They Cut Out the Middleman

The cost didn't disappear. It transferred to someone who didn't know how to carry it.

Cedric Atkinson

In November 2021, Allbirds went public at $4.16 billion. They made shoes from merino wool. They sold them on a website. They did not need a store, a retailer, or a middleman.1

By January 2026, they were closing every full-price store they had opened. Market cap: $20 million. Down 99.5 percent. The company had never recorded a profitable quarter. Cumulative losses since 2019: $433 million.2

They were not alone.

Casper went public in February 2020 at $12 a share, slashed from a target of $17 to $19 after investors balked. Nine months earlier it had been valued at $1.1 billion. CNN called the IPO "officially a disaster." Two years later it was sold to a private equity firm for $286 million. Two years after that, to a foam manufacturer. The mattress company that said it was disrupting mattress stores became a subsidiary of the factory that makes the foam.3

Peloton peaked at $49.3 billion in January 2021. Its founder told investors it was "so much more than a bike." Eighty percent of its revenue came from selling hardware. By May 2024 the stock had fallen to $2.70. Four CEOs in four years. Accumulated losses through 2025: $5.3 billion.4

Brand Peak Current / exit
Peloton$49.3B~$1.6B−96.8%
Smile Direct Club$8.9B$0 (liquidated)−100%
Allbirds$4.16B~$20M−99.5%
Blue Apron$1.89B$103M (acquired)−94.5%
BARK$1.6B~$150M−90.6%
Casper$1.1B$286M (sold)−74.0%
Dollar Shave Club$1.0BSold at a fraction
Brandless$500M+$0 (shut down)−100%
Combined peak valuations: ~$68 billion. Combined current/exit value: ~$2 billion. Sources in footnotes 1-8.

Every one of them told the same story on the way up. We sell direct. We cut out the middleman. The margin the retailer takes is ours now.

The existing explanation is customer acquisition cost. Digital advertising got expensive. Facebook raised its prices. Apple killed the tracking. The math stopped working.

That is the mechanic. It describes what happened. It does not explain why.

The margin

A retailer takes 30 to 50 percent of the consumer price.9 The number looks like a tax. It is not a tax. It is the cost of performing a set of functions that the brand cannot see from the outside.

One hundred and twenty million people hold Costco memberships. They walk past every product on every shelf. The brand did not pay per eyeball to get them there. The retailer's buyer decided the product belonged. That decision transferred the buyer's credibility to the product before the customer had ever heard of it. If the customer does not like it, the retailer handles the return at a scale that makes the per-unit cost close to invisible. The brand does not build the distribution network. The brand does not lease the warehouse. The brand does not negotiate with the shipping company.10

The DTC brand had to replicate every one of these functions. Not as a retailer, with decades of infrastructure and a hundred million members. As a startup, with a Shopify store and a Facebook advertising account.

In 2013, the average online merchant lost $9 for every new customer acquired. By 2022, that number was $29. A 222 percent increase over eight years.11 Total spending on digital advertising in the United States rose from $59.6 billion in 2015 to $258.6 billion in 2024. A 4.3-fold increase. Every DTC brand was bidding in the same auction. The auction was getting more expensive every quarter.12

In April 2021, Apple released iOS 14.5. Users had to opt in to being tracked across apps. Roughly 25 percent did. Meta estimated a $10 billion revenue loss the following year. For DTC brands, the cost of finding a customer had been climbing for years. Now the tools they used to find that customer were half-blinded.13

Casper spent $422.8 million on marketing between 2016 and the third quarter of 2019. The company served 1.4 million customers over that period. The implied cost of acquiring each one: roughly $300. Marketing ran between 35 and 40 percent of revenue for eight consecutive quarters.14

The retailer's margin
30-50%
✓Discovery (foot traffic)
✓Curation (buyer selection)
✓Trust transfer
✓Returns at scale
✓Fulfillment
Casper's marketing spend
35-40%
✓Discovery (paid ads)
×Curation
×Trust
×Returns
×Fulfillment

The retailer's margin buys discovery, curation, trust, returns infrastructure, and foot traffic. The marketing budget bought discovery. One function out of five. And it cost as much as the retailer charged for all of them.

