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Wednesday, February 28, 2024

Amid a Pandemic, Magic Spoon Eats Cake

Birthdays in quarantine have mostly been bittersweet, lonesome affairs. On Instagram, those who celebrated in April blew out candles in solitude or posted photos of their living rooms, filled with number-shaped balloons but absent any guests. There’s not much fun on a birthday when it’s a party of one.

But there was plenty of fun at Magic Spoon, a cereal startup celebrating its first year in business. The brand filled its Instagram with technicolored squares of birthday cakes, sprinkles, and heaping bowls of the high-protein, low-carb cereal it sells for $10 per beautifully illustrated box. Making it through year one as a startup seemed like cause for celebration, but so was the last month of sales, some of the highest Magic Spoon has seen yet.

“Our business is shelf-stable food that’s purchased online and delivered directly to peoples’ doors,” says Gabi Lewis, Magic Spoon’s cofounder. “So, yes, we’re definitely seeing an increased demand.”

When Magic Spoon launched last April, it hoped to do for cereal what Warby Parker did for eyeglasses, or what Quip did for toothbrushes: Take a familiar everyday product, give it an Instagrammable glow up, axe the middleman, and send it straight to customers’ doors—direct to consumer, as the buzzy business model is often called. Cereal was ripe for disruption, a multibillion-dollar market dominated by stodgy conglomerates and beset by years of flagging sales. Magic Spoon targeted health-conscious millennials with keto-friendly ingredients, whimsical packaging, and flavors that harken to childhood favorites: fruity, frosted, cinnamon, cocoa. The startup raised $5.5 million in seed funding, along with personal investments from the kingmakers of direct-to-consumer companies: Joey Zwillinger (the cofounder of Allbirds), Jeff Raider (the cofounder of Harry’s), and Dave Gilboa and Neil Blumenthal (the cofounders of Warby Parker) all chipped in, as did musician Questlove and Digg.com founder Kevin Rose.

Launching a direct-to-consumer brand—often shortened to DTC, or D2C—doesn’t automatically confer the luster it did a few years ago, though. The approach that catapulted startups like Casper, Glossier, and Dollar Shave Club to billion-dollar valuations was already showing some strain even before the pandemic. Competition was growing, and so were costs. The results were not always sustainable, leading to recent high-profile flops like Outdoor Voices and Casper’s public market debut. Investors started to demand profits, not just new customers. And then came Covid-19.

Magic Spoon does not appear to be as vulnerable to the pandemic’s shockwaves as some of its other DTC brethren so far. The Brooklyn-based company had spent the past year ramping up manufacturing, bulk-buying its specialty ingredients, and learning how to produce even more and more of the brightly colored boxes. When the pandemic hit, those things came in handy. “In general, we’ve been fairly unaffected in the supply chain,” says Greg Sewitz, the other cofounder. And they’ve seen more demand. Since the pandemic began, Lewis says Magic Spoon has seen “a meaningful jump month to month, greater than anything we’ve seen in prior months.”

Magic Spoon isn’t alone. Other direct-to-consumer companies are experiencing a boost. Otherland, which makes candles, and Tracksmith, which sells activewear, have both reported bumps in sales. So have loungewear makers like Lively, and Thinx, which makes period-absorbing underwear. (“Periods don’t stop for pandemics,” says a banner on the company’s website.)

Direct-to-consumer food startups, in particular, are seeing a huge difference. “Most people were already comfortable buying online, and across most retail categories,” says Andrew Lipsman, the principal retail analyst at eMarketer. “Where the pandemic is making a difference is in the food and beverage category, which had been slow to shift online.” More people are cooking at home when bars and restaurants are closed, and while grocery stores remain open, fears of contracting the virus have led shoppers to seek out other options.

“The new users are super interesting,” says Nicole Quinn, a partner at Lightspeed Ventures, who has invested in companies like Rothy’s and Brandable. (Lightspeed is also an investor in Magic Spoon.) “My mother, she’d never tried online groceries. But now she’s like, ‘I’m 70 years old, I don’t want to risk going outside, so yes, I will order Daily Harvest.’ It’s opening up a whole new user base.” Daily Harvest, a subscription service focused on healthy foods, has seen a surge in sales since the pandemic began, says Rachel Drori, the company's CEO and founder. “Over the course of the last month, we've been beating our customer acquisition target on average 70 percent per day.” Food subscription services in general seem to be taking advantage of the moment. Blue Apron’s stock jumped more than 300 percent in March; HelloFresh expects its first annual profit this year.

Hitting those milestones can seem like validation of the DTC model. The shelter-in-place orders due to Covid-19 are “a unique opportunity for many direct-to-consumer companies to do what they do well and move very quickly to take advantage,” says Caitlin Strandberg, a principal at the VC firm Lerer Hippeau, which has invested in brands like Allbirds, Casper, Glossier, and Warby Parker. “But this only works in certain categories.”

In other categories, the picture is bleaker. Retail Dive—which follows commerce companies—found that week-over-week spending fell 7 percent across all direct-to-consumer brands in March, with certain product categories, like clothing and shoes, hit especially hard. The CEOs of Allbirds, Rothy’s, Ministry of Supply, and Cuyana have all said that revenue is down. (Rothy’s and Ministry of Supply have since pivoted to making personal protective equipment, like masks.) With borders shut and people staying at home, the suitcase startup Away announced layoffs and furloughs in April after seeing a 90 percent decrease in sales. Companies with a retail footprint have also had to furlough or lay off employees.

Even for the startups still doing well now, there’s no guarantee it will last. The question for startups that have seen more users during this time is whether or not their recent wins can outlast the pandemic—and the looming recession. “The way you generate repeat purchases is through brand loyalty,” says Strandberg. “So in this moment, when everyone’s glued to their phones, can you capture that initial attention and retain that attention from the consumers?”

Some of the immediate challenges facing DTC startups have eased, like the cost of marketing. The price of ads on platforms like Facebook and Instagram, where many of these companies find new customers, have decreased in recent weeks. But there’s no guarantee that those new customers will spell profits. “Ad rates across the board have plummeted, particularly for social ads on which D2Cs are obviously heavily reliant,” says Lipsman. “While that theoretically might lower customer acquisition costs, there are fewer customers to acquire right now.” And at the end of the day, DTC companies need consumers to spend money, whether it’s on $1,000 mattresses or $10 boxes of cereal.

Magic Spoon’s founders are keeping an eye on their new customers, but they readily admit that anything could happen. “It’ll be interesting to see how this all plays out six or nine or 12 months from now,” says Lewis. “Is it panic buying? Is it people trying to get food online for safety reasons? Or are people actually more comfortable with this channel?” He adds that the team is “trying not to read too much into the numbers we see in this moment.”

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