Summary of Key Points
DTC (Direct to Consumer) brands, which once relied solely on online sales, are now collectively moving into physical stores. The reason is that the cost of acquiring customers online has increased significantly (by 25%-60% in the past two years; for some categories, it can cost up to $80 to acquire a new customer), while physical stores offer the advantage of fixed rent and scale effects (the more people there are, the lower the cost per customer). Additionally, physical stores can drive online sales in their local areas. However, not all brands have been successful: some have made money from their offline operations (for example, Warby Parker generates two-thirds of its revenue from offline sales), while others have suffered losses and had to close their stores (for instance, Allbirds almost shut down all of its direct-operated stores in the United States). The key factors determining success include whether the product requires a physical experience, the rationality of the store location, and the accuracy of cost calculations.
1. Why Can't Online Revenue Support Growth Any Longer?
Before 2021, the strategy for DTC brands was simple: create a website and invest in Facebook ads to target customers precisely. Warby Parker, for example, grew by selling affordable glasses online, while Glossier gained followers on Instagram to promote its beauty products. However, in 2021, Apple changed its privacy policy, allowing users to opt out of cross-platform tracking, which reduced the accuracy of Meta (Facebook's parent company) ads and increased ad costs due to more brands competing for the same audience.
For instance, what used to cost $100 to acquire 10 new customers might now only yield 5, with each customer costing $20 or more. The revenue generated from advertising no longer covers the expenses, indicating that the pure online model is reaching its limits.
2. The Hidden Benefits of Physical Stores: More Than Just Selling Products
The logic behind physical stores is the opposite of online sales. Online ads are charged per click, while rent for physical stores is fixed; regardless of the number of visitors, the cost per customer decreases. Moreover, stores serve as a "brand amplifier" – industry data shows that DTC brands experiencing growth in offline sales typically see a 13.9% increase in local online sales.
For example, Vuori sells sports clothing, and customers need to touch the materials to determine their quality; opening physical stores directly boosts sales. Gymshark creates fitness experience spaces with training classes and community activities, treating the store as a "content community" rather than just a place to sell products. Figs targets healthcare professionals by providing relevant communities, and Boll&Branch sells high-end bedding, where customers are willing to pay more after experiencing the quality of the materials. These brands' physical stores address needs that online sales cannot meet.
3. Why Some Succeed While Others Fail: It Depends on Whether the Product Requires a Physical Experience
Although both Warby Parker and Allbirds opened physical stores, their outcomes were different due to the nature of their products:
- Successful Example: Warby Parker sells glasses, which require customers to try on before purchasing; the store is an essential part of the buying process. The company also strategically chose locations where its online customer base was concentrated, ensuring a ready supply of potential customers. In 2024, two-thirds of its revenue came from offline sales, with faster growth than online.
- Failed Example: Allbirds sells eco-friendly shoes, and their selling points (comfort, sustainability) can be effectively communicated through online content, so customers don't need to visit physical stores. Its stores function more as showrooms, unable to generate enough sales to cover rent costs. After expanding from 22 to 58 stores, Allbirds had to close all of them. Another example is Luna, which rented a large and expensive store that resulted in a monthly loss of $135,000, leading to the company's downfall.
Glossier took a different approach by not opening many physical stores itself but instead partnering with Sephora, allowing its products to be sold in their stores. It only maintained three flagship stores for customer experience, avoiding the risk of bearing rent costs, provided that the brand was well-known and Sephora was willing to cooperate.
4. Three Critical Calculations Before Opening a Store
1. Rent Is Not an Additional Cost; It Should Replace Acquisition Costs: The idea that "rent is a new form of acquisition cost" holds true only if the customers brought by the store help reduce the need for additional advertising spending. If rent adds to existing ad costs, it will lead to losses.
2. Evaluate the LTV/CAC Ratio: Investors now focus on this metric: the lifetime value of customers (LTV) divided by the cost of acquiring them (CAC) should be ≥3:1. Whether the money is spent on advertising or rent, if this ratio is not met, long-term sustainability is at risk.
3. Don't Be Afraid of Channel Competition: Opening a physical store may lead to a temporary decline in online sales, but this doesn't mean business is declining; it's simply customers moving from online to offline purchases. It's important to consider total sales and the number of new customers, not just online data.
In conclusion, Blumenthal (the founder of Warby Parker) put it best: "Sustainable growth means steady annual growth." Brands that rush to expand without properly calculating these factors often suffer setbacks.
Conclusion
The expansion of DTC brands into physical stores is not a matter of following trends but a result of high online costs. Success requires that the product truly benefits from a physical experience, strategic location selection, and a cost model that effectively replaces advertising expenses with rental income. Blind expansion, like Allbirds' experience, can turn physical stores into money-draining operations. This is evident in everyday consumer behavior: brands that require customers to try, touch, and experience their products are more likely to succeed with physical stores.