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How a New Wave of DTC Startups Are Tapping Big Retail to Scale Growth

As customer acquisition costs surge for online-only businesses, brands from Caraway cookware to Jinx pet food are turning to brick-and-mortar chains like Target to drive sales.

This story originally appeared on CO— by the U.S. Chamber of Commerce

This story was originally published on CO— by U.S. Chamber of Commerce and was written by Barbara Thau.

The CEO of organic baby food brand Raised Real is unequivocal about what it takes to build a profitable direct-to-consumer business today: To reach scale and achieve sustainable, long-term growth, these online-only brands must diversify their revenue streams by selling their products in brick-and-mortar stores, too.

It’s precisely why Santiago Merea, who co-founded the frozen food startup in 2016, led the brand’s expansion into Target’s stores this year.

For DTC brands like Raised Real, which was purchased by Once Upon a Farm in June, “stores drive customer awareness and customer acquisition organically,” Merea said.

In a competitive DTC landscape where customer acquisition costs — namely online advertising, a prime marketing vehicle for online-only brands — have soared, Raised Real ranks among a fresh crop of digitally native startups bowing at national chains to accelerate profitable growth.

Startups ranging from Jinx pet food to Caraway Home cookware are betting on big retail to drive newfound scale, boost brand exposure and churn the hefty sales conversion rates associated with placement in hundreds or thousands of stores that typically elude online-only brands, DTC founders told CO—.

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It’s not surprising why: Although the pandemic steamrolled e-commerce sales, the store’s still the thing: At $4.8 trillion in U.S. sales, brick-and-mortar merchants still boast the lion’s share of the U.S. retail market, accounting for 85.8% of total retail sales in 2020, according to eMarketer data.

“If you want to build a business the old-school way, to make money, retail distribution is a [sound] model with blended costs,” as the brand and the retailer share the burden of customer acquisition expenses, Merea said.

A changing DTC landscape

This latest wave of startups follows in the footsteps of DTC pioneers such as men’s grooming brand Dollar Shave Club and eyewear disruptor Warby Parker, which gained shelf space at big retail and also opened their own freestanding stores.

Digitally native, venture-backed startups proliferated at the dawn of the DTC era a decade ago. They invested heavily in online marketing to fuel growth, as “costs were so low then that you could acquire customers for almost nothing,” Merea recalled.

But times have changed. Demand for digital ads on Google and Facebook, for example, which dominate the digital advertising space, has soared, upping the cost to advertise on these sites exponentially. Average Facebook CPM [cost per 1,000 ad impressions] has jumped from $9.89 in January 2020 to $14.63 in August 2021, according to ad automation platform Revealbot.

“Extremely low barriers to entry combined with the rising tide of e-commerce spending has made the DTC space very crowded,” Andrew Lipsman, principal analyst for eMarketer, told CO—. “Many DTC brands today look the same and sound the same, and as ad dollars keep flowing into social ads on Facebook and Instagram, it's getting harder to stand out and acquire new customers as easily.”

Compounding matters, startups in the DTC space are increasingly competing with big brands with multimillion-dollar budgets, said Terri Rockovich, CEO of premium dog food brand Jinx. “It’s become really expensive to acquire customers online-only.” [How the Pandemic Helped Brands Like Moët Hennessy Uncork New Revenue Streams]

Converting more browsers into buyers: ‘If someone walks by a product at your store, that’s a free impression’

Rockovich has had a front-row seat to the changing retail landscape as a former executive at DTC disruptors like mattress startup Casper. It’s a perspective she brings to Jinx, the DTC brand she co-founded in 2019, inspired by Blitz, her beloved hound mix that was suffering a host of health problems then.

Related: 5 Lessons I Learned From Launching a Startup During The Pandemic

Eager to hit on a healthy pet meal for the adopted rescue dog, Rockovich explored the wilderness of “confusing” options in the category “brand after brand, bag after bag,” she told CO—, “but there was nothing good for him that he enjoyed eating.”

So Rockovich, working with nutritionists and manufacturing partners, came up with Jinx’s line of lean meats and plant-based “super foods” for today’s modern dogs, and therein lies its market distinction, she said.

The pet food category was designed years ago for highly active dogs and remained that way, according to Rockovich. The reality is that today’s dogs “are sleeping most of the day. That’s led to obesity, which leads to a host of other issues.”

Now with a vision to “own the pet pantry with all-natural ingredients,” Jinx is plotting to multiply its business among “millennial pet parents,” the highest spenders on the category, by meeting them in the store aisle.

Amid pandemic-heightened demand for its pet food and placement on sites like Petco.com, the brand earned the attention of big retail this year, landing its best-selling items in 400 Target doors.

“If someone walks by a product at your store, that’s a free impression and an opportunity to sell the consumer at the shelf and win our share [of the pet food market],” she said.

