Rising Tariffs, Squeezed Margins & the New DTC Growth Equation

It’s only February but we’ve already faced a year’s worth of intrigue and tumult thanks to the new regime in the US.

And if you entered 2025 thinking that performance marketing might get easier or that e-commerce was going enjoy fresh headings, well…you’ve probably been pretty disappointed so far.

In today’s edition, webreak down the ever shifting state of play when it comes to the importing situation, plus we look at if there’s an “alpha” left in DTC.

For any brands out there struggling with performance marketing and wondering how to break out of the plateau, we dug up a vital resource and with some nuggets of wisdom for you.

Today:

1. Tariff Tumult - The volatile landscape of tariffs, duties, and Section 321 developments.

2. Finding Alpha in DTC - The financial and operational challenges of growing a DTC brand in 2025.

3. Brand X Performance - How integrating brand and performance advertising creates a multiplier effect for sustainable growth.

Let’s get into it.

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1. Changing Tariffs & Duties: The Highs and Lows of Section 321 and Global Trade Tensions

This is a difficult one to report on because things are changing daily. There’s an outside chance that everything you read below could be rendered moot by the time you open this newsletter.

For now, we’re unpacking two intertwined stories: the evolving status of Section 321 (the de minimis exemption) and the new tariff threats coming down on imports from Canada, Mexico, and China.

Here’s how things stand at the time of writing.

Demystifying Section 321 & the De Minimis Exemption

As you probably know by now, Section 321 is a critical provision in U.S. customs law that allows for the duty-free importation of small shipments.

Essentially, if the total value of a package is below a certain threshold—currently set at $800—importers can bypass the cumbersome tariff process. This “de minimis” rule has been previously exploited by “fast fashion” brands like Temu and Shein as well as Chinese re-sellers and drop shippers.

Recent Upheaval:
In early February 2025, President Trump signed a series of executive orders that shook things up:

• Suspension of the De Minimis Exemption: On February 1, 2025, the exemption was suspended for goods coming from Canada, Mexico, and China. This meant that even shipments under $800 could be subject to duties and tariffs, potentially increasing costs on a vast array of products.

• A Swift Reversal: Just days later, on February 3 and February 7, 2025, tariffs on Canadian and Mexican goods—as well as those on Chinese products—were temporarily suspended.

• Meanwhile, U.S. Customs and Border Protection (CBP) has proposed a rule that would modify the de minimis exemption further. Under this proposal, shipments valued at $800 or less that are subject to specific tariff provisions (Sections 201, 232, or 301) would no longer be exempt, meaning standard duties and fees could apply.

The net result? Importers are caught in a regulatory tug-of-war, trying to anticipate what comes next while recalculating costs on the fly.

Tariffs on Canada, Mexico, and China: New Orders, New Uncertainty

Adding to the complexity, President Trump recently announced significant tariffs on key trading partners—each with its own set of rates and responses:

🇨🇦 Canada:

• Tariff Rates: A hefty 25% tariff on most goods, with a reduced 10% tariff for energy resources like oil and natural gas.

• Recent Developments: Announced via executive orders on February 1, 2025, these tariffs were set to take effect on February 4. However, following negotiations, tariffs on Canadian goods were suspended for one month (February 3, 2025), even as Canada retaliated with a 25% tariff on $155 billion worth of U.S. goods—including beverages, cosmetics, and paper products.

• Canadian officials have also urged consumers to “buy Canadian” to support the local economy and have put mitigation measures in place to ease the blow.

🇲🇽 Mexico:

• Tariff Rates: A uniform 25% tariff on all goods.

• Recent Developments: After the initial announcement on February 1, 2025, Mexico agreed to delay the implementation of these tariffs for one month by boosting border security measures (including deploying 10,000 additional national guard members).

• Meanwhile, Mexico has signaled that retaliatory tariffs—ranging between 5% and 20%—could soon target U.S. products like pork, cheese, and fresh produce.

🇨🇳 China:

• Tariff Rates: An extra 10% tariff layered on top of existing tariffs.

• Recent Developments: Unlike its North American counterparts, the additional 10% tariff on Chinese imports went into effect on February 4, 2025.

