The e-commerce darlings that were meant to save retail may soon find themselves in bankruptcy court.
Internet and direct marketing retailers had the highest median market signal one-year probability of default of any sector at 8.1%, according to S&P Global Market Intelligence data and analysis from February. Other sectors included home furnishings retail; apparel, accessories and luxury goods; department stores; and consumer electronics.
Already this year Forma Brands — the parent company to beauty brands Morphe, Bad Habit, Jaclyn Cosmetics and Playa Beauty — filed for Chapter 11. Aside from bankruptcy, digitally native retailers have needed to close stores and lay off staff as a way to cut costs amid economic pressure.
“These business models were supposed to be the major disruptors. And were the major disruptors for a long time. But if you add the inflationary challenges — which means their costs are going up and upwards in their supply chain, costs are going up — and you add to that that they are not bricks and mortar so everything is done by shipping, and you throw in multi-year supply chain disruptions, that's a real tough combination,” said James Gellert, CEO of financial analysis firm RapidRatings.
And while retailers are facing challenges like massive supply chain disruption, and consumers are pulling back more on discretionary purchases amid inflation and other economic pressure, the problems many e-commerce companies are experiencing predate the pandemic.
Take Wayfair for example. The retailer, by design, sells a broad range of offerings in an effort to attract a wide consumer base. The problem is, so does Overstock. And Amazon. And Target. And Walmart. And a large swath of other major retailers.
Retailers that sell a lot of brands and don’t provide a differentiated product offering are primarily competing on price by providing customers with the biggest deals. Those companies, especially those operating primarily online, face challenges when it comes to both acquiring and retaining customers.
“Those retail models are powerful in that they have diversified offerings, and they are not overweighted to consumer preference for one individual brand. But the flip side of that is that there is no brand loyalty to them specifically,” Gellert said.
When seeking to attract consumers on the endless void of the internet where competition is brimming, customer acquisition costs quickly add up, sometimes coming at the expense of reaching profitability. Pure-play e-commerce retailers are twice as likely as retailers who have stores to report being unprofitable, according to a 2022 survey conducted by Ipsos for Publicis Sapient and Salesforce. Pure-play e-commerce retailers are also nearly twice as likely to report they are struggling to make necessary investments to improve profitability.
“Identifying, capturing at a reasonable cost, and sustaining a customer base is a challenge,” Gellert said. “A lot of the online retail companies have to spend so much to capture consumers and it is very hard to hold on to those consumers unless they have a truly unique product.”
This is why several digitally native companies have since taken their products offline and opened stores. Physical retail can serve as an additional marketing channel to help acquire customers and can diversify brands as competition grows. Allbirds, Warby Parker, Casper and even Wayfair and The RealReal have turned to brick and mortar.
But stores can also help brands improve the speed of fulfillment.
Companies like Amazon and Target have normalized fulfilling online orders quickly, whether through fast delivery or store pick-up options. For smaller retailers that don’t have access to the same resources as those companies, there’s growing pressure from consumers to meet those expectations around fast and free fulfillment.
“I think all consumer brands are struggling with this and particularly those that don't have the balance sheets to stockpile inventory and have the brick-and-mortar places for people to go in and buy that inventory,” Gellert said.
As digitally native retailers work to address existing problems and face newer challenges — like higher production costs, a pullback in consumer spending and increased competition — having cash available will set apart those who survive and those who fall.
“It's going to come down to: Who's got the ability to raise money and has the liquidity to survive this difficult time? The companies that have access to capital are going to survive. The companies that have less access to capital, or no access to capital, and/or are going to be paying a lot more for their capital as rates have risen — those are the companies that we're going to see either fail, or need to be purchased, or have some major event that goes on that will change the nature of your business,” Gellert said.
Companies that have a 9.99%-50% chance of bankruptcy
Companies that have a 4%-9.99% chance of bankruptcy
According to data from CreditRiskMonitor, 11 online retailers have an elevated risk of filing for bankruptcy in the next 12 months. Of those retailers, six have a FRISK score of 1, the highest risk, with a 10% to 50% chance of filing for bankruptcy. The other five retailers carry a FRISK score of 2, representing a 4% to 10% chance of filing for bankruptcy in the next 12 months.
