Here are some general factors that contribute to bankruptcy risks for DTC brands.
- Market Saturation: If a particular market or niche becomes oversaturated with DTC brands offering similar products or services, it can lead to increased competition, price wars, and reduced profit margins, making it challenging for some brands to survive.
- Customer Acquisition Costs: DTC brands often rely heavily on online advertising and marketing to acquire customers. If customer acquisition costs rise significantly and surpass the lifetime value of customers, it can strain the financial health of these brands.
- Supply Chain Disruptions: Issues such as disruptions in the supply chain, increased raw material costs, or logistical challenges can impact a DTC brand’s ability to produce and deliver products efficiently, leading to increased expenses and potential financial strain.
- Changing Consumer Preferences: Consumer preferences and trends can change rapidly, and DTC brands need to adapt to these shifts. Failing to stay relevant or failing to innovate in response to changing consumer demands could result in declining sales and financial instability.
- Dependency on Online Platforms: If a DTC brand heavily relies on a single online platform for sales and that platform changes its algorithms, policies, or fees, it could significantly impact the brand’s reach and revenue.
- Financial Mismanagement: Poor financial management, including overspending on marketing, ineffective cost control, or inadequate budgeting, can lead to financial difficulties and increase bankruptcy risks.
- Economic Downturns: Economic downturns can impact consumer spending, leading to decreased sales for DTC brands. Brands without sufficient financial resilience or diversified revenue streams may struggle to weather economic challenges.
- Regulatory Challenges: Changes in regulations, especially those related to e-commerce, privacy, or product compliance, can create challenges for DTC brands. Adapting to new regulatory requirements may require additional resources and investment.
It’s important to note that the specific reasons for bankruptcy risks in 2023-2024 would depend on the economic and industry-specific conditions prevailing at that time.
Credit Risk Monitor has created a system that enables it to predict when companies might go bankrupt.
“Our proprietary Frisk score indicates a company’s level of financial stress, based on the probability of bankruptcy over a 12-month horizon. It’s proven 96% accurate in predicting U.S. public company bankruptcy during this time horizon,” the company says on its website.
When a company reaches the lowest score on the Frisk scale, a 1, that means it has a 10% to 50% chance of filing for bankruptcy. That’s where three popular direct-to-consumer brands — Sleep Number, Rent the Runway (RENT) and Marley Spoon — find themselves right now. All three have received a 1 on the Frisk scale, which serves as a warning to vendors and lenders.
A low Frisk score can become a self-fulfilling prophecy because vendors and lenders might become wary of extending credit to a company with that rating. That could make it hard for the retailer to buy inventory in order to generate cash.
Ultimately, that’s what drove Bed Bath & Beyond, Christmas Tree Shops and Tuesday Morning into bankruptcy. Vendors tightened their terms and, in some cases, asked for cash up front. In a market where new loans are expensive and hard to come by, that quickly created a Chapter 7 situation where those brands had to be liquidated.