Retail Dive's DTC outlook for 2023

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 2022, 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 2023 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 in July 2022, 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 in 2023 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 2022 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

In 2022, 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 in 2023.

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.

A lot has changed since DTC’s darlings first entered the market.

Companies like Warby Parker and Allbirds were founded out of the belief that brands could cut out the middleman by selling directly to consumers, and therefore pass those savings along to customers.

But the playbook has changed. Brands can no longer get by exclusively selling products via their websites, making the need for physical retail and wholesale deals ever more important. Many of those early DTC brands have brought their products offline and have matured enough to step into the public markets.

And as a result of that success, the direct-to-consumer space has become an increasingly crowded one to operate in with competition from other startups as well as from traditional retailers leaning into the model more, like Levi’s, Nike and Adidas.

Now as the next class of DTC brands try to break through a market that’s more saturated than ever, finding ways to resonate with consumers is necessary. 

“There's a lot more competition, they're no longer the rebels. They're becoming a bit more mainstream,” Jonah Ellin, chief product officer at 1010data, said. 

Consumers are seeking innovative products from brands with a story they can relate to themselves. Consumers are also looking for companies that offer a greater purpose, including through social or environmental initiatives.

As the DTC space continues to heat up, here is a look at nine emerging brands to keep an eye on in 2023.

1. Hilma

Founded by Brooke Torres, a marathon runner, Hilma set out to reimagine the experience of buying running shoes for women.

The brand offers multi-dimensional sizing, meaning each size offered has three fits, depending on the shape, length and volume of a consumer’s foot.

“Imagine if bra companies made just one cup size and your only option was band length. That’s basically how sneaker sizing has worked for decades,” the company said.

Torres said the idea behind the brand came from her own experience trying to find the right running shoe.

“I could not figure out the right running shoe for me even though I was trying so many different products,” Torres said in a video posted on the brand’s Instagram page. “At first I thought I was an edge case. I thought everyone else had a running shoe that worked for them and there must be something weird about my foot. But then I realized a couple things: One, most running shoes are made for men, and two, there’s no such thing as just one fit of running shoe that works for everyone, including every woman.”

The brand has raised about $3 million to date, according to CB Insights. Hilma has quickly grown in popularity since launching in late 2022: The brand’s website had over 16,000 visits in 2022, according to data from Similarweb shared with Retail Dive.

2. Topicals

Skincare brand Topicals — which has become known for its science-backed products, including Faded and Like Butter — has grown in popularity since its founding in 2020.

The brand, which was founded by Olamide Olowe, aims to change the way consumers think about treating skin conditions, like flare-ups.

Topicals tripled in revenue in 2021 and late last year secured $10 million in Series A funding, led by CAVU Consumer Partners. At the time, the brand said the fresh funding would be used to drive its omnichannel growth, hire more employees, support channel expansion and raise brand awareness. Topicals has expanded beyond its own DTC channels to sell in retailers, like Sephora.

The brand said it will also continue its mission around mental health advocacy. Individuals with chronic skin conditions are two to six times more likely to experience anxiety and depression, according to the brand’s website. As of November, Topicals has donated more than $50,000 to nonprofit organizations providing mental health services for marginalized communities. The brand in November said it would launch a 12-month accelerator program to provide nonprofits offering mental health services with leadership training, mentorship and business advisory.

3. Fishwife

Founded in 2020 when many consumers turned to pantry staples to limit trips to stores, Fishwife focuses on ethically sourced, premium tinned fish.

The name derives from the 16th century, a term used to describe fishermen’s wives and daughters who sold fish at the markets.

“The term gradually evolved into gendered insult for women who were brash, foul-mouthed, and brassy. We relate,” the company says on its website.

Fishwife’s website saw over 207% year-over-year growth in 2022, according to Similarweb.

The brand’s colorful and whimsical packaging can now be found at retailers like Whole Foods, Foxtrot and a number of indie stores.

4. K18

Founded by tech industry veteran Suveen Sahib and beauty veteran Britta Cox, K18 set out to develop products using a scientific approach.

Among the brand’s most popular products is the Leave-in Molecular Repair hair mask, which has over 11 billion views on TikTok.

