The Retail Dive Outlook on 2021

The pandemic's arrival in March 2020 meant that it didn't make Retail Dive's trends to watch last year, but it completely upended all expectations for the year.

The health crisis was closely followed by the whole industry throughout 2020, courtesy of the havoc it wreaked on retail operations. Stores were forced closed, employees were furloughed or laid off, rent was skipped, supply chains were strained.

Headed into 2021, retailers have survived the immediate triage period, but the pandemic is still very much present and will continue to shape the year ahead. Indeed, the ability of the crisis to cause more problems, or abate them, depending on how the world recovers will perhaps have the largest effect on the industry this year.

The pandemic is a thread weaving through almost every trend the industry faces in 2021, in some cases speeding up inevitable changes many years in the making and in others sparking unexpected developments. Whatever this year brings, the changes driven by the convergence of the pandemic and longstanding industry tailwinds will influence what retailers do and reshape the industry. 

Here's what Retail Dive is tracking in 2021. 

1. The pandemic will forever alter the brick-and-mortar landscape

The major blow to retailers that came from the pandemic's forced closure of stores last spring lessened somewhat throughout the year as stores reopened, but long-term changes to the retail landscape are inevitable.

Several retailers, whether through bankruptcy or not, sped up or expanded plans to close stores, especially at malls. Companies as diverse as Gap Inc., Macy's, Victoria's Secret and Nordstrom announced plans to close doors permanently, adding up to hundreds of empty locations, many of them mall anchors and specialty tenants or downtown flagships. 

Strip centers fared better, and Macy's is among those switching to the format. Analysts also see some hope for neighborhood shopping districts as people continue to work from home and frequent their local shops, and Foot Locker and Nike are among those embracing the idea of community-oriented locations. But the pandemic, despite some help from a financial COVID relief package early in 2020 designed to help keep small businesses afloat, has been especially challenging for many mom and pops. 

It's an open question whether downtown shopping corridors will recover, considering that working from home could remain an option for many workers even after the pandemic subsides. What's more certain is that yet more malls are destined to falter, even some at the high end, with the pandemic accelerating what would have been a five- or 10-year trend. The troubles have ushered in an unprecedented level of cooperation between landlords and their retail tenants, which could provide retailers with flexibility to serve customers in their ideal locations, wherever those may be. 

2. The culling of weak retailers will continue apace 

The COVID-19 pandemic had the effect of consolidating several years worth of e-commerce growth into a matter of months. It also likely had a similar effect on retail bankruptcies. Last year, J.C. Penney, Neiman Marcus, J. Crew — all retailers that might have slogged into 2021 or 2022 — filed for bankruptcy in an effort to restructure. Others such as Stein Mart and Lord & Taylor, which liquidated their physical footprints, might still be standing today if not for the crisis. 

Bankruptcies in 2020 hit levels not seen for more than a decade as the pandemic dragged heavily on traffic to stores and forced them to shutter in the spring. As the COVID-19 pandemic continues to weigh on shoppers and the economy, retailers lacking cash, that are heavily indebted, suffering severe and persistent sales declines, or some combination of those things, are vulnerable to bankruptcy or disappearing entirely. No matter how 2021 plays out, you can expect fewer stores and perhaps companies than today as the year begins. 

3. The generalist giants will try to consolidate their 2020 gains

Walmart, Amazon, Target and Costco all saw growth last year ranging from very solid to explosive. Each of them got there in different ways and for different reasons, but those companies have a few things in common. They are huge, with vast cash and capital resources to invest in their businesses and capabilities. And all four are generalists to varying degrees, selling everything from basketballs to apparel to milk. 

Along with leaning on Amazon's super fast delivery, pandemic-wary shoppers in 2020 flocked to the one-stop big-box sellers like never before. Their broad offerings meant customers could reduce their trips and, with them, their potential virus exposure. That had the effect of accelerating a longstanding trend of consumers ditching specialists for generalists as a matter of convenience and price. Walmart and Target have also made deep investments in their omnichannel capabilities and product offering that were paying off just as the pandemic shifted shopping habits. 

The question hanging over the year ahead is whether retail's biggest players can hold on to customers they gained during the pandemic, or, on the flip side, whether smaller specialists can compete against the retail heavies.

4. The distinction between DTC and traditional retailers will continue to blur

Direct-to-consumer brands have grown in popularity over the past decade, but cracks in the model have begun to emerge in recent years. Some so-called DTC darlings have faced company culture issues, while others have revealed just how difficult it can be to reach profitability selling goods almost entirely online.

And while these brands weren't totally immune from the industry-wide disruptions brought on by the pandemic, they fared slightly better as consumers were driven online.

Wayfair and Chewy — two companies that previously struggled to reach profitability under mounting advertising and marketing costs — have posted record results since the start of the pandemic. Wayfair reported two consecutive quarters of profits, the first time the retailer has been in the black since going public in 2014. The home retailer has benefited from both the category seeing a boom in recent months and more consumers shopping online. And Chewy, while not yet profitable, posted "record" net sales in its most recent quarter and grew its net active customers to 17.8 million.

The model is also attractive to more traditional retailers, like Nike and Under Armour, which have touted the benefits of focusing on their direct-to-consumer channels over wholesale to boost profitability.

The distinction between the two — pure-plays and traditional retailers — will further blur in the year ahead as the ways in which DTC brands adopt traditional practices like opening stores and traditional retailers adopt the direct-to-consumer model continue to shake out.

