The first half of the year has passed and many companies have reported their second-quarter results. A roundup of direct-to-consumer’s biggest brands presents a mixed bag of earnings, with some doing better than ever while others attempt to enact transformation plans.

Brands such as On and Canada Goose – which reported revenue jumped year over year by double digits – have been focused on growing DTC channels. Meanwhile, Olaplex saw DTC sales drop and Grove Collaborative named a new CEO amid declining sales. 

Regardless of how well certain companies did during the latest quarter, the stage is now set for the back half of the year with the ever-important holidays approaching. The team talks about themes from DTC earnings in Q2, how they compare to mass retail and what’s to be expected as the year progresses.

For more insight into retail’s most important period, register for the Insights into the Holiday 2023 season virtual event on September 21. Retail Dive Senior Reporter Daphne Howland will be joined by colleagues at Marketing Dive and Supply Chain Dive to preview the season.

Resource links:

• DTC’s Q2 was a mixed bag as holidays approach
• ‘Haves and have-nots’: How the funding market is panning out in 2023
• Macy’s swings to a loss in Q2 as consumer situation deteriorates

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.

Similar to how DTC mattress brand Casper has expanded into sleep gummies and nightlights, more companies could be searching for growth through product variety as the year progresses.

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.

 

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By BigCommerce

It’s a challenging time to run a business. With costs going up, consumers buckling down and supply chain issues still rearing their ugly heads, growth is often the last thing businesses are thinking about. But it doesn’t have to be. Here are some strategies you can employ in your own ecommerce business to succeed while your competition is just treading water.  

Start selling wholesale 

Direct-to-consumer (DTC) ecommerce has exploded in growth since the start of the decade. In the US alone, DTC ecommerce is set to make up $212 billion of total ecommerce sales by 2024. But it’s no longer accelerating at the same rate it once was. In fact, some experts are even going as far as to say that the “go-it-alone” era of ecommerce is over.  

As buyers return to real-world storefronts and in-store sales begin to rebound, it has become more necessary for the “DTC darlings” that emerged during the pandemic to incorporate wholesale approach into their overall sales strategy. 

Solo Stove, a BigCommerce merchant that focuses on a variety of outdoor products through its suite of Solo Brands, embodies this principle by using both wholesale and direct-to-consumer sales to help see positive growth. In the first half of 2023, wholesale revenues for Solo Brands grew 55%, offsetting a decrease in DTC sales of 12%.  

Start selling on new channels 

Every day, more and more shoppers are buying through non-traditional channels, like Gen Z. 97% of Gen Z consumers say that they use social media as their top choice for shopping inspiration. While you may already be selling on social channels like Facebook, marketplaces like Amazon or search engines like Google, it may benefit you to expand into new sales streams, depending on your target market and where they like to shop.  

While adding new channels to your existing strategy might seem like a hassle, using a tool like Feedonomics can help make channel management a breeze, and allow you to quickly scale your business into new channels and markets.  

Don’t forget about physical channels, too. As more consumers are returning to physical storefronts, the lines between offline and online sales are starting to blur. Adding buy online, pickup in-store (BOPIS) functionality could give a boost to your bottom line by bringing more customers into your physical locations.  

Improve user experience at checkout 

Checkout is one of the most important steps in the purchasing process. One small hiccup and your shopper’s cart could join the other 70% of online shopping carts that get abandoned. While this number is staggering, there are a few things your business can do to improve your customer’s checkout experience.  

One of the easiest ways to do this is by being as clear and transparent as possible when it comes to shipping and taxes. Dippin’ Dots used BigCommerce’s open APIs to customize their checkout process to include a calendar where shoppers can choose their delivery date and get accurate shipping costs at the same time. No surprises means more conversions.  

Start selling international 

Expanding internationally is often a fear-inducing thought for many in the ecommerce space. Not only do you need a whole new site in the local currency and language, you also need to consider shipping, customs and taxes. But setting up cross-border selling isn’t as difficult as it sounds with the right ecommerce platform.  

Burrow, a luxury home goods brand, recently expanded from operating solely in the US into the Canadian market. Using tools from BigCommerce as well as other technology partners, they were able to create this new site specifically for the Canadian market with up-to-date pricing and shipping information.  

What’s holding you back?  

Growth during challenging economic times isn’t impossible. In fact, it’s anything but, especially when you have the right technology partners by your side. What’s stopping you from expanding your business? If your ecommerce platform is keeping you from growing, it might be time to look for an alternative.  

Look for a platform that allows you to sell B2B and DTC from the same back-end, and provides fantastic tools that can help B2Bs and DTC companies succeed in the space. Find a partner that easily integrates with marketplaces, social channels and search engines so you can start taking orders immediately. And seek out a tool that works with leading technology partners that can help you start selling your products across borders quickly and easily. Learn more about finding the right ecommerce platform for your business here.

In this later stage of the pandemic — despite inflation cutting into discretionary purchases and higher spending on services like restaurants, travel and entertainment — consumers have headed back to stores, putting a damper on the e-commerce surge of the last couple of years.

That’s being acutely felt at a lot of DTC companies, which have few stores, if any, for customers to go into. Yet many of these disruptors began faltering even before the pandemic, as they were increasingly forced to reckon with how arduous and expensive customer acquisition is without physical locations or wholesale distribution.

These days we’re even witnessing the tumbling of unicorns – those startups that at some point reached or surpassed a billion-dollar valuation. In addition, the number of new retail technology unicorns has dropped by a third from Q4 2021 to Q1 2022, according to a report from CB Insights.

As DTC brands continue to face challenges to their models, here’s a look back at where some digitally native darlings ended up.

Allbirds

Allbirds crossed over to the land of the unicorn four years ago, going public at the end of 2021 with a familiar DTC story — rising sales and widening losses. At press time, its share price had fallen more than 80% from its initial public offering and the retailer had confirmed layoffs of 8% of its workforce “to ensure our operating structure is set-up for the next phase of growth.”

