D2C companies and traditional retailers look to each other to drive sales

As the digital landscape changes, direct to consumer retail looks more like a launch strategy than a permanent business model. Popular D2Cs—Harry's, Native, Allbirds, to name a few—have found a home at traditional retailers like Walmart and Nordstrom while also opening their own storefronts.

While OG D2Cs need the traditional retailers to grow their customer base and churn a profit at scale, the traditional retailers are now relying on D2Cs to freshen up their product base and bring in new innovation. 

Instead of setting fire to traditional retail, the new class of digital brands is behaving more like fuel for conglomerates and retailers they partner with. Vice President of Strategic Consulting Ashley Lockridge says there are a slew of reasons D2Cs are moving in this direction, particularly as "they want to expand their brand visibility."  But what does this change mean for marketing models of both, specifically how brands use and apply consumer first-party data?

D2C: Businesses that started online 

When D2Cs first came onto the scene, many thought these brands turned the traditional business model on its head. At its peak, some believed these brands were ushering in a new era of shopping, calling it  "the direct brand economy."

Digitally native all stars like Glossier and Allbirds built names for themselves by betting big on the web and avoiding wholesale stores to establish stronger customer relationships with very few or no brick-and-mortar locations.

These brands touted themselves on direct accessibility for consumers, but they also created the ability for many brands—CPG brands in particular—to collect and use once elusive first-party data. This marketing model changed the way most retail marketers started approaching their larger strategy. In bypassing traditional retail integration, D2Cs took advantage of their ability to capture first-party data, revealing new avenues for customer acquisition and engagement.

And it worked in some ways: Brands like the sleep product seller Casper and skincare and beauty brand Glossier reached unicorn status with billion-dollar evaluations.   

But despite these high evaluations, they didn't have equally as high of revenue. Allbirds, for instance, has yet to be profitable and same goes for other D2Cs such as Warby Parker.  

Hitting a plateau 

What was once an online-only strategy for D2Cs is increasingly becoming an online-only sales model as a starting point. Instead of writing off the traditional business model completely, D2Cs have instead just flipped it on its head: the initial driver is building an online presence then, in a move of symbiosis, moving to brick-and-mortar and retailer locations once the need for scalability comes into play.   

With profitability being a struggle for traditional D2C brands, these businesses need to meet the customers where the customers are, and they happen to be in a lot of different places which includes in stores. As Chief Commerce Strategy Officer at Publicis Jason Goldberg puts it, “no digitally native brand has achieved a billion dollars in annual revenue without a store. You need those stores as a cost-effective customer acquisition channel at some point.”

Lockridge agrees. "Scalability is a major challenge for a lot of D2Cs – cost of acquisition is extremely high in the world of ecommerce. The migration to retailers is vital for many D2Cs to expand their digital and physical footprint and take advantage of the retailers’ established relationship with their customers."

Providing a high touch experience is also a key component of this shift into retailers, Lockridge points out. “With segments like Gen Z having a propensity to shop in store and D2Cs struggling with how to create these in person experiences, retailers provide an avenue for crafting experiential shopping opportunities.” 

Traditional D2C brands have seemingly found success in the retail avenue for growth. Warby Parker, for instance, stated 40% of its net-revenue was made up of in-store purchases and plans to expand at a rate of roughly 30 stores annually.  

Relationship status? Going smoothly 

The relationships between retailers and D2C brands seems to be a mutually beneficial one. D2Cs came to the realization that it would be critical to provide value for customers beyond the purchase transaction and their need to earn long-term brand affinity, while legacy retailers like Target are looking for ways to spice up their inventory and drive foot traffic.

Physical retailers need new, interesting product selection in stores as much as digital brands need new outlets to acquire customers more efficiently and affordably. Retailers need to ensure they have the breadth and depth of products that are fresh and new in the market to make sure they are competitive. Otherwise, "they run the risk of losing share of wallet if they don't have specific D2C brands in their stores" says Ashley. For retailers, it's a key revenue stream.  

That being said, D2C brands should be wary of being drawn into the traditional retailing business model, whereby their products fight for scarce space on store shelves. There, the supplier with the deepest pockets usually wins. Such arrangements may give the brand an initial boost powered by the retailer’s reach, but the long-term advantages are yet to be fully known. Channel extensions that address gaps in the customer’s journey should be the real purpose of retail partnerships and extensions must be thought out as part of a deliberate growth strategy.

In the future, Lockridge foresees D2Cs getting more creative about how they embrace their retailer relationships. One of her clients, a children’s’ apparel retailer, is working with her team to establish a loyalty program rewarding wholesale purchases of their products. This strategy provides the best of both worlds – gaining the first party data of your retail shoppers while also extending the brand’s reach.

As D2Cs look to retailers for growth, one thing remains clear-–embracing their direct connection to customers in everything they do is vital for long term success. Keeping this in mind, partnerships between retailers and D2Cs just might be each party’s missing piece for now.