• China has vowed countermeasures, and given that products such as electronics (smartphones, computers, and appliances), textiles, toys, and household goods are heavily imported from China, this move is expected to ripple through multiple sectors.

What Does This Mean for Your Business?

For DTC brands relying on lean, international supply chains, these developments are more than regulatory chatter—they have real-world cost implications:

• Margin Squeeze: Even a brief suspension of the de minimis exemption forces a rapid re-evaluation of pricing strategies. If duty-free shipments suddenly become taxable, margins could shrink unless brands pass on the costs to consumers.

• Supply Chain Jitters: With tariffs now in flux—and with potential new tariffs looming on key import channels—brands might need to diversify sourcing or build more robust contingency plans.

• Consumer Impact: Ultimately, these tariffs are likely to lead to higher prices for end consumers on everyday items—from smartphones and clothing to toys and household goods.

That said, closing the 321 loophole will also allow smaller brands or companies who manufacture domestically to compete on an even playing field, an outcome that is being welcomed in some corners of the industry.

Takeaway

While the temporary suspension of tariffs on Canadian, Mexican, and Chinese goods offers a brief respite, the underlying uncertainty remains.

With the CBP poised to possibly tighten the de minimis exemption and with retaliatory measures already in play overseas, the import landscape is set for continued volatility. For now, the smart play is to stay informed, keep a close dialogue with your customs brokers, and build flexibility into your supply chain strategy.

Growing a DTC Brand in 2025: Squeezed Margins, Rising Debt, and the Fight for Alpha

If you’ve been hearing that DTC is “dead” or that the old model no longer works, the truth is…more complicated.

Taylor Holiday recently shared a mega-thread going through the numbers that make growth so challenging in the current environment:

Let’s go through his findings…

On paper, many 8-figure brands still boast attractive metrics—a median 55% gross margin, 27% contribution margin, and an 8% EBITDA. But beneath these numbers lies a story of declining top-line growth, heavy working capital demands, and a growing struggle for free cash flow.

The Hidden Cost of Growth

Recent data from over 500 eight-figure brands (courtesy of Finaloop and Iris Finance) reveals a harsh reality:

• Profitability in a Vacuum:
  While a median EBITDA of 8% may seem decent at first glance, consider the underlying financial mechanics. With a 92-day cash conversion cycle (CCC) and COGS representing about 45% of revenue, brands are essentially financing three months of inventory—roughly 11% of their annual revenue.

• The Growth Conundrum:
  Every 15% jump in revenue demands an additional 1.5–2% of revenue invested in inventory and working capital. In a no-growth scenario, a brand might see around 4% free cash flow, but aggressive growth targets can push this figure downward, sometimes even into negative territory.

• Rising Leverage:
  As Drew Fallon points out, many brands have seen their leverage soar—averaging 54% and in some cases doubling year-over-year. This rising debt, combined with shrinking margins and escalating customer acquisition costs, creates a financial squeeze that makes traditional growth models increasingly unsustainable.

While these numbers paint a sobering picture of the financial challenges faced by DTC brands today, the conversation doesn’t end there.

Others think there might still be some opportunity—and even “alpha”—left in the model.

Kiva is the founder of Selva Ventures, a firm that invests in health and wellness brands. Let’s look at what he thinks emerging companies can win in eCom :

• Meta is the middleman

  First, the bad news. The model of cutting out the middle man and passing the savings to the customer is gone. The rise in the cost of acquisition has gobbled up that advantage.

• Go Retail 

  The good news: retailers still provide an efficient method to reach customers, plus a strong DTC/ecommerce traction is a great signal to them that your brand is worth considering.

• Advantage vs Incumbents
  Legacy brands were built on distribution moats and aren’t great solving consumer problems or embracing the buyer.

• The Role of Data and Metrics
  Kiva reminds us that 2 numbers remain critical: gross margin and repeat purchase rate. In many categories, a repeat purchase rate above 30% (with 40%+ being ideal) signals genuine consumer value and loyalty.

• Execution Over Hype
  While many pundits have dismissed DTC due to high-profile failures, there are numerous lean brands—often raising less than $50 million—that are quietly building substantial equity by focusing on operational excellence and customer-centricity.

