2020 upended nearly every aspect of the retail industry. Many retailers were forced to temporarily shutter stores, furlough employees and adjust strategies on the fly to account for increased e-commerce demands as the pandemic hit.

Direct-to-consumer brands, however, were uniquely positioned to weather the disruptions, operating relatively few stores and already having a very active presence online where consumers shifted spending.

The sector faced struggles of its own though, from supply constraints to shipping delays, forcing brands to make tough decisions like furloughing and laying off employees. But the space has also persevered, pivoting strategies that account for the seismic changes taking place across the industry.

Heading into 2021, DTC brands will continue to navigate pandemic-induced headwinds that will ultimately shape the space in the long term.

Here are eight trends Retail Dive is watching in the DTC space in the year ahead.

1. More traditional retailers enter the DTC arena

What do traditional retailers do to beat DTC brands on their turf? For some top retailers, the answer is to emulate them. With less foot traffic in physical stores, retailers took inspiration from DTC brands on how to approach tech-savvy consumers.

Nike shut down nine wholesale accounts last August, according to Susquehanna Financial Group, in a bid to accelerate its DTC strategy. Under Armor reaped the benefits of this model too, announcing it would exit a few thousand wholesale doors and lean into a DTC strategy. Its DTC revenue jumped 17% to $540 million last October. 

Some big-box retailers also formed partnerships with DTC brands. Target, Sam's Club and Nordstrom are just some of the stores that feature DTC brands on their shelves. From the beginning, DTC brands displayed inherent values such as personalization and user-friendly platforms that have proven valuable during the pandemic. And traditional retailers took note.  

2. Digitally native brands see the value in physical retail

DTC brands planted their seeds online, and in some cases, swore off physical retail. But over the years, these brands realized that in order to scale their businesses and succeed in the industry, they need to enter brick and mortar in some capacity.

For some brands that meant forging partnerships with traditional retailers in order to test out the water of physical retail. Target brought in brands ranging from Casper to beauty brand Versed. Nordstrom formed partnerships with Glossier, Away, Bonobos and Kim Kardashian West's Skims shapewear brand, among others. And Crate and Barrel launched an exclusive, limited-run collection with Parachute to sell online and in 65 of its retail stores.

Other brands opted for pop-ups or permanent locations of their own. In 2018, Casper announced plans to open 200 stores across North America, while Adore Me around the same time said it had plans to open 200 to 300 locations over the next five years. Commercial real estate firm JLL previously anticipated digitally native brands could open some 850 stores by 2023.

Among those DTCs that have jumped into physical retail, several adopted a showroom model in which they don't sell merchandise in-store, but offer consumers the opportunity to touch and feel a product before going online to purchase. The model has garnered the attention of traditional retailers as well, namely Nordstrom and Ikea, which have integrated elements of the merchandise-free concept into their Local and urban planning studio stores respectively.

3. DTC brands extend their category reach

Though the pandemic has made it difficult for some brands to execute their growth strategies, it has been the root cause of demand for casual and self-care products as consumers continue to work from home. And for digital natives like Thinx, Ipsy and Bombas, expanding into these categories seems like a natural extension of their brand. 

As top brands lose market share in certain categories, DTC companies have the opportunity to expand their product offerings. Social distancing measures have only made customers more reliant on e-commerce platforms, and in entering new markets, DTC brands are finding creative ways to retain their new customers.

4. Tech-savvy consumers will be drawn to DTC brands

One of the most immediate effects of the pandemic for retailers was the need for an efficient e-commerce platform — something DTC brands already had. Last year, e-commerce sales rose to $795 billion from $600 billion in 2019, according to data from eMarketer. 

While consumers spend less time in malls and more on the devices in the palm of their hands, DTC brands have opportunities to appeal to a new demographic and retain the ones they already have. DTC brands' commitment to sustainability will also likely amplify on social media and continue to resonate with Gen Z and millennials.

