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.

 

E-commerce beauty platform Thirteen Lune is opening its first brick-and-mortar store in Los Angeles sometime in early 2023, according to details shared with Retail Dive.

The store will be located at 120 N Larchmont Blvd.

The platform, which was co-founded by Nyakio Grieco and Patrick Herning in 2020, focuses on showcasing Black- and Brown-founded beauty brands. The company’s assortment of featured brands is 90% “created by BIPOC founders,” with the other 10% “exemplifying allyship,” per the email.

"We’re thrilled to bring the beauty of inclusion to life in our hometown of Los Angeles with the opening of the Thirteen Lune flagship. Shoppers of all backgrounds will have the opportunity to discover beauty brands created by Black and Brown founders in this experiential, community-driven retail hub,” Grieco said in a statement. “We entered brick and mortar through our shop-in-shop partnership with J.C. Penney which has allowed us to bring hyper-inclusive beauty to diverse audiences nationwide. With our flagship, we are furthering our omnichannel approach, and will engage the Los Angeles community at a local level in a format that goes far beyond the typical beauty store model."

J.C. Penney launched a beauty concept initially with Thirteen Lune last October, called J.C. Penney Beauty, which acts as a beauty hub both online and in stores for the department store. In September, J.C. Penney announced it was going to expand its venture nationwide by the spring of 2023. 

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The retail landscape has transformed dramatically over the past two years, with direct-to-consumer (DTC) brands facing significant challenges and opportunities. The release of Apple's App Tracking Transparency (ATT) feature in iOS 14.5 in April 2021 has led to higher customer acquisition costs (CACs). Meanwhile, supply chain disruptions have threatened the seamless customer experience that DTC brands pride themselves on.

In reaction to these challenges, the industry has seen an overcorrection, with many brands shifting to a wholesale-first approach to achieve profitability. However, this doesn't mean that DTC should be relegated to the sidelines. On the contrary, DTC can and should still play a pivotal role in building a strong brand. The key lies in creating a balanced, holistic strategy that leverages the strengths of both DTC and wholesale.

Controlling the customer experience

While wholesale partnerships allow brands to scale quickly and efficiently, they often allow less control over product positioning and customer experience. In DTC sales, on the other hand, the focus is all on building a direct relationship with the consumer and controlling the narrative around the brand.

Brands should leverage the complementary nature of these two channels by creating a seamless journey from wholesale to their DTC channel. The key is ensuring wholesale and DTC enrich rather than cannibalize each other.

For instance, a brand might test new products on their DTC storefront and only make them available via wholesale once they’ve achieved the desired traction. Other brands use their online store to offer subscriptions, memberships or personalization, providing customers with the convenience and exclusivity they couldn’t find in wholesale.

Creating data-driven journeys

One significant advantage of DTC over wholesale is the ability to collect and then leverage zero-party and first-party data, which can strengthen customer relationships and improve key metrics such as customer acquisition cost (CAC), average order value (AOV) and repeat purchase rate (RPR).

Robust data strategies involve quantitative and qualitative analytics, including customer interviews, heatmaps, post-purchase surveys and A/B testing, allowing brands to quickly test and validate new ideas with their existing and potential customers.

The more a brand knows about its audience, the more strategically it can deploy this information across all sales channels. The data collected via the DTC channel can be leveraged when exploring and negotiating with wholesale partners and designing an overall wholesale strategy.

Improving fulfillment and returns

The integration of logistics can be another area where DTC and wholesale join forces.

For instance, strategies such as 'click and collect' or ‘buy online, return in-store can leverage the logistical strengths of a wholesale partner while providing a seamless online-to-offline experience for the customer.

These also help brands lower the cost of shipping products and processing returns, which can translate into higher margins or more competitive pricing.

Building for long-term success

DTC should be viewed as a longer-term investment built alongside your wholesale presence. This dual-channel approach allows brands to be present wherever the consumer prefers to shop, ensuring a holistic customer experience.