In February 2020, the technology analyst Ben Thompson applied Clayton Christensen's Law of Conservation of Attractive Profits to the DTC model. His finding: the value that was supposed to shift from retailer to brand had instead shifted from retailer to platform. Facebook and Google had become the integrated players. DTC brands were commoditized in the middle. Harry's, the razor company, fled back to brick-and-mortar because that was the only place to escape Facebook's squeeze.15

The middleman was not eliminated. The middleman changed. And the new middleman charged more for less.

The test

Thomas Sowell opens an essay called "Are Jews Generic?" with a prisoner-of-war camp.16

Prisoners received Red Cross packages. On delivery days, they traded with each other. One-on-one, chaotic, inefficient. Then certain prisoners began circulating around the camp, exchanging goods back and forth, accumulating stock in one place and selling it in another. They provided a genuine service. They saved time, matched supply to demand, absorbed the friction of the search. But the other prisoners did not see it that way. "Profits were not regarded as a reward for labor," Sowell wrote, "but as the result of sharp practices."

"Here, in microcosm, was the fundamental problem of the middleman down through the centuries and around the world."

Sowell had a name for this.17

On August 4, 1972, Idi Amin ordered every Asian in Uganda to leave within ninety days. Between 50,000 and 80,000 people. Out by November. They controlled 90 percent of the country's businesses and generated 90 percent of its tax revenue. Amin called them "bloodsuckers." He called it the Economic War. He said God told him in a dream.18

Manufacturing output fell from 740 million Ugandan shillings in 1972 to 254 million in 1979. A 66 percent collapse. Sugar production dropped from 73,800 tonnes to 8,000. An 89 percent collapse. The real value of salaries and wages fell 90 percent in less than a decade. Per capita GDP was 40 percent below 1970 levels by 1987.19

In 1991, nineteen years later, President Museveni invited the expelled community to return. The government acknowledged that rebuilding the country's infrastructure would require the investment and expertise that only the ousted Asian business community could provide.20

The same pattern repeated across centuries. In 1603 Manila, an estimated 20,000 Chinese traders were killed. Prices rose. Shortages followed. The Spanish invited them back. In 1639, it happened again. Across Southeast Asia, when governments restricted Chinese minorities who dominated retail trade, grain shortages and capital flight followed. Every time, they were quietly hired back.21

Sowell called this the withdrawal test. If the middleman leaves, does the system collapse? If yes, the value was in what the middleman brought, not what the middleman took.22

"The perennial desire to 'eliminate the middleman,'" he wrote in Basic Economics, "is perennially thwarted by economic reality."23

In 2018, Zillow decided the real estate agent was the middleman. They launched Zillow Offers, buying homes directly with an algorithm. No agent required. By the fall of 2021, they owned 9,800 homes and had committed to buy 8,200 more. On November 2, they shut the entire program down. Wrote off $304 million in a single quarter. Lost $881 million for the year. Laid off 25 percent of their workforce. Total losses over three years: $1.4 billion.24

The algorithm could not do what the agent did. It could not assess the condition of a kitchen from a photograph. It could not read a neighborhood. It could not account for the school that was about to lose its rating or the highway extension that would change traffic patterns in eighteen months. "We've determined the unpredictability in forecasting home prices far exceeds what we anticipated," CEO Rich Barton said.25

The agent's commission was 5 to 6 percent. Zillow charged sellers a comparable fee. The margin was not the point. The knowledge was the point. And the knowledge could not be replaced by the technology that was supposed to make it unnecessary.

The rhetoric is the same everywhere. Amin called them parasites. DTC founders called them an unnecessary margin. Zillow called them an inefficiency. The assumption is always the same. The middleman extracts value rather than creates it. And the discovery is always the same. After the middleman is removed, the cost of performing the middleman's function exceeds what the middleman charged.

