Direct-to-Consumer Brands Amidst the COVID-19 Crisis

In the past few years, we have seen a huge shift towards Direct-To-Consumer (DTC) distribution within fashion retail. Originally conceptualised for digital native brands to have full flexibility over their retail strategies, this business model is now the preferred distribution medium for most brands. The DTC Brands Amidst The Covid-19 Crisis report explores how DTC brands are evolving during this pandemic and the innovative marketing strategies implemented as online spending increases.

Written by Ashley LooiApril 7, 2020

Introduction

The direct-to-consumer (DTC) model has been a major disruptor in retail, stealing market share from legacy brands. DTC brands cut out the middleman by manufacturing and shipping their own products.

Nearly $4 billion USD of capital has been invested in DTC brands in the past 10 years. Brands like the Honest Company, Harry’s and Allbirds were among the pioneers of the DTC model. The creative story-telling and emphasis on digital marketing carried out by DTC brands were the early factors of success for the business model.

However, the cost of digital advertising has increased tremendously in recent years – DTC advertising spend increased by 50% in the past year. The rising customer acquisition cost has forced DTC brands to adapt to the competitive retail landscape. DTC brands have acclimatised by opening brick-and-mortar stores and partnering with retailers like Nordstrom and Selfridges.

When faced with the Covid-19 crisis, DTC brands were among the brands to announce store closures. How do these brands pivot their marketing and distribution strategies to address this issue?

More than 4,300 data points were screened from January to March 2020 across Everlane and Reformation in the US and UK markets to observe their response to the Covid-19 crisis and the key learnings.

All data used in this report comes from products retailing online as tracked by Omnilytics, unless otherwise mentioned.

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Early Success

Compelling Brand Story/Messaging

In order to compete with legacy brands that have been around for decades, DTC brands are expert storytellers. Everlane emphasises its use of ethical factories, complete with information on each factory. Reformation tells a story of sustainable fashion through the use of natural fibres that are renewable and plant-based as well as recycled fibres. The details of the different fabrics, along with their fibre standards are made available on Reformation’s website.

Price Transparency

Leveraging on the DTC concept, Everlane takes the opportunity to show customers its cost breakdown along with a price markup comparison against traditional retailers. Everlane reveals that its prices are half of what traditional retailers are charging. The radical transparency creates value, drawing customers away from legacy brands and towards Everlane.

Social Media Advertising

In the beginning, DTC brands focused their digital marketing efforts on social media to increase visibility. Consumers would be bombarded with ad banners and sponsored posts. This combined with the compelling storytelling by DTC brands contributed to their large success.

However, not only was this high cost of customer acquisition not scalable, but DTC brands have begun to face issues concerning securing funding from venture capital companies due to over-investment. Profits are insufficient to cover the rising cost of digital advertising.

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Struggles & Covid-19 Impact

Increasing Customer Acquisition Costs

The increase in demand for digital ad space has caused prices to inflate and DTC brands are feeling it. DTC advertising increased by 50% in the past year. As a result, the cost to acquire each customer has followed suit.

Competitive Retail Landscape

Brands and retailers are becoming more digitally focused during the Covid-19 crisis, putting all their efforts into their e-commerce channels. As the retail landscape becomes more competitive, Everlane and Reformation have to ensure that they stand out among the noise.

Brick-and-Mortar Store Closures

There has been a decrease in foot traffic due to the Covid-19 crisis, with quarantine measures carried out in various countries. Everlane and Reformation have announced that their physical stores will be closed until further notice. The foresight of Reformation to widen its distribution channels has paid off during brick-and-mortar store closures. The brand’s partnership with Nordstrom and Selfridges helps to increase brand visibility – extremely crucial during the Covid-19 crisis. Everlane only partnered with one retailer – Nordstrom.

Disruption to the Supply Chain

As the coronavirus situation picks up in the US and UK, quarantine measures have been imposed. Reformation closed its Los Angeles factory and distribution centre, following California’s ‘Safer at Home’ order. President Trump also recently extended the US social distancing guideline until 30 April. These disruptions will lead to supply chain bottlenecks, causing lead times to increase.

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Performance Overview

Reformation will potentially struggle with its newness launch schedule during this period. The current status of its supply chain may not allow for Reformation to maintain its high new-in rate. If the brand were to maintain its historical newness throughout the crisis, it might run the risk of being understocked.

Everlane A Year Ago

Compared to last year’s quarter-to-date, Everlane has managed to achieve sell-out rates nearly 4x higher – from just 24% to 94% in 2020. With this amazing feat, it is undeniable that Everlane has successfully managed to navigate the retail landscape in the last twelve months.

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Covid-19 Response

Operations/Supply Chain

Despite the disruptions to its supply chain, Reformation maintains that its online store will remain operational for shoppers to purchase items but shipment will be delayed until distribution centres reopen.

Everlane is experiencing a smaller impact on its supply chain due to multiple factory partners located across the globe. Production will only be affected in countries that have imposed quarantine and lockdown measures. Its distribution centre is still functional, however shipment could be delayed.

Stabilising Sales & Inventory Levels

Both brands have made significant changes to their newness launch schedules in response to social distancing and lockdown as case numbers in the US and UK increase rapidly. Instead of staggering newness over the next few weeks, Everlane and Reformation chose to optimise for increased online spending. In the week of 23-29 March, both brands added the highest number of new-in SKUs within the past two months. This is potentially dangerous for Reformation as the brand will not be able to generate more new arrivals for the time being, which could lead to an issue of being understocked.

Additionally, Everlane is taking opportunity of consumers staying home during quarantine and lockdown measures. The brand has shifted from putting emphasis on new arrivals to drawing attention by running promotions. Everlane is experimenting with limited time promotions to help stabilise sales, including the brand’s first 25% site wide sale.

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Meet the Author

Ashley Looi

Ashley Looi combines her major in econometrics with her interest in fashion to help brands and retailers uncover actionable insights. She currently produces in-depth reports on the fashion industry and its changing retail scene across the United States, United Kingdom, Australia and Southeast Asia.

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