DTC companies often rely on, and tout, the lack of middlemen as part of their appeal to customers. Brands like Warby Parker and Allbirds have long advertised their favorable price points by pointing out their thin margins and lack of markup.
But with inflation up and costs of goods on the rise, those thin profit margins are becoming a liability. Warby Parker and Allbirds, both with earnings calls last week, revealed layoffs, declining revenues and rising costs, showing the vulnerability that the DTC model holds in these times. But at the same time, both brands also laid out plans for weathering this storm.
For Allbirds, its second-quarter net loss was up by 287%, and its total losses for the first half of the year were more than its losses for the entirety of 2021. Overall revenue was up 15%, meaning the widening losses are entirely caused by increased costs.
To offset that, the company is making big changes. It’s liquidating its activewear category, which it launched in August of last year, and it laid off 8% of its staff just before the earnings report came out. And Allbirds CEO Joey Zwillinger said other cost-saving measures are coming.
“We are investing in various elements of our supply chain to reduce both cost of goods and our carbon footprint,” Zwillinger said on the August 8 earnings call. “This includes forming new relationships in our manufacturing base, upgrading to more automated distribution centers and moving to a dedicated returns processing provider in the U.S.”
Warby Parker also saw its profit margin slipping, from 59% in the second quarter of last year to 57% this quarter, equating to a $32 million loss.
Part of Warby Parker’s plan to turn things around, surprisingly, relies on physical retail. The company will open 40 stores this year, bringing the total number of new locations opened between 2021 and 2022 to 75. The strategy is surprising because, even by co-CEO Dave Gilboa’s own reckoning, retail stores will likely be impacted by downward spending trends.
Gilboa said retail productivity started to decline in May, to around 80% of average monthly sales, and that it could fall even further to 75% before the end of the year.
“We believe that the slowdown in retail productivity coincides with and is primarily driven by a range of factors, including a pullback in consumer spend on durable goods and, secondarily, a pullback in marketing spend as we focus on profitability,” Gilboa said on the company’s August 11 earnings call. “Despite the lower retail productivity percentage, the unit economics of our stores remained strong.”
To make up for declining retail productivity, Gilboa said Warby Parker is planning to scale back on marketing spend, bringing the budget down from 17% of revenue, as it was in the first half of the year, to 12% of revenue.
Two of Warby Parker’s biggest costs are marketing and employee payroll, so cutting back on marketing and laying off 63 people are ways to significantly cut costs. Gilboa said he hopes the new stores will serve as passive marketing themselves to offset the lowered spend on traditional marketing.
Warby’s retail strategy is a smart one, according to Andrew Duffy, CEO of employee management platform SparkPlug.
“The smart DTC players are aware that we’re not seeing a decline in shopping, but that we’re seeing a decline in e-commerce purchasing,” Duffy said. As of May 2022, e-commerce sales are down by 2% year-over-year. “Brick-and-mortar retail spending has remained strong and continues to rebound in a big way from the pandemic. Any DTC brand that hopes to succeed in the coming decade needs to figure out how to take advantage of the most cost-effective customer acquisition channel they have: the old-fashioned brick-and-mortar store.”