When filing for its IPO, the shoe e-retailer planned to open “hundreds” of stores, but it still runs very few. With the debut in 2022 of a storefront in New York, the company had just over 40 globally. This year the brand is moving more assertively into wholesale, partnering with Nordstrom and Public Lands in the U.S. and Zalando in Europe. Allbirds has also diversified its assortment by getting into resale.

Away

The unicorn buzz started months before Away achieved it in 2019 — just in time for the pandemic to derail the luggage company’s momentum by drastically curtailing travel. Sales plummeted 90% and the company was forced to furlough half its staff and lay off another 10%. At the end of 2021 the company brought in yet more new leadership after months of executive turnover and reports of a toxic work culture. Rumors of an IPO have quieted since surfacing in April 2021.

Casper

When Casper reached unicorn level in 2019 it already had plenty of bragging rights. That included being named Retail Dive’s Startup of the Year and landing partnerships with West Elm, Nordstrom and Target; the latter was also an investor. The online mattress company dreamed of cornering the market on slumber itself and opened a series of stand-alone locations and shop-in-shops. But during its early-2020 IPO, Casper slashed its opening share offer, bringing its valuation down well below unicorn. Failing to achieve profitability, the company apparently put the public markets to sleep, and ended up in a private equity portfolio in late 2021.

Dollar Shave Club

Unilever plunked down a cool billion for Dollar Shave Club in 2016, but early in 2022 the consumer products giant's CEO, Alan Jope, expressed buyer’s remorse. Speaking to analysts, Jope said some of the conglomerate’s acquisitions were mistakes, and singled out the men’s grooming brand.

“Dollar Shave Club did not deliver as expected, and the economics of the DTC model changed,” Jope said, according to a Seeking Alpha transcript.

It’s changed for DTC grooming rival Harry’s as well, though its unicorn valuation seems to have stuck. Schick maker Edgewell in 2020 terminated their merger agreement after the Federal Trade Commission moved to block it. Since then Harry’s has collected more investments and is seeking growth by acquiring brands.

Glossier

In 2019, as Glossier earned its unicorn valuation, it was also garnering cult status among beauty consumers. Small steps into brick and mortar were stymied by the pandemic, however, and the DTC brand closed all locations. In 2021, Glossier staked a comeback on international growth and, once again, stores.

2022 had barely begun, however, when Glossier laid off a third of its workforce and founder-CEO Emily Weiss admitted the brand had made strategic mistakes. A few months later she stepped down as chief executive. Now Glossier is grappling with inflation, announcing price hikes to offset expenses, and confirmed another round of layoffs as it moves away from its DTC-only approach. The company is opening stores again — running five at press time with more to come — and for the first time is a wholesaler, inking a deal with Sephora in July.

Jet.com

Jet.com may have had a triple-unicorn valuation in 2016 when Walmart bought it for $3 billion, but, today, it doesn’t exist.

Rent the Runway

Rent the Runway joined other disruptors in achieving a billion-dollar valuation in 2019, a time when unicorns didn’t seem all that rare. During the pandemic, though, customers had little use for nice officewear or dressy clothes, and the company tweaked its model last year to allow non-subscribers to purchase used clothing. Its troubles didn’t impede its IPO in the fall of 2021, although the stock had tumbled to under $5 per share at press time, far below its previous valuation.

In 2022, the company’s sales and active subscriber numbers have recovered, though its loss widened in its most recent quarter. In July, off-pricer Saks Off 5th’s online company announced it will sell pre-owned, pre-rented Rent the Runway items on its website.

Stitch Fix

Stitch Fix garnered a $1.6 billion valuation at its IPO in 2017, and at one point in 2021 its share price approached $100. But those days are gone as the apparel e-retailer, which missed out on this year’s brief clothing boom, scrambles to figure out how to stem losses and expand beyond its niche apparel box business. Under a new chief executive, who took over from the founder in 2022, the company has turned to traditional e-commerce, shaken up its styling team, resorted to layoffs, leaned on its digital recommendation engine to differentiate itself from department stores and watched its share price slump to below $10.

Nordstrom threw in the towel on its similar Trunk Club box business earlier in 2022.

StockX

Sneaker resale site StockX was another 2019 unicorn, and in 2021 the footwear business in general was enjoying what NPD Group analysts called “stimulus-fueled comps.” But in 2022 footwear sales are down, and the retailer is running into trouble. In June, StockX said it is laying off 8% of its workforce and making other adjustments, but that it remains in growth mode. The company is also contending with legal challenges from Nike over the authenticity of some of its shoes.

It’s been nearly two years since Vuori announced ambitious plans to open 100 stores by 2026 and expand into international markets.

The announcement came as the activewear brand raked in a whopping $400 million investment at a $4 billion valuation from SoftBank Vision Fund 2. Vuori has remained profitable since 2017, the company told Retail Dive.

And despite other direct-to-consumer brands pulling back on their own retail expansions — Allbirds, for example, earlier this year announced it would slow down store openings as the DTC footwear brand executes on its transformation plan — Vuori’s Vice President of Retail Catherine Pike said the brand is on track to reach its goal.

“We are seeing great engagement and excitement from our local customers, which has encouraged us to continue our expansion plans in the U.S.,” Pike said in an email to Retail Dive.

The brand now operates around 40 stores globally, quadrupling its store footprint since it announced its brick-and-mortar plans in October 2021.

In that time, Vuori has opened in new markets, including Austin, Texas; Boston; Chicago; London; and more recently, Bethesda, Maryland, just outside of Washington, D.C.

“Community is an important pillar of Vuori. When opening in new markets, we look to our existing engaged community in these locations, while considering the ways in which we can introduce the brand to new local customers in the market,” Pike said

The stand-alone stores represent “the ultimate manifestation of our brand and our community centered ethos,” according to Vuori founder and CEO Joe Kudla.

While leaning into its own stores has been valuable to Vuori, the company took an unconventional path when it entered the market. The brand, which was founded in 2015, initially started out by selling its products to third-party fitness studios in order to acquire customers.

“When we originally launched the business we sold primarily to fitness studios to connect directly with people wearing the product at the point of activity, catering specifically to men who were often underserved in this category,” Kudla said in an email. “With that said, we quickly found this channel to be challenging to build a business around on its own and the larger retailers weren’t quite ready to get behind premium mens activewear.”

