Some of the biggest digital brands are finally making headway on slashing marketing costs, a key step toward profitability. Finding ways to attract customers without overspending on Instagram ads, however, remains a work in progress.
In the second quarter, Warby Parker’s adjusted earnings before interest, taxes, depreciation and amortisation grew more than 100 percent to $14 million. But its active customers — shoppers who bought an item within a 12-month period — grew a little over 1 percent year over year, compared to a nearly 3 percent increase in the first quarter. Allbirds, still trying to win back core customers after a failed product expansion into activewear and performance footwear, slightly narrowed its adjusted EBITDA losses by $3 million, but its sales slipped 10 percent year over year. Though it has roots beyond DTC, hair care company Olaplex is seeing similar issues: It lowered its full year guidance and said it doesn’t expect demand to increase this year.
After investors turned on money-losing brands last year, these firms slashed digital advertising spend — historically their primary vehicle for new customer acquisition. Though an effective tactic for improving the bottom line, it also limits reach.
Now, these brands are renewing their focus on brand awareness and adopting conventional strategies, like television ads or international expansion, to grow their customer bases. Some are embracing wholesale or brick-and-mortar — Allbirds entered multi-brand retailers like Nordstrom and REI in 2021, while Warby Parker opened 59 of its own stores in the past year to entice customers. Olaplex is giving its retail partners samples to hand out in hopes of driving more traffic to its e-commerce site.
The challenge for the old guard of DTC disruptors is to execute these new brand awareness strategies effectively without interrupting their paths to profitability. But it’s too soon to tell whether these tactics are efficient at attracting new customers. Some experts say the payoff of these strategies may not be evident until next year. That’s a timeline some companies can’t afford: Warby Parker’s, Allbirds’ and Olaplex’s stocks have dropped more than 60 percent since their respective public market debuts.
“We’re still in a weird world where the economy is wonky. You’re still coming out of some hard comparisons,” said Dylan Carden, research analyst at financial-services firm William Blair. “Some of these businesses are living for 2024, when they think they’re going to have a better grasp of normalised trends.”
Bigger Audience, Smaller Profits
To increase exposure, Allbirds is thinking globally. The brand announced last week that it entered new agreements with distributor partners in Canada and South Korea that are set to finalise later this year. It expects those partnerships to elicit the kind of exposure that leads to profitable sales growth without the costs of opening stores or warehouses.
“We’ve been searching for the right partners with strong merchandising capabilities to drive the right products for the right channels, as well as the ability to connect with the local consumer, enhance brand equity and fuel customer engagement,” Allbirds’ chief executive, Joey Zwillinger, said on an analyst call in August.
Olaplex is also aggressively leveraging its third-party partnerships. In the first quarter of the year, the brand sent nearly 800,000 samples to Sephora stores. Customers who buy from any brand on Sephora’s website and pick up in-store get a free sample of Olaplex’s No. 3 Hair Perfector. This strategy could increase new customer growth by 30 percent this year, said JuE Wong, Olaplex’s president and CEO. Olaplex’s brand awareness campaign, which includes the sampling program, led to a more than 50 percent increase in traffic to its site in June, even as sales on the brand’s own e-commerce channels have declined.
“When people are thinking of prestige, premium or performance hair care, they think of us,” Wong said. “That is why we believe our integrated, full-funnel investment is so important.”
Warby Parker, perhaps, has the biggest bet to make. Despite opening new stores, it has saved money with its pullback on digital ads. The company’s operational expenses dropped 11 percent year over year for the first six months of 2023. Its losses narrowed by nearly $40 million in the same period.
But Warby Parker is confronting the limitations of this combined strategy, evident by its dismal growth of new customers and 6 percent decline in online sales in the second quarter. Neil Blumenthal, Warby Parker’s co-founder and co-CEO, acknowledged on an earnings call in August that the 1 percent increase in active customers was a “low point” driven by the continual dip in marketing spend. It’s putting more money in advertising, but not in the conventional DTC manner or in a way that targets the traditional DTC customer.
Warby Parker is ramping up advertising on linear (network or cable) television that spotlight its progressive lenses, which the company introduced in 2014 and are typically used by an older consumer. This could help the brand expand beyond its Millennial urbanite customer, experts say.
“There’s maybe an older customer that just never heard of Warby [Parker] or thought that Warby [Parker] was a brand for a 20-year-old Brooklyn [based] customer,” said Edward Yruma, managing director and senior equity analyst at investment bank Piper Sandler. “You’re not exploiting the full power of the business if you’re not trying to attract a broader customer base.”
The pressure for these tactics to perform is on. After all, slashing costs can only do so much if a company isn’t actively growing sales. Warby Parker’s year of narrowing losses could be reversed if its brand awareness campaigns don’t drive people to its online or physical storefronts. Carden of William Blair noted that Warby Parker set its adjusted EBITDA profit margin targets for the third quarter to as low as 5 percent, after reaching nearly 9 percent in the second quarter.
“They set the third-quarter profit margin below where the street was,” Carden said. “A not insignificant piece of that is this brand awareness campaign they are going to run.”