With no end to the pandemic in sight and continued funding, DTC brands are poised to continue to gain more popularity.

5. Securing funding could be easier, at least for some

The pandemic also impacted how investors view the retail space, and in particular, how they think about DTCs. The seismic shift in consumer behavior meant massive e-commerce sales. E-commerce is projected to post a 32.4% increase over the prior year when all the tallies for 2020 are in, according to eMarketer. That brought success to many DTC brands, which had few brick-and-mortar locations to worry about and could capitalize on the move to online purchasing.

It also means that DTC brands can expect to have a larger customer base to draw from, Andrea Hippeau, principal at Lerer Hippeau, told Retail Dive in the fall, something that appeals to investors in the space. As far as shifting consumer behaviors this year, DTC brands and tech companies are some of the best-positioned, though some investors said the focus might shift to more realistic growth expectations and less funding in the future. Whether certain categories get more of a funding lift than others is up for debate, but investors are clearly still interested in the model: DTC darling Allbirds raised a cool $100 million in September, and outside furniture brand Outer secured $10.5 million this January.

6. Exit strategies get more complex

Once brands grow to a certain size, they begin eyeing their next move. 

Some brands have pursued acquisitions by larger retailers. However, in the case of razor brands Billie and Harry's — which were to be acquired by Procter & Gamble and Schick maker Edgewell, respectively — those deals were complicated by Federal Trade Commission actions. Both mergers were ultimately terminated.

Other brands have gone the route of initial public offerings. Casper and Chewy both filed IPOs in recent years. But releasing their financial information publicly came at the cost of exposing where their businesses have been less successful, primarily when it comes to operating profitably.

More recently, going public by way of special purpose acquisition companies — or SPACs — became a popular option across industries with the total number of these kinds of deals reaching 248 in 2020, up from just 59 the year prior, according to SPACInsider. IPO fundraising through SPAC deals exceeded $83 billion last year, an increase from $3.9 billion in 2015 and $503 million in 2010.

American Apparel in 2007 went public through such a deal, and more recently BarkBox parent Bark entered into an agreement with Northern Star Acquisition Corp. to begin trading on the New York Stock Exchange.

7. Leadership turns to retail vets as founders step back

DTC brands and their founders are inextricably tied in many cases. Many DTC brands have origin stories of a founder who had a problem themselves and set out to solve it. Brands like Outdoor Voices and Away come to mind. But recently, as popular DTC brands scale much larger than their startup days, and execs run into both operational and workplace culture issues, founders have taken a step back, and retail veterans have moved into C-suite roles. 

Outdoor Voices' founder Tyler Haney resigned early last year. Away's Steph Korey stepped down for a seasoned Lululemon exec to take over. (He has now also left the company after barely a year, succeeded in an interim capacity by Korey's co-founder.) In January, Dollar Shave Club's founder and former CEO Michael Dubin made the shift to adviser and board member, making way for Jason Goldberger, a "proven leader and experienced CEO" to take over.

The shift of founders away from the day-to-day of their brands isn't likely to end, as successful DTC brands continue to expand and recruit leadership that can help them reach the next growth stage.

8. Brands will continue to struggle with profitability

As more online companies begin trading publicly, offering a glimpse into their finances, trends around their profitability have emerged.

Until the second quarter of 2020, Wayfair consistently posted net losses since its public debut in 2014, while at the same time it reported mounting advertising costs. The retailer in fiscal year 2019 posted a nearly $1 billion net loss — an increase of more than 95% year over year — while its advertising costs in the period reached $1.1 billion. Online retailers Chewy and Casper have faced similar issues.

Media costs came down during the pandemic, providing some relief to these brands, but the solution is temporary and brands need to continue to look for ways to mitigate the high costs of acquiring customers online. In order to eventually turn a profit, brands will need to continue finding solutions to attract consumers — whether it's opening brick-and-mortar stores or forging partnerships with larger brands — and bring marketing costs down.