If you walk around a trendy neighborhood in any big city these days, you’ll find it sprinkled with stores of DTC heavy-hitters – Parachute, Lunya, AllBirds and the like. Since these success stories made it through digital channels, why is turning to physical retail suddenly the new DTC trend?
Take DTC darling, Warby Parker, as an example. Warby Parker, the prescription glasses and sunglass retailer, came charging into the scene in 2010 and quickly disrupted the category with a digital-only strategy. However, it opened its first physical store in 2013.
One might think Warby’s stores could cannibalize its online sales – with higher overhead – but co-founder Dave Gilboa says that’s not true: “Once we open a store, we see a short-term slowdown in our e-commerce business in that market. But after nine or 12 months, we see e-commerce sales accelerate and grow faster than they had been before the store opened. We’ve seen that pattern in virtually every market.”
In September 2021, Warby Parker went public with a $3 billion valuation and pitched a growth strategy centered around stores (the brand currently has 145 in the U.S. and plans to open more).
How is Brick and Mortar Changing the DTC Ecosystem?
1. High Customer Acquisition Cost
One reason DTC companies go offline is because of rising digital customer acquisition costs (CAC). While acquiring customers through digital marketing was once a cost-effective model, as more retailers (including major brands with big budgets) have upped their digital marketing game, the price of digital advertising has skyrocketed. Over the last five years, CAC has risen by more than 60%, according to ProfitWell.
Believe it or not, even when opening physical stores in expensive and upscale locations like well-known New York City neighborhood SoHo, it’s often more cost-effective for DTC companies to gain customers through high foot traffic locations like these, rather than solely relying on digital marketing acquisition.
In part, this is because DTC companies aren’t opening big-box retail stores. To acquire customers, all they need is a well-designed, curated space. Many, including Casper, Bonobos and Framebridge, have even adopted an inventory-free showroom model.
2. Necessity of Omnichannel to Scale Growth
Many DTC brands reach a point when using an omnichannel strategy becomes necessary for growth. No DTC brand has achieved $1billion in annual revenue without stores. Customers shop through multiple channels, and brands need to meet them where they are. This becomes especially important when DTC companies approach the IPO stage. They need to show investors they can turn a profit, and that’s simply very hard to do exclusively through digital channels.
3. Brand Awareness
Physical footprints are a great way to increase brand awareness, which can boost sales through all channels. MeUndies, for example, partnered with Nordstrom to create a physical footprint. Additionally, some DTC brands, such as Naadam, report that while sales from the stores themselves may not be huge, they saw an increase in digital sales from customers in the markets where physical stores are located. In this way, stores essentially serve as strategically positioned advertisements in areas densely populated with target customers.
4. Using Experience to Build Community and Brand Loyalty
A physical store is also an opportunity to build community and increase brand loyalty. DTC brands can leverage deep customer knowledge acquired through their digital success to design engaging in-person experiences to complement other sales channels.
Yoga apparel brand, Alo Yoga, adapted to this DTC trend well. In 2007 the brand started selling ‘street fashion’ yoga apparel and opened its first store in Los Angeles in 2016. At its store location, in addition to browsing Alo’s activewear, customers can take workout classes, grab a coffee and even conduct a business meeting from one of its lounge areas – all in a beautifully designed space, centrally located to where they live, work and play. Alo has since opened a second flagship location in New York City, as well as with smaller locations in California, New York and Texas.
Since opening physical stores, Alo’s growth has accelerated, as demonstrated by:
- Acquisition of yoga app Cody in 2018 which was rebranded to Alo Moves (on-demand classes)
- Expansion into the beauty space in 2020 (The Glow System)
- Inclusion on Fast Company’s “Most Innovative Companies” list in 2021
While they don’t officially disclose revenue, Alo reported it to be around $200 million annually as of 2020.
While many DTC brands achieve initial success through a digital-only strategy, there often comes a point when they need to turn to physical retail to reach the next wave of growth. The need for in-person experiences is still an important channel for brands and shows no signs of going away.