How DTC Brands Are Cutting Costs

In the second half of 2022, Honeylove hit a milestone: for the first time in its four-year history, the intimates brand was consistently profitable before interest, taxes, depreciation and amortisation.

The shapewear seller had steadily grown sales by introducing new categories, including bras, underwear and pants, reaching $61 million in revenue in 2021. But when it came to margins, it was a move last May to start shipping orders from a warehouse in Columbus, Ohio, rather than a more expensive facility just outside Los Angeles, that proved decisive.

Honeylove estimates it saved $400,000 per month by shifting its logistics to a city with lower labour and shipping costs. That was enough to bump the company’s EBITDA profits to around $200,000 in July, then double that in August and $500,000 in September, said Igor Lebovic, Honeylove’s co-CEO.

Lebovic said cutting costs on the back end was essential as the company wanted to avoid raising outside money. The cost of capital has risen sharply, forcing start-ups that raise funds to accept lower valuations.

Honeylove is far from the only start-up embracing thrift this year. Supply chains and marketing costs, two of the biggest expenses for digital brands, are under particular scrutiny. A slowing economy and investor impatience means the clock is ticking for brands to achieve profitability.

“The strategy up until now was to break even,” Lebovic said. “The strategy now is to generate cash.”

The Power of the Product

Cost-conscious companies are paying close attention to inventories after an industry-wide glut of late-arriving and off-trend merchandise forced many retailers to introduce deep markdowns over the holidays.

Brands normally produce a certain number of goods based on a revenue growth rate goal; they’ll make 50 percent more items to ensure sales rise 50 percent. When a company misses sales targets — if high inflation hurt consumer demand, for instance — it is often left with a mountain of unsold inventory that needs to be discounted, which cuts into profit margins per item sold.

AYR is taking a more conservative approach to inventory planning this year. The costs to make the apparel brand’s seasonless wardrobe staples, including high-rise denim, breton-stripe T-shirts and oxford button-ups, is often its biggest expense, said Meg Covington, AYR’s chief financial officer.

AYR will still introduce new denim cuts, polo shirts and button downs in lighter materials, as well as more menswear. But it will produce a smaller number of those new items, with plans to cut spending on producing new goods this year by 30 percent. The brand will also continue to sell items that went unsold last year.

“We have the luxury of sitting on goods that we can sell over multiple seasons and even multiple years,” Covington said. “We plan for what we know we can achieve.”

AYR, which has been EBITDA profitable since 2020, expects its new inventory strategy will save the company anywhere between $1 million and $10 million this year.

Similarly, Another Tomorrow is updating its manufacturing strategy. The womenswear brand will introduce a made-to-order option for select seasonal items, like its tailored suits in limited edition colours. This program will help to ensure each style the brand produces is guaranteed to sell through, said Vanessa Barboni Hallik, Another Tomorrow’s CEO.

Revising the Marketing Mix

Online marketing remains a major, and unpredictable, expense for many digital brands. Many brands may be tempted to slash their entire marketing budgets this year. Yet, experts say that brands looking to shore up their savings will need to invest deeper in cheaper forms of advertising that drive new customers and help retain existing buyers.

“People should be diversifying their marketing mix … [and] homing in on specific channels,” said Michael Duda, a managing partner at investment firm and creative agency Bullish. “You’ve got to figure out where your position of strength is.”

For The Honey Pot Company, buying Google search terms related to vaginal wellness has been a cheaper alternative to paid ads on Facebook and Instagram. The feminine care brand spends 30 percent less on average to appear high up when a person searches terms like “herbal pads from that honey brand” than on a social media ad where it pays per click.

Google search drives 50 percent more traffic to The Honey Pot Company’s site than traditional paid ads. The brand plans to lean further into this channel and buy more general search terms like “menstrual pads” to entice a larger swath of potential buyers who are looking for items like its organic cotton tampons and overnight pads.

The Honey Pot Company is “doubling down on investments where our humans are actually searching,” said Giovanna Alfieri, vice president of marketing at The Honey Pot Company.

AYR spends about 50 percent of its marketing budget on catalogues, which sometimes showcase the brand’s employees wearing its clothes. First introduced in 2021, the catalogues helped increase the number of repeat purchases by more than 50 percent in 2022.

The brand plans to send most of its catalogues to existing customers in 2023, and expects to save around 25 percent of its spend on the format by using it primarily as a customer retention tool.

“On marketing, we’re focusing on the highest returning spend,” Covington said. “The cost saving is optimising our spend to the highest returning channels.”