PROTECTING RETAILERS AND A LIFESTYLE

SURF SKATE SNOW SUP WAKE

“Retail in 2023: Back to Basics” by Chelsea Zhang and Rick Zullo via Total Retail

“Retail in 2023: Back to Basics” by Chelsea Zhang and Rick Zullo via Total Retail

Credit: Warby Parker

Over the last several years we’ve seen a tremendous boon in direct-to-consumer (DTC) and e-commerce strategies for retail. Venture capital flooded into the category leaving incumbent retailers feeling pressured. 2022 started to see a reversal of some of these trends. The first half of the year saw consumers back in stores to the detriment of e-commerce as many industry watchers touted the importance of omnichannel strategies. The second half was plagued by concerns of inflation and a possible recession, depressing consumer spending with a migration to value. This dynamic is worsening an already alarming excess inventory problem. While Black Friday hit nominal records, discretionary spend actually fell below 2019 levels, with revenues down 5 percent and units down 8 percent. In 2023, we see a challenged consumer market that will reinforce many of the fundamentals of retail.

Bifurcation of Consumer Spending

Consumer staples such as P&G and Nestle are reporting failing sales volume and higher prices while luxury brands like LVMH and Hermes are booming and off-price retailers like TJ Maxx and Dollar General are hitting all time highs (up 5.5 percent and 12 percent over the last year compared to -29 percent for S&P retail index $XRT). Everything within the middle of those two extremes is seeing challenges as consumer spending pulls back. Luxury has historically been immune from these recession cycles as premium consumers trade down from larger ticket items like housing, cars, furniture and travel. We see the market moving to these extremes, reaching for value and luxury and believe brands will need to reposition themselves in the market to survive.

Consolidation Within DTC

Amongst these challenges, we feel there will be massive consolidation amongst DTC brands. While the venture market flooded the category with capital in previous years, the recent slowdown has cooled investor interest in emerging brands, forcing many of them to break towards profitability or the arms of a buyer. This cooling has been a function of observed performance (or lack thereof) of digital-first acquisition and slumping stock prices of DTC darlings like Warby Parker ($WRBY), AllBirds ($BIRD) and Rent the Runway ($RENT) — these stocks are down 69 percent, 89 percent and 85 percent from their debuts. Startups that last raised at lofty valuations will likely struggle to raise subsequent rounds, with strategics and financial buyers with healthy balance sheets finding themselves in a target-rich environment as founders look for graceful exits. We could see these trends spilling over from DTC brands to e-commerce enablement (e.g., headless solutions) as well given the reliance and concentration on DTC brands as customers.

Omnichannel is Table Stakes Again

Offline channels have represented one of the few bright spots in retail over the last couple of months with traffic remaining healthy. As DTC suffers from sky-high customer acquisition costs and excessive return rates, brick-and-mortar has thrived as consumers flocked back to stores and demonstrated lower return rates with higher average order values. We expect brands to make a concentrated effort to expand their omnichannel strategies into third-party marketplaces, retail, and wholesale in 2023. Our portfolio company Leap, a retail-as-a-service platform enabling brands to expand their brick-and-mortar presence, saw record demand in 2022 and recently announced major partnerships with Simon and Rohrer to expand into new markets.

Related story: What’s Next for Smaller Retailers in 2023?

Inventory is Everywhere

Unwanted inventory was retail’s biggest headache in 2022 and shows no signs of slowing down in 2023. Per Equal analysis, excess and returned inventory totals $1 trillion-plus. Retailers suffered from an enormous mismatch in consumer demand and inventory as well as elevated digital returns and struggled to move inventory through severe discounting, and then disposition channels for cents on the dollar. Given the cashflow pressure of the industry, disposition of excess is going to be a major focus area as brands try to salvage what they can from their oversupply.

Given the challenges of digital acquisition rates and the long-term consequences of discounting, brands will be forced to develop more advanced strategies on how to thoughtfully liquidate this inventory through cost-effective means that protect their brands. Ghost, a managed marketplace for excess inventory and Equal portfolio company, is enabling brands to better optimize the ROA on excess inventory and continues to see tremendous interest from brands across all categories and price points.

Investing in Fundamentals, Not Growth

Business leaders of the last several years have been hyperfocused on growth, not just within retail, but in the broader economy. Faced with the challenges cited above and a tightening market for capital, we see a need to realign priorities towards fundamentals over growth. Many of the growth-oriented strategies of the last several years resulted in elevated acquisition costs, higher return rates, and massive inventory imbalances that have resulted in retail margins taking a significant hit in 2022. In 2023, we expect more brands to look towards investing in post-delivery, returns, and disposition as a means to salvage margin, rather than decaying margins further in unprofitable channels like DTC. For some, this will feel like a massive transformation and for others it will feel very much like it’s back to basics.

As we look to the retail segment for 2023, uncertainty is ever present, but as is opportunity. So much of the innovation mandate over the last several years centered on “disruption,” with dollars being deployed behind brands attempting to unseat incumbents and the solutions enabling them. In 2023, the “enablement” opportunity is abound. Brands and retailers will need to transform their operations to navigate a tighter market, creating immense possibilities for the platforms capable of helping them to do so. With a returned focus to fundamentals, solutions focused on improving the economics of the industry value chain are likely to see ample interest from brands, both emerging and incumbent. We think aligning towards industry enablement, rather than disruption, can provide a much more productive (and perhaps, more importantly, profitable) environment for retailers as they look beyond 2023 and see this as a potentially transformative year for the industry.


Chelsea Zhang is an investor at Equal Ventures, where she focuses on e-commerce and supply chain. Rick Zullo is co-founder and general partner at Equal Ventures, a venture firm built for the next generation of innovators.


Total Retail is the go-to source for retailers looking for the latest news and analysis on the retail industry. Be sure to bookmark this helpful and relevant site:  https://www.mytotalretail.com/


We at Board Retailers Association are here to help you to succeed by providing resources and programs that enable you to lower day to day costs, increase margins and create more remarkable customer experiences. We provide a voice for our Retail Members and will never share your information. BRA has been “protecting retailers and a lifestyle” for 20 years. If you are not yet a BRA Retail Member, you can easily opt in to either Regular (no cost) or Distinguished ($100/yr.) Membership via this super simple join form