To make this integrated strategy easier to implement, consider consolidating your tech stack. This consolidation can streamline operations, making it easier to create a seamless wholesale-DTC transition for brands and their customers.

In conclusion, by strategically leveraging the unique strengths of both DTC and wholesale models, brands can not only deliver a comprehensive and engaging customer experience but also quickly adapt to meet the ever-evolving demands of today's retail landscape.

Ahead of showcasing its latest premium mattress collection at the Las Vegas Market trade show, Purple announced it expects to report a fiscal 2022 net loss between $83.7 million and $97.5 million. The preliminary results compare to its 2021 reported net income of $3.9 million.

The home goods brand said Monday it expects 2022’s net sales to be on the lower end of its guidance, at about $574 million, according to a press release. Adjusted EBITDA is expected to also be at the lower end of its guidance range of $2 million to $7 million.

"I am pleased that we delivered sequential improvement in quarterly net sales despite ongoing macroeconomic challenges,” Purple CEO Rob DeMartini said in a statement. “While our fourth quarter top-line performance was encouraging, industry headwinds, in particular the impact of inflation on consumer discretionary spending and a highly promotional environment during the holiday season, put some additional pressure on gross margins and profitability.”

At Las Vegas Market this week, Purple will reveal a new line of premium mattresses, which DeMartini says will be launched through its e-commerce, wholesale and showroom channels in the second quarter of 2023.

The projected results come amid a battle between the brand’s board and an activist investor. Earlier this month, Purple said it had previously rejected an unsolicited buyout bid from Coliseum Capital Management, which currently owns about 44% of the brand’s shares. The investors have since proposed to replace most of Purple’s board, according to a statement from a special committee its board.

After serving as acting CEO since December 2021, the company officially gave DeMartini the chief role in March 2022, and later appointed a new chief operating officer in May.

Purple’s financial performance has declined since the height of the pandemic, when it saw 2020 net revenue increase 51.4% year over year, with direct-to-consumer revenue jumping by 83%.

Going into the highly anticipated shopping period from Thanksgiving to Cyber Monday, inflation set a gray backdrop.

With inflation up 7.7% in October and retailers handling inventory dilemmas, some brands may have been worried about how consumers were going to spend.

Data following the holiday event shows shoppers spent $9.12 billion online during Black Friday, with some even opting to use buy now, pay later to finalize purchases. Consumers spent a record $11.3 billion on Cyber Monday, where shoppers forked over $12.8 million every minute during the peak hour of 8 p.m. to 9 p.m. Pacific Standard Time.

E-commerce giant Amazon touted its performance during the shopping period last week, saying it was its biggest yet, selling “hundreds of millions of products.”

“This was a record-breaking holiday shopping weekend for Amazon. Customers shopped millions of deals this weekend and we have many more amazing deals to come,” Doug Herrington, CEO of Worldwide Amazon Stores, said in a statement at the time.

But how did direct-to-consumer brands fare?

After experiencing a tough year, DTC brands likely hoped to see some relief during the holiday shopping extravaganza. Several digitally native brands, once deemed unicorns, saw their valuations plummet over the past year or so, turning to layoffs to ease the impact a return to stores — plus inflation — has had on their businesses.

Nonetheless, a handful of DTC companies reported promising results from the Thanksgiving to Cyber Monday weekend, indicating consumers aren’t ready to strictly shop with the big players yet.

DTC furniture and home decor company Wayfair has had a particularly rough year. In its Q3 earnings report this November, the retailer reported it lost around 1 million active users from Q2. Net revenue fell 9% year over year to $2.8 billion and operating loss increased to $372 million from $70 million in 2021.

During the latest holiday shopping period, however, Wayfair reported “strong results,” according to a press release from last week. The retailer said that between Thanksgiving and Cyber Monday, sales increased by a “low single digit” compared to the same period last year in the U.S. The home sector saw shoppers eyeing premium comfort items and hosting essentials.

Black Friday was Wayfair’s biggest sales day, noting that shoppers bought a piece of bedding every five seconds on the day. Sales of extendable dining tables along with bar cart sales showed consumers are eager to host again, the retailer said.

