really cool way to get consumers coming to a store and sharing the experience on social. Of course, Glossier is organically very instagramable!

Deciem is another example of good store presence and they have a number of really cool stores in London now. You can’t get in the door because it is so busy! What Deciem really nails is stellar store staff who are knowledgeable and willing to share information on the products. Consumers go specifically to the store because they want to have a long conversation with one of the Deciem team to tailor make a routine of products for you. The key is about making the experience something different and unique, something that your customer can’t get online.

Warby Parker and Ace and Tate, both glasses brands, are examples of DTC in other categories that invest heavily in offline because consumers want to try on their products. Beauty is similar; customers need to touch, feel and smell the product. A beauty brand trying to scale just online will always be challenging and a barrier to entry for consumers. Even by bringing customers to site in an innovative way, you still have a harder job of selling them the product in a 2D way rather than a sensory experience.

Complementing any DTC business with an offline experience is really key for beauty, which proves difficult with international. As a small brand, how could we potentially scale in Australia thinking about it the logistics of that? For us, that’s just so difficult unbelievably difficult.

Dominika With beauty as you say there’s the touch and feel element of it, but what more could somebody get from coming into your space and engaging with you physically? I think that’s where we’re seeing brands really own the transition from an online only direct consumer brand, through to having that physical space as well.

There are loads of different ways to engage with customers outside of Facebook and Google ads, for example content collaborations, tech stack, making sure e-commerce experience is slick. The delivery space is really paramount with good delivery times and transparency with your customers.

With DTC it is really important to commit to making sure the customer journey is better off with you versus buying from a retailer, like Boots, for example. The customer are willing and want to connect and hear the story of a brand and their founders.

Elsie Community is another buzz word within DTC. Getting consumers to be so engaged and interested in your brand that they feel like they are part of a community increases their loyalty with you as a brand and encourages them to bring friends into the community as well. This sense of building a community as a brand is difficult, but brands who win at it are those who have a real USP and know they have something really authentic and interesting to say. We don’t necessarily have any gold dust when it comes to building a community, but building a community will obtain loyal consumers and ambassadors on the ground for you.

If you pick out a number of leading DTC brands, there is a sense of community in some way that leads pillars of their success.

Let’s talk about wholesale and the key benefits in the context of our latest launch. Which is very exciting.

Dominika A key benefit of working with established wholesalers is the overnight scale achieved in audiences and customers. Especially if you’ve got VC backing, where you’re required to scale quickly.

Elsie For example, we have just launched with Boots in the UK, which we’re really excited about. It may seem like an odd move, particularly as we’ve just an entire podcast on DTC, but there’s logic to our decision here.

It’s an example of where using wholesale strategically as part of your wider business plan can really pay off. Currently, we are very strong in terms of DTC in London and the south of the UK and see most of our customer base driven through those areas.

It’s probably a result of investing into Facebook advertising too, lookalike pools are built on your current customer based and there is a cycle of trying to acquire customers who look like your current customers. We are in a cycle of having a very London centric customer base and continue to attract people in London. Although our office and often our events are in London, so it does also make sense. However, we are really conscious of wanting to expand and spend time nailing our home market, not just the capital.

Dominika Boots have shown interest for a while but it never felt right until the latest opportunity. They approached us with this really exciting concept, where they are taking on a Sephora-esq, dedicated beauty area that focuses on make-up, haircare and skincare and highlights independent brands alongside bigger, relevant brands of the moment. The space feels like a true beauty destination that you want to go to try products and chat to staff that know what they’re talking about.

The UK is screaming out for this. Apart from someone like Space NK, who are a much higher price point, we don’t have anything similar in the UK and Boots are filling a real gap in the market. They approached us with this concept in their top 30 stores and we recognised this as a real opportunity to become accessible to the whole of the UK through one retail partnership that’s both online and physical presence.

Elsie The proposition was really attractive for us because we can tap into those incremental audiences that we were talking about earlier. On top of that, their click and collect services are insane, with 90% of the UK living within 10 minutes of a boot store. That is crazy! You can order by 8:00 pm and go and collect it from your local store by 12:00 p.m. The next day.

Dominika Imagine all those panic holiday shops!

Elsie Dreamy! Boots is a great scale opportunity for BYBI, that would be difficult to achieve through DTC and our current funding. We simply wouldn’t be able to replicate a delivery service like that. The complexity in this scale can only be achieved by somebody like Boots and BYBI being able to lean on that, as a small independent brand, is incredibly valuable.

Dominika It’s amazing. I did order something else from Boots recently and got their e-commerce packaging; they’re actually really eco-friendly as well, which warmed my heart.

They use recycled card, the products fit perfectly with no excess packaging and it’s all FFC, which shows a lot of thought and actually it just shows that wholesale partners can align to your ethics as well. I would have been really disappointed if it arrived in like a massive Amazon box with plastic pillows.

We’re really excited about Boots as we’ve really struggled with finding a retailer that can offer a scale in the UK, but also be a bit of a beauty destination. We have struggled in the past in some of the more obscure environments that we’ve gone into, for example Oliver Bonas, which isn’t specifically a beauty destination. The customers we’re after are skincare consumers looking for results-driven natural, vegan skincare, who wouldn’t be picked up at a non-specific beauty destination. We’re hugely ambitious and we want to make natural, vegan and sustainable beauty accessible from a price perspective, but also from an accessibility perspective and it is easy to go to Boots or do click and collect. It is a good example of giving away margin, but you are getting a service in return for your customers that you can’t necessarily offer.

The process has been fluid, two way and supportive and the execution looks great as well. We’ve been able to put the BYBI stamp visually on the way our products look in-store, which is amazing. If you see it, please send us a picture! Thank you.

Elsie As ever if you have any questions please get in touch and you can DM or email us. We would love to hear more from you guys in terms of topics, guests and any general ideas for the podcast! We will do our best to talk about them.

Dominika Thank you guys. We hope you find it useful and stay tuned as we’ve got some great episodes and killer guests coming up. So, subscribe and tune in.

The podcast can be listened to on Apple and Spotify.

•Direct to Consumer •