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This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
Inflation has been running rampant, so let’s look at how it is impacting DTC businesses.
Above is Allbirds' most recent Consolidated Statements of Operations and Comprehensive Loss, which we are using just to remind everyone of what a P&L can look like. Let’s step down that P&L and call out some of the lines most impacted by inflation.
Net revenue (Sales)
Inflation may lead consumers to act more frugally, spending on necessities and reducing discretionary buying. While we haven’t seen this impact yet and consumer spending is currently 18% higher than two years prior, that is driven by individuals dipping into savings while pandemic restrictions ease, according to McKinsey. So, let’s hope for the best, but model the worst. What happens when consumers no longer want to dip into savings to buy things?
What to do
- Model decreased repeat purchase rates, lower AOV’s and lower conversions from new customers.
- Make sure to model the impacts of slower inventory turns on working capital, cash, and future buying.
- Model increasing your prices.
Fuel prices have increased significantly, with the recent volatility pushing UPS to join FedEx in recalibrating their fuel surcharges to a lag time of one week, rather than two. The Cowen/AFS LTL Freight Index reports that even though the average LTL shipment weight lies below the 2018 baseline, fuel has been a significant driver in increasing average LTL cost per shipment’s growth by 0.9% quarter-over-quarter, and analysts expect LTL rates to only increase from here.
Fuel price increases are also impacting your suppliers as their costs are increasing. The price of Brent oil, the benchmark used to monitor the pricing of over three-quarters of the world’s oil used for global shipping, is currently at $119.57, up 42% from six months ago when prices were at $69.88.
Morgan Stanley’s energy team is monitoring these changes, and analysts predict that Brent oil prices will reach “$130 in the third quarter of this year.”
What to do
- Model increases in per-unit costs and inbound freight costs
As noted above, if consumers buy less, conversion rates are likely to be lower. Obviously, lower conversion rates mean higher CAC’s.
What to do
- Model impact of lower conversions and higher CAC’s on ad budgets, cash and inventory.
Inflation will impact fulfillment in multiple ways including increased fuel costs for shipping and increased labor costs. UPS and FedEx have both implemented fuel surcharges, raising express parcel by 129% and ground parcel fuel surcharges by 89% compared to October last year.
What to do
- Model increases in shipping costs, per order costs, and base 3PL contracts
For most DTC brands, headcount or payroll is the majority of OpEx. Inflation is already impacting wages.
What to do
- Model increases in wages for new and current hires
- Model increases in benefits costs for all headcount
Interest costs (Capital costs)
As the Fed fights inflation, interest rates will rise. The companies giving you money have to borrow that money so as their cost of capital increases, they will pass those increases on to you. Even if it’s MCA without an "interest rate," your cost of taking their money will increase. Somewhat related to inflation, borrowing will not only get more expensive, it will get more difficult. This means options with less capital and worse terms.
What to do
- Model lower borrowing amounts. The deals you got last year or even six months ago are likely gone. So model lower borrowing amounts
- Model increased borrowing costs. This is especially important for the fintech/new lending products where terms can be confusing and structures are new. As cost of capital increases and your growth and profits per customer decrease, some borrowing deals may be uneconomical so you want to understand where your threshold is.
Challenges bring opportunities
The public market’s perception of what is valuable is changing rapidly. Peter Oppenheimer, Chief Global Equity Strategist at Goldman Sachs, explains that, “Not so long ago, investors were enamored with fast-growing companies that used software to send a ride or groceries to your door at the push of a button, even if the firm’s profits were far off in the horizon. But these days, healthy margins and companies that make real, physical stuff are back in focus.”
In the old market, DTC was out of favor because investors realized it didn’t look or act like tech stocks. DTC was far more capital intensive and lower margin with harder growth. But as investors seek durable margins with provable demand, DTC has a chance to shine again.
With this understanding, it becomes clear just how widespread these problems are. Inflation has been a key topic on earnings calls of late, and by Q4 2021, 71% of S&P 500 companies had mentioned inflation as a significant concern on their earnings calls, in addition to related topics.
Trending in Economy
On average, customers spend $59 more than the value of their gift card, Fiserv found.
In retail, sales are often measured in goods, whether they are purchased for ourselves or someone else. There are plenty of strategies that brands and retailers use to increase those sales, whether it is marketing, loyalty programs or how that item is presented.
In most cases, these are two different parts of the equation for retailers: The product that is bought and the strategies that lead to the purchase.
That’s what makes the gift card unique.
It is an item you can buy, with a section in the store all its own. Eventually, it leads to the purchase of other goods, so the gift card is leads to a direct sale. Yet it’s also a means to build a retail brand and create incentives that both introduce customers to a store and keep them coming back.
That’s a key takeaway from the 20th Annual U.S. Prepaid Consumer Insights Study from fintech and payments company Fiserv.
At this point, the gift card feels like a staple of the shopping experience. But it is only about 30 years old. In 1994, Blockbuster Video pioneered the sale of cards for gifted purchases directly as a means to combat fraud in paper gift certificates. Since then, they’ve proven to have a multitude of uses that stretch beyond the holidays.
Starbucks and Amazon gift cards are commonly distributed as prizes at team-building events and as pick-me-ups by friends showing they care. In 2022, 60% of consumers said they received a gift card from an employer, according to the Fiserv report. That was a big increase from 32% in 2019. People appreciate the gesture. The survey found that 85% of employees think that gift cards from an employer make for appropriate incentives.
For people looking to show generosity, gift cards can also be a means to stretch dollars. At a time of high inflation, people are looking for deals with their discretionary purchases. Gift card promotions that offer discounts and bonuses are proving particularly popular, the study found. Two-thirds of consumers said promotions can influence them to purchase more, while more than half of consumers took advantage of such an offer in 2022.
Yet the more difficult consumer environment is also having an impact on overall gift card sales. In 2022, the growth of gift card purchases slowed.
“Overall, 56% of U.S. consumers purchased more gift cards in 2022 compared to 2021,” said Tom Niedbalski, VP of gift solutions at Fiserv. “This was a decline from the 73% of consumers who said they bought more gift cards in 2021 than they did in 2020.”
Inflation and less discretionary income were the driving factors for consumers who said they bought fewer gift cards during 2022, as 35% of consumers said inflation was the reason they were purchasing fewer cards.
It's important for brands and retailers to understand why consumers buy gift cards. But it's just as crucial to understand where they can fit in retail strategy. Beyond sales, gift cards can help drive repeat customers, and extend a brand. These tools are particularly valuable at a time when retailers are focused on profitability in a tougher consumer environment.
Fiserv explained four areas in which gift cards are of particular value for brands.The following is directly quoted from Niedbalski:
Improving cash flow and revenue. Gift cards not only drive in-store and online traffic, there is an associated “lift,” or overspend, when a gift card is converted into a sale. On average, customers spend $59 more than the value of their gift card.
Repeat customers. Retailers use gift cards to foster loyalty and customer engagement, ultimately leading to repeat customers. One way we see this play out is through promotions associated with gift card sales. For example: a consumer who buys a $100 gift card for the holidays will receive a $20 bonus card that can be used after January 1 – creating a pre-holiday sale and post-holiday transaction in the New Year.
Branded currency. A gift card places a merchant’s brand directly into the consumer’s wallet, increasing brand awareness and ensuring the merchant’s brand is with the consumer when they are looking to buy.
Year-round marketing. The gift card has grown beyond the traditional holiday season. From birthdays and graduations to anniversaries and babies, gift cards are becoming the most popular way to recognize milestones – giving retailers opportunities to run additional promotions throughout the year.