Why DTC is a relationship and not just a channel

DTC has become “a bit of a dirty word,” Lovesac founder and CEO Shawn Nelson told Retail Brew. The furniture company executive said that the DTC label is similar to other recently diminished buzzwords, such as NFT and crypto.

“I don’t think it’s going to go away,” he added. “I just think that it’s going to drift.”

Nelson’s comments come during a period of transition for some brands claiming the DTC label. Many companies are relying more on wholesale to increase sales and improve the reliability of demand in an uncertain market. But whether this pivot marks a slow retreat from the DTC model is a matter of some debate.

For Nelson, the DTC label was always just a punchy three-letter pitch for investors, not a lasting business model. Case in point: Lovesac considered itself a more traditional retailer prior to 2016, but then pivoted after the success of DTC brands such as Warby Parker and Casper.

“Frankly, it was a story that investors can understand because it was a story that was being talked about,” he said.

Out of juice: Now, with venture capital pulling back and DTC brands struggling with profitability, Nelson said the label has lost its “juice,” adding that “it’s not toxic, but I don’t think it’s what it was five years ago when it was all the rage.”

John Merris, CEO and director of Solo Brands, a DTC brand that recently shifted more of its sales into wholesale, said he “didn’t disagree” with Nelson’s argument. “[Being DTC] was really used as a way to basically go out and raise funds for a lot of businesses that were ‘direct-to-consumer’ businesses and then those investors, those VCs just got super enamored with the idea of…direct to consumer,” he said.

At the same time, Merris pointed out that the “direct’ in “direct to consumer” is still a meaningful distinction for Solo Brands. “Direct to consumer for us means a direct-to-consumer relationship, not a channel,” he said. “Long term, I don’t see direct to consumer being viewed as a channel like e-commerce or brick-and-mortar retail. DTC is about the relationship you create with your consumers regardless of the channel you create it through.”

Controlling sales: Both Nelson and Merris distinguished between DTC as a channel and DTC as a customer relationship. So what’s the difference? At Lovesac, it comes down to whether the company controls the sales process—regardless of which channel that sale happens to take place in.

Nelson, for example, said Lovesac is “essentially 100%” direct to consumer, but then noted that it also sells within big-box stores such as BestBuy and Costco. Indeed, the “other” category in its latest earnings report—which includes sales made at wholesalers—grew 3.1% in the second quarter.

Why these sales still qualify as “direct,” according to Nelson, is because Lovesac is retaining “100% of the customer data” and is able to tailor the sales experience to meet the needs of the product, which in this case is large, modular furniture.

Lovesac does this by entering into what Nelson called “hybrid partnerships” with wholesalers that require all its product to be sold through pop-up or shop-in-shops (also known as store-within-stores) that ensure the company touches each transaction.

Nelson said he understands why other DTC brands are turning to wholesalers, due to the higher volumes they bring in, but that Lovesac’s “highly differentiated product” requires it to “continue to control the physical sales process.”

All about the sale: Solo Brands’s Merris echoed this way of thinking about the fine line between DTC and wholesale, even as it embraces the latter. He noted that Solo Brands is partnering with retailers such as Costco and Dick’s Sporting Goods to “still maintain that direct relationship with the customer even though they’re the ones that are actually at the point of sale transacting with the customer.”

In other words, DTC could come to define the quality of a brand’s relationship with their customers, rather than whether it sells its products online, at a brick-and-mortar store, or through a third-party wholesaler.

Nelson succinctly described this more pragmatic approach to DTC: “What is every DTC brand really doing? They’re selling shit. Now whether their first business happened to be a website or whether it happened to be a physical store, who really cares? I think what matters is sales and profits in the end.”