The exposure is paying off. Since launching Jinx at Target two months ago, the pace of merchandise reorders from the chain — 10-plus in two months — “has exceeded our expectations,” Brianna Kauffman Matz, strategy director for Jinx, told CO—. “Additionally, within the Target ecosystem, in-store and dot-com, approximately 10% of total sales are happening online, and sell-through at shelf has a higher conversion rate.”

That comes as little surprise, as conversion rates, the number of shoppers who make purchases, are consistently higher in-store than online, said Matt Kaness, retail veteran, angel investor in the DTC and consumer tech space and the former CEO of ModCloth, who led the digitally native apparel brand’s move offline.

In apparel, for example, the conversion rate online averages 3%, versus 30% in-store, he said.

What’s more, the backing of Target, which has become a destination for DTC brands from Harry’s men’s grooming items to Winky Lux beauty products, is invaluable, he said. For one, “They have the scale and the balance sheet that a startup doesn’t to fund inventory investments.”

Sales-wise, Jinx’s brick-and-mortar business could eventually outpace its online business tenfold — in part because the pet category as a whole is growing, Rockovich said. “Wholesale is a major opportunity to unlock sustainable growth.” [How Three Startups Landed on the Shelves of Target, Whole Foods and Nordstrom]

Strengthening brand equity in-store — and selling out in five hours

Caraway Home debuted in 2019 as a DTC cookware brand with brick-and-mortar aspirations.

Launching online only enabled the ceramic non-stick cookware brand, which comes in bold colors and gold hardware, to aim its eye-candy-for-the-stovetop message squarely at millennials, said founder and CEO Jordan Nathan.

Caraway is not for cooks who see themselves as the Bobby Flay of their home kitchen. It’s for folks, many enmeshed in seminal life moments like buying a home, who want style, ease of use and convenience (sets come with pot, pan and lid holders, for one.)

“We want to help people spend less time in the kitchen,” Nathan said. “They need something that looks good and cleans up well.”

The DTC space also granted the brand a platform to spread the word that unlike most of the non-stick cookware on the market, Jordan says, Caraway is Teflon-free, which, the company claims, means it’s safer and non-toxic. Direct-to-consumer messaging enabled the brand to proclaim its stated mission “to get Teflon off the shelves,” he said.

But after building a following on its own site and via digital registries like Zola, Caraway’s growth online plateaued.

So the cookware brand took the brick-and-mortar plunge into Crate & Barrel this year: “the perfect partner for us, as they’re so focused on high-design products and the high-fashion [oriented] interior- design customer,” Nathan said.

Caraway’s first shipment to the home furnishings chain sold out in five hours; a second batch sold out in a few days; and another shipment will bow in 80 stores for the holiday season, according to Nathan.

“Their team’s commitment to highlighting exceptional design, a deep understanding of color and outfitting an interior space, and their ability to transform everyday products into works of art were key reasons why we sought to build a partnership,” he said. “Being able to tap their expertise and customer base has only strengthened our brand [equity] in the home design and kitchen space.”

Caraway is now focused on securing partnerships with other retailers. “It’s where you can acquire new customers and reach new audiences,” he said. “Opening our own stores is [another] super exciting opportunity.”

Balancing the potential pros (fatter profits) and cons (occupancy costs) of opening DTC-branded stores

Unlike wholesale partnerships, DTC brands that opt to open their own stores incur occupancy expenses including rent, utilities and store buildout design. However, “you can amortize that cost over a longer period of time, versus the marketing costs of acquiring customers DTC-only through online and other media, which must be immediately expensed,” said Kaness.

For a DTC startup, branded stores can be the most profitable channel, Kaness said. That’s because “you’re capturing the full profit margin because you’re not selling through someone else’s retail.”

Back in 2015, Modcloth tested consumers’ appetite for its concept offline with temporary pop-up shops around the country. The brand opened its first permanent store in Austin after doing its due diligence: Tapping data insights, it determined that the Austin pop-up didn’t cannibalize its online business in that market. Then working with a real estate broker, ModCloth identified an Austin neighborhood with a population makeup akin to its core online shopper.

In-store order profitability proved “substantially higher than online orders,” Kaness said

Digital native startups like eyewear merchant Warby Parker and footwear disruptor Allbirds are case studies in “methodically picking the right locations,” Kaness said. But for a DTC brand going it alone, opening stores is no easy feat. “Stores are more labor and capital intensive, which is harder to scale, and decisions like location and build-out design are hard to undo,” he said.

Whether a DTC brand opts to open namesake stores, go the wholesale route or do both, a key component of retaining customers is expansion into physical stores, said Frank Riva, vice president of marketing for 1010data, which provides analytics-based intelligence to the retail and consumer markets. It costs, on average, five times more to acquire a new customer versus retaining one, he said. And “Growing and maintaining customer loyalty is becoming more dependent upon having a broader omnichannel offering,” Riva said.

“As we see many traditional brick-and-mortar retailers scale back the number of physical locations, we see DTC brands doing just the opposite and extending their physical presence.”

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CO— by the U.S. Chamber of Commerce

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