This led the brand to launch its DTC channel. Vuori’s own channels have allowed it to connect with its customers to hear feedback.

In addition to serving as a point of contact for consumers to interact with brands, another major reason DTC companies turn to brick-and-mortar retail is to help bolster their marketing efforts.

“Many brands use their own retail stores more as a marketing tool, and less as a commerce tool. They want to be places where people are going to see the product,” Matt Powell, adviser at Spurwink River, told Retail Dive. “One of the big challenges for DTC brands is customer acquisition. It's hard to get a new customer to come to you unless you've got really strong word of mouth or social media marketing. So having stores is another way to get people to learn about your brand and become a fan, and also allows you to have a deeper relationship with your current customer.”

And while 100 locations may seem like a lofty goal, especially as other retailers announce store closures, the number of locations isn’t necessarily what’s important as long as the brand is being thoughtful about where it’s opening its stores, according to Nora Kleinewillinghoefer, a partner in the consumer practice of Kearney.

“As we think about retailing right now and brick and mortar, it is secondary locations that are struggling, it's not the primary locations necessarily. It's about being in the right place with your consumer, not just being everywhere,” Kleinewillinghoefer said, adding that stores can be places “where you can talk to somebody about the brand, you can tell your stories, but you can also leverage the more expanded DTC online presence or e-commerce channel to create that breadth of assortment — it doesn't have to be in the retail format. So if you're thoughtful about the format, location and execution, I don't think opening new retail is a problem.”

How early wholesale adoption led Vuori to success

Vuori has also steadily built out its roster of wholesale partners over the years in order to further expand its reach.

“While our early adoption of a direct strategy has served as a big catalyst for our success, partnering with the best retailers across several of [the] industries that are relevant to our customer … has helped ensure we show up where our customers are and provides valuable perspective on how Vuori sits in the market relative to other great brands,” Kudla said.

The brand now sells in retailers from Nordstrom and REI to fitness studios like Equinox, as well as independent outdoor and running stores.

“Embracing wholesale early in our life cycle was a big part of our success. We were a bootstrapped business that started in a garage so we had to find efficient ways to share our product and our story with our customers,” Kudla said, adding that a holistic, multi-channel strategy where the company could stay “in control of our business at wholesale” would allow it to drive awareness for its online business. “The question for us was not whether or not to sell wholesale, but rather how we go about doing it.”

For Vuori, wholesale has also allowed the company to introduce the brand to a more niche customer base and then continue to connect with that consumer down the line at Vuori’s own stores, which feature a wider, more diverse product offering, according to Pike.

DTC brands can learn a lot from their wholesale partners, particularly those retailers that have been operating for a while, according to Kleinewillinghoefer. The retailers not only extend the reach for smaller brands, but they also can teach brands about product placement and storytelling.

“They can create visibility for you in much more effective ways than if you're just going DTC and trying to do it on your own,” Kleinewillinghoefer said.

Standing out in a saturated market

Vuori’s brick-and-mortar plans come off the back of heightened demand in the activewear market. But its early popularity came well before that and it was largely due to what consumer segment it was going after.

“So many of the activewear brands in the marketplace right now are focused on the women's side because they're all chasing Lulu and the success that's been there,” Powell said. “Vuori — it's not entirely a men's focus — but having more of a men's focus set them apart a little bit.”

In recent years, retailers selling activewear and athleisure thrived during the onset of the pandemic as more consumers sought out healthier lifestyles, and apparel became more casual as people started working from home. However, as with many successful things, this led to increased competition.

“With the amount of noise that we're all seeing, everyone can create a cost-effective T-shirt. Creating a product is not the problem. It's differentiating yourself with the storytelling, the quality and the connectivity to the customer,” Kleinewillinghoefer said. “I think Vuori has been making a big splash by being very controlled about how they show up [and] where they show up, particularly when it comes to partnerships like wholesale.”

And while the return to office has contributed to more structured apparel becoming more prominent than during the pandemic, comfortable athleisure styles aren’t going away anytime soon.

“We've completely shifted what’s work appropriate. Work from home is still a very real thing. We are still much more hybrid than we were prior to the pandemic,” Kleinewillinghoefer said. “The acceptability of a more leisurely dress code when you're in your home, for example, is completely changed. Nobody's expecting somebody to sit in their home wearing a dress shirt because there’s just no reason to.”

However, despite the reintroduction of dressier styles driven by a resurgence of in-person events and reopening of offices, there is still solid demand for activewear, Powell added.

“I think a lot of people are really misreading that trend and they're making the assumption that he's going into his closet and throwing all of his hoodies away and buying suits and dress shirts and that's simply just not happening. Did he go out and buy one or two suits for events and maybe for work? Yes, but he's not throwing out his entire activewear wardrobe,” Powell said.

To stay relevant, Vuori has formed partnerships with other brands, including with Clae for footwear and Bala. The brand is also prepping new product launches later in the year.

“Moving into the back half of the year we have some exciting new products that will be launching, with a focus on innovative new fabrics that we can’t wait to introduce to our community as well as expanding in some new exciting categories,” Kudla said.

While M&A activity has been down in 2023 so far, FullBeauty Brands has been bullish on acquisitions.

The inclusive sizing company acquired the intimates brand Cuup in July, just a few months after it acquired the apparel brand Eloquii from Walmart. The terms of both deals were not disclosed.

With the purchase of Cuup, all of the brand’s employees became FullBeauty employees, though Cuup’s co-founder Kearnon O’Molony will not be joining the company, according to details shared with Retail Dive. Cuup co-founder Abby Morgan left the chief marketing officer position at Cuup in April 2022, according to LinkedIn.

FullBeauty’s purchase of Cuup went “very quickly,” FullBeauty CEO Jim Fogarty told Retail Dive.

“This would not be average. ... The needs of the situation, it was important that we move fast,” the executive said. “If you’ve done acquisitions before you get a little bit more credibility.”

