A decade ago, “direct-to-consumer” emerged as a cool new business model pioneered by startups such as Everlane and Warby Parker. They sold products to customers online and cut out middleman retailers. These days, the DTC model is increasingly the norm.
The pandemic has pummeled the retail industry, forcing department stores to close and driving some retailers to bankruptcy. Brands that tied their fates to these retailers suffered the most; those that were able to pivot to a DTC model were better able to take control of their businesses and survive. In a conversation at Fast Company‘s Most Innovative Companies Summit, Shopify president Harley Finkelstein and fashion designer Rebecca Minkoff predicted that in the post-pandemic world, all brands will be DTC—including legacy brands such as Schwinn bikes and Heinz ketchup.
How COVID-19 changed the game
At the start of 2020, 70% of Rebecca Minkoff’s sales came from wholesale orders from department stores such as Bloomingdales and Saks Fifth Avenue. Then, in March, when the lockdowns went into effect, every single one of those wholesale orders was canceled. Minkoff was thrust into an existential crisis. “When you have so much coming from wholesale, that’s your focus every day,” she says.
Overnight, Minkoff and her cofounder (and brother) Uri had to overhaul the business model they’d used since launching in 2005. “With a lot of sleepless nights, copious amounts of wine, we reorganized the team to make the shift to direct-to-consumer,” she says.
Across the industry, many other brands were facing the same crisis: Retailers canceled orders, saddling brands with tons of inventory. Some brands weren’t able to find new ways to sell their products, so they declared bankruptcy or shut down. But others tried to pivot. “When the tidal wave comes, you see two types of people,” says Finkelstein. “The people who grab their surfboards to ride it out, and the people who got out of the water and grabbed their towels.”
Over the past decade, many startups launched with a DTC approach, including brands such as Away, Outdoor Voices, and Harry’s. But over time, even more-established companies have started to tinker with this model. Finkelstein says heritage brands such as Schwinn, Heinz, and Budweiser have launched Shopify sites to forge a direct relationship with their customers. Minkoff, for her part, has spent years investing in a website and a strong social media presence. But before the pandemic, many brands saw their DTC operations as merely an extension of their business; suddenly, they had no choice but to pour all their resources into this channel.
There were other brands—particularly small businesses—with no online presence at all. Some tried to build digital storefronts overnight. Shopify saw this play out firsthand, as it helped many mom-and-pop stores quickly create websites. “We did things like turn physical stores into fulfillment centers where they could do curbside pickup or local delivery,” Finkelstein says. “Some were resistant, just waiting for the status quo to resume, but others were willing to ask: ‘What is the new situation? What are the new rules? How do we adapt?’ What you saw was a tale of two different types of entrepreneurs.”
In Minkoff’s case, the scrambling paid off: Her online sales grew, making up for the lost sales from retailers and department stores. The business was able to weather the worst of the crisis and is now poised to thrive in the post-pandemic world, partly because the DTC business model means higher profit margins and partly because the brand now has more control over the relationship with its customers. Minkoff says retailers are slowly coming back to place orders; she’s not opposed to this, but she believes the power dynamics have changed forever. “It’s a different relationship,” she says. “If the retailer wants the goods, great, but there’s no returns.”
Retail is everywhere
In this new reality, Minkoff notes that there are many creative ways brands can forge relationships with customers. Sure, there’s the website and Instagram. But that’s just scratching the surface.
During the most recent New York fashion week, for instance, she streamed her runway show on Instagram and TikTok, then offered customers behind-the-scenes footage on Only Fans. She created an augmented-reality version that was streamed on Yahoo.com, powered by RiotLab. Minkoff has also popped up on Clubhouse, where she holds industry chats. “For us, it’s always about trying something new,” she says. “When we started on Snapchat, it was us and Taco Bell, and it was a very lonely place, to be honest. We will try any platform as long as we see there is an ROI—and that doesn’t always mean sales. The metrics are different for different platforms.”
During the pandemic, it made sense for brands to shift their focus online. But as the vaccine rolls out and the end of the pandemic is in sight, it’s an open question what will happen to retail stores. On the surface, the answer seems bleak: UBS predicts 100,000 stores will shutter by 2025.
Minkoff and Finkelstein both believe that physical retail will live on, albeit in a different form. Minkoff has a network of brick-and-mortar stores and expects to reopen them in the summer. But they won’t be primarily about selling products. Instead, she sees them as creative brand extensions. For instance, rather than simply working with an Instagram influencer, customers could come to the store and interact with a person. It could be a place to highlight female-founded businesses and reinforce the message that Rebecca Minkoff is a brand that supports women.
Finkelstein, for his part, says many of the brands within Shopify’s network are already starting to think differently about what to do with these retail spaces. “Until now, stores have been glorified warehouses, but going forward, they will take on the role of immersive branding with deeper engagement with customers,” he says. “What’s really exciting for us is that we’re going to see retail everywhere, on social media, in stores, on e-commerce sites, and everything in between. The brands that are successful will know exactly how and where to sell to their customers because they will really understand their customers.”