The return

Allbirds entered Nordstrom in June 2022 and REI in October 2022. Amazon in November 2023. By 2025, the co-founder was doing the arithmetic out loud. "We never believed that direct would work to meet the ambition of the scale that we thought we could achieve," Joey Zwillinger told Inc.26

Casper put its mattresses in 1,200 Target stores in 2017. By the third quarter of 2021, retail partnerships accounted for 38 percent of its revenue, growing 79 percent year over year. The channel it had promised to disrupt was the only channel that was growing.27

Casper's CEO was direct about it. "We were very loud in the beginning about like, 'Mattress stores are terrible,' and 'It's a crappy experience,' and 'We're going to only sell online,'" Emilie Arel told Retail Dive. "Well, that's where 80 percent of the mattresses in the U.S. are sold. So we can either get on board or we can be small forever. Those are the choices."28

Peloton began selling on Amazon in August 2022. Dick's Sporting Goods in November 2022. Costco in November 2024. The company that described itself as a technology, media, software, product, experience, fitness, design, retail, apparel, and logistics company was asking Costco to sell its bikes.29

AG1, the supplement company that spent more than $100 million over fifteen years building the most capital-efficient DTC operation in the industry, including $26 million a year on podcast advertising alone, entered Costco in June 2025. First brick-and-mortar distribution in the company's history.30

Gymshark, 96 percent direct-to-consumer at $807 million in annual revenue, entered Dick's Sporting Goods in October 2025.31

Simeon Siegel, a managing director at BMO Capital Markets, described the structural finding in November 2024: "Everyone believed the mantra should be DTC or die because they wanted to eliminate the middle person and make more money. What they finally realized was: No one eliminates the middle person, they simply become the middle person, and that brings its own set of costs."32

Governments expelled the middleman. Economies collapsed. They invited the middlemen back. DTC brands cut out the retailer. Valuations collapsed. They entered wholesale.

The language changed. The structure did not.

This is not a critique of the founders. They saw a real margin. They built real products. Many of them saw the math before their investors did. The error was structural, not personal. The middleman's margin looked like a tax because it was visible. The cost of performing the middleman's function was invisible until the brand was already committed to performing it.

Sowell saw this in every century he studied. "The departure of these supposed 'parasites' and 'exploiters,'" he wrote, "has not been followed by a more prosperous life by the rest of the population but usually by economic decline, sometimes catastrophic decline."33

The withdrawal test does not measure sentiment. It does not care whether the middleman is popular. It measures function. If the system collapses when the middleman leaves, the middleman was not taking a cut. The middleman was performing a function nobody else in the room knew how to do.

You can fire the middleman. You cannot fire the function.

They cut out the middleman. Then they spent a decade discovering what the middleman was for.

New pieces when they're ready. Nothing else.