5. Some pandemic pivots may not stick

To retailers during the pandemic, pivoting and making quick changes meant survival. When stores began offering curbside pickup and contactless payments, and turned some locations into online warehouses, the purpose of a store was redefined. But with the rollout of vaccines, some changes might not be here to stay. 

The pandemic upended makeup testers and dressing rooms, and when customers return to physical stores, retailers will have to reimagine experiential retail. As demand for contactless fulfillment offerings like buy online, pick up in store surges, retailers will look for ways to make these services more sustainable.

Growth was pushed aside during the early stages of the pandemic when a record number of stores shut down for good and survival became retailers' main priority. 2021 will likely allow retailers more time to focus again on innovation, but still, new tools emerged in the midst of the pandemic as retailers looked to create socially distant experiences, like using augmented reality to test cosmetics, automated checkout tech and group video shopping platforms. Only time will tell which changes are built to last.

6. The e-commerce boom will continue, but so will its challenges

The pandemic spurred the growing share of sales that e-commerce took by historic numbers last year. But as more consumers grew reliant on making purchases online, the number of orders coupled with pandemic-driven employee shortage left retailers and postal services struggling to cope with the demand. 

Site crashes, late deliveries and faulty discount codes reflect badly on retailers, leaving customers unsatisfied. In fact, only 15% of consumers in a recent survey were happy with their online shopping experiences, according to Contentsquare. Giving customers richer and more personalized shopping is essential for retailers if they want to rank well on Google in 2021 and keep up with e-commerce giants.

With store closures and social distancing measures that limit store capacity, retailers have no choice but to compete in an already crowded e-commerce space. Many brick-and-mortar stores have already permanently closed doors due to online competitors in addition to problems caused by the pandemic. 

Still, e-commerce platforms attracted more groups of customers in 2020 and will potentially continue to do so into 2021. Shopping app downloads, for example, reached 2.8 million on Black Friday — a new single-day record, according to preliminary estimates from Sensor Tower Store Intelligence. 

7. Apparel attempts to bounce back (or at least not bleed out more)

Apparel was in trouble before the pandemic. Experts observed in 2019 that it was one of the most distressed segments of retail, and was suffering from the pitfalls of being oversaturated and overstored. That same year, most of the major bankruptcies were filed by companies that mostly or exclusively sold apparel, including Forever 21, Barneys New York, Charlotte Russe and Gymboree. 

Then, in 2020, trends that were problematic within the sector accelerated, leaving in their wake additional bankruptcies from department stores that chiefly sold clothing including J.C. Penney and Lord & Taylor, to specialty players such as J. Crew and Ascena filing Chapter 11. To add to the confusion, large swaths of the population were suddenly working from home and staying there because events and travel were canceled. It changed the way they dressed, with people who once reached for suits or dresses suddenly donning athleisure and loungewear. 

In short, the segment took a tremendous hit and the immediate future is about recovery. McKinsey & Company's The State of Fashion 2021 report envisions two possible scenarios to get there. The first "earlier recovery" probability states that global fashion sales will decline by 0% to 5% in 2021, and is predicated on successful virus containment and swift economic restoration. The second "later recovery" scenario doesn't have the apparel industry returning to 2019 levels until the fourth quarter of 2023. 

That means the possibility of additional specialty retailer bankruptcies or acquisitions. It also points to apparel companies increasingly relying on digital channels to sell products, even as demand is diminished "due to restrained spending power amid unemployment and rising inequality," according to McKinsey.

8. Consumers will be stuck, and that's a problem for retailers  

In 2020, as with so many other macro trends, the pandemic worsened the wealth gap. 

When Trump took office in 2016, the top 1% of households held more wealth than the middle class, a reversal from before 2010, and only the top 20% have fully recovered from the Great Recession, according to the Brookings Institute. The pressures on the middle class are a problem for the economy as a whole and for retailers in particular — both depend on a consumer with enough disposable income and financial confidence to buy more than they need.

The pandemic strained both. Personal income in November was down $221.8 billion or 1.1%, disposable personal income fell $218 billion or 1.2%, and personal consumption expenditures fell $63.3 billion or 0.4%, according to the most recent estimates from the U.S. Bureau of Economic Analysis. Jobless claims are also "essentially stuck at a painful, inflated level due to the coronavirus surge," according to Robert Frick, corporate economist at Navy Federal Credit Union. Some 10 million jobs disappeared since February last year, and the holiday season was marked by bargain-hunting due to pandemic-related job and income loss, according to GlobalData. The Conference Board recorded a surprise deterioration in consumer confidence last month. 

Despite the promise of vaccines and extra savings from being stuck at home, the average consumer has reason to remain on edge this year, mostly because of the ongoing pandemic. "And as long as that surge continues, even with stimulus, we can expect more than 1 million Americans will lose their jobs weekly, based on state and federal measures," Frick said in emailed comments on the last day of 2020.

9. New owners take center stage

2020 brought in a surprising new class of retail owners that ultimately may change the trajectory of business models. Authentic Brands Group, which already owned a handful of apparel brands and licenses and eventually bought Barneys in 2019, teamed up with Simon Property Group again this summer to buy legacy retailer Brooks Brothers and then Lucky Brand. They had previously partnered to buy Forever 21 early in the year and Aeropostale in 2016. Now their 50/50 venture, called Sparc Group, is the operating partner for Aeropostale, Forever 21, Lucky Brand, Brooks Brothers and Nautica.

Real estate companies got further into the mix, effectively turning mall owners into retail business owners. In arguably the biggest play of the year, landlords Simon Property Group and Brookfield Asset Management bought J.C. Penney's department store operations at the close of 2020. 

