2023 sucked for DTC

"The year of the retail fire sale" per Modern Retail

For my last newsletter of 2023, I wanted to share some “year in review” thoughts and headlines that caught my attention. But first, I wanted to start with sharing a few of my predictions back in Dec 2022 that are relevant to the rest of this Clicks to Bricks issue:

1. Profitability > Growth at any cost

2. Consolidation of DTC brands

3. Shift/decline in capital markets’ interest

4. Return of the store (again)
   

First let’s recap the retail channel’s latest entrants!

Brands who opened their first store

Many brands have finally been forced to open a store. As digital advertising costs have skyrocketed, brands have accepted that the channel is no longer a sole, sustainable one. Many brands are moving offline, whether to wholesale and/or owned stores. Given this newsletter’s focus is on owned stores, here are a number of brands who opened their first store in 2023:

1. True Classic: This DTC menswear brand opened its first company-owned and operated brick-and-mortar store at the Houston Galleria. Retail Dive

2. Figs: A DTC health care apparel brand, opened its first store in LA's Century City Mall. Retail TouchPoints

3. Kizik: A hands-free footwear brand, opened its first retail store in Fashion Place Mall near Salt Lake City on May 19, 2023. RIS News

4. Melissa & Doug: Toy brand Melissa & Doug made a new mark on its 35-year history this fall with its first-ever retail store. RIS News

5. Radio Flyer: The 106-year-old maker of the iconic Original Little Red Wagon, announced its first-ever retail store. It is scheduled to open in November…The store will be in the Woodfield Mall in Schaumburg, IL, in the Chicago area. RIS News

6. Princess Polly: Princess Polly’s first retail store opened in September, but it wasn’t the fashion brand’s first foray into the physical. In March, the previously online-only trendsetter — owned by a.k.a. Brands Holding Corp. and founded in 2010 in Gold Coast, Australia. — partnered with Pacsun to roll out to 15 stores, including Pacsun’s Soho, NY, flagship store. RIS News

7. thirteen June: On May 5, thirteen lune opened its first standalone retail location, a 1,700-square-foot space highlighting over 100 brands, in the Larchmont Village neighborhood in Los Angeles, CA. RIS News

Brands that busted

Back in 2017-2018, I had the amazing experience of supporting M&A and incubation efforts at Walmart. We were building and buying our way to a portfolio of digital brands, which included Bonobos, ELOQUII, Modcloth, Allswell, and a number of other incubations.

During this time I had a few big head scratching moments and observations as I looked at potential M&A targets:

1. Their most recent valuations were wildly inflated: typical retail valuations can range from 1-3x revenue. These brands were asking for double digits in a few cases because that’s how big of a valuation they most recently fundraised on.
   
   The head scratching thought: how is anyone underwriting these absurd multiples?
   

2. Unproven revenue streams: we looked at a business that sold products in just a single apparel category. They had tens of millions of revenue in their forecast for categories AND channels (eg stores) that hadn’t even been explored yet, and they were asking for those to be included in their valuation considerations. This wasn’t just them — it was every single brand we looked at.
   
   The head scratching thought: the nature of VC is to underwrite revenue streams that don’t yet exist, but companies rarely get full, if any, credit for those in an exit (acquisition or IPO).
   

3. Aggressive and unproven margin expansion: despite margins actually deteriorating as a result of increased promotional activity and negative Variable Contribution Profit (gross margin less variable costs like marketing), brands always underwote their margins as expanding because “with enough scale which we’ll finally achieve next year, we can cut back on these things"
   
   The head scratching thought: so there’s no actual tactical plan beyond “when we achieve scale…”
   

4. Revenue growth > profitability: The amount of times I heard and have read “we could be profitable, but we’ve chosen to invest in growth” is painful. Equally painful is “when we achieve scale, we’ll be very profitable!”
   
   The head scratching thought: Whatever happened to business fundamentals? I get startups lose money, but why is there SO little focus on profitability?
   

5. Optimistic lifetime values: A lot DTC brands have leaned on Lifetime Values to justify their customer acquisition costs (CACs). In other words, they’d be fine spending $250 in marketing to acquire a customer that only spent $100 on their first transaction (with only, let’s say, 20% or $20 going to the bottom line) — because surely they will come back 3-4x per year and eventually break even as a customer…
   
   The head scratching thought: that’s a lot of faith to put into your tens of millions of dollars performance marketing budget, and a dangerous faith to have when revenue growth is more important than profitability.
   

6. Many DTC brands were founded by “smart” founders: many of these founders were NOT even remotely seasoned operators. Most were recent B school graduates who managed to raise capital because — back in the 2010s — it was relatively easy, especially if you came from a rockstar entrepreneurship program. But the fact remained: most founders lacked retail experience.

Here was my conclusion back in 2017/2018 when I took it all in: holy s***, there’s a big DTC bubble forming and it’s going to pop. I don’t know when or how, but valuations are inflated, business fundamentals and seasoned leaders are lacking, and there seems to be a lot o of optimism and very little balance in outlooks.

5 years later, those observations weren’t the trigger, but they were collectively the fire starter that led to 2023 being the year of the retail fire sale.

Here’s a few headline busts that caught my attention in 2023:

1. Lunya filed for bankruptcy Modern Retail

2. Showfields filed for bankruptcy Modern Retail

3. Parade exits at a discount Modern Retail, BoF

4. Haus Modern Retail

5. Smile Direct Club filed for bankruptcy BBC

6. Express closes on Bonobos acquisition as sales fall 15% Retail Dive

7. VCs no longer do DTC Crunchbase

8. After years of focusing on DTC, Nike is quietly bringing more wholesale partners back into the fold Modern Retail

Others at risk

Headlines that caught my attention

Despite the doom and gloom, retail is far from dead; it’s simply going through quite a Darwinian phase and year. Here are some interesting headlines that should exude some optimism about the future of stores:

1. How the purpose of stores is evolving. Retail Dive

2. DTC brands embrace hybrid models as online growth slows: GlobalData. Retail Dive

3. ICSC The Halo Effect III: Where the Halo Shines ICSC

4. DTC Brands Going Hybrid to Grow Invision

5. Collaborative Growth: Canadian DTC Brands Forge Alliances In Retail Expansion Forbes

6. Why menswear brand Rhone has more than doubled its store footprint this year Modern Retail

7. What The Growth Of Direct-To-Consumer Brands Means For Retail Real Estate Forbes