Repeat customers made up 73% of holiday orders during the entire shopping weekend and “hundreds of thousands” of new customers made orders.

“In fact, leading up to Cyber Five, our November year-over-year revenue trends strengthened relative to the down 10 percent quarter-to-date update we shared on our recent conference call, with the Cyber Five period itself comping flat for the company,” Niraj Shah, CEO, co-founder and co-chairman of Wayfair, said in a statement.

Parachute, another home-oriented DTC retailer, reported some success as well during the period. The brand, which first launched with bedding textiles, expanded into living room furniture in October.

The company sold one robe every minute during its eight-day holiday sale, according to data shared with Retail Dive. Down duvet insert sales at the brand were up 30% this year, and over 30% of in-store shoppers during the period were new customers to Parachute.

On the non-home front, suiting brand Indochino saw a 36% increase in Black Friday to Cyber Monday sales compared to 2021, according to data shared with Retail Dive. The brand entered the womenswear market in August to expand its customer base. Its 86 stores across North America saw a 16% year-over-year bump for in-store appointments.

E-commerce software provider Shopify also reported that the independent brands it works with saw an increase in customers this year.

Shopify said over 52 million customers globally made purchases from brands it works with during the shopping weekend, which is up 12% year over year. Additionally, some of the top trending products from Shopify clients included the Our Place Always Pan and Gymshark Training Leggings, with apparel and accessories being the top category, per a press release.

“This year, Black Friday Cyber Monday showed us once again that consumers are voting with their wallets to support the independent brands they love,” Harley Finkelstein, president of Shopify, said in a statement. “We saw record level shopping happening across all channels this weekend, proving businesses that meet their customers where they are, whether that’s online or in-person, will earn their loyalty in return.”

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.

Dive Brief:

• As it grows its physical store footprint, DTC furniture brand Burrow has entered the Canadian market, according to a Thursday press release emailed to Retail Dive.
• Canadian shoppers can now purchase items on the DTC brand’s website from its various furniture collections and customize them to fit their home decor style, according to the press release.
• The brand is now shipping its products directly from its greater Toronto area warehouse and offering customers free delivery on all orders, per the announcement.

Dive Insight:

Leading up to its expansion into Canada, Burrow experimented with ways to showcase its products to offline consumers.

The brand partnered with coffee shops to display its furniture, but discontinued those collaborations after discovering that having everyday crumbs in between the cushions of its furniture pieces was off-putting to potential buyers. The company debuted its first showroom in New York City, where customers could test out furniture and watch Netflix as well as attend networking and happy hour gatherings.

The company has since been plotting a physical store expansion. In April, the company announced plans to open 10 storefronts over the next two years, the first of which would be opening in Boston. At its stores, shoppers can view products before they are for sale on its website. In the press release announcing its entry into Canada, the company noted that it also has stores in Atlanta and Los Angeles.

“Since launching in the U.S. in 2017, our decisions have been motivated by customer feedback. In conversations with Canadian friends and family, we learned there were similar frustrations around the traditional furniture-buying process – from a lack of product selection to delayed delivery,” Stephen Kuhl, co-founder and CEO of Burrow, said in a statement. “We’ve been thoughtfully planning this expansion to make sure we could offer Canadian home and condo dwellers alike the complete Burrow experience. As we expand our assortment in the years to come, we’re focused on simplifying the modern furniture shopping experience and bringing it to an even broader demographic.”

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.”

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."

After putting brick-and-mortar plans on ice at the onset of the pandemic, DTC brands are back in expansion mode.

Companies like Brooklinen, Savage X Fenty, Burrow and ThirdLove have announced plans to open more stores as the limitations of selling almost entirely online become increasingly apparent. As many DTC brands grapple with the high cost of customer acquisition — which sometimes can come at the expense of profitability — stores have become an additional marketing vehicle.

DTC brands are strategically mapping out physical locations of their stores, and are starting to look beyond New York City for viable options.

