In 2018, every design editor’s inbox was flooded with press releases for direct-to-consumer startups that went something like this:

After scouring the internet for weeks, John Smith made a startling discovery: He simply could not find a high-quality egg beater anywhere. There was a gap in the market. Drawing on his entrepreneurial experience and $10 million in VC funding led by XPump and Northsouth Capital, Smith launched Beatr. With the mission of democratizing the egg-beating space, he’s cutting out the middleman and bringing the masses a quality product at an affordable price.

The item in question could be a spatula, a pillow, a sofa or a Roman shade. As long as someone was cutting out the middleman, it could be—and it was—anything and everything. The pitches got so common that I made a satirical, fill-in-the-blanks Mad Lib and circulated it among my colleagues.

That was the apex of the DTC era. Now, such pitches are few and far between. More common is news of a once-hyped direct-to-consumer home brand folding or being bought out of distress. This year in particular was brutal. Snowe was acquired. Ditto for The Inside and Maker&Son. Article laid off more than 200 employees. Interior Define is having massive issues and its future is uncertain. Dims abruptly folded. And those are only the brands that made headlines; behind the scenes, many direct-to-consumer darlings are quietly shopping for an exit. Call it DTC’s annus horribilis.

What happened? Three things.

1. Apple
You can pin the turning of the DTC tide to an exact date: April 26, 2021, the day that Apple rolled out the latest version of its mobile operating system, iOS 14.5. Software updates generally don’t imperil entire business models, but this one did. As part of a broader push for the tech giant to focus on privacy, the update required iPhone apps to give users the option to opt out of being tracked for advertising purposes.

What may sound like a minor, technical change was seismic in impact. Until then, the direct-to-consumer economy had been largely built on the efficiency of the Facebook (and by extension, Instagram) ad machine. If you had a DTC eggbeater to sell, you could use those social media marketing engines to home in on narrow, surprisingly specific demographics—say, 28- to 35-year-old urban-dwelling professionals making at least $50,000 who had browsed baking recipes over the past year and had recently shopped for a whisk. When the vast majority of users started opting out of tracking, that micro-targeting became significantly less efficient.

The change impacted the entire e-commerce ecosystem, but it was particularly brutal for DTC home brands. Their secret weapon—a hyperfocus on social media as a sales channel—turned into a massive liability when business conditions changed. For most DTC players, Instagram and Facebook marketing was not just one expense among many, but the single biggest line item on the budget. Compensating for the change meant spending tens, if not hundreds, of thousands of dollars more, only to achieve parity.

The fact that direct-to-consumer brands are generally targeting the kind of upwardly mobile consumers who are likelier to use Apple products made the change all the more deeply felt. It was as though someone had simultaneously raised the rent and doubled the utilities—cutting into already thin margins.

2. COVID-19
It’s common knowledge that the pandemic sent demand for home goods through the roof. Less easy to appreciate was its brutal effect on the supply side of the business, especially for DTC home goods brands.

Consider, for example, the state of play in March of 2020. With the world shutting down and the stock market in free fall, it made sense to radically tighten inventory positions and pull back on manufacturing orders. Then, a few months later, the sudden rebound of demand for home goods sent brands scrambling to restock their digital shelves. But by then, shipping containers were four or five times as expensive, raw materials were unobtainable, and manufacturers all over the world were jacking up prices.

That set of conditions put DTC brands in a pickle. If they raised product prices to match their rising expenses, they would be just as expensive—if not far more—than the luxury makers they had been hoping to disrupt. But not doing so meant making far less margin, or even losing money on every order. That was assuming they could get the product made at all.

In every way, what had been key advantages for DTC brands became weaknesses almost overnight. Cutting margins to the bone meant they could cut out retailers and offer value to consumers—but when suppliers raised prices, there was no cushion. Focusing on a single product had given them laserlike marketing abilities—but they had nothing to fall back on when it couldn’t be manufactured profitably.