Sources

  1. Allbirds IPO: November 3, 2021, Nasdaq (BIRD). Priced at $15/share. First-day close: $28.64. Peak market cap: $4.16 billion (CompaniesMarketCap). Founded 2015 by Tim Brown and Joey Zwillinger. Time magazine named the Wool Runner "the world's most comfortable shoe" in 2016.
  2. Allbirds current status (March 2026): market cap $20.37 million. Decline from peak: 99.51% (CompaniesMarketCap). Revenue peaked at $297.8 million in 2022, fell to $189.8 million in 2024 (Allbirds Q4 2024 earnings release). Cumulative net losses 2019-2024: approximately $433 million (StockAnalysis.com; SEC filings). 1-for-20 reverse stock split effective September 4, 2024, following Nasdaq delisting warning (Retail Dive, April 2024). January 28, 2026: announced closure of all remaining full-price U.S. stores by end of February 2026, retaining two outlet locations (Retail Dive).
  3. Casper IPO: February 6, 2020, NYSE (CSPR). Priced at $12/share, reduced from $17-19 target range. Market cap at IPO: approximately $476 million. Private valuation: $1.1 billion (Series D, March 2019). CNN headline: "officially a disaster" (February 5, 2020). Sold to Durational Capital Management: announced November 15, 2021, at $6.90/share, approximately $286 million (CNBC; BusinessWire). Completed January 24, 2022. Sold to Carpenter Co.: October 29, 2024 (Retail Dive). Terms undisclosed.
  4. Peloton IPO: September 26, 2019, at $29/share. Peak stock price: $171.09 intraday, January 14, 2021. Peak market cap: approximately $49.3 billion (Motley Fool). Revenue: ~80% from hardware in FY2019 (S-1 filing; product revenue ~$734M of ~$915M total). All-time low: $2.70, May 2, 2024. Accumulated net losses FY2019-FY2025: approximately $5.3 billion. Annual losses: FY2019 -$245.7M, FY2020 -$71.6M, FY2021 -$189M, FY2022 -$2,827.7M, FY2023 -$1,261.7M, FY2024 -$551.9M, FY2025 -$118.9M (StockAnalysis.com; SEC filings). CEOs: John Foley (out February 8, 2022), Barry McCarthy (out May 4, 2024), interim co-CEOs Karen Boone and Chris Bruzzo, Peter Stern (January 1, 2025).
  5. Smile Direct Club: IPO September 2019, valued at approximately $8.9 billion. Chapter 11 filed September 2023. Converted to Chapter 7 liquidation January 26, 2024. Cancelled all outstanding aligner orders. Shut down.
  6. Blue Apron: IPO June 2017 at $10/share, approximately $1.89 billion valuation (lowered from $15-17 range). Acquired by Wonder Group for $103 million, announced September 28, 2023, closed November 13, 2023.
  7. BARK (BarkBox): SPAC merger June 2021, valued at $1.6 billion. Stock peak: approximately $19.54. March 2026: approximately $0.78/share. Brandless: SoftBank Vision Fund invested $240 million, July 2018. Shut down February 2020. First SoftBank Vision Fund company to close. Dollar Shave Club: acquired by Unilever for approximately $1 billion, 2016. Unilever sold 65% stake to Nexus Capital Management, October 2023, for undisclosed price widely reported as "a fraction" of the original acquisition (Inc.; Axios; Retail Dive).
  8. Combined peak valuations for the eight brands listed: Peloton $49.3B + Smile Direct Club $8.9B + Allbirds $4.16B + Blue Apron $1.89B + BARK $1.6B + Casper $1.1B + Dollar Shave Club $1.0B + Brandless $0.5B = approximately $68.5 billion. Current/exit values as cited. Total excludes Rent the Runway (~$1.7B peak), Honest Company ($1.44B), Away ($1.4B), Outdoor Voices ($110M), and other DTC brands not listed.
  9. Retailer margin ranges: 30-50% of consumer price depending on category, retailer, and product type. Costco: approximately 14% for HOME category products. Big Box blended: approximately 33%. Full range documented in CPG Multi-Channel Pricing Benchmarks (TGR-0013).
  10. Costco membership: 136.8 million cardholders worldwide as of fiscal year-end 2024 (Costco Investor Relations). Functions described (discovery via foot traffic, buyer curation, trust transfer, returns at scale, distribution infrastructure) are standard retail economics per DTC Ceiling research and Shopify DTC Oracle.
  11. SimplicityDX press release via BusinessWire, July 19, 2022. "In 2013, merchants lost on average $9 for every new customer acquired, but today merchants lose $29." 222% increase over eight years.
  12. US digital advertising revenue: IAB/PwC Internet Advertising Revenue Reports. 2015: $59.6 billion. 2024: $258.6 billion (14.9% YoY growth). 4.3x increase over nine years.