“If you look at the old retail playbook, it was kind of: Put down stores until the profit per square foot doesn't make so much sense,” Katherine Black, a partner in the consumer practice of Kearney, said. “What we see really with DTC brands is their stores, their location strategy is really used to lower their cost of customer acquisition to their online store. So they're really looking for locations that have very high traffic.”

Among the regions gaining popularity with DTC brands is Washington, D.C.’s Georgetown neighborhood.

Warby Parker, Everlane, Faherty, Allbirds, Brilliant Earth, Bonobos and Outdoor Voices are just a handful of brands that have opened in the area in recent years.

But the neighborhood hasn’t always been a hotbed for online brands.

The last decade of retail in Georgetown

When a shopper walked down Georgetown’s popular M Street 10 years ago, the retail scene looked different.

“The most noticeable, notable change — retail space wise — over the last 10 years has been the fact that restaurants have basically abandoned M Street. Not entirely, but almost entirely. And what seems to replace them almost every time is some sort of, generally women's clothing store,” said Topher Matthews, writer of the Georgetown Metropolitan blog and resident of the neighborhood since 2003. “Out of every five new stores, four of them are some sort of clothing store.”

In addition to restaurants exiting M Street, Matthews said a lot of college bars that had once been mainstays in the neighborhood, like Rhino Bar, have since disappeared as well, replaced by national apparel retailers.

“It probably was about 10 years ago, I had some tourists walk up to me on M Street, and they basically were like, ‘So where are the shops?’ And I was like, ‘Well, you're here,’” Matthews said. “They were like ‘These are just what you'd see in a mall.’ I sort of shrugged my shoulders. Like yeah, that's what we got. Ten years ago, it was probably even more of a mall than it is now.”

But some of those traditional retailers, like Brooks Brothers and Loft, that operated stores on popular streets in the neighborhood have filed for bankruptcy and closed many stores as a result, including their Georgetown locations. This, Matthews said, has added to the number of vacancies or perceived vacancies in the area.

“Generally, vacancies are always, always a story with Georgetown where it seems to be high,” he said, adding “that's one thing that locals complain about all the time. It doesn't matter how far back they've been complaining about vacancies, particularly on Wisconsin Avenue. … There's just increasing numbers of vacant spaces down there, which in the past, it had these very stable national brands.”

More recently, the vacancy rates in the neighborhood spiked in 2020 following the murder of George Floyd and subsequent protests, according to Joe Sternlieb, CEO of Georgetown’s Business Improvement District. “I think we had vandalism in 57 businesses when they came through, and a bunch of places didn't reopen, and some places reopened and closed,” Sternlieb said. “We had a net loss over the pandemic of about 60 brick-and-mortar retail and restaurant businesses. Last year, we had a net increase of 27 between openings and closings, and I think we'll do something similar this year.”

The increased vacancies coupled with the fact that rents became more negotiable opened up an opportunity for DTC brands to move in, Kearney’s Black said.

“A lot of brands who were in high growth mode really took advantage of that trend as much as possible during the pandemic because I think most folks saw that as a real opportunity to continue their expansion strategy,” Black said. “Those with capital who had a strong business model, who were in growth mode, I think absolutely took advantage of some of the other stores going out of business or closing.”

What makes Georgetown so attractive for DTC brands?

Several brands that launched online realize the importance of having a physical presence to help acquire customers and scale their businesses.

“Direct-to-consumer brands that do not have a brick-and-mortar strategy, need to have one,” said Philippe Lanier, a principal at EastBanc, the landlord who owns the Georgetown stores of Outdoor Voices, The Reformation, Gorjana, Everlane, Faherty and Glossier. “A comprehensive retail brand needs to have both and needs to be able to string a story between how they sell online … versus the experience that [consumers] have in the store.”

While New York City, Los Angeles and San Francisco were among the top cities where DTCs opened their first few stores, Georgetown is quickly becoming a destination for digitally native brands.

