Getting sold on a “make $1,000 a day working anywhere” drop shipping course? Here’s why you might want to rethink.

Direct-to-consumer (DTC) brands — those that generate the majority of their sales online — have a tough market. Emerging brands like Warby Parker, Allbirds and The Honest Company are all down nearly 80% since going public last year.

Digital brands get pressured

In the past decade, anyone could spin up an e-commerce site in minutes, find a drop-shipping service or put money into Facebook ads — and watch the $$ flow in.

• But as competition increased, so did Facebook ad costs, leading to falling profitability.
• One social media ad buyer said Facebook ad costs have doubled or tripled in the past two years.

But problems in the industry run deeper than just poorly performing ads. Supply chain issues and slowing consumer spending have been too much to handle. A lack of profitability among DTC brands has also been an issue — with losses growing in 2022.

DTC brands are becoming just “brands”

Many DTC brands have pivoted to traditional retail strategies:

• Expand with physical stores and grow into other categories.
• Diversify sales channels — pushing into wholesale and third-party distribution (i.e., Nordstrom, Zalando)

Recently, Peloton partnered with Amazon to sell on its marketplace — a first for Peloton, which has never sold through another retailer. Allbirds launched its first store in 2017 — and ended the recent quarter with 46 stores.

But few reach the status of Nike or Lululemon — two examples of strong-performing brands that have endured scandals, market downturns and rising ad costs.

Investors: Loyal customers are paying customers

Many of the top-performing brands whose stock has outperformed the S&P 500 have one commonality: a strong loyalty/membership program.

Amazon Prime members spend 2.3x more than non-subscribers, Nike members make up 70% of sales in new stores and Starbucks members make up 50% of overall sales.

Per Forerunner Ventures, brands of the next decade will succeed with loyalty. Before you invest in another retail brand, ask yourself: how are they keeping their customers loyal?

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