Also on the scene is Retail Ecommerce Ventures, which snapped up the IP of multiple retailers including Modell's Sporting Goods, Dressbarn and Stein Mart. 

Although the impact of shifting ownership may not be seen immediately, many questions remain regarding these players. Will brands become divorced from their operations? Are companies that were once household names going to lean into licensing? Are more specialty retailers going to end up selling their IP to conglomerates? And ultimately, how is it all going to impact the shopping experience?

Imagine that it's the first week of January 2020 again. Justin Bieber has a new song. Impeachment is the talk of Washington, D.C. There is news of a flu-like virus outbreak in China, but unless you're an epidemiologist or travel to the country, you might not be paying that much attention. There haven't been any reported deaths yet. 

Now imagine a time traveler arrives and tells you what is to come: An out-of-control pandemic, full hospitals, mass deaths, stay-at-home orders, social distancing. In retail, the largest chains in the industry, along with scores of smaller retailers, close their entire footprint for around two months. There's also triple-digit digital sales growth for some, the sudden prominence of curbside pickup and massive financial mobilization as companies try to stay afloat without their stores open.

Such a time traveler would probably have been dismissed as a delusional crank. It doesn't sound possible. And yet, it all happened. The entire industry changed, in multiple ways, overnight. 

"My whole life deals with getting people to do things that I know they can do that they don't think they can do in ways that I know they can do them, but they don't think they can do them," Joel Bines, co-head of AlixPartners' global retail practice, said in a fall interview. "And there's so much plaque in the system that prevents them from doing it. And then all of a sudden, the country shuts down." 

The year 2020 taught retailers the outer bounds of risk and reality as most have known it to-date. The question for the year ahead and beyond is: Will they internalize those lessons, and will they apply them to both crises and opportunities not yet at their doorstep?

A new appreciation for cash

Last spring, the industry went through a collective event without precedent in modern retail. Well over 100 store chain operators closed their full footprint starting in March. Reopening didn't start broadly until early May.

For many, if not most, of those companies that closed their stores, that meant their primary revenue channel was simply shut off for that period. Excepting those deemed essential because they sold food or other non-discretionary goods, the industry was put in hibernation. Suddenly, every discretionary retailer's cash flow was of prime importance. 

"When you're entering a choppy period, cash is king, and so you want to activate all of your cash-generating maneuvers," Bines said.

Retailers took dramatic measures simply to stay in business while turning off the main cash spigot. Overnight, seemingly fixed aspects of a company became flexible. 

Some of these went to the very heart of a retail business. Vast numbers of employees were put on furlough until further notice. Product orders were put on hold, and many retailers insisted on longer payment terms with suppliers on future orders. Retailers also skipped rent or put it off. All these are things that would put relationships in serious risk in normal times. Even during a pandemic they strained relationships with employees, suppliers and landlords.

Along with core functions, companies also raised and preserved cash by nixing dividends to shareholders, cutting back executive pay and tapping their credit lines for cash. In short, the rules for operating were flipped overnight. It showed how malleable the rules were to begin with, not to mention how vulnerable even seemingly healthy companies can be when crisis comes. 

​According to RapidRatings data sent to Retail Dive, the industry as a whole in 2020 improved year over year on a measure of short-term resiliency and default risk, a marker in large part of how much liquidity companies raised to weather the COVID-19 crisis. At the same time, a financial health score measuring medium-term risk fell for the sector as those same companies took on new liabilities and struggled operationally to make up for the pandemic's hit to cash flow. 

In response to the turmoil of 2020, Bines said retailers are now thinking more about setting up their businesses to consume less cash on a fixed basis than they did before, making them less vulnerable to shocks like the pandemic. 

"At the highest level, the way you do that is you variablize as much of your expenses as you possibly can, even if it means that you pay more per unit than you would otherwise pay," Bines said. "The variabilization means that if volume drops, you don't have that fixed expenditure associated with that kind of stuff." That, in turn, means your fixed costs don't become a sudden massive risk if revenue gets turned off by a major event. 

Examples of this sort of variablizing include switching from a fixed payment model with landlords and suppliers to revenue-sharing arrangements. Retailers might also need to ease their fixation on gross margins.

"At the end of the day, inventory is cash," Bines said. "Every time you walk into a store, and you look at a rack of clothes, you should be looking at a rack of dollar bills. You want to push as much product through your own retail channel as you can and think very hard about what you want to do with items that are old or potentially have been obsoleted."

E-commerce: 'We've got to do it'

In retail operations, one of the starkest overnight changes was how e-commerce suddenly took center stage. While online shopping looms large for investors and media, it represents a relatively small share of the overall retail pie, and a similar fraction of many individual retailers' own sales. 

But when retail chains shuttered their stores en masse to join the fight against the pandemic, e-commerce became the only kind of commerce for many. At Macy's, for example, e-commerce grew 53% in the second quarter while stores sales fell 61%. At Nordstrom, digital jumped from 30% of sales in Q2 2019 to more than 60% of sales during the same period last year. Digital penetration also doubled at Dick's Sporting Goods during the quarter. And those are just a few of those that saw massive spikes. 

"We just proved anything is possible. As an industry, if you look at what we did, we took five years of e-commerce penetration and accumulated it in five months," Bines said. "If we can do that as an industry, we can do anything."

The pandemic forced retailers to speed up the transition to digital, whether they were ready or not.

"For traditional brick-and-mortar retailers, if anything this has accelerated their digital transformation — that's painfully obvious," said Damian Walch, managing director and leader of the business resilience unit at Deloitte.