Over 15 direct-to-consumer companies have opened up stores in the neighborhood with more on the way, including Glossier, which plans to open a store in the summer 2022.

So what makes this quaint D.C. neighborhood attractive to DTC companies?

For one, it’s situated near a university, which generates significant traffic to businesses. But the neighborhood has also become a destination for residents from the surrounding suburbs, which Black attributes to how easily accessible it is for those residents compared to other neighborhoods, like SoHo, which is more isolated.

“We have 2.8 million square feet of retail and 4,000 housing units, maybe 1,000 residents at best,” Sternlieb said. “Ten percent of our retail sales are to residents … 90% of the customers were imported from probably a two- or three-mile radius of Georgetown.”

It’s also become a stop on the map for out-of-town tourists visiting Washington, D.C., who “want to check out Georgetown. They've heard of it before, get a cupcake, whatever,” Matthews said.

And unlike some other areas, like downtown where many of the businesses close after workers leave the offices, Georgetown continues to draw traffic well after those stores close for the night.

“The interesting thing about Georgetown is, it has a long day to it. It's not just a shopping center that closes at 6 p.m. or 8 p.m. There are a number of bars and restaurants — it's known to have a very vibrant nightlife scene,” Black said. “If part of your strategy is almost to use the store as a billboard, that counts. So that store, that billboard is getting really active traffic long after the store is closed at night with a key target demographic. Because you’re getting people cycling through as tourists or for business purposes or as part of the university, you're getting a wide range of eyeballs on that store, which is exactly the strategy to make the brand known to then acquire those customers to the website.”

Downtown areas, which were heavily saturated with offices and commuters, suffered particularly hard when businesses shifted to remote working. Georgetown, being somewhat more residential, was better able to weather the challenges.

“The residents never left. I say we lost 60 businesses but we didn't lose 390,” Sternlieb said. “It's just a beautiful environment that people want to be in. So on a nice day — even at the height of the pandemic — there were still people sort of walking around. In downtown it was sort of an office park and when the office workers stopped coming, everything imploded. Whereas in Georgetown, when the office workers stopped coming, the residents were still here, the visitors were still here, the tourists — to the extent that there were tourists — were still here.”

To help cater to the conditions brought on by the pandemic, the neighborhood introduced 35 outdoor areas for restaurants to expand to during the pandemic, Sternlieb said, adding that it has “created a sense of life” on the streets further enticing other businesses to open up.

The ability to work from home and have more flexibility has also helped weekday traffic in the neighborhood to increase because consumers have more time to shop and dine during the week as opposed to saving it for the weekend, according to Lanier.

The area, being a true neighborhood, fits into the authenticity these brands try to possess and feels a bit more "genuine," Black said. And the fact that many of the buildings are older with smaller square footage appeals to the needs DTC brands have when it comes to opening stores.

“Everybody's figured out that Georgetown is the amenity rich neighborhood, that it’s well maintained,” Sternlieb said. “The people are back and so if they're going to move back into the market, this is the place they want to come first.”

Sustainability has been a focus for several DTC brands from day one, and that has helped attract younger consumers. 

From the materials brands use to curb waste to the way in which they produce goods, brands like Allbirds, Reformation, Everlane and others have baked sustainability into their DNA.

But as these brands look to scale, are their sustainability goals in jeopardy?

Despite sustainability targets, certain areas of business are still harmful

Several retailers, including DTC brands, have outlined goals aimed at operating in a more sustainable manner.

Reformation, for example, reports its progress around sustainability quarterly. In the first quarter of 2022, the apparel brand reported that it launched a denim capsule collection made from recycled fabric scraps from factory floors, joined Land to Market — a sourcing solution for regenerative agriculture — and Fashion for Good, and set goals to achieve 100% traceability through its supply chain by 2025, among other things. This comes in addition to Reformation’s other initiatives, including a recycling program.

Allbirds similarly has outlined goals for itself to cut its carbon footprint in half by 2025 and reducing it by “near zero” by 2030, including shifting to regenerative agriculture, using renewable materials and utilizing responsible energy.