After officially launching in 2020, K18 expanded into wholesale in late 2021, entering over 500 Sephora stores.

The brand continued to gain traction in 2022: Website visits last year grew by 107% compared to 2021, hitting over 2 million visits, according to Similarweb. K18 also touts a growth score of 90.3 (on a scale of 100), a score Charm.io uses to track how fast a brand is growing. A company's growth score is a multidimensional measure combining scores of various social media platforms — including Instagram, TikTok and LinkedIn — and tracking likes and engagement on those platforms, as well as the brand's website traffic.

5. Fly By Jing

Fly By Jing was founded by Jing Gao in 2018 with products inspired by the flavors of her hometown of Chengdu, China.

"I created Fly By Jing because I didn't see products that spoke to me on the market. I wanted to rewrite false narratives about Chinese food and showcase the complexity of China's 5,000-year culinary history and that 'Made in China' can mean the highest quality products with no artificial flavors or preservatives," Gao said in a statement. "Launching Fly By Jing enabled me to reconnect with my own heritage and identity, and I'm proud of how this very personal expression of flavors inspired by my hometown has been embraced by so many others.”

The brand features products ranging from chili crisps to sauces.

Fly By Jing has expanded beyond its own website — which grew 68% in 2022, according to Similarweb. Charm.io gave the brand a growth score of 87.

The brand is now sold in retailers like Whole Foods, Target, Sprouts and Foxtrot, and on online grocery stores’ websites like Thrive Market and FreshDirect.

6. Tower 28

Amy Liu wanted fun products to use on her sensitive skin that didn’t feel clinical, thus leading to the founding of Tower28.

“At Tower 28, we know that what goes on your skin also goes in your bloodstream. We also know that beauty doesn't have to be so serious, which is why our products are non-toxic, free of sensitizing irritants, full of calming, nourishing ingredients, plus a healthy dose of FUN,” Liu says on the brand’s website.

The colorful purple and orange packaging help the brand stand out, and it has inked deals to be sold in all of Sephora’s stores in the U.S., including those within Kohl’s locations, as well as some Credo Beauty stores.

Tower28’s own website has continued to grow as well: The brand saw nearly 23% year-over-year growth in 2022, according to Similarweb. Tower 28 also touts a Charm.io growth score of 87.9.

7. Nugget

While Nugget launched in 2014, the brand became wildly popular in recent years.

Nugget, known for its modular couches for kids, was created out of “the idea that furniture isn’t just something to sit on, but a source of creativity, exploration and fun.” The brand exploded in popularity at the onset of the pandemic as families spent more time in their homes. 

In fact, the brand needed to create The Nugg Lotto in 2020 as a way for its staff to keep up with surging demand. Ahead of the holidays, Nugget selected 5,000 to 10,000 customers per week, which were allowed to purchase products that would arrive in time for Christmas.

And while the program has since ended, the brand continues to grow: Charm.io gave Nugget a growth score of 84.4.

8. Saltair

Founded by model, entrepreneur and influencer Iskra Lawrence in 2022, Saltair has exploded in popularity.

The brand’s website had over 466,000 visits in 2022, according to Similarweb, and launched its products in Target’s stores and website earlier this year.

"In a world where we told we are never enough, a daily self-love ritual is essential. Even if it's the 5 minutes you get of peace and quiet in the shower, every body deserves those little luxuries. That is why we created Saltair, for us to cherish those daily moments and turn them into something special not mundane,” Lawrence said in a statement last year. “Every body is welcome and we cannot wait for you to upgrade your daily body care experience.”

The brand launched under brand incubator The Center, whose portfolio also includes Naturium, MAKE Beauty and Phlur.

9. Maude

Founder Éva Goicochea launched Maude in 2018, tapping into her background in healthcare legislation and brand strategy.

"Before we launched, the sexual wellness industry could be defined by the ubiquity of the experience, be it on shelf or online: The confusing over-assortment and opaque quality standards, inflated pricing (particularly on devices), and the tired, gendered tropes of how to sell ‘sex,’” Goicochea said in a statement in 2021. “Through accessible design and fair pricing, we're here to set the new standard in the category. We stand out as the only company that focuses on modern intimacy — for all people.”