  13. Apple iOS 14.5 released April 26, 2021. App Tracking Transparency (ATT) required opt-in for cross-app tracking. Opt-in rate: approximately 25% for apps showing the prompt (Flurry Analytics, Verizon subsidiary, tracking 2 billion devices). Meta CFO Dave Wehner, Q4 2021 earnings call (reported CNBC, February 2, 2022): "We believe the impact of iOS overall is a headwind on our business in 2022. It's on the order of $10 billion."
  14. Casper S-1 filing (SEC, January 2020). Marketing expenses: $422.8 million from January 2016 through September 2019. Total customers since 2014: 1.4 million. Implied CAC: approximately $302 (Venture Twins S-1 analysis; The Drum). Sales and marketing as percentage of revenue: 43% (2017), 35% (2018), 32-40% range across subsequent quarters.
  15. Thompson, Ben. "Email Addresses and Razor Blades." Stratechery, February 25, 2020. Applies Christensen's Law of Conservation of Attractive Profits: "Old CPG integrated R&D, manufacturing, marketing, and shelf space. DTC saw infinite digital shelf space and thought they could integrate marketing, retail, and manufacturing. But digital marketing requires massive R&D (targeting algorithms) and massive inventory (users). Facebook and Google had both." Harry's fled to brick-and-mortar to escape Facebook's squeeze, then was blocked from acquisition by the FTC.
  16. Sowell, Thomas. "Are Jews Generic?" in Black Rednecks and White Liberals, Encounter Books, 2005, pp. 65-110. POW camp illustration at pp. 71-72. "Profits were not regarded as a reward for labor, but as the result of sharp practices" (p. 71). "Here, in microcosm, was the fundamental problem of the middleman down through the centuries and around the world" (p. 72).
  17. Sowell documents middleman minority patterns across dozens of countries in Migrations and Cultures: A World View (Basic Books, 1996), The Economics and Politics of Race (William Morrow, 1983), Race and Culture: A World View (Basic Books, 1994), and Applied Economics: Thinking Beyond Stage One (Basic Books, 2004).
  18. Uganda expulsion: Idi Amin, General Notice No. 2170, August 4, 1972. Initially applied to British-passport-holding Asians, expanded August 9 to include citizens of India, Pakistan, and Bangladesh. Ninety-day deadline. Between 50,000 and 80,000 expelled (estimates vary by source). "Bloodsuckers": confirmed in Uganda Monitor and multiple secondary sources. "Economic War": Amin's official name for the expulsion campaign. Dream from God: announced at Tororo barracks; "'God' tells Amin to expel Asians" (Uganda Monitor). UK House of Lords Library; National Archives; CGTN Africa.
  19. Uganda economic collapse: manufacturing output 740 million shillings (1972) to 254 million (1979); sugar production 73,800 tonnes (1973) to 8,000 tonnes (1978); real value of salaries and wages fell 90% within a decade; GDP fell 5% (1972-1975); per capita GDP approximately 40% below 1970 levels by June 1987 (IMF, elibrary.imf.org). Sources: Aliran analysis of Uganda expulsion; IMF country report.
  20. Museveni invitation: 1991. Property restoration formally announced 1992. World Bank made restitution a condition of lending. The government acknowledged that rebuilding would require investment and expertise from the expelled community. Christian Science Monitor, 1992; PBS Frontline.
  21. Manila, 1603: Sangley Rebellion. Chinese traders controlled the city's commerce. Estimated 15,000-30,000 killed (academic range; 20,000 commonly cited). 1639: Second Sangley Rebellion, 17,000-22,000 Chinese killed. After each event, the Spanish needed Chinese traders back for commerce. Southeast Asia: Sowell, The Economics and Politics of Race (1983). Indonesia Presidential Regulation 10 of 1959 banned Chinese from rural retail. Approximately 102,000 shipped back to China. Grain shortages and capital flight followed. Sources: "Chinese Merchants, Silver Galleons, and Ethnic Violence in Spanish Manila, 1603-1686" (academic); multiple Philippine historiographies.
  22. Withdrawal test: Sowell, Conquest and Cultures: An International History (Basic Books, 1998). "If this partner, supplier, or team member left tomorrow, would the system they built survive? If not, the value is in their capabilities, not in your structure."
  23. Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy, 4th edition, Basic Books, 2010. "The perennial desire to 'eliminate the middleman' is perennially thwarted by economic reality" (pp. 139-143). "Despite superficially appealing phrases about 'eliminating the middleman,' middlemen continue to exist because they can do their phase of the operation more efficiently than others can" (Chapter 6).