But despite some of the commitments companies are making, there are a number of things brands are currently doing that have negative environmental impacts, like how and where a brand manufactures, transports and packages products; what its back-of-house operations look like; and how it handles reverse logistics.

The consequences of manufacturing overseas are greater, pushing many companies to consider nearshoring, according to Brian Ehrig, a partner in the consumer practice of Kearney.

“If you're making things in China or Vietnam or India, you've got to ship them all across the world. Your choices are boat or air … and either one leaves a very big carbon footprint,” Ehrig said.

And packaging can have a major impact on whether a brand is operating sustainably. DTC brands are still one of the biggest users of plastic and corrugated packaging, according to Tyler Higgins, retail practice lead and managing director at global consulting firm AArete.

That comes on top of the fact that consumers may receive packages frequently depending on the brand and type of product they sell.

“From a transportation standpoint, they’re a high use of miles,” Higgins said. “A lot of consumers might get packages for seven straight days from the same direct-to-consumer brand.”

The targets that some brands set for themselves to address these problems, however, really only focus on the factors within their own control, Higgins said.

“A lot of those things that fall on the world of scope 3 emissions, [brands] don't put as much onus on or focus on because it's less in their control and they're really focused on building their brand around the specific products they're manufacturing,” Higgins said, adding that sustainability is “sort of in the eye of the beholder, for lack of a better phrase.”

While many DTC brands may claim to be transparent when it comes to their sourcing materials, they may also have ships and trucks burning fuel within their supply chains.

“They may tout their manufacturing process, but then they may go put it in a plastic bag or corrugated box before it ships to your front door,” Higgins said. “What I think brands are doing is picking what they have the most control on and what they're good at and touting that component, even if the other pieces” are not necessarily sustainable.

But as more digitally native brands turn to physical retail, questions are emerging around how that impacts their sustainability targets. 

Stores versus e-commerce

DTC brands have come to realize the benefits of having a brick-and-mortar presence, including allowing customers to touch and feel a product before purchasing, reducing customer acquisition costs by serving as an additional marketing vehicle and, for some, serving as a fulfillment channel for goods. But does operating a store have environmental benefits as well? It’s a question that doesn’t have a straightforward answer.

When looking at products on a per-unit basis that were manufactured from the same locations, AArete’s Higgins believes a store is more sustainable because “you're delineating the emissions over a much broader polling of items.”

But something to factor in, which impacts how sustainable a physical location is overall, is how consumers are getting to the store — something that falls in the realm of scope 3. To think about sustainability holistically, retailers need to consider things like how much fuel is used to get to the store or whether public transportation or biking options are available, Chris Ventry, retail and consumer lead at SSA & Company, said in an email.

In the U.S. 95% of shopping trips are made by car, according to research led by Sadegh Shahmohammadi. Comparatively, in the Netherlands that number was 44%.

Operating fewer stores or no stores at all will have less of a negative impact, Ehrig said. That’s because the fewer distribution points a brand has, the fewer places it needs to house inventory. When a brand operates hundreds of stores, it needs to carry inventory in all of those locations, and for a brand — particularly in the apparel sector — the risk of miscalculating demand is higher.

“The likelihood that I forecast the demand for that is relatively low, which means I'm going to have more obsolescence of inventory and then I have to dispose of that in some way,” Ehrig said. “When you have a lot of store locations, it means that you could have the wrong inventory in too many of the wrong places. That's really the big risk.”

According to research released last year from MIT’s Real Estate Innovation Lab, e-commerce was found more sustainable than traditional retail in more than 75% of the scenarios the researchers developed.

But when it comes to opening stores, brands may be prioritizing scaling their businesses, even if it comes at an environmental cost.

“While [stores] have some kind of impact on their carbon footprint, it could be a very good thing for their business,” Ehrig said. “So that's sort of a trade off.”

Because shoppers don’t shop in a single channel, stores have become a necessity for DTC retailers. Brands can adopt ways to leverage stores to lower their environmental impacts.

