How do DTC and retailer-distributed brands compare?
One spends significantly more on marketing.
Last year I conducted an analysis comparing brands that distribute via DTC (direct, ecomm brands) and brands that distribute via retail. Contrary to recent news, both models can be profitable. But the business models are slightly different.
As a heads up, the data is now a year and a half out of date. But the insights are just as relevant. And this is a preview for an upcoming piece on omni-channel marketing.
Behind the numbers of consumer brands
I looked at publicly available finances of (4) types of consumer branded companies to get an idea their business models and who is actually making money:
DTC softgood single brands — FIGs, Warby Parker, Allbirds, Gymshark
Data-wise, I compared the following metrics to build a basic idea of where profitable and non-profitable brands invest their cash:
Product spend: Cost of goods sold / Total Revenue
2. (Rough) Marketing spend: SG&A / Total Revenue
Exact marketing spend by firm is not publicly available. But since marketing typically falls into SG&A, we can look at SG&A as a proxy. Other typical SG&A items include rent, salaries, and distribution.
3. Is the business profitable? Net income / Total revenue
The data is not perfectly scientific; different company data covers different time periods. However, it still provides a good sense of where brands are allocating funds.
Profitability by consumer brand, summarized:
What does a profitable consumer brand look like today? Some takeaways
1. Multiple models exist
You can be profitable as a single DTC brand or house of brands that distributes via retail. But the economics are different. Brand houses which distribute via retailers can spend significantly less on marketing than direct-to-consumer (DTC) brands who have to acquire each customer on their own:
CPG houses like P&G invest a majority of spend into product (50–57% of revenue goes to COGS), with 18–33% remaining going to marketing and ops. The exception is L’Oreal, which spends less on product (26%), and more on SG&A (54%), implying that marketing cosmetics is quite expensive.
Soft goods like LEVIs and VF Corp spend less on product (30–45%), and more on marketing and operations (40–50%), potentially due to owned stores. Nevertheless, they still eke out a profit.
Direct-to-consumer brands invest heavily in marketing (56–125% of revenue) as they have to acquire each customer, with 27–46% on product — DTC brands tend to keep product costs under half of revenue (Warby Parker and Allbirds spend 42–46% of revenue on product, while FIGs and Gymshark keep it to 27–32%). Profitability becomes a problem with marketing costs — Warby Parker’s SG&A is a whopping 125% of revenue, while Allbirds sits at 73%, resulting in neither brand producing profits. FIGs and Gymshark keep marketing to 56–62% and are profitable.
2. Given DTC’s inherently high marketing costs, they can cut their product costs or raise prices to allow more room for marketing:
Marketing is often listed as the culprit for DTC brands’ lack of profitability. But product cost also plays a role. The two profitable DTC brands I analysed, Gymshark and FIGs, have lower relative cost of goods (27–32%) than unprofitable Warby Parker and Allbirds (42–46%). Warby and Allbirds might consider raising prices to offset their expensive marketing costs, and/or cutting product investment.
