2022 was a wild year for retail, with the impact of pressures like inflation largely halting the growth some direct-to-consumer and digitally native brands saw throughout the COVID-19 pandemic.
2023 is starting off to be an equally intense year for the industry, with a potential recession looming in the background while retailers dig themselves out of deep pits of inventory and grapple with increased expenses.
While macroeconomic challenges seem to be nonstop right now, DTC brands have faced a number of headwinds over the past few years, pushing them to find ways to get ahead strategically.
Toward the end of last year, brands were calculating the correct balance of stores by closing locations or announcing expansion plans, proving that a brick-and-mortar strategy of some kind is still important.
And while global venture capital funding was down in 2022, that doesn’t mean it's nonexistent. With some brands still announcing funding rounds over the last few months, there’s some hope that capital is still available for others — brands might just need to position themselves better to snag it.
What else does 2023 have in store for DTC? Here’s a look at trends that are likely to impact the sector going forward.
1. The balancing act of brick and mortar
While expanding into physical retail has become necessary for many digitally native brands, it has presented DTCs with new challenges, especially those that have been more focused on e-commerce. The COVID-19 pandemic first created a boom for online retail, with many DTCs remaining focused on that channel. But rapid growth also pushed some companies to expand their store presence, especially as health-related restrictions wore off.
In 2023, retailers have started to revisit how many stores are necessary due to macroeconomic pressures.
Several DTCs have closed stores they opened over the past few years, while others have cut staff at such locations. Forma Brands, beauty accelerator and owner of the makeup brand Morphe, closed all its U.S. stores in early January just before filing for bankruptcy the following week. Around the same time, clothing brand Everlane announced it was laying off about 9% of employees, including a little less than 3% of store roles.
For those opening locations or testing the waters with pop-ups, understanding the customer experience will be key.
Athletics brand Wilson Sporting Goods, which has made DTC a priority, has been steadily expanding its physical presence in key markets, most recently opening two new Chicago locations that offer a variety of experiences such as a full pickleball court, laser personalization services and a putting green.
Additionally, beauty brand Glossier opened a new location in Washington, D.C.’s Georgetown neighborhood last July, which features an airplane theme that celebrates the city’s international relevance, showcasing arrival and exit signs, as well as custom luggage tags available for purchase.
And store expansion could potentially help mall traffic this year if fresh brands can attract new shoppers to those shopping hubs. Mall owner Simon Property Group even announced a partnership with DTC platform Leap in November to help brands get into stores.
2. Who wants wholesale?
Brands want wholesale (in some shape or form), leading some to create or expand partnerships with mass retailers.
To improve customer access and visibility, brands may continue to seek out wholesale deals throughout the year, changing their traditionally strong preference for DTC e-commerce channels.
In the second half of 2022, two big-name DTC brands announced their entry into wholesale, both in the hopes of promoting growth. In July, Glossier announced it had entered a wholesale deal with high-end retailer Sephora, which would begin sometime early in 2023. Additionally, home fitness brand Peloton started selling through Amazon in August, and just a few weeks later announced a wholesale deal with athletics retailer Dick’s Sporting Goods, which includes branded store spaces.
And mass retailers are pushing to get newer brands in their stores, which could further grow the wholesale focus for DTC brands. Ulta’s new store format has a “Cue the New” space specifically meant to highlight brands new to the retailer so that customers can discover them more easily.
3. Profitability takes center stage
Growth at all costs? That infamous startup mindset isn’t exactly welcome going into 2023, due to a variety of market factors.
More companies have begun charting serious paths to profitability, with some noting how difficult it has been.
“The expectation to be profitable shifted overnight,” Everlane CEO Andrea O’Donnell said in a memo to employees about layoffs earlier this month, adding that “today’s tough decision is intended to set us up to improve profitability in 2023.”
While some are cutting costs to get an inch closer to profitability, others may be looking to new product categories to keep customers coming back. Product expansion seems even more important for brands whose core product may be a once-in-a-decade buy – such as mattresses.
4. A fight for funding
Last year, venture capital funding slowed down quite dramatically. Data from CB Insights’ 2022 State of Venture report shows total global funding for the year was down 35% compared to 2021, and U.S. funding was down 37%. Globally, total deal volume fell by 4%, with IPOs specifically decreasing 31%.
In O’Donnell’s memo to Everlane employees about the layoffs, the CEO noted: “It’s no secret that these are difficult times for venture-backed companies.”
