Could the DTC slowdown pose a risk to marketing agencies?
Agencies have queued up to be associated with direct-to-consumer startups this past decade. As part of The Drum’s Evolution of E-commerce Deep Dive, we look at whether they’re at risk now the sector is struggling.
DTC businesses thrived in the pandemic, but a cooldown could render them shaky bets as clients / Unsplash
Direct-to-consumer (DTC) brands were supposed to be the future of retail, blending the buzz of the startup scene with a democratic vision of shopping. But investors and analysts have cooled on the scene in recent months.
As the pandemic-era retail surge subsided and consumer spending began to contract, Made.com, Zalando, Peloton and Warby Parker have all seen profits and stock prices fall. Elsewhere, higher interest rates have made borrowing more expensive, meaning venture capitalist backers of startups or challenger companies have less cash available.
”Most of our e-commerce clients had a big boom during Covid, but now things are starting to settle down and get back to normal levels as there’s a lot of nervousness around inflation and cost of living,” says Shaun Uthup, creative director at Sozo.
The agency, based in Gloucestershire, England, focuses on startups and scaleups in the SME range, with typical revenues hovering between £1m-£5m ($1.15m-$5.75m). He says that ”some clients are panicking and others are now putting the brakes on”.
Together, those factors mean DTC brands and startups are likely to shift focus to profitability rather than outright growth – an alteration that could affect the agencies they work with as their marketing approaches change.
Many agency businesses have found success in specializing in services for startups. But with greater scrutiny on marketing budgets – and the reality that not every startup will survive the current economic climate – DTC startups and scaleups might carry more risk as clients than agencies are comfortable with.
According to Adam Killip, marketing director at new business consultancy Rainmaker, some agencies are turning away from the sector. ”We’ve had a couple of agencies that came to us because they needed to reduce their focus on startups,” he says.
Lauren Kleinman, founder of Los Angeles-based DTC-focused agencies Dreamday and The Quality Edit, meanwhile says she has witnessed clients in the sector go under in recent months. ”Unfortunately, we’ve had a few clients where their business goals were too aggressive. They overshot their projections for the year and ended up spending more money than they were making and ended up going out of business.”
While Killip and Uthup point out that the DTC world is ”not a monolith” and that some categories have struggled more than others, Uthup says ”there’s definitely a risk” to agencies that cater to this market.
According to Kleinman, DTC clients across the board are attempting to make their businesses more resilient and more profitable. ”There were a few shaky months over the summer... we did feel some impact. We could tell clients were stressed because there has been a lot of pressure from institutional investors to hit certain goals, whereas before there was more leniency around spending money to get your brand seen.”
That has had an impact on client demand and spending, she says. ”We’ve noticed brands are really focused on everything being ROI-driven, making sure they get at least a dollar out for each one they put in.”
While demand for PR and affiliate marketing is still strong, ”clients are more hesitant to pull the trigger on new strategies or on partners that haven’t been proven as efficient channels,” she adds.
Uthup tells The Drum that clients are challenging agencies to offer more services. ”In digital marketing, we mainly focus on Google ads and Google organic SEO, but clients are also pushing us to do social ads and other forms of marketing to drive more traffic to their sites.
”We’re having lots of conversations about conversion rate optimization (CRO). During Covid, they had shedloads of traffic and were struggling to keep up with orders. Now that there’s a slowdown they’re thinking about how to increase their conversion rate.”
So, how can agencies that previously catered to the DTC brand market adapt to heavier weather? Killip says that some are looking to diversify their client portfolio by bringing in larger brands, adding that clients with more established marketing teams, longer-term strategies and deeper benches on their internal teams were seen as more attractive prospects in an uncertain economy.
Those companies can provide more stable business relationships, too. ”Often, startups don’t turn into long-term clients,” he says. ”Some of them fall by the wayside or their own requirements change.”
Kleinman agrees, noting that both the companies she runs are looking to work with larger, more established clients going forward. ”We’re generally looking for companies that ideally are profitable, that are out of that dangerous startup period, that have found something that has traction.”
Her team has also reviewed billing arrangements for its smaller startup clients to make sure they pay on time. ”We work with a lot of smaller brands and we’re trying to figure out billing solutions to make sure that, at the end of the day, if we do our end of the deal, they’re going to be able to pay us.”
Killip recommends agencies double down on their due diligence when considering clients of this type. ”It’s never been more important to have really good insight and intelligence on specific companies,” he says. ”That could be their financials, how they’re set up, what their marketing team looks like and whether they’re used to working with agencies.
”With scaleups, there can be growing pains in-house. You need to be able to sift through the ones that represent good opportunities, in both their budgets and ambitions, before you invest your time in having conversations with them. It’s about lifting the bonnet up.”
For more on the Evolution of E-commerce, check out The Drum’s latest Deep Dive.