Speed in building out new capabilities is something retailers haven't always excelled at. In the past, "even for the most agile retailers it took forever to do things," Walch said. "Some that have ignored digital and e-commerce said, 'We've got to do it.'" Which meant that they not only had to execute but also make decisions much faster than they had in the past. 

The quick expansion comes with its own risks. While retailers build out their e-commerce and omnichannel capabilities, they need to "make sure they do that in a more resilient, hardened manner," meaning that "e-commerce sites don't go down if you're pushing people to the web or to an app, that you're doing it in a very hardened manner," Walch said.

Along with e-commerce, curbside and store pickup channels also exploded during the year. In the holiday season alone, curbside rose 88% year over year between Nov. 1 and Dec. 9, according to Adobe Analytics. (Later numbers from Adobe showed 36% curbside growth for the season through December.)

Going back to Dick's in Q2 2020, the sporting goods specialist said e-commerce sales, including those via its contactless pickup option, skyrocketed by 194% during that period, which included weeks of store closures. GameStop, which posted an 800% rise in global e-commerce sales during Q2 2020, said it was able to recapture 73% of sales at stores closed for the pandemic through its curbside channel. 

Some retailers were prepared before the pandemic for the shift to curbside and store pickup. Target began rolling out its Drive Up curbside option across the country in 2019, and consequently had the capacity when consumers started using the option during the pandemic. The retailer then posted triple-digit growth in its same-day service channels, which includes curbside, throughout the year. During the holiday period, Target's curbside sales grew 500%.

But others put together a service for their customers essentially overnight. "We operate with 85% of our staff furloughed, we get on BOPIS in two weeks, we extend this out to parking lots," Bines said, describing the ad hoc and desperate adaptation among retailers during the closures. "And how do we do it? We do it with spray paint and cardboard signs and emailed spreadsheets. Is it sustainable? Of course not. But can you do it? Of course you can."

He added, "That's what resiliency means, right?"

'Starting with supply chain'

Like in-house operations, retailers' supply chains came under intense strain and went through wild convolutions last year amid the pandemic. 

Starting with the initial outbreak of COVID-19 in China, the coronavirus itself disrupted manufacturers and others along the supply chain. Then came the long weeks of store closures, with cancelled orders and mothballed inventories. When stores reopened, sellers entered a world of unpredictable demand and wildly different trajectories for some product categories. Work fashion plummeted. Toilet paper and bicycles sold out. 

The crisis, perhaps for the first time, put supply chains front and center for retail companies. "If we go back 10, 15 years, what was dominating retail was brands — marketing, new product introduction, new features, segmentation and tailoring to different consumers," said Curt Mueller, senior partner with McKinsey & Company. "It was like, 'It's great that I have a supply chain, but the supply chain just needs to deliver, that's all I care about, because I'm going to build a great brand.'"

The pandemic changed all that. "You go on any analyst call, you go on any earnings review, you're really starting with supply chain," Mueller said. "Supply chain is, quite frankly, being put in a position that it has not been in the past."

In response, companies are working more to assess risks, be more strategic, and become more agile through information sharing with suppliers. To be more resilient going forward, Mueller noted, involves accurately assessing the risks to supply chain and deciding financially which risks to cover. That's not always an obvious calculation for retailers, which operate on thin margins and, if owned by public shareholders, often face pressure to hold down capital costs. 

And the risks are many. The once-in-a-century pandemic shock is just one among many possible. Supply chains going forward face risks from new pandemics to cyberattacks to political and social unrest to climate change. As McKinsey noted in a report late last summer, "Shocks that affect global production are growing more frequent and more severe." 

After the shock of COVID-19, and without knowing what risks will actually come to pass, agility becomes key. "How quickly can you move to capture new opportunities? How quickly can you move to avoid huge pitfalls?" said RapidRatings Chairman and CEO James Gellert, describing what supply chain resilience means today. "How can you grow quicker than you have before to capitalize on a competitor's weakness? How can you source from one place versus another? How do you source a product when a key supplier goes under?"

Doing those things, he added, requires a "well-organized machine where you have a procurement organization that is well tied to the finance organization, and the supply chain managers are plugged in and purchasing managers are plugged in, and everyone is singing the same tune and operating in a cohesive way that is coordinated with a common mandate from senior management in a company."

Along with agility, transparency is coming into focus. That is, transparency between retailers and firms in their supply chain. Success and even survival for both sides often means knowing the needs and the financial health of the other.

"If there isn't sharing of information and there isn't transparency, then it can only be an arm's-length relationship and a commoditized relationship, where someone is buying something from someone else as opposed to being strategically aligned," Gellert said. "That, to me, is one of the central points particularly in retail, where the industry is changing and has been changing."

A wake-up call

The COVID-19 crisis and retailers' rapid adaptations to it shattered old ways of doing and thinking. It also highlighted the concept of resilience itself, which before may have seemed like a distant abstraction for retail leaders not caught up in the urgent day-to-day business of mere financial and operational survival. 

"I've been in this discipline for 30 years," Walch said. "I've been through the Northridge earthquake, 9/11, Hurricane Sandy, Hurricane Katrina. In this case we've seen both retailers and consumer product companies for the first time say, No. 1, that this was a huge wake-up call for them, and No. 2, they're no longer just planning for the thing that just happened to them."

In this case, that means not just planning for the next pandemic or next wave of COVID-19. It means thinking about all the things that can disrupt a business that, to date, haven't happened. It means, Walch notes, conducting risk intelligence and setting up command centers, and thinking about other potential crises: climate change, malware attacks, civil unrest, new waves of the pandemic, and more. "They're saying, 'We know we have to do this better going forward,'" Walch said. "So I believe this is different." 