In 2020, actress Dakota Johnson joined the brand as an investor and co-creative director. And in 2022, Maude teamed up with Sephora to help the retailer launch its intimate care category. Through the partnership, 20 of Maude’s products — including devices, lubricants, and bath and body products — would be sold on Sephora’s website.

The brand saw 42% growth on its own website in 2022, reaching 4.7 million visits.

2021 was a big year for venture capital.

Global venture-based funding rose 111% year over year to about $621 billion, according to data from CB Insights’ 2021 State of Venture report. The U.S. was the leading region for total funding dollars that year, and the unicorn valuation count rose globally by 69%.

But in 2022, that picture changed.

Global funding in 2022 was down 35% to $415.1 billion, per CB Insights’ 2022 report. In the U.S., there was a 37% drop year over year, but it was a 31% increase from 2020. While deal volume fell by just 4% globally, there was a 31% drop in IPOs. More specifically, retail technology funding globally declined by 52% in 2022.

And for retail overall, VC deal activity dropped in the U.S. by about 36%, with the two largest 2022 deals by size being late-stage fundraises, according to data from PitchBook shared with Retail Dive.

While venture capital for female-founded brands in the U.S. has trended upwards in recent years, the reality is that the amount of capital invested in startups solely founded by women dropped year over year in 2022, from 2.4% to 2%, according to PitchBook. Meanwhile, the amount invested in brands with male and female co-founders increased from 15% to 16.5%.

The retail world has already seen a handful of bankruptcies and layoff announcements in 2023, making for a bleak outlook as the year ramps up. Some brands are noting increased expectations from prospective investors, and venture capitalists may be getting more conservative with their money as they watch the market.

But is the state of venture funding really a new issue, or are investor behaviors returning to a form of normalcy? And what types of companies are snagging some of the limited funds available?

‘There's a lot of pain’

It seems like the word profitability has never been more important for brands dependent on funding right now.

When Everlane’s CEO Andrea O’Donnell informed employees in January 2023 that nearly 9% of the company would be laid off, she left a sobering note about the state of the business in the current market.

“It’s no secret that these are difficult times for venture-backed companies. The expectation to be profitable shifted overnight,” O’Donnell wrote in an internal memo reviewed by Retail Dive. “Today’s tough decision is intended to set us up to improve profitability in 2023.”

And O’Donnell isn’t the only brand executive noticing the pressure.

Ariane Goldman, founder of maternity brand Hatch, gained operational control of several competitors in early 2023 after Marquee Brands made a minority investment in the brand. The move marked a unique deal during a time when some companies are struggling to raise any funds at all.

In an interview with Retail Dive at the time, Goldman noted that the fundraising market was already quite different than when she had entered it.

“We entered at the height when perception was valued on growth and brand equity, and then it very quickly turned into profitability and a lot less people are interested in making any investments, regardless of category or brand,” Goldman said.

But how is this viewed from the perspective of a venture capitalist?

VC firm Lerer Hippeau was one of the top 10 U.S. investors in retail by deal count in 2022, according to PitchBook. The portfolio of brands it works with includes a slew of traditionally direct-to-consumer up-and-comers, including Cuup, Topicals, Parade, Otherland, Prose and more.

When asked about the larger emphasis on profitability, partner Andrea Hippeau told Retail Dive that it is especially pertinent for DTC brands right now.

“The long story short is that the music has stopped in terms of endless amounts of VC money going into to all sorts of companies,” Hippeau said. “The idea of raising not as much money, getting to profitability and kind of controlling your own destiny is definitely what we're telling our companies at this point.”

The infamous growth-at-all-costs mindset that startups are often known for is changing, according to Hippeau, who said this challenging state will likely continue for another 12 to 24 months.

“There's a lot of pain that has to be kind of dealt with at the moment,” Hippeau said. “It's not necessarily these founders' fault that they've been hearing one story from VCs about grow, grow, grow, and seemingly overnight, that story changed to the bottom line, bottom line, bottom line.”

Show me the money

Despite the staggering statistics and gloomy economic outlook, plenty of retail companies are still announcing the completion of funding rounds.