Both acquisitions are part of FullBeauty’s goal to attract younger consumers, which has not historically been the company’s core customer demographic, Fogarty added. Both Eloquii and Cuup also share the same focus on sizing inclusivity and innovation that FullBeauty has.

“We wanted to expand into taking care of more of the addressable market and in particular, moving a little lower toward Gen X and millennials,” the executive said. “A lot of businesses will try to take their existing brands and go younger, we knew that that was not ever the way to do it.”

FullBeauty operates a portfolio of brands all focused on inclusive sizing, including Catherines, Woman Within and Jessica London. Though Cuup already has wide-ranging bra sizes, the parent company thinks it can potentially expand Cuup’s band size offerings.

“Cuup was a brand that was similarly focused on hard-to-fit size or size aspects that weren't being dealt with well,” Fogarty said. “They have cracked the code on having a great product that they would describe it as sexy for the woman, not sexy for the man.”

Cuup will join FullBeauty’s digital mall that also houses Eloquii, June+Vie and Swimsuits for All. At the moment, Cuup, Swimsuits for All, June+Vie and Eloquii all sell swimwear in addition to other offerings. All the brands also sell intimates except for Eloquii.

“I think we will clean up some of that shared product,” Fogarty said of the overlap between the brands.

Prior to FullBeauty’s latest acquisitions, the company bought Catherines in a bid for $41 million in 2020. The move came after FullBeauty entered and exited bankruptcy within 24 hours in February 2019.

Leading to the bankruptcy, FullBeauty’s inventory and gross margins weren’t being properly managed, though the company has since reset its merchandise assortments and re-evaluated its inventory purchases, Fogarty previously told Retail Dive.

“We're fortunate to have a nice-sized business that has low capital expenditure requirements,” Fogarty said. “We've also returned with dividends to our shareholders, so you're always trying to look for opportunities to invest back in your own business. ... Our board's very supportive, particularly as the macro environment is tough. That's a great time to be acquiring businesses to make us stronger.”

When 2023 began, retail was starting to experience a slowdown in funding.

In 2021, global venture-based funding rose 111% year over year, according to data from CB Insights’ 2021 State of Venture report.

But that high quickly came tumbling down in 2022, when global funding dropped 35% to $415.1 billion, per CB Insights’ 2022 report. Retail venture capital deal count in the U.S. fell 28% from 2021 to 2022, according to data from PitchBook shared with Retail Dive late last month.

The outlook for funding in 2023 already looked bleak back in January, but the first half of the year may have turned out worse in some ways, Lerer Hippeau partner Andrea Hippeau told Retail Dive.

“I think the longer it stays bad, the worse it gets,” she said. “It becomes a little bit of a systemic issue versus just kind of a blip or a moment in time.”

But what does “worse” actually look like? Here’s a peek at how the funding market turned out during the first six months of the year and what might be on the horizon.

By the numbers

A look at the data so far this year doesn’t paint a pretty picture. 

Global venture capital funding during the first half of 2023 reached just $130.2 billion, which is less than a third of last year’s $421.2 billion year-end total, according to data from CB Insights’ State of Venture Q2 2023 Report.

Median deal size globally is down in 2023 so far across all investor categories, which includes private equity and venture capital, per CB Insights. 

“It's a little bit of a story of haves and have-nots,” Hippeau added. “The very, very best brands and the very, very best companies are still getting funded. But if you're even a dip below best in class, that's when it's becoming extremely challenging.”

For the first and second quarters combined, global funding in retail tech was $9.5 billion, down 76% from the same period in 2022 when funding was $39.6 billion. The number of deals during that time also declined by nearly 50% for the retail tech sector.

Looking at retail overall, funding as of June 23 was at $12 billion globally and $4.2 billion in the U.S., according to data from Crunchbase for the segments Retail Dive follows, such as apparel, consumer goods and cosmetics. The data excludes tobacco, drones, flowers, classifieds, laundry and dry-cleaning. In comparison, retail funding during the first half of 2022 reached $42.9 billion globally and $14.6 billion in the U.S.

The funding process seems to be taking longer overall compared to the last few years of peaked activity, Hippeau noted.

“We're telling companies it's going to take twice as long and you're going to have to talk to twice as many people as you did in the previous cycle for fundraising,” Hippeau added.

Deal count globally for retail was at 237 as of June 27, which is less than a third of last year's full-year total of 735 deals, per PitchBook. Although the numbers exude a sense of doom and gloom, the reality is that some companies are still successfully raising capital.

In perhaps one of the biggest retail deals so far this year, Kim Kardashian’s Skims brand closed a $270 million Series C funding round led by Wellington Management in July. The brand’s valuation reached a whopping $4 billion. 

But you don’t have to be Kim Kardashian to snag fresh funding in a down market. Last month, activewear brand Ten Thousand raised $21.5 million, children’s brand Lalo secured $10.1 million and direct-to-consumer retail platform Leap raised $15 million.

Some food brands have also snagged funding, including Fly By Jing — known for its Sichuan chili crisp — which raised $12 million and Momofuku Goods, which secured $17.5 million, both in March.

But what can the industry expect during the months to come?

What the future holds

There may soon be another wave of funding rounds, with lower totals and lower valuations, as brands run out of options for capital. Hippeau expects the slow market could also lead to forced acquisitions and even companies going out of business as money dries up.

“We haven't seen that yet because of the companies that didn't have to raise. Maybe they raised a big round in 2021 or were very close to being profitable and were able to eke out a few more months before they had to raise,” Hippeau said. “Those companies are going to have to come to market unless they've been able to flip to profitability.”

Already this year, brands have experienced down rounds. Tonal, for example, was valued at $1.6 billion in early 2021 following a funding round, but by early 2023, the company's valuation had fallen to between $550 million and $600 million, according to The Wall Street Journal. Meanwhile, direct-to-consumer sleepwear brand Lunya in June filed for bankruptcy following a slew of issues such as declining consumer demand and a failed bet on retail stores.

