It’s been two years since DTC brands such as Allbirds, Figs, and Warby Parker took Wall Street by storm in a flood of blockbuster IPOs, and when it was hard to leave the house without running into a slickly produced ad for some industry-disrupting product ready to be shipped to your home.
Higher interest rates, supply-chain snarls, and changes in the digital advertising market may have slowed certain brands’ roll since the peak of the DTC boom, but they’ve hardly fallen off the face of the Earth. Many are just trying to find their footing in a changing economy.
In this new world, Polly Wong, president of Belardi Wong, a marketing agency with 400 active retail clients, told Retail Brew there are two clear trends impacting the sales environment for DTC companies:
- Conversions are down despite continued customer engagement, indicating that brands are still connecting with customers.
- And in a historically uncommon turn of events, affluent shoppers are pulling back on their spending the most among consumers.
Still engaged: Tackling the first issue, Wong said her clients’ “sessions” (any digital interaction with a customer) are rising even as conversion rates (the number of the interactions that turn into sales) decline. In other words, shoppers are still browsing, but not clicking the buy button.
“The challenge is not that consumers are not interested in shopping,” she said. “The problem is that conversion rates are down across the board.”
She added that many companies have focused their efforts on “bottom funnel” marketing. These are tactics that are usually used once you already have an engaged potential customer, and include strategies such as increased “remarketing” via social media to repeat browsers.
Bad vibes: When asked what might be behind the hesitancy from shoppers, Wong gently reminded Retail Brew that economic sentiment has been less than stellar in recent months. Remember when multiple commercial banks collapsed in the span of just a few weeks last spring?
There’s also the fact that until fairly recently, many economists and large banks were predicting a recession in this year or next.
“The affluent consumer is paying very close attention to all the economic indicators,” she said. “Banks collapsing make people very uncertain and nervous, and inflation was making people nervous.”
Retail news that keeps industry pros in the know
Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.
Noted. But why would affluent consumers cut their spending the most?
Spending hangover: Wong said affluent consumers are likely more invested in stocks and arguably more sensitive to the ebbs and flows of the market, but that’s not the only factor giving them pause. You also have to consider the economic truism that you can only have so many sweaters (or TVs, appliances, and home remodeling for that matter).
“I mean, it’s on the heels of complete spending gluttony from that group during the pandemic,” she said.
Fall recovery: Where does that leave us today? Wong said she thinks there’s a good chance of a rebound in spending come fall, as consumers fully process the fact that a recession is now considered less likely.
In addition, online sales (DTC’s bread and butter) have held strong. They jumped 1.9% month over month in July, according to the Commerce Department. This rate might look tiny compared to the extraordinary double-digit increase of the year before, but it’s strong relative to overall retail sales, which ticked up 0.7% in July from the month before.
Pessimistic view: Some economists, however, are less optimistic.
National Retail Federation Chief Economist Jack Kleinhenz said in a release earlier this month that while the economy proved more resilient in the second half of 2023 than expected, “the pace of consumer spending growth is becoming incrementally slower.”
Spending growth dropped from 4.2% year over year in the first quarter to 1.6% in the second, according to NRF retail sales data. While federal retail sales data still shows continued gains, there are indications that US consumers could feel the pinch in coming quarters. Credit card debt, for example, crossed $1 trillion for the first time in Q2.
“Consumers remain inclined to spend, but we think the fundamental backdrop is poised to change and expect outlays to decline toward year-end,” Oren Klachkin, lead US economist for Oxford Economics, wrote in a research brief following the data release. “Incomes are bound to weaken as the economy dips into a recession, elevated interest rates will make it expensive to borrow, and excess savings will eventually run out.”