However, funding – and even acquisitions – are not completely lost. Over the past couple of months, small brands like BloomChic and InnBeauty Project have raised capital, and Mielle Organics got acquired by Procter & Gamble.
VC’s are more concerned about where they put their money, though. A newly proposed U.S. Securities and Exchange Commission rule – facing immense backlash by funders – would make it easier to sue investors for negligence and increase the amount of responsibility put on VCs when their startups fail, according to reporting by Bloomberg.
With whatever funding is available, DTCs are likely to fight harder for it this year.
5. Traditional brands turn to DTC
Traditionally DTC brands may be looking toward wholesale, but several old-school companies are looking more toward DTC channels.
Since seeing its DTC business demonstrate growth in 2019, denim company Levi’s has doubled down on its focus to sell directly to consumers. As part of a larger goal to achieve $10 billion in revenue within five years, the brand said in June that it would invest more in the space with the hopes of getting DTC revenue to 55% of annual net revenue by 2027. Athleticwear giant Nike has also continued to invest in its DTC channel, announcing plans for stand-alone Jordan brand stores, and has decreased its wholesale presence with partners like Foot Locker.
With macroeconomic headwinds in full force, brands may continue to diversify their customer touchpoints beyond what they’ve traditionally done.
6. Sustainability gets trickier
While it is already difficult for retail to decrease its negative impact on the environment, a variety of factors will make that harder throughout 2023.
Younger consumers, such as Gen Z, are increasingly interested in brands' environmental impact. An October 2021 Simon-Kucher & Partners study showed that 60% of respondents said sustainability was an important factor in purchase decisions, and Gen Z in particular feels strongly about the topic. The ethical demands from that generation are even impacting grocers’ online presence.
And that pressure is expected to increase, according to a study of retail executives released by Deloitte in January. Sixty percent of surveyed executives said they expect increased scrutiny of ESG (environmental, social and corporate governance) practices this year.
However, with brands focusing more on staying above water amid economic distress, some of those ESG goals and initiatives might be put to the side. The same Deloitte study showed that over half of executives are planning minimal or no ESG investments this year, favoring margin enhancement opportunities amid market volatility.
But for brands still looking to tout their sustainability claims, the Federal Trade Commission might be keeping a closer watch on the reliability of such statements. The FTC announced in December that it was seeking public comment on potential updates to its “Green Guides,” a set of guidelines last reviewed in 2012, which aim to help brands avoid using unfair or deceptive statements to mislead consumers. Citing the difficulty consumers face in verifying sustainability claims made by brands, the FTC is hoping to make that easier by tackling marketing claims head-on.
7. DTC brands turn to discounts
Never say never, especially when it comes to discounting. After 2022 inflated inventory levels for brands, the start of 2023 isn’t exactly spreading hope that consumers will start spending heavily again.
In the past, several DTC brands made it a point to not discount their merchandise. Now, to help clear space, some are reconsidering.
Athletics company Lululemon has moved in this direction, offering a “rare-for-them” discount this month likely stemming from their well-known elevated inventory levels, according to emailed comments from BMO Capital Markets analyst Simeon Siegel.
Some cult-favorite brands like Glossier can even be found at off-pricers such as T.J. Maxx, according to Reddit posts on the r/glossier forum.
If the current state of the economy continues or worsens, more brands might increasingly look to deals. Allbirds co-CEO Joey Zwillinger during a November earnings call said the brand expects “persistent inflation and high levels of promotional activity” in the fourth quarter.
8. Brands weigh the costs of returns
With cost cutting being so important for brands at the moment, it is no surprise some might turn an eye to the high prices associated with shipping and delivery.
Free returns in particular have become a point of contention across the entire retail industry, with consumers expecting such services at no cost while brands look to save wherever they can. Returns were on the rise this past holiday season leading up to the end of the year. And some larger retailers, such as Zara, have already signaled that free returns don't need to be the standard and have opted to charge for some returns.
Diminishing the chances that a customer will even want to return an item would surely help, and virtual try-on technology has the potential to help shoppers feel more confident when buying items like makeup or apparel online. Larger companies such as Walmart, Victoria’s Secret and Amazon have all launched features to help customers try before they buy and improve size identification.
If smaller DTC brands can afford the investment, that tech might help with decreasing return rates. With retail sales having missed some analysts' expectations in December, nothing is off the table for brands looking to save some money.
Editor's note: This story first appeared in our Retail Dive: DTC daily newsletter. Sign up here.