The essence of uncertainty is not knowing which risks will become reality. The fog of not knowing perhaps made it easier to shunt aside risk management, continuity planning and other seemingly abstract and far-off imperatives. But the pandemic has made it impossible to ignore risk, at least for now.  

Yet even for those taking resilience seriously today, preparation is not straightforward, and certainly not any easier than it was before. 

"Planning in advance from a corporate management perspective, and planning for black swans and acts of God, these horribly difficult-to-predict circumstances — that is just hard," Gellert said. "So the question becomes not have you planned for everything, but are you agile enough to adapt?"

The unique circumstances of the pandemic have caused online sales to balloon, seemingly overnight. As retailers were forced last spring to temporarily shutter their stores, either by choice or by government mandate, consumers shifted their spending online.

E-commerce sales in March jumped to $70.1 billion from $61.7 billion in February, and were up 18.2% from the prior year, according to the Department of Commerce. 

As a result, retailers across the industry adjusted their strategies to meet the increased demand to their digital channels. Several ramped up fulfillment options, like curbside and in-store pickup. At Home piloted buy online, pick up in store at 28 stores in January with a gradual rollout to other markets throughout the year. In response to more sales happening online, though, the retailer expedited those plans in order to serve its customers. Target's same-day services — pick up, drive up and Shipt — helped drive record growth over the year. And Lowe's in September announced it would introduce pickup lockers to most metro areas by the Thanksgiving holiday.

On the other hand, direct-to-consumer brands, which by and large operate nearly entirely online, were already well-positioned to gain as consumers spent more time, and money, online.

But physical stores, something some DTCs vowed against in their early days, remain a valuable asset for digital brands.

Why DTCs move offline

DTC brands saw an opportunity selling directly to the consumer online, cutting out the middleman and creating unique experiences for their customers.

"Direct-to-consumer brands obviously found great traction and great success through their e-commerce and digital platforms. But that has become a pretty crowded space," Tyler Higgins, leader of the retail practice at AArete, said. "They started to realize that even despite the pandemic — the pandemic definitely slowed everybody's plans down — that brick-and-mortar stores hold just some unique value that is near impossible for them to gain just through kind of a digital footprint."

The cost to acquire customers online eventually becomes prohibitively high. Among the few DTC brands that have gone public in recent years, high marketing costs are a commonality. Casper's sales and marketing expenses reached $154.6 million in 2019, a 22.5% increase from the prior year. Chewy spent $426.9 million on advertising and marketing in 2019, up 8.6% from the previous year. And Wayfair's advertising expenses hit $1.1 billion in 2019, up 41.5% year over year.

Although media costs came down during the pandemic, it only offered a temporary solution. Brands create an additional marketing channel and opportunity to acquire customers by opening a physical store.

Brick-and-mortar stores are "brand-building locations," Michael Brown, a partner in the consumer practice at Kearney, told Retail Dive. "They need to be in high-traffic, high-density markets of the target consumer to be able to build that brand affinity and that brand experience. They're billboards."

What's the point?

While direct-to-consumer brands are moving further offline, the function of their spaces oftentimes differs from that of traditional retailers.

DTC brands have a smaller footprint — in terms of store count and square footage — than more traditional retailers. Several brands have also adopted a showroom, inventory-free model where consumers can view and try out products in person to then go online and order them. 

But with the pandemic drastically cutting back on how often consumers venture out to stores, brands may be forced to adapt their models to what the consumer wants.

"I think the ability to walk away with a product that same day is always attractive. Being more convenient to the customer and being able to provide them with the same-day service and a product I think is only a benefit," said Ben Lazzareschi, executive vice president of Retail at JLL. "That added level of customer experience and convenience and ability for customers to kind of hold and feel and take home their product that same day is really only a good thing, but I don't think that necessarily is going to replace DTC."

Offering merchandise in stores, however, would force digitally natives to completely rethink their operating model and supply chains. Alternatively, Brown actually suggests traditional retailers should be the ones taking note from DTCs with their showroom models.

"I think the showroom model is one that needs to be adopted by traditional retailers as well, because what's happening with the direct-to-consumer brands is they've built a fulfillment network that is very efficient in shipping goods to a consumer's home," he said. "A fulfillment network that has to send large quantities of product to a store to be displayed to maybe be sold out of that location, or maybe has to be shipped from that location to consumers to get it out of the store, is a completely different operating model. So [DTC brands] built very effective operating models based on shipping goods to the consumers' homes from large fulfillment centers, and they need to continue to leverage that operating model."

However, determining a store's purpose isn't one-size-fits-all, and the showroom model may go away for some brands, while others that are simply using stores as a means for brand awareness will likely remain merchandise-free.

Follow the consumer

While much of the retail industry works to rightsize its footprint (8,736 stores shuttered in 2020, according to Coresight Research), it opens opportunities that otherwise wouldn't have been made available to smaller brands, like DTCs.

But that doesn't necessarily mean direct-to-consumer brands will move into the massive stores retailers are leaving downtown.

"The challenge with some of those large format, downtown, high-profile urban locations is significant operating costs and occupancy costs for something like that," Lazzareschi said. "By and large, most direct-to-consumer brands — they're kind of showrooms or they have limited amounts of products," eliminating the need for such large spaces.

When the pandemic took hold and made typical in-person activities like eating out and shopping in stores less desirable, it ignited a trend of residents moving out of cities and to the suburbs. Brands in turn are looking to follow their base outside of urban markets.