Takeaway

For DTC, growth is now a high-wire balancing act—combining the pressure of rising acquisition costs, tighter cash flows, and increased competition with the need to continuously innovate.

What we’re seeing is an evolution from “business model” to “sales channel”, with a focus on how to integrate things that build exceptional digitally native brands with established (but still high leverage) channels like mass retail.

The arbitrage of cheap digital marketing is probably gone for good. Consider adaptation, execution, and fundamentals as the way forward.

Brand x Performance: Unlocking the Multiplier Effect in Advertising

We happened on a massive 100-page resource this week that we wanted to share.

With the ongoing performance marketing challenges, this report argues that brands need to stop thinking of brand and performance as silos in their business, and instead think of ways to combine them into a powerful multiplier effect.

We invite you to read the whole thing, but here are some key highlights:

The Two Jobs of Advertising

1. Short-Term Conversions:
At its most basic, advertising needs to drive immediate sales. This “bottom of the funnel” approach targets high-intent buyers with tactical, measurable messaging.

But there’s a catch: research reveals only about 5% of potential customers are actively in-market at any given moment. Focusing solely on conversion means missing out on the vast 95% of future buyers.

2. Long-Term Brand Equity:
Brand marketing’s role is to create lasting, positive associations with your brand. By building strong memory structures and fostering loyalty, brands ensure that when customers are ready to buy, they think of you first.

This long-term play isn’t just “nice to have”—it’s essential for sustaining growth.

Shorter version:
Relying exclusively on performance marketing can lead to diminishing returns. When you over-optimize for immediate results, you risk missing the broader impact that a strong brand can have on every touchpoint of the customer journey.

The Pitfalls of a Performance-Only Approach

• Misleading Metrics:
  Last-click attribution often overstates the value of performance channels (by as much as 190%) and undervalues brand-driven activities.

  This skewed view can lead to an over-reliance on tactics that deliver short-term wins but erode long-term potential.

• Diminishing Returns & Optimization Myopia:
  Heavy investments in performance advertising tend to hit a plateau—costs rise, efficiency falls, and opportunities for sustainable growth are lost.

  Channels like paid search become over-optimized while underutilized media (think video or social) hold untapped promise.

So, what’s the solution? The answer is to view brand and performance advertising as a continuum—a framework where each reinforces the other, generating what’s known as the “multiplier effect.”

Embracing the “Brand x Performance” Framework

Instead of choosing between brand and performance, adopt a holistic “bothism” strategy:

• Integrated Measurement:
  Move beyond simplistic, last-click metrics. Incorporate models that capture the long-term impact of brand-building efforts alongside immediate conversion data.

• Creative as a Catalyst:
  Invest in emotionally resonant creative that not only drives short-term sales but also builds lasting brand equity. Think storytelling, memorable visuals, and campaigns that connect on a human level.

• Modernize the Funnel:
  Recognize that today’s purchase journey isn’t linear. The “messy middle” requires touchpoints that nurture awareness, guide consideration, and eventually drive conversion.

• Reimagine your media mix: Digital video and social platforms, for instance, can deliver both immediate ROI and long-term brand lift.

Actionable Steps for Leaders:

1. Prioritize Brand Equity:

   • High-awareness brands can drive up to 13% sales growth for every 10% increase in ad spend.

   • For emerging brands, even modest investments in brand-building can establish a critical baseline.

2. Reassess Your Metrics:

   • Combine short-term conversion data with long-term brand impact assessments.

   • Use integrated models to capture the true incremental value of your advertising efforts.

3. Foster Collaboration:

   • Break down silos between brand and performance teams. When both work in tandem, the synergy boosts overall effectiveness.

By viewing brand and performance not as separate, competing channels but as complementary forces, DTC and e-commerce brands can overcome the challenges of rising acquisition costs and squeezed margins.

Takeaway

In a world where advertising budgets are under constant pressure and the competition for consumer attention is fiercer than ever, the key to sustainable growth lies in balance.

Integrating brand marketing with performance advertising isn’t just a trendy idea—it’s a strategic imperative. Embrace a “brand x performance” mindset, modernize your funnel, and measure success on both immediate and long-term metrics.

Quick Hits

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