Plenty of brands this year have also already been acquired some of which were bought out of bankruptcy. To name a few, hair care brand Mielle was acquired by Procter & Gamble in January, Aesop was bought by L’Oréal for $2.5 billion in April and Walmart sold off Bonobos, Eloquii and Moosejaw.

However, total merger and acquisition value did drop year over year during the second quarter from $1.14 trillion in 2022 to $732.8 billion, according to reporting from Reuters.

The success of Cava’s IPO in June, though, may mean there's an opening in the IPO market with pent-up demand for some segments, according to Hippeau.

“I do think there could be a momentary period of time where the IPO market moves up and maybe that leads to the venture world opening up a little more,” Hippeau said. “But I don't think that necessarily means that there's a full-blown recovery happening.”

Demonstrating some hope in the beauty space, Il Makiage owner Oddity went public in July. Oddity was at first aiming for a valuation of about $1.7 billion through its IPO, but wound up selling shares at a higher price than initially expected. The beauty company touts itself as consumer technology-driven, with centralized technology and data science departments for its brands. That may be an important distinction as the market shifts away from its earlier highs.

During the sector's prime years, direct-to-consumer darling brands were bringing in large amounts of cash. Private label company Brandless snagged $240 million from SoftBank in 2018, Casper reached a $1.1 billion valuation following a $100 million funding round in 2019 and razor brand Harry's was acquired for nearly $1.4 billion that same year. But across the DTC industry, Hippeau says that the current funding market seems to be reflecting some of the adjustments needed in the space.

“With platforms like Shopify and all the other kinds of tools that are out there, the bar is actually way lower to start a brand,” Hippea said. “As an example, why should Target buy a direct-to-consumer brand when they can spin up a brand, hire a branding agency and put up a Shopify site themselves? So I think the bar is lower for entry, which makes the former way of investing harder.”

Amid a sea of redundancy, artificial intelligence may bring forward innovation that the industry hasn’t seen in years. The technology could usher in new e-commerce companies and even improve the capabilities of brands' personalization. It might also reinvigorate venture capital interest in retail.

“AI, at the end of the day, is a really large technological platform shift,” Hippeau said. “We're at the very, very early innings of it. I do think that there's going to be a whole new crop of consumer companies leveraging AI in different ways, whether that's to be more efficient with their operations, so that they’re able to get to profitability faster, or different ways to service consumers.”

Dive Brief:

• Apparel brand Skims — which was co-founded by Kim Kardashian — on Monday opened its first European pop-up shop in the U.K. with retailer Selfridges, according to details emailed to Retail Dive.
• The pop-up will be open Monday through July 8 and is located at Selfridges’ The Corner Shop in London. The retailer will reveal a new selection of Skims swimwear and apparel available in-store and online every Monday, including limited-edition pieces. Selfridges will open a redesigned and expanded permanent Skims shop-in-shop this summer.
• Customers can purchase a maximum of six Skims swimwear pieces. Additionally, Skims plans to expand into free-standing brick-and-mortar stores across the U.K. and EU territories over the next three years. 

Dive Insight:

Skims’ latest pop-up shop adds to the company’s growing list of in-person activations and wholesale partnerships. 

“I’m thrilled to open our first international pop-up experience at the iconic Selfridges Corner Shop. We expect demand and buzz to be high as this is the first time SKIMS Swim will be available in retail outside of the U.S,” Jens Grede, Skims co-founder and CEO, said in a statement. “The pop-up experience will set the tone for the future of SKIMS in London, as the cultural and fashion destination is a key market for our global expansion.”

Selfridges Keyholder members have priority access to shop for the first 30 minutes during Monday launch days, according to the retailer’s website. The pop-up location is designed to look like a summer Los Angeles poolside oasis and will offer custom Skims ice cream treats by Chin Chin Labs.

Skims — which sells underwear, apparel and more — has steadily been expanding its physical footprint.

The brand in May opened a pop-up shop in New York City at Rockefeller Center. The summer-focused space featured a blue theme with a diving board water feature. It also offered food provided by Morgenstern’s Ice Cream.

Earlier in May, the brand opened a dedicated space inside Saks Fifth Avenue’s New York flagship store. The space showcases Skims’ body-positive collections including Fits Everybody, Seamless Sculpt and Cotton alongside its Soft Lounge and Boyfriend styles. Skims also plans to be available in more Saks doors by the end of this quarter, including stores in Houston, Boston and Bal Harbour, Florida.

Skims also expanded its C-suite in January, hiring Robert Norton as its chief commercial officer. Norton previously served as president at the Italian luxury brand Moncler and acted as CEO of Americas at Roberto Cavalli.

August has already brought a lot of change to the industry. 

Some companies have switched up their leadership in an effort to focus on growth, with Grove Collaborative’s co-founder Stuart Landesberg stepping down from the CEO position and Wolverine Worldwide terminating CEO Brendan Hoffmann. 

Meanwhile, many brands have also focused on expansion, whether through wholesale or direct-to-consumer channels. DTC jewelry brand Aurate debuted its first-ever wholesale partnerships with Macy’s and Helzberg Diamonds while Warby Parker re-emphasized its love for brick and mortar by opening 13 new stores during its second quarter. 

Such moves come amid a tough macroeconomic environment, leaving some brands to struggle while others flourish. With the year more than halfway over, the holiday season is quickly approaching – with millions of consumers expected to have less money to spend – while profitability becomes an increasingly important goal. 

So how are brands performing with the industry’s most important time of year around the corner? Here’s a roundup of DTC earnings from the past few weeks. 

Allbirds

Allbirds is executing on a transformation plan announced in the spring, which is intended to help the brand reach profitability and includes four main pillars — reigniting its product and brand; optimizing its U.S. stores and slowing the pace of openings; transitioning its international go-to-market strategy; and improving cost savings and operational efficiency.

As part of the plan, the footwear retailer announced steps to transition its international model by entering into agreements to shift operations in Canada and South Korea from a direct go-to-market model to a third-party distributor model.

“We are spending every waking moment focused on driving sustained and durable profit for the future chapter of Allbirds,” co-founder and CEO Joey Zwillinger said on a call with analysts.. “It is not going to happen overnight.”