DTC brands had once been lauded for their efficiency and agility compared to slow-moving traditional manufacturers and retailers. But when crisis hit, they had very little pull with shipping companies and manufacturers. While the Walmarts and Williams-Sonomas of the world could use their scale as leverage to cut deals at every step in the supply chain, DTC players were often forced to wait at the back of the line for a chance to pay increasingly steep prices.

For all of those reasons, though 2020 and 2021 saw unprecedented jumps in raw sales, it was increasingly difficult for DTC brands to operate profitably. Then, when the retail market for home goods began to decline in early 2022, incoming cash dried up, and conditions went from bad to worse.

3. Venture Capital
Struggling to make money is actually nothing new for DTC brands. Many were never consistently profitable. But in the heyday of the direct-to-consumer phenomenon, profitability wasn’t the point—growth was the goal. Many DTC brands were funded during a golden era of venture capital, a time when the market was so flush with cash and visionary founders so prized that VCs would compete desperately to write them checks.

In that climate, the goal was always to gobble up market share from the legacy players—period. If you could show growth at the next investor meeting, it didn’t matter whether you were doing it profitably or not. The prevailing thinking was that profitability would come. For now, just grow.

Then, in 2021, as it became clear that inflation was not just a momentary blip and the U.S. economy was likely teetering toward a recession, the culture of venture capital changed. Suddenly, VCs began asking tougher questions of the companies they had funded. Unit economics became as important as “growth hacking,” and the purse strings began to tighten—2022 saw the largest drop in VC funding in two decades. Battered by Apple’s privacy measures and the chaos of the pandemic, DTC brands sought relief from the same investors who had fueled their growth, only to get the brush-off. With nowhere left to turn, DTC founders began looking for a quick exit or, failing that, simply to shut down and move on.

What happens next?
There are of course exceptions, and some DTC brands have been able to weather the storm and emerge stronger. The ability to manufacture in the U.S.—once seen as an expensive disadvantage—became a huge strength amid a collapsing global supply chain. Time in the market was also hugely helpful. Parachute, for example, started as a bedding disrupter in 2014. But the company has had eight years to grow into a robust omnichannel brand, giving it more room to maneuver than a bedding company founded in 2019 might have.

But with a few big exceptions, 2022 was a tough year for DTC home brands, and 2023 will likely offer up more of the same. Though the supply chain has calmed down and companies have found new marketing work-arounds, the slow-rolling economic downturn will likely continue to cause more DTC brands to shutter or sell than launch or thrive.

What to make of the DTC fall from grace (or at least hype)? Many will cheer the demise of would-be disrupters with no small amount of schadenfreude. It’s not hard to understand why legacy brands that had quietly sold plates at a profit for 80 years get irked when a twentysomething former marketing exec comes along with talk of disrupting the plate space.

But despite DTC brands’ occasional absurdity, such companies also brought real value and energy into an ecosystem that had grown staid and stale. In 2005, who thought you could launch a bedding brand that would make young people feel something? Through a combination of marketing savvy, cheap money, a newly accessible global supply chain and sheer entrepreneurial will, DTC founders injected new life into the market for home goods.

What will survive are the great brands, the energy and playfulness, and the desire to connect with consumers. What will likely fall away are the business structure and the crazy growth projections. Founders will have more modest goals and seek to wholesale their goods whenever possible. Omnichannel will be the new name of the game—eventually the term “DTC” will fade into something more all-encompassing, like “digital-first.”

And just as the first DTC era unbundled individual products into stand-alone companies, the next one will see a great rebundling. Already a robust group of holding companies that specialize in acquiring and streamlining DTC brands has emerged. By taking advantage of economies of scale, and by centralizing operations, they can hope to squeeze profitability out of once cash-bleeding businesses. The first DTC era was about branding and growth—the next will be about cash flow and operational excellence.

But a more stable DTC era is still a ways off. For the immediate future, expect 2023 to continue 2022’s trend of shutdowns and acquisitions. In an interview about the fate of Snowe, the CEO of the e-commerce rollup company that had acquired the brand shared a blunt assessment of the marketplace: “You’re going to see a lot of these kinds of deals next year,” he said. “A lot.”

Homepage photo: ©wertinio/Adobe Stock