  24. Zillow Offers: iBuying program launched April 2018 in Phoenix, buying homes directly with algorithmic pricing. Paused new purchases October 18, 2021. Program wind-down announced November 2, 2021, alongside Q3 2021 earnings. Q3 2021: $304 million inventory write-down. Full-year 2021 Homes segment loss: $881 million. Total cumulative losses 2019-2021: approximately $1.4 billion (Wolf Street analysis of SEC filings). At shutdown: approximately 9,800 homes owned plus 8,200 under contract (Florida Realtors). Approximately 25% of workforce laid off, roughly 2,000 employees (GeekWire; NPR; CBS News). Over the program's lifetime, Zillow acquired 32,292 homes total (ResiClub).
  25. Barton, Rich (Zillow co-founder and CEO). Zillow Q3 2021 press release and shareholder letter, November 2, 2021: "We've determined the unpredictability in forecasting home prices far exceeds what we anticipated and continuing to scale Zillow Offers would result in too much earnings and balance-sheet volatility." Earnings call: "Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in." Agent commission: typical U.S. real estate commission 5-6% (split buyer/seller agents). Zillow Offers charged sellers an average service fee of approximately 7.5% (range 1.5-9%), comparable to or exceeding traditional commissions (Houzeo; ListWithClever).
  26. Zwillinger, Joey. Inc.com, "Allbirds Is Taking the Amazon Plunge in a Bid to Regain Flight," by Ali Donaldson, November 16, 2023. Full quote: "We never believed that direct would work to meet the ambition of the scale that we thought we could achieve." Allbirds wholesale launches: Nordstrom announced May 24, 2022, products in stores June 1, 2022 (CNBC). REI announced and launched October 4, 2022 (Retail Dive).
  27. Casper-Target: Target invested $75 million in May 2017, began carrying products in 1,200 stores (TechCrunch). Q3 2021: retail partnership revenue $60.0 million out of $156.5 million total (38.3%), up 78.6% YoY (Casper Q3 2021 earnings).
  28. Arel, Emilie (Casper CEO, December 2021 onward; replaced founder Philip Krim). Retail Dive, "'It's going to be a very tough year': Casper CEO on the home goods market in 2024," January 17, 2024. Full quote: "We were very loud in the beginning about like, 'Mattress stores are terrible,' and 'It's a crappy experience,' and 'We're going to only sell online.' Well, that's where 80% of the mattresses in the U.S. are sold. So we can either get on board or we can be small forever. Those are the choices."
  29. Peloton retail partnerships: Amazon, announced August 24, 2022 (first-ever wholesale deal). Dick's Sporting Goods, announced September 29, 2022, products in 100+ stores starting November 1, 2022. Costco, seasonal partnership at 300 stores, November 1, 2024, through February 15, 2025. Bike+ at $1,999 in-store. Sources: Peloton press releases; Retail Dive.
  30. AG1 (Athletic Greens): entered Costco June 2, 2025. 600+ locations nationwide. 40-count stick packs at $72.99. First brick-and-mortar distribution in company's 15-year history. Revenue approximately $600 million (2024). Podcast advertising spend: $2.2 million per month ($26.4 million/year) across hundreds of podcasts (Capital Letter). Third-largest podcast advertiser in the US. Sources: Fortune, January 2025; PR Newswire, May 30, 2025.
  31. Gymshark: revenue approximately GBP 607 million (~$807 million) for the year ending July 2024 (Drapers Online). 96% direct-to-consumer as of 2023. Entered Dick's Sporting Goods House of Sport, October 24, 2025, at 12 locations. First U.S. wholesale partnership. Source: Business of Fashion, October 2025.
  32. Siegel, Simeon (Managing Director, BMO Capital Markets). Retail Dive, "DTC is dead. Long live DTC." November 4, 2024. Full quote: "Everyone believed the mantra should be DTC or die because they wanted to eliminate the middle person and make more money. What they finally realized was: No one eliminates the middle person, they simply become the middle person, and that brings its own set of costs."
  33. Sowell, Thomas. "Are Jews Generic?" in Black Rednecks and White Liberals (2005). "The departure of these supposed 'parasites' and 'exploiters' has not been followed by a more prosperous life by the rest of the population but usually by economic decline, sometimes catastrophic decline, as the economy of Uganda collapsed after middleman minorities from India and Pakistan were expelled during the 1970s."