Over the past few months, brands such as Makeup by Mario, Thirteen Lune and InnBeauty Project have all announced the completion of multimillion-dollar funding rounds.

And some retailers are even entering the venture capital world as investors themselves. In May 2022, Home Depot launched a $150 million venture capital fund. Ulta Beauty also announced the creation of its digital innovation venture fund in August 2022, and Dick’s Sporting Goods started its own fund in November 2022 for sports startups.

So why are some brands closing deals while others aren’t? Current economic pressures may just be bringing companies with more potential to the top, according to Hippeau.

“I think companies that are built out of this market and this environment are going to have better fundamentals from day one,” she said. “And I think that they're going to be built as more sustainable long-term businesses with more financial fitness and rigor.”

But for Hippeau, it’s no longer just about having a cool brand image. Innovation in products and strong retail distribution are key to staying competitive in fundraising right now.

“You see brands of ours, like Topicals with Sephora, actually putting DTC to the side and really entering the market through these deeply ingrained retail partnerships,” Hippeau added.

Although retail technology funding dropped year over year in 2022, the number of deals was still higher than 2020 and 2019, per CB Insights. Despite lower dollar investments, innovation is still at the forefront of some retailers' minds.

And the fact that two out of three retail tech deals last year were considered early-stage may be one of the more interesting takeaways, according to CB Insights Principal Analyst Laura Kennedy.

“Maybe the investors aren't putting quite all of their eggs in one basket,” Kennedy told Retail Dive. “And now there's kind of a return to looking at some of the more innovative, early-stage solutions.”

There’s been increasing interest in retail innovation occurring within countries such as India, Indonesia and Nigeria, according to Kennedy. Amazon’s AWS in November 2022 announced it was opening its second infrastructure region in India in an effort to drive innovation within the country. And Walmart is preparing to invest an additional $2.1 billion in India’s e-commerce and payments capabilities, according to reporting from TechCrunch. This includes a potential $200 million to $300 million investment in PhonePe, as well as a $1.5 billion deal to purchase another firm's shares of Flipkart (Walmart owns a majority share of the company).

“We're seeing a lot of activity from and funding towards companies helping retailers and merchants that traditionally are operating in sort of informal ways,” Kennedy said. “They're recording their businesses on paper, they're the stalls in markets and they're not digitized. A lot of these tech companies are just very simply helping them digitize their operations.”

A focus on technology in retail is more than just a pandemic-era phase for the industry and is something that will likely remain as funding normalizes, according to Kennedy.

“The willingness to spend on technology and test it feels like it has stuck around, even as funding has declined,” Kennedy said. “[Funding] through the middle of last year was the aberration. So maybe we're returning to some kind of more steady state. That would be the glass-half-full way of looking at it.”

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 2023. Other sectors included home furnishings retail; apparel, accessories and luxury goods; department stores; and consumer electronics.

Already in 2023, 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.

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.

Here’s a closer look at some of the digitally native retailers at risk:

Wayfair

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.

Grove Collaborative

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%.

In late 2022, 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 2022 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.

Boxed

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 2022, 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.

In early 2023, 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

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 RealReal

Luxury reseller The RealReal has landed on past iterations of Retail Dive bankruptcy watchlists before.

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 RealReal brought on Neiman Marcus veteran John Koryl as its new CEO in January, replacing founder Julie Wainwright, who resigned from the position in June.

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.

Direct-to-consumer brands have faced a number of challenges in the first several weeks of 2023 alone.

After being faced with early pandemic disruptions, including store closures, staff cuts and supply chain turbulence, brands are now met with new challenges, including the impacts of inflation and the higher costs of doing business.

Over the past several months, brands including Everlane, Wayfair and Warby Parker have announced new rounds of layoffs in an effort to cut costs.

Other brands — like Glossier, The Ordinary, Dr. Dennis Gross and Nugget — have raised prices as a result of increased production and shipping costs.

For some companies, the difficulties over the past several years have proved to be too much for their businesses. Already in 2023, Forma Brands, the parent company of beauty brand Morphe, filed for Chapter 11 citing liquidity and operational issues as a result of the pandemic, changing consumer beauty habits and terminated influencer partnerships. And it likely isn’t alone.