"There's no doubt that we have seen an increased focus on suburban markets for retailers with the work-from-home strategy … premium suburban high streets and premium suburban pedestrian retail streets have become more of a focus and float to the top of the targeted sub-markets and markets for expansion," Lazzareschi said. Higgins, who categorizes this as "the second wave" of brick and mortar for DTC brands, said pop-ups may be used even more now than before as "testing grounds for a certain city."

Once consumers begin moving back to cities, which Lazzareschi predicts will happen, the focus will shift to premium streets in urban markets again. Even now, Higgins added, the focus remains on popular locations like SoHo, Boston Seaport and San Francisco for DTC brands looking to open their first location.

But even with the vaccine rollout well underway, the pandemic is still raging on, and the return to "normal" remains unclear. Nonetheless, now is when brands should be looking to forge deals with landlords.

"It's actually a great time to be looking. If you are a good credit tenant with a great brand and have a successful operational history, I mean landlords right now are making deals in most markets with more concessions than they have been in years," Lazzareschi said. "The smart ones, frankly, will be doing long-term deals and leveraging the opportunities that are available now with landlord concessions."

But for other brands less eager to pull the trigger and open more stand-alone stores at the moment, Higgins expects to see more partnerships formed with traditional retailers. Casper, which formed over 20 partnerships with retailers like Target, Costco and Sam's Club, in November added Nordstrom to that list. And Target has welcomed a growing number of DTC brands to its shelves recently, including Function of Beauty and Winky Lux.

"Can they enhance partnerships with large existing brands?" Higgins said. "Obviously, that comes at a cost, but the size that they want to be in such a crowded space, that's one way to try to see a huge revenue growth that a lot of these brands are targeting."

How many stores do digital brands need?

Traditional retailers have moved to close stores over the past several months in order to rightsize their footprints. Macy's and H&M, for example, have announced plans to shutter hundreds of locations. 

So as DTC brands look to expand their footprints, the question remains: How many?

Warby Parker already operates well over 100 stores, and Casper previously announced plans to open around 200 stores across North America. E-commerce retailers were projected to open some 850 stores over the next several years, according to a late 2018 report from JLL.

While the pandemic has caused some brands to rethink just how many stores they need, Brown believes the "right number" to operate for a DTC brand lies somewhere in the 200 to 400 range.

It also depends on the category in which the brand operates. Casper's goal of hundreds of stores may be rationalized by the fact that a mattress is a purchase consumers oftentimes want to touch and feel before buying, whereas categories like beauty or apparel may not need as many.

But even as some brands reconsider the sweet spot when it comes to store count, the number of deals being made will likely accelerate to pre-pandemic levels in the months ahead.

"There's a lot of discussion that retailers, including DTC brands, are going to be stepping on the accelerator in the middle to end of this year to focus on stores getting opened in 2022," Lazzareschi said. "We anticipate that they are going to be expanding at pre-pandemic levels."

 

The formula of where to locate a store involves many variables — rent, lease terms, parking, zoning, visibility — but perhaps above all is going where the people are.

The pandemic has shuffled much of that, including the tenant-landlord relationship. Even more profound is how it may have reshaped consumer habits, including where they shop and even live, for the longer term. The disease outbreak and its changes to daily life may be reversing a decade of migration into cities and ushering in a work-from-home practice that could last even after social distancing is no longer required.

"The ramification of not going to work every day, and everything that is happening locally, is almost beyond comprehension," Lee Peterson, executive vice president of thought leadership and marketing at WD Partners, said by phone. "It changes the landscape in retail. Everyone's home in this five-mile radius."

Downtown is down

City centers have been eerily quiet for nearly a year now, as both office workers and tourists stay away, and it's unclear when or to what extent they'll come back.

Before the pandemic, the vast majority of office workers, about 90%, were in an office setting five days a week, according to commercial real estate analytics firm Green Street. That's predicted to decrease. Adding the caveat that "any forecast beyond that requires educated guesswork," Green Street now expects that percentage to fall to 60% in the next five to 10 years. A quarter of the other 40% who won't go to the office daily, or 10% of the total office-using workforce, will work from home full time, which "equates to a 10-15% hit to net office demand," Green Street said.

Moody's commercial real estate arm Reis forecasts the national vacancy rate to rise to 19.4% by the end of this year, peaking at about 19.7% by 2022. That could go even higher depending on what employers decide about their space needs — decisions that may not be finalized until "late this year or next year and beyond," according to a Jan. 15 report.

That's the climate that leads Green Street to expect higher income consumers to move to "the suburbs and low-cost markets, potentially upending the long-running megatrend toward urbanization." Because of this longevity of remote work, the firm expects many people to opt for areas with nice weather. Such an exodus could hurt city budgets, which could lead to fiscal issues that only exacerbate the trend, according to an emailed report.

Others are not so sure that cities will lose their appeal, considering that, due to the pandemic, people miss the convenience and culture that they offer. Walter Marin, founder and senior principal of New York City architecture and design firm Marin Architects, believes that many will return once the pandemic has passed.

"There's a dynamic to living in the city that you can't buy anywhere else," he said by phone. "There's a certain life that you can't substitute, and right now it's temporary. I don't think people are selling their apartments, they've just bought another one. And one thing about the emptying out is that it's a massive opportunity for other people."

That's true for retailers as well. More rational rents are opening up city centers to new tenants, according to Jill Rowe, a partner at law firm Venable who represents real estate brokers, owners and commercial tenants. "Here in San Francisco, it used to be impossible to get any space downtown, and now people are snatching up better locations at better rents," she said by phone. "So there's been sort of a leveling of the market and opportunities are being seized."