Warby Parker

Warby Parker saw revenue increase and losses narrow in the second quarter. The eyewear brand’s active customers grew 1.2% to about 2.3 million.

The modest customer growth in the period comes as the brand pushes further into physical retail. During Q2, Warby Parker opened 13 new stores, ending the period with 217 locations, and executives said it’s on track to open 40 by the end of the year.

Purple

Purple missed analysts estimates for revenue and EBITDA during Q2 as the mattress retailer’s revenue shrunk and its losses widened from the year-ago period.

The company has a more cautious view of industry demand for the remainder of the year and as a result lowered its full-year outlook. Purple now expects net revenue to be between $560 million and $590 million, down from a previously projected $590 million to $615 million, while adjusted EBITDA is expected to range from breaking even to negative $10 million, down from previous EBITDA estimates of positive $13 million to $17 million.

Wayfair

While Wayfair’s revenue fell during Q2, it was able to narrow its losses during the period. Executives credited the improvement in profitability to a plan the company initiated last year.

“Last year, we laid out a plan to strengthen our business that included a path to sustainable and growing profitability with several key milestones,” Wayfair co-founder, co-chairman and CEO Niraj Shah said in a statement. “For the past few quarters, you’ve seen us execute against that plan — to lower our costs, focus on the basics and earn more customer and supplier loyalty. And you’ve seen the tangible impact of this plan as our performance has continued to improve.”

However, Wayfair saw its active customer base shrink during the period, declining 7.6% year over year to 21.8 million.

Oddity

Less than a month after making its public market debut, Oddity reported strong earnings for the second quarter.

“We delivered our strongest second quarter and year-to-date financial results ever, beating our plan on revenue and all key profit metrics, and allowing us to raise our full-year outlook,” Oran Holtzman, Oddity co-founder and CEO, said in a statement.

The Il Makiage and SpoiledChild parent company projects full-year net revenue to be in the $475 million to $480 million range, compared to previous estimates of $453 million. Oddity also expects adjusted EBITDA to be between $96 million and $101 million, up from previous projections of $91 million.

Hims & Hers

The quarter “marks a significant turning point for Hims & Hers,” according to Andrew Dudum, co-founder and CEO. The healthcare company was able to grow its revenue while also narrowing its losses.

“We are excited by the progress made this quarter, which we believe sets that foundation for long-term growth at an attractive margin profile through distinct competitive advantages,” CFO Yemi Okupe said in a statement. “Our economic flywheel is clearly working. It has enabled us to strategically bring highly sought after personalized products to very attractive price points, and simultaneously expand margins. We believe this uniquely positions us for significant market share gains.”

Olaplex

Olaplex faced declining sales and profits in the second quarter and missed the company’s own expectations as its “Professional and Specialty Retail channels experienced slower demand and some customers right sized their inventory positions in response to current trends,” JuE Wong, Olaplex CEO and president, said in a statement.

By channel, professional net sales declined 61.2% year over year to $40.9 million, DTC was down 6.4% to $38.5 million and specialty retail was down 53.7% to $29.8 million.

As a result of slower demand, the hair care company lowered its full-year guidance, now expecting net sales between $445 million and $465 million, down from previous guidance of $563 million to $634 million. Olaplex also expects adjusted net income between $96 million and $108 million and adjusted EBITDA between $161 million and $176 million.

A.k.a. Brands 

Despite a drop in sales during the quarter, A.k.a. Brands saw progress with operational issues during the timeframe.

“We continue to execute against our strategic initiatives and have made significant improvements in our operating efficiencies, which enabled us to deliver on our adjusted EBITDA and cash flow expectations for the second quarter,” Ciaran Long, interim CEO and CFO, said in a statement. “I’m also pleased that we continued to strengthen our balance sheet by way of strategically reducing inventories, which were down 16% since the end of fiscal 2022, and we paid down $12.5 million of debt in the quarter.”

The company reported that its Princess Polly brand expanded wholesale relationships with Pacsun, with plans to open its own brick-and-mortar location in Los Angeles in September. A.k.a. Brands also noted that Culture Kings’ flagship store in Las Vegas exceeded expectations.

Grove Collaborative

The sustainability-focused company announced major leadership changes as part of its second-quarter earnings report. 

Co-founder Stuart Landesberg stepped down from the CEO position and transitioned to the executive chairman role on the company’s board. Jeff Yurcisin – former Shopbop and Zulily CEO – succeeds Landesberg and joined Grove’s board of directors. 

“I could not be more excited to welcome Jeff, an experienced, brilliant and customer-centric leader to Grove and as Grove’s next CEO,” Landesberg said in a statement. “He will be terrific at the helm, as Grove continues to push towards greater sustainable growth and impact.”

Grove also announced a $10 million investment from growth equity firm Volition Capital with Managing Partner and co-founder Larry Cheng joining Grove’s board. The capital will be used for growth opportunities, general corporate expenses and potential stock buybacks.

On

On’s second quarter brought in record numbers – again – and demonstrated the brand’s commitment to growing its direct-to-consumer channel.

The athletics brand reported DTC net sales grew more than wholesale, increasing 54.7% to 163.5 million Swiss francs ($185.5 million at current rates) during the quarter while wholesale jumped 51% to 280.8 million Swiss francs. On also raised its net sales outlook for the year from the previously projected 1.74 billion Swiss francs to 1.76 billion Swiss francs.

“We continue to see a small, but increasing contribution from our owned retail store business,” co-CEO and CFO Martin Hoffmann said on a call with analysts. “This does not yet include the material contribution from our new Williamsburg store given the late June launch ... The store serves as another prime example of how retail is able to showcase On as a full head-to-toe brand.” 

The Honest Company 

The Honest Company’s increased sales during the quarter came after the brand announced in March that it would raise prices in the mid- to high-single digits. 

During Q2, the brand saw diapers and wipes revenue increase 6% year over year while its skin and personal care business saw a decline of 2%. Digital revenue jumped 10% and retail increased 5%, with strong consumption at key retailers and new distribution. 