Experts are predicting many brands won’t make it through this new round of challenges.

So, as competition heats up — and funding becomes harder to come by — what does it take for a DTC brand to be successful in today’s retail environment?

‘You can't just roll out the DTC playbook’

Over the past decade, “DTC” has grown from a buzzword in retail to a widely used business model. The space has become increasingly crowded from both startups and traditional retailers adopting the model.

Levi’s, Adidas, Nike and Under Armour have all outlined plans to lean more into their direct-to-consumer businesses.

“There's a lot more competition. They're no longer the rebels. They're becoming a bit more mainstream,” said Jonah Ellin, chief product officer at 1010data, adding that the term DTC is “becoming more jumbled and confusing. There are so many brands and because so many of the national brands are now establishing their own DTC, it is certainly becoming a much more crowded space.”

And what consumers are interested in is becoming more focused. Today’s consumers, particularly those in younger generations, are increasingly seeking out brands that tout social or environmental good, according to Ellin.

“Buy a pair of socks for you, we’ll give a pair of socks to charity. Purchase these products and you're also helping to save the environment. I think that's really something that's building loyalty with those customers and establishing the relationship,” Ellin said.

To succeed, brands not only need to have a mission that’s attractive to customers, but also meet consumers where they’re shopping. 

As a result, many digitally native brands have taken their business offline and moved into brick and mortar through pop-up stores or permanent locations. Allbirds has opened several locations over the years — including in New York, Colorado and California — and now operates around 60 stores. Glossier and ThirdLove have also pushed into physical retail recently. And Warby Parker as of November operates just under 200 stores.

“The difference between a store and a website is a store is on the street,” Emmett Shine, co-founder of former brand agency Gin Lane and multi-brand DTC company Pattern Brands, said. He added that brick-and-mortar locations can serve as an additional marketing channel for brands looking to acquire and retain customers.

Other brands have inked wholesale deals as a way to get their products in front of customers. Skincare brand Loops earlier this month announced a nationwide expansion into Target after already forming partnerships with Nordstrom and Ulta Beauty. Casper has entered retailers like Costco, Nordstrom and Bed Bath & Beyond. And Allbirds has hit the shelves of REI, Zalando, Dick’s Sporting Good’s Public Lands banner and Nordstrom.

“There's a lot of value from it,” Shine said. “You can effectively meet high attention customers where they're at, while getting very good brand awareness at a price point ratio for what you send and what you get back that is ensured and understood and relatively stable.”

Pushing into wholesale has become necessary for many brands looking to scale their businesses because it introduces a brand to a broader set of consumers and helps to legitimize it. However, it does come with some risks.

When a brand enters wholesale, it loses some control over its messaging that it otherwise would be able to manage within its own stores.

“Once you decide to open up to other channels, it can be a great route to expansion, but you will lose some of that relationship. You will lose a lot of that control,” Ellin said. “That needs to be a careful consideration if you're going to go that pathway.”

Physical retail is also becoming an increasingly important marketing channel for brands as they continue to grapple with the effects of the iOS14.5 update, which made tracking online activity through apps like Facebook much more difficult.

“It's a lot noisier, it's harder to cut through. You can't just roll out the DTC playbook, like Warby Parker did, and use Facebook to really generate the first initial audience and target the consumer base as efficiently as you once could,” Alex Song, founder and CEO of Proxima, said.

So as the DTC space becomes more crowded, it’s becoming increasingly more important for brands to prove they have a real value proposition.

According to Song, while it’s “meaningfully easier” now to launch a brand than ever before because finding manufacturers to work with — which was once a challenge for DTC brands — has become easier, successfully executing on their business objectives is where challenges begin to arise. 

“It's easy to market anything but the fulfillment side of it and becoming that trusted partnership between the customer and your brand is really critical,” Ellin said.

And while the early days of DTC included a lot of disruption to traditional retailers, given today’s competition, brands will need to lean on those aspects that distinguished them from the start to set themselves apart: effectively connecting with their customers.

