The direct-to-consumer craze is slamming into reality

The following is a selection from Big Technology, a newsletter by Alex Kantrowitz. To get it in your inbox each week, you can sign up here.

They were the hottest names in tech. Brands like Warby Parker, Stitch Fix, FIGS, and Allbirds pioneered a new form of retail, one that went “direct to consumer” — via the internet — instead of selling through established outlets. Riding the promise of low overhead, no middlemen, and a seemingly infinite pool of customers, these companies’ valuations soared well into the billions. They appeared unstoppable. But today, they’re crashing hard with no bottom in sight.

A gloomy confluence of rising Facebook ad prices, worsening ad measurement, soaring shipping costs, newly-sober public markets, and smaller-than-anticipated customer bases are dealing DTC companies a harsh blow. A Big Technology analysis of public DTC companies with market caps of more than $800 million found nearly every one of these companies are dealing with revenue contraction, shrinking margins, runaway losses, or a combination of all three. Together, they’ve lost billions in market cap in 2022, drastically underperforming the market in an already bad year.

“There’s certainly a reckoning happening,” said Orchid Bertelsen, COO of Common Thread Collective, an ecommerce agency that works with DTC companies. “The environment is much more unforgiving.”

Skyrocketing Facebook ad prices have done the most damage to the DTC industry so far. These companies have long relied on affordable Facebook advertising for growth, a precarious bet that’s now coming due. Operating largely without physical storefronts, they’ve used Facebook to reach customers who may otherwise have walked into a real-world shop. Nearly all DTC companies have low name recognition — Warby Parker went public with just 13% brand awareness — so reaching thousands of people for a few dollars on Facebook helped them compensate. But the plan’s stopped working.

Facebook ad prices have skyrocketed in recent years due to rising demand — and in some cases, contracting supply — leaving DTC companies in a bind. “In two years, it’s basically doubled to tripled,” said David Herrman, a social media ad buyer, of the cost to advertise on Facebook. In the U.S. the cost to reach 1,000 people on Facebook jumped from $6 to as much as $18 within the past two years, Herrman said.

As prices rise, Apple’s iOS privacy changes have added yet another obstacle, harming DTC companies’ ability to measure whether their social media ads are working. “The iOS 14 privacy changes affected everything,” Herrman said. “The internal metrics and mechanisms that Meta uses for attribution are off somewhere around 30, 40, or 50%.” Unable to optimize effectively, DTC companies are now spending more for worse results, eating into their margins.

Then there’s the supply chain. As the pandemic settled in, the cost to import containers from China exploded, in some cases by a factor of 10. This added yet another cost to…