“Underpinning our second quarter performance was our Transformation Initiative, which drove positive operating cash flow in the quarter as a result of disciplined inventory management, marketing efficiencies and a tight focus on our cost structure,” Chief Executive Officer Carla Vernón said in a statement. “We remain committed to expanding margins and driving shareholder value as we continue to realize additional benefits from our Transformation Initiative in the back half of the year.”

The digital disruption of the past couple of decades has been a challenge for traditional retailers like mass merchants and department stores, not just because online upstarts emerged as competitors, but also because brands could more easily bypass them in order to sell directly to consumers.

There are financial and marketing arguments in favor of this idea, but recent research throws them into question. In 2021, Coresight Research analysts touted the advantages of both direct-to-consumer sales and wholesale partnerships for brands. They noted that the DTC model leads to higher advertising and operating costs, but yields higher margins and a better understanding of the customer. But also that, while wholesale carries lower margins, it provides access to a larger customer base and more efficient marketing.

Now, extensive research from BMO Capital Markets challenges that further. To their own surprise, analysts there found that selling DTC often doesn't mean fatter margins. In a set of apparel brands studied by BMO, four out of the top five merchandise margin-getters had robust wholesale revenues. American Eagle Outfitters and Gap Inc. (two retail companies with minimal to no wholesale operations) have merchandise margins below wholesale-heavy Ralph Lauren and PVH, according to BMO's report.

"For all the conversation about reducing or eliminating the middleman or the middle person — because the middle person takes a toll — what we found is the middle person is actually a very economical way to grow a business," BMO Capital Markets Managing Director Simeon Siegel said by phone. "The most shocking is the gross margin piece. It's confusing that [selling DTC] wouldn't see higher gross margin, and I think ultimately the answer is tied to scale."

A new dynamic

Wholesalers and retailers have long had a fraught relationship, with each undervaluing the other's contribution, and perhaps overvaluing their own, according to Jeffrey Sward, founding partner and CEO at Merchandising Metrics.

Gross margin traditionally was a sore point, and there was a time, at least in the apparel space, when retailers took advantage of their power when they had it, Sward said by email.

"Retailers bought what they wanted to buy, and when the season-ending margins were not up to expectations, they demanded that the wholesaler literally write a check to get the margins back up to acceptable levels," he said. "Sometimes it was from the retailer making bad choices, and sometimes the wholesaler had an off season. But either way, the wholesaler had to write the check."

This tension (and even some level of brands selling direct via mail-order), pre-dates the internet, but e-commerce made it especially easy for wholesalers to throw up a website and sell directly to fans, Sward said. Whatever first led brands to avoid retailers, the practice has snowballed. Coresight found that, in 2020, DTC revenue at several brands grew by double digits, including at Canada Goose (21.7%), Levi's (17.8%) and Under Armour (11%).

For Levi's, DTC is about not just sales, but also its connection with shoppers, according to Sanjeev Mohanty, managing director of U.S. and Canada at Levi Strauss & Co. The denim maker has steadily turned away from wholesale, so that by 2019 it had declined to 30% of the business, down from about half of the business eight years before. Meanwhile, by the end of fiscal year 2020, DTC approached nearly 40% of Levi's business, from 20% in 2011, according to a filing with the SEC.

"Through our app, website and stores, we're able to deepen our engagement with consumers and create a truly unique experience that keeps them returning," Mohanty said by email.

But many brands are finding that it's not so easy.

"Along comes the internet and poof — wholesalers have direct access to customers! The wholesaler figures that if they are going to bear all the risk for all retail results, they might as well go direct," Sward said. "Then they discover that execution at retail is actually damned difficult, and expensive. Wholesalers saw an opportunity to pocket the retailers' profit, but quickly discovered how hard that really is."

It turns out that direct selling may not boost sales all that much, either, and in fact scaling back wholesale can mean a hit to revenue, BMO found. Over the last five years, for example, Skechers' sales expanded despite a decline in DTC penetration, while revenues at Vera Bradley and Michael Kors were generally flat despite greater DTC penetration. That suggests that any unit price lifts made possible by DTC sales couldn't make up for the sales lost by abandoning wholesale, per that report. "Said another way, revenue per unit may grow, but total company revenue does not," BMO analysts said.

The only way to grow

Streetwear brand Planet Brooklyn Academy has hit a growth ceiling, so it's time to go wholesale, according to founder and Creative Director Rob Norman.

"It's a volume issue," Norman, who also teaches product development of fashion at the Fashion Institute of Technology, said by phone. "I have a retail store and having online sales helps. But we are at a point where, basically, we're at a standstill, mostly because of our retail space — because of the size of it and the amount of products we can carry in it."

Norman has crunched the numbers and found that ordering in the bulk amounts needed to meet wholesale demand drives down his costs at the factory, among other savings, making his profits at wholesale similar to selling direct. "So let's look at other retailers as being my store," he said. "They're carrying my products, and that's better because I don't have to deal with the headache of rent and all that stuff because they're selling it out of their stores."

Many DTC brands fail to grasp that, according to Siegel. "For the most part, third-party retailers have very low gross margins," he said. "The fact that their gross margins are so low suggests they're not expensive to the brands that are selling to them. And I think that's a key part of the story, that third-party retailers are an inexpensive sales force."

Moreover, brands like Nike and Levi's may be turning more to direct sales because their wholesale business is quite mature.

"Wholesale has become this dirty word, which is effectively forcing smaller companies to steer clear of a channel that they probably should embrace," Siegel said. "What we're finding is that companies that pivot to direct are actually signaling that their wholesale is tapped, not that wholesale is bad."

Good news for department stores?

Brands discovering (or rediscovering) the advantages of wholesale sounds like a dream come true for department stores, given how much Ralph Lauren, Coach and others have scaled back those partnerships in recent years.

Planet Brooklyn Academy will also avoid department stores; Norman said the brand is looking to work with boutiques whose vibe and customer match its own. But that doesn't make department stores a "bad" channel, according to Siegel.