Part of this will mean offering consumers an experience that can only be encountered directly through their channels. For example, Converse can be bought through several traditional retailers, including DSW, Kohl’s and Finish Line. But by shopping directly from Converse’s website, consumers are given the ability to create custom shoes, giving them control over the material, print and other aspects of the product’s design.

“I could buy a pair of high tops in a store, but I can go directly to the website and buy custom high tops that have the designs on them that are going to be more reflective of who I am,” Ellin said.

The new era of DTC

While early DTC darlings helped pave the way for brand launches over the years, the strategies necessary for success have changed.

“I think DTC as we knew it — from the Warby Parker and Dollar Shave Club days — is dead. The playbook has changed,” Song said. “We’re probably already past DTC 2.0, and are working on what does 3.0 now look like?”

As far as what’s important in this new DTC era, Song said brands need to be committed to ensuring they can deliver on promises to consumers, seek out new customer acquisition opportunities — like partnering with a celebrity or personality — to grow their audiences, and providing value to consumers.

To the latter point, proving their value is becoming more important in getting consumers to ultimately make a purchase, especially in today’s economic environment where shoppers are more mindful of their buying behavior. They are seeking to get the best value and quality out of the products they do buy, Song says.

“Many people are going to be more economically conscious,” Song said, adding that customers are concerned about “getting as much value as I can out of purchasing from this brand. That's where the quality of a product becomes more important than ever.”

Brands can no longer just focus on launching with an appealing aesthetic, but must ensure that they have a clear product market fit in order to be successful.

“There's a lot of really great founders with a lot of really great ideas — great branding, great typography, cool marketing, great photography. They're digitally savvy, they're good on social media. Those are kind of table stakes now,” Shine said. “What's so hard today is to actually make a product that has good unit economics on it. It's really hard to make a product that is high quality, that people want, that you're going to break even by the time you actually sell to market, and pay for your overhead and do everything. That's what so many people fall into.”

One of the biggest challenges many brands are still trying to overcome today is figuring out how to scale a business profitably.

“You've heard many stories where people were writing checks for businesses that were losing a lot of money. The previous sentiment was: Well, if you grow your top line enough and you have a big enough brand presence, you can figure out the profitability and operational disciplines later,” Song said. “The environment today where capital is much more expensive ... every investor out there is asking, ‘What are your unit economics?’ This matters more than ever because that is a big sign of what the value proposition is in terms of your business and your product.”

But trying to grow a business through multiple funding rounds while operating unprofitably isn’t sustainable, Song added, especially as investors pivot away from the “growth-at-all-costs” mindset and funding becomes more scarce.

“I kind of think of Series B as a line in the sand where if you got to a Series B at this point — you have enough scale, you have enough capital — that you have to actually figure out how to run a profitable business,” Song said. “If you are able to run a profitable business, you have a much more increased likelihood to be able to navigate these challenging and choppy waters ahead. But if you didn't get there, and you didn't raise enough money that you're going to have enough runway to last, and you didn't get to this more profitable version of your business where you're not just growing at all costs, you're going to have a hard time.”

This has become a pinnacle moment for DTC brands that are still struggling to reach profitability, which may result in a narrowing of competition. 

“My bet is you're going to have a lot of brands fold. Just basically say, ‘We're not doing this anymore. Doesn't work. Can't get money,’ unfortunately,” Song said. “I think there will be a big cleansing of the DTC landscape if you will. You'll see the people that made it are going to be benefiting from a less noisy environment.”

After years disrupting traditional retail, many startups and online pure-plays, including DTC brands, are now running into a new reality. Even usually bold venture capitalist investors have grown more discerning about where they put their money in the current inflationary climate, where money is not so cheap. As a result, several players are under pressure to pivot from a mindset of “growth at all costs,” to a focus on profitability.

The DTC space is a major beat for Retail Dive reporter Dani James, who joins The Backroom as podcast co-host. Because of the importance of and volatility in the area of direct-to-consumer sales, both at upstarts and legacy brands, Retail Dive has launched a daily newsletter roundup of such stories from her and the team — you can sign up for that here.

In this episode of The Backroom, Dani and senior reporter Daphne Howland talk about the big picture for DTC companies, the importance of brick and mortar and more as 2023 gets going.