Many of those retailers outlined above also carry a high or very high probability of default over the next 12 months, according to RapidRatings data, which rates companies based on their near-term and medium-term financial health. The firm tracks two key indicators: the Financial Health Rating, which is the primary risk measurement indicating the risk of default in 12 months, and the Core Health Score, which measures the core financial health of a company and reflects long-term sustainability and operational efficiency. The metrics are based on a scale of 100, with 100 being the best and 0 being the worst.
These companies represent a high or very high risk of default in the next 12 months
Here’s a closer look at some of the digitally native retailers at risk:
Wayfair has grown in popularity as shopping online for home goods has become more widespread.
Wayfair stood to benefit in the early days of the pandemic as consumers both avoided unnecessary trips to stores and sought out goods to make their homes more comfortable. And it did. 2020 marked the first year the online retailer was able to turn a profit since going public in 2014.
But that success was short lived, and Wayfair reverted back to its pattern of losses as consumers shifted spending away from the home to other areas, like entertainment and dining out as the economy opened up more broadly.
In 2022, the retailer’s net loss topped $1.3 billion as its customer base shrunk to 22.1 million, down 19% from the year prior. This came as full-year net revenue declined 11% year over year to $12.2 billion.
Sustainable personal care company Grove Collaborative started out by selling other brands on its website, but now sees most of its growth stemming from its own private labels, CEO Stuart Landesberg said in late 2021.
Grove Collaborative entered the public markets through a de-SPAC transaction with Richard Branson’s special purpose acquisition company amid a wave of IPOs from other digitally native companies. But like other digitally native companies, the retailer has struggled with profitability.
At the end of fiscal 2021, Grove’s net revenue inched up 5.3% to $383.7 million, but its operating loss grew by nearly 94% and its net loss increased by 88%.
Late last year, the company received a delisting notice from the New York Stock Exchange that it was no longer in compliance with its continued listing criteria, which requires companies to have an average closing share price of at least $1.00 over a 30-day trading period.
Following tough financial performance in the public markets, Grove in December refinanced its debt with a $72 million four-year term loan. The loan, which matures in 2026, was used to help bolster the company’s profitability, the company said at the time.
Online retailer Boxed, which focuses on selling bulk-sized pantry items, was founded to simplify the bulk-buying experience “without membership fees,” a dig seemingly directed at club retail giants like Costco, BJ’s and Walmart-owned Sam’s Club.
The retailer went public via special purpose acquisition company in 2021, but has faced financial turmoil over the past year.
In October, Boxed received a delisting warning from the New York Stock Exchange for not being in compliance with the exchange’s listing criteria because its stock price had been less than $1.00 over a 30-day trading period. A month later, the retailer received another delisting warning from NYSE for failing to comply with the exchange’s listing requirements of having a market cap above $50 million over a 30-day trading period.
Early this year, Boxed announced it was exploring “strategic alternatives,” which could include a sale of the company.
The company has been facing declining liquidity, reporting cash and cash equivalents of $32.1 million as of Sept. 30, down from $105 million in the year-ago period.
Redbubble, which calls itself the “world’s largest marketplace for independent artists,” became popular for selling things like stickers and phone cases.
But the company’s financial health has taken a turn for the worse over the past year.
The company’s financial health rating has moved from a “very low risk” in 2021 to a “high risk” in 2022, according to RapidRatings. Redbubble’s core health score — a measure of medium-term sustainability — went from a 74 in 2021 to a 22 in 2022.
RapidRatings said that while the brand has some strength in leverage, it demonstrates weakness in liquidity and earnings performance. “Significant improvement in one or more of these areas is imperative,” the firm said.
In fiscal 2022, Redbubble reported marketplace revenue fell 13% from the prior year to $483 million and its net profit after taxes swung to a loss of $25 million from a profit of $31 million in 2021. The company had $74.9 million in cash as of Sept. 30, compared to $89.1 million in June.
The company, like many digitally native retailers that have filed for IPOs in recent years, made its public trading debut despite operating unprofitably.
In its most recent quarter, the retailer reported revenue grew 10% year over year to $160 million as gross merchandise value rose 13% to $493 million. And while the company narrowed its loss slightly, it’s still operating in the red, reporting a net loss of $39 million and an operating loss of $38 million. At the end of its fiscal year, the company had $294 million in cash and cash equivalents compared to $418 million at the end of 2021.
The company has also joined a growing list of retailers making job cuts, announcing in February it laid off about 230 employees, or 7% of its workforce. This reverses a move The RealReal made in 2022 to add staff after labor shortages hurt the business.