‘Businesses will shut down’: The coronavirus threatens to crush direct-to-consumer businesses’ wild growth

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The coronavirus is wreaking havoc on consumer businesses, but is especially threatening to digital-based startups that raised a lot of money on the promise of rapid growth.
The economic shock from the coronavirus adds to existing pressures on these companies.
Beauty and apparel are especially hurting, but some sellers of home and essential products have seen sales upticks, sources said.

Arfa, a direct to consumer brands startup, planned to launch a new personal care line called Hiki. That all changed as the coronavirus shut down industries and consumer spending.

So Arfa’s founders huddled with board members and investors and decided to do something drastic: Give the products away for free, to hospitals and health care workers. Regular customers are also being offrered two Hiki products for free, in exchange for customers being kind to others.

“Our mission is to make people feel more comfortable in their skin,” said Ari Wengroff, cofounder of Arfa. “So encouraging human connection at an intimate level when a lot of us are feeling isolated is a strategy we believe is going to work.”

Not every DTC firm has the capital to be able to give product away, however. For others in the space, which had been booming in recent years, the pandemic’s impact could be the final straw.

Direct-to-consumer companies, many of which grew by taking advantage of cheap advertising rates on Facebook, have seen those costs go up.
At the same time, their conversion rates have gone down as more competition enters the category. Online mattress company Casper seemed novel when it started in 2014, but now there are more than 100 “bed in a box” sellers.
Many of these DTC companies are venture-backed and built on a fast-growth model. The barrier for new funding is now higher as funders scrutinize founders more closely after seeing massively venture-funded bets go awry like WeWork and Uber. And the inability to have face-to-face meetings hampers deals.

“Funding will become harder. Businesses will shut down. A lot more investors will circle their current portfolio to make sure they can weather the storm,” said Mike Duda, managing partner at hybrid accelerator agency and venture capital fund Bullish, whose investments have included Warby Parker and Peloton.

‘Nobody’s buying anything’

A primary function of DTC startups has been to test and learn fast, said Heather Hartnett, CEO of Human Ventures, a VC fund and startup studio. You can do that when there’s a steady stream of people purchasing, generating data. But as people stop shopping, that data goes away.

DTC insiders say companies are slashing their advertising by as much as 80% as their sales, especially of nonessential items, have plunged and advertising risks landing flat or being tone deaf when people aren’t in a buying mood.

“I’ve seen apparel go completely in the gutter as well as beauty,” said Nik Sharma, who consults to DTC startups. “No one’s really buying anything.”

In addition, early-stage companies are more likely to have the added vulnerability of relying on a single factory or distribution center to make and ship their products from, which puts their …read more

Source:: Businessinsider – Tech

      

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