"There's nothing good or bad about department stores," Siegel said. "Figuring out which brands belong in Nordstrom, which brands belong in another department store, which brands belong in off-price or which brands belong where — that is a key part of every brand's internal storytelling. But the notion that a channel is universally bad is lazy. Department stores are not going to zero. They're still huge revenue generators."

Like Planet Brooklyn Academy, Levi's is looking to find its customers in more than one place. For them that does include certain department stores, Mohanty said.

"We've built a robust network of wholesale partners to ensure we stay close to the consumer while also remaining true to our brand identity," he said. "At the same time, these channel partners provide another distribution point and an opportunity to attract a broader consumer audience that's interested in quality products at all price points from premium to value."

Recognizing the upside of wholesale is important when weighing its costs.

"Here you have a company that's willing to put its staff on the floor and sell your product in real life or online for a fairly nominal fee," Siegel said. "Everyone hears the word 'fee' and thinks it's bad, but the reality is, whether it's your sales force or others, ultimately, people get paid to do a service. The question is, how effective are they at it?"

Brands that hate third parties also love third parties

Much is made of the fact that many DTC brands that once only sold online have opened physical locations, after finding that customer acquisition costs are much lower at brick-and-mortar stores. But some of those brands are also tying up with other retailers in search of growth.

In 2022, online pet company Bark partnered with Walmart, adding to a wholesale network that already included REI, Target, Costco, Petco, PetSmart, Amazon and others. The strategy puts Bark's products into more than 33,000 physical stores.

Does that mean that a brand like Bark is losing its connection to its customer? Generally speaking, the concern is unfounded because most DTC brands already routinely partner with third parties when it comes to customer communication, according to Siegel.

"The biggest pushback to this report that I've gotten, as to why brands embrace DTC, is that if you're direct, you're closer to your customer data, and you have more control over your brand image and don't have to trust it to someone else," he said. "What I think is fascinating is that every single digitally native business has publicly acknowledged that they embrace marketing agencies. So companies that suggest they would never give up their distribution are comfortable outsourcing their actual brand imaging and storytelling — which is also a third party, which is also a middle person, which is also an additional fee."

Some wholesale deals are at least as much about branding as about distribution, according to David Schneidman, director at Alvarez & Marsal's Consumer Retail Group. The Sun Bum sunscreen brand began online, then turned to wholesale. Selling through "reputable hotel chains or beach clubs only elevates their equity while giving the consumer a premium experience," Schneidman said by email.

But every brand ultimately needs some channel for mass distribution, too, Schneidman also said. And these experts all noted that consumers are availing themselves of every channel. That includes the retailers that some brands won't partner with.

"The beauty of omnichannel that people forget is that it's got to be more than one," Siegel said. "'Omnichannel' used to be, 'Don't forget about e-commerce.' But over the course of the pandemic it basically became, 'Do just e-commerce.' What we need to internalize is that there's no such thing as a bad channel. There's just different fits."

Nike is scrambling to pare down an overabundant trove of merchandise, with inventories up 44% companywide and a whopping 65% in North America, its largest market, at the end of its most recent quarter. In the comparable period last year, by contrast, Nike inventory was flat year over year; in 2020, inventory rose 15% and in pre-pandemic 2019 it rose 12%.

This is not just a Nike problem: Much of the apparel sector is grappling with pile-ups, with Levi’s last week reporting a year-over-year inventory increase topping 40%.

“There are record high levels of inventory across the sector with demand slowing,” Cowen & Co. analysts led by John Kernan said in emailed comments, noting that markdown allowances, storage costs and inventory-flow costs are all up. “Nike's 150 [basis points] increase in markdown pressure one quarter into the company's calendar [fiscal year] is indicative of a fragile environment.”

The problem comes at a time when the athletic shoe powerhouse has scaled back its retail partnerships, part of its strategy to sell more directly to customers. That in turn has upended the strategy at Foot Locker, one of its major partners. In February, the footwear retailer said it expects Nike to make up 60% of its total purchases this year, down from 75% in 2020 and 70% in 2021.

But Nike may be losing out, too. Retail partners offer a connection to customers, and provide higher sales volumes and even healthier margins than many brands realize, according to research from BMO Capital Markets.

It does make sense for a brand like Nike to scrutinize its suite of wholesale partnerships and cut off retailers unable to add value to the customer experience, according to Richard Hammond, founder and CEO at customer analytics firm Uncrowd. But it can be a mistake to take that too far, he said, adding that JD Sports in the U.K., Foot Locker and many boutiques in places like Brooklyn offer a customer experience that is true to Nike’s brand.

“Both JD Sports and Foot Locker are magnets for exactly the customer Nike wants to sell to,” he said by email. “And now that the landscape has shifted, having a small army of retail partners ready to do everything to shift one more unit can make all the difference.”

Retailers are also pretty good at demand forecasting and take on a major portion of the inventory risk, according to Jeffrey Sward, founding partner and CEO at Merchandising Metrics. 

“The beauty of the relationship between a big brand and a store chain can be summed up in one word: predictability,” he said. Store floors and stockrooms have certain capacities, and turnover rates in stores are fairly steady, which all gives merchandise planning “pretty solid boundaries.” It’s possible that Nike’s DTC strategy is less predictable, he said.

The current environment may be underscoring the importance of getting the wholesale-DTC mix right. Brands that walked away from wholesale now have fewer outlets as they grapple with rising overstocks and hesitant consumers, BMO Capital Markets Managing Director Simeon Siegel said by email.

“It seems that, like most other retailers, Nike got wrapped up in pandemic-level demand and bought inventory as if it wouldn’t slow,” he said. “However, unlike other retailers, they may be seeing the compounding effect of now having fewer points of distribution to sell their excess goods as they moved to DTC and away from many wholesale partners.”

Does that mean that Nike needs Foot Locker more than it may have thought? That depends, according to all the experts interviewed for this story.

“At the end of the day, neither DTC nor wholesale alone are the answer. Healthy distribution and partnerships are — whether they are company-owned or partnered,” BMO’s Siegel said. “Nike, and all brands, need to figure out what the right level of optimization is. But they need to internalize that moving to direct hasn’t lifted margins. It is simply one channel within the broader approach towards retailing.”