Plus, within metropolitan areas, thanks to urban dwellers opting to stick around during the pandemic and beyond, neighborhood shopping districts have been enjoying better traffic and sales than malls or downtown areas, several analysts said.

Kenneth Lamy, CEO of financial management firm Lamy Group, who works with commercial landlords, says such areas, and the stores and restaurants in them, may more readily bounce back from the challenges of the pandemic. It could be why Gap this year decided to close its downtown San Francisco flagship, and why Foot Locker and Nike have recently opened up neighborhood-based stores in Los Angeles.

"I think stores in those communities, those neighborhoods, will recover faster, because they're supported by those who live in that neighborhood," Lamy said by phone. "They don't have the distance, the geography is convenient. You don't have to jump on a subway, or you don't have to get in your car and drive to the mall. So I think they will be definitely earlier to see momentum that starts, while for the others it'll take a little bit longer."

More broadly, consumers have been conscientious about frequenting their local shops during the pandemic, and that will likely continue, according to Katie Thomas, who leads retail think tank Kearney Consumer Institute and studies consumer trends.

"I think the rise of the local is really something that will stick," she said by phone. "I think there's actually more potential with malls to reinvent themselves exactly in that vein, to have more local to consider. It used to be a good thing that every mall in America kind of felt the same and now that's not what we're looking for. We're looking for more evolution, things coming and going, local businesses."

The mall is tumbling down

Unfortunately for malls, there's a lot of retail space that could be available to local retailers, especially traditional enclosed shopping centers.

The retail vacancy rate rose to 10.5% in the fourth quarter, the highest since 2013 (as was the third quarter's 10.4%), with rents down, according to Reis. The mall vacancy rate rose another 0.4% to 10.5%, the highest in more than two decades. There's "trouble brewing," even for upper-tier malls once considered mostly immune to the challenges at lower-tier ones, according to a recent report from S&P Global Market Intelligence.

The declines speed up with every closure announcement, especially by department store anchors and former mall mainstays like Gap Inc., which last year said 350 stores would close, mostly in malls. American Eagle Outfitters in January said it would close as many as 225 stores by 2023, and that newly signed leases would be for shorter terms. CEO Jay Schottenstein said at the company's Jan. 21 investors day that the retailer has developed a modular system that allows 80% of a store to be moved to another location rather than dismantled, giving the company more flexibility in where it runs its stores.

Open-air malls and strip centers are faring better than enclosed malls, in part because retailers from Macy's to Gap join Target, Kohl's and others in taking advantage of the more convenient parking and smaller square footage. They haven't been spared the fallout from the closures and bankruptcies that accelerated last year: Their fourth quarter vacancy rate reached 10.5%, up from 10.4% in the third quarter and 10.2% in the fourth quarter of 2019, and the highest since 2013. But those centers in 20 metro areas saw rent increase, while another eight held steady, Reis said.

In recent years, decisions about store location have centered around where not to run a store, leading to a raft of closures only accelerated by the pandemic. Now, an unusual amount of flexibility from landlords and tumbling rents could lead to more stores opening, sometimes in unexpected places.

"Now in the little neighborhoods, the strip centers, the little areas with shops, a lot of things could open that would work really well," Peterson said. "How cool would it be if your favorite clothing store was down the street?"

2020 upended nearly every aspect of the retail industry. Many retailers were forced to temporarily shutter stores, furlough employees and adjust strategies on the fly to account for increased e-commerce demands as the pandemic hit.

Direct-to-consumer brands, however, were uniquely positioned to weather the disruptions, operating relatively few stores and already having a very active presence online where consumers shifted spending.

The sector faced struggles of its own though, from supply constraints to shipping delays, forcing brands to make tough decisions like furloughing and laying off employees. But the space has also persevered, pivoting strategies that account for the seismic changes taking place across the industry.

Heading into 2021, DTC brands will continue to navigate pandemic-induced headwinds that will ultimately shape the space in the long term.

Here are eight trends Retail Dive is watching in the DTC space in the year ahead.

1. More traditional retailers enter the DTC arena

What do traditional retailers do to beat DTC brands on their turf? For some top retailers, the answer is to emulate them. With less foot traffic in physical stores, retailers took inspiration from DTC brands on how to approach tech-savvy consumers.

Nike shut down nine wholesale accounts last August, according to Susquehanna Financial Group, in a bid to accelerate its DTC strategy. Under Armor reaped the benefits of this model too, announcing it would exit a few thousand wholesale doors and lean into a DTC strategy. Its DTC revenue jumped 17% to $540 million last October. 

Some big-box retailers also formed partnerships with DTC brands. Target, Sam's Club and Nordstrom are just some of the stores that feature DTC brands on their shelves. From the beginning, DTC brands displayed inherent values such as personalization and user-friendly platforms that have proven valuable during the pandemic. And traditional retailers took note.  

2. Digitally native brands see the value in physical retail

DTC brands planted their seeds online, and in some cases, swore off physical retail. But over the years, these brands realized that in order to scale their businesses and succeed in the industry, they need to enter brick and mortar in some capacity.

For some brands that meant forging partnerships with traditional retailers in order to test out the water of physical retail. Target brought in brands ranging from Casper to beauty brand Versed. Nordstrom formed partnerships with Glossier, Away, Bonobos and Kim Kardashian West's Skims shapewear brand, among others. And Crate and Barrel launched an exclusive, limited-run collection with Parachute to sell online and in 65 of its retail stores.

