Signals of possible DTC exits in 2022 indicated by declining transaction volume
In the dynamic world of direct-to-consumer (DTC) brands, the landscape has been shifting, with several brands making strategic moves to adapt and thrive.
One of the biggest draws for DTC brands in an acquisition is access to resources, leadership, and infrastructure they didn't have before. Casper, for instance, inked an acquisition deal with private equity firm Durational Capital Management last year, resulting in it being taken private again.
Despite the uncertain environment, several DTC brands are still posting sales gains. The Honest Company, for example, reported a 5% year-over-year increase to net sales in the second quarter. This resilience is a testament to the strength of these brands and their ability to adapt to changing market conditions.
Across DTC brands, there were 298 acquisition deals in 2021, according to PitchBook. However, the number of such deals has come down to 70 as of July this year. This decrease could be attributed to investors' projections of assumed consumer behavior not happening, causing larger companies to pull back on acquisitions and brands putting IPO plans on ice, according to Kondrat.
Consumer confidence is not great, causing some consumers to pull back on spending, making for a weaker market and fewer deals. Yet, down cycles don't mean that every sector has to be down. If a brand has a great story, it can still attract capital and resources, even in a less attractive market.
For those brands that still want to pursue an exit, they will need to demonstrate profitability or a clear path to profitability to investors. Brands need to prove their product market fit and have a strong value proposition for customers. Razor brand Billie was acquired by Schick maker Edgewell last year, a testament to its successful product market fit and strong value proposition.
In the current market conditions, brands that haven't reached profitability should focus on getting their house in order, getting their costs in the right place, and focusing on their core products or services, as well as their core consumers. Unless the need for capital is imminent, brands aren't necessary to exit. They should use this period to create greater efficiencies to move closer to reaching profitability.
The retail industry has also seen a wave of layoffs in recent months as a means to cut costs. Walmart, Gap, Victoria's Secret, Glossier, Allbirds, and Warby Parker have announced workforce reductions. This trend is not unique to DTC brands, as retailers across the industry have turned to layoffs to navigate the challenging market conditions.
Despite the drop in IPOs across all sectors, there's still a lot of capital out there that needs to be put to work. Brands like Milk Makeup and Obagi forged a deal with a special purpose acquisition company (SPAC) to go public last year. As of July this year, the number of SPAC deals has come down to 70.
In conclusion, while the market conditions are challenging, DTC brands are navigating these challenges with resilience and strategic decision-making. They are focusing on their core products, demonstrating profitability, and adapting to the changing market dynamics to continue serving their customers and thriving in the long run.