Buildings and construction accounted for some 36% of global energy demand and 37% of energy-related CO2 emissions in 2020, according to a report from the United Nations Environment Programme. Nonetheless, “brick-and-mortar sustainability is a real issue that some direct-to-consumer brands are taking seriously — and using as a way to send a message to their customers,” Ventry said, pointing to examples like Patagonia’s use of sustainable building principles, Google’s LEED platinum store in New York and Allbirds’ pledge to use renewable energy across its entire retail portfolio.

Brands can also use their stores as a place to collect returns, a problem that online brands — particularly those selling apparel where size and fit play a big role — have to grapple with.

“The average person is going to buy one product — they'll probably buy three of them and return two of them,” Higgins said. “You ultimately are probably doubling the miles on the road, doubling the packaging that’s being sent around [and] doubling the amount of time it trades hands.”

Creating a point where consumers can return items in person may help mitigate some of those factors.

Brands can also leverage wholesale partnerships with traditional retailers as way to get their products in front of consumers in person, while also mitigating some of the negative impacts associated with running a store.

“Naturally, wholesale is going to be, on a per-unit basis, more carbon-friendly or more environmentally friendly than direct to consumer,” Higgins said.

However, when those consumers travel to a mass merchant to pick up products being sold by those DTC brands, those retailers are then passing on the environmental cost of fulfilling the purchase to the consumer, which starts to enter scope 3 emissions.

“It is a little bit of, you know, passing the buck,” Ehrig said.

There are benefits to wholesale, though: The way a product is packaged for wholesale is different. It generally contains less packaging so more product can fit on a container to be shipped.

Measuring progress

In 2021, several direct-to-consumer brands entered the public markets, from Warby Parker and Allbirds to Brilliant Earth and On. But those newly public companies may face greater scrutiny around their sustainability targets as the Securities and Exchange Commission lays out rules around reporting on climate risk.

The SEC wants to require companies to describe their climate risk and plans to achieve targets set for curbing those risks in their 10-Ks. Companies would be responsible for disclosing scope 1 emissions, like their greenhouse gas emissions from their facilities, and scope 2 emissions, like their energy purchases. While there could be more limits on requiring companies to disclose their scope 3 emissions, those companies that have already made commitments about curbing their scope 3 emissions will need to report progress.

But even for companies that are still privately held, issues around whether their sustainability targets are adding up are starting to arise.

“Most companies are not sure if all the efforts that they're making are really adding up to the commitments that they've made,” Ehrig said. “We're really doing a lot of reverse engineering of these 2025, 2030 goals to understand how they are measuring all these things. Are they making the right kind of impact? I would say that the vast majority of the companies that I've seen, the spirit is there and the funding is there, as well. Actually being able to track and measure all of this is one of the most difficult challenges that they have. And, boy, getting it wrong would be a serious, serious mistake.”

Where can brands go from here?

While many brands have already undertaken initiatives to help mitigate environmental harm, they’re just scratching the surface.

Focusing on the manufacturing side as well as the type of packaging used for products should continue to be a priority for brands moving forward, experts said.

“Even when not mandated by laws in certain jurisdictions, DTCs could increase their use of recycled corrugated cardboard,” Ventry said, adding that “there are opportunities for DTCs to further encourage consumers to reuse or recycle packaging.”

And finding ways to use the customer data brands already have to help streamline supply chains and reduce the number of miles on the road can help further reduce their carbon footprints. 

“It’s become clear that factoring in sustainability and eco-friendliness has become not only a differentiator for direct-to-consumer brands, but a necessary part of their operations and planning. Brands that are most successful in this game will use data to make informed decisions about reducing waste. They’ll incorporate green practices into developing new products, including sustainable packaging and raw materials; they’ll design environmental strategy into their stores and operations,” Ventry said. “DTC brands need to be thinking 360 degrees about their impact on the planet, their customers’ perception of their responsibleness, and the effect on their bottom line of making these changes.”