Other brands opted for pop-ups or permanent locations of their own. In 2018, Casper announced plans to open 200 stores across North America, while Adore Me around the same time said it had plans to open 200 to 300 locations over the next five years. Commercial real estate firm JLL previously anticipated digitally native brands could open some 850 stores by 2023.

Among those DTCs that have jumped into physical retail, several adopted a showroom model in which they don't sell merchandise in-store, but offer consumers the opportunity to touch and feel a product before going online to purchase. The model has garnered the attention of traditional retailers as well, namely Nordstrom and Ikea, which have integrated elements of the merchandise-free concept into their Local and urban planning studio stores respectively.

3. DTC brands extend their category reach

Though the pandemic has made it difficult for some brands to execute their growth strategies, it has been the root cause of demand for casual and self-care products as consumers continue to work from home. And for digital natives like Thinx, Ipsy and Bombas, expanding into these categories seems like a natural extension of their brand. 

As top brands lose market share in certain categories, DTC companies have the opportunity to expand their product offerings. Social distancing measures have only made customers more reliant on e-commerce platforms, and in entering new markets, DTC brands are finding creative ways to retain their new customers.

4. Tech-savvy consumers will be drawn to DTC brands

One of the most immediate effects of the pandemic for retailers was the need for an efficient e-commerce platform — something DTC brands already had. Last year, e-commerce sales rose to $795 billion from $600 billion in 2019, according to data from eMarketer. 

While consumers spend less time in malls and more on the devices in the palm of their hands, DTC brands have opportunities to appeal to a new demographic and retain the ones they already have. DTC brands' commitment to sustainability will also likely amplify on social media and continue to resonate with Gen Z and millennials.

With no end to the pandemic in sight and continued funding, DTC brands are poised to continue to gain more popularity.

5. Securing funding could be easier, at least for some

The pandemic also impacted how investors view the retail space, and in particular, how they think about DTCs. The seismic shift in consumer behavior meant massive e-commerce sales. E-commerce is projected to post a 32.4% increase over the prior year when all the tallies for 2020 are in, according to eMarketer. That brought success to many DTC brands, which had few brick-and-mortar locations to worry about and could capitalize on the move to online purchasing.

It also means that DTC brands can expect to have a larger customer base to draw from, Andrea Hippeau, principal at Lerer Hippeau, told Retail Dive in the fall, something that appeals to investors in the space. As far as shifting consumer behaviors this year, DTC brands and tech companies are some of the best-positioned, though some investors said the focus might shift to more realistic growth expectations and less funding in the future. Whether certain categories get more of a funding lift than others is up for debate, but investors are clearly still interested in the model: DTC darling Allbirds raised a cool $100 million in September, and outside furniture brand Outer secured $10.5 million this January.

6. Exit strategies get more complex

Once brands grow to a certain size, they begin eyeing their next move. 

Some brands have pursued acquisitions by larger retailers. However, in the case of razor brands Billie and Harry's — which were to be acquired by Procter & Gamble and Schick maker Edgewell, respectively — those deals were complicated by Federal Trade Commission actions. Both mergers were ultimately terminated.

Other brands have gone the route of initial public offerings. Casper and Chewy both filed IPOs in recent years. But releasing their financial information publicly came at the cost of exposing where their businesses have been less successful, primarily when it comes to operating profitably.

More recently, going public by way of special purpose acquisition companies — or SPACs — became a popular option across industries with the total number of these kinds of deals reaching 248 in 2020, up from just 59 the year prior, according to SPACInsider. IPO fundraising through SPAC deals exceeded $83 billion last year, an increase from $3.9 billion in 2015 and $503 million in 2010.

American Apparel in 2007 went public through such a deal, and more recently BarkBox parent Bark entered into an agreement with Northern Star Acquisition Corp. to begin trading on the New York Stock Exchange.

7. Leadership turns to retail vets as founders step back

DTC brands and their founders are inextricably tied in many cases. Many DTC brands have origin stories of a founder who had a problem themselves and set out to solve it. Brands like Outdoor Voices and Away come to mind. But recently, as popular DTC brands scale much larger than their startup days, and execs run into both operational and workplace culture issues, founders have taken a step back, and retail veterans have moved into C-suite roles. 

Outdoor Voices' founder Tyler Haney resigned early last year. Away's Steph Korey stepped down for a seasoned Lululemon exec to take over. (He has now also left the company after barely a year, succeeded in an interim capacity by Korey's co-founder.) In January, Dollar Shave Club's founder and former CEO Michael Dubin made the shift to adviser and board member, making way for Jason Goldberger, a "proven leader and experienced CEO" to take over.

The shift of founders away from the day-to-day of their brands isn't likely to end, as successful DTC brands continue to expand and recruit leadership that can help them reach the next growth stage.

8. Brands will continue to struggle with profitability

As more online companies begin trading publicly, offering a glimpse into their finances, trends around their profitability have emerged.

Until the second quarter of 2020, Wayfair consistently posted net losses since its public debut in 2014, while at the same time it reported mounting advertising costs. The retailer in fiscal year 2019 posted a nearly $1 billion net loss — an increase of more than 95% year over year — while its advertising costs in the period reached $1.1 billion. Online retailers Chewy and Casper have faced similar issues.

Media costs came down during the pandemic, providing some relief to these brands, but the solution is temporary and brands need to continue to look for ways to mitigate the high costs of acquiring customers online. In order to eventually turn a profit, brands will need to continue finding solutions to attract consumers — whether it's opening brick-and-mortar stores or forging partnerships with larger brands — and bring marketing costs down.