Resource links:

• 8 DTC retail trends to watch in 2023
• 12 digital natives that have learned to love old-fashioned retail
• Why some digital natives are always tweaking their models
• Retail disruptors are turning to layoffs to cut costs and restructure

Digitally native retailers, including DTC brands, sell goods in just about every category, from exercise bikes to lingerie, razors to luggage. But through the years, as they’ve pitched venture capitalists, wooed shoppers, stolen market share and disrupted retail, their basic business models have had much in common.

They operate online, without stores or retail partners. Thanks to that, they easily vacuum up shopper data and keep customer relationships all to themselves. With no rent to pay or physical locations to run, their margins, theoretically, are fatter. And without wholesale, their customers pay full price, directly to them.

But of course, the devil’s in the details. Many digital natives have strayed from their original visions, often in the very ways that purported to make them disruptive in the first place, in an attempt to achieve scale and/or profitability.

“Probably the first domino to fall was ‘you don't have to run stores,’” Rick Watson, founder and CEO of RMW Commerce Consulting, said by phone. “Then the second thing that happens is, a lot of these DTC brands, like Harry’s, have been acquired by bigger consumer product companies. And now folks like Allbirds and others are prioritizing wholesale. Wholesale is cool again.”

Several DTC brands and marketplaces, including Glossier, The RealReal, Casper, Warby Parker, ThirdLove, Peloton, Allbirds, Away, Lively and Wayfair, have opened brick-and-mortar stores. Increasingly, more are also turning to wholesale, which turns out to be an effective channel for boosting sales and margins.

Some continue to change up other aspects of their sales approach. In recent years, for example, Rent the Runway has: introduced various new subscription tiers; dropped unlimited rental; added kids and (with a retail partner) home decor; offered sales of previously rented clothing; opened those sales to non-subscribers; partnered with a retailer to sell those garments; partnered with retailers and hotels for pickup and dropoff; opened then closed its own physical locations; and developed exclusive designs.

Stitch Fix has similarly shifted its approach numerous times. The box e-retailer expanded to the U.K., added men’s and kids’ clothes to its offer, allowed box subscribers to buy garments a la carte, provided previews of curated boxes so customers could reject or accept certain items, opened its a la carte website to all consumers, added a search function to that site, then restricted it once again to only those who have ordered a box.

Exercise bike company Peloton has scrambled to adjust prices and make other changes after its pandemic-era boom fizzled. Those that are dependent on clients signing up for a membership are grappling with the decline of that model, according to Watson. ThredUp and Nordstrom appear to have taken that note, as both shut down their curated box services in the last couple of years.

“I think people are subscriptioned out,” Watson said. “So I think they're grasping at straws a little bit. They need to find a next act. That's definitely Stitch Fix. RealReal just has pretty major profitability issues. If they sold higher-margin goods, maybe they can charge more and turn a profit on those things. The challenge is, the site then becomes so exclusive that how many items are those in the world?”

Expanding what turns out to be, for many digital natives, a niche customer base is getting harder as venture capital money has dried up and customer acquisition costs have soared, Watson also said. Fundamentally, more of these companies, including of late Thirteen Lune, Our Place and Vuori, realize the tweak they need most is selling through brick and mortar.

"Regardless of the model that a DTC adopts, the math simply doesn’t support an online pure-play retail model of any kind that can be sustained against those that have a physical presence and can copy whatever someone else does online,” Forrester Principal Analyst Brendan Witcher said by email. "Not enough consumers have shown the propensity to remain long-term, loyal customers of a pure-play, online-only retailer. If they did, these companies would not have to spend the millions of dollars in advertising and marketing that wipe out their profitability.”

While the pandemic super-charged e-commerce, that acceleration will serve to slow its growth somewhat over the next year or two, especially as consumers return to stores, according to Euromonitor Senior Consultant Rabia Yasmeen. The first wave of e-commerce’s disruption is giving way to a new era, she said by email.

“As current trends clear the path ahead for physical retail – we can see the next development of retail would see integration of physical and digital, with one supporting the other,” she said. “Hence, years of dynamic, double digit e-commerce growth are likely to be only seen in the case of unusual circumstances.”