Retail Dive's Outlook on 2022

Both 2020 and 2021 were unmistakably impacted by the pandemic, albeit in different ways. 

During 2020, especially as the COVID-19 crisis was just beginning, mass closures and stay-at-home orders created chaos for retailers as the world tried to understand what precautions to take. Much of the year was purely survival mode, as some retailers drew down cash to stay afloat and others teetering on the edge were tipped into bankruptcy by the sudden blow to sales and liquidity.

After a wave of bankruptcies in 2020, but 2021 was calmer in that regard. Instead of bankruptcies, the year was marked by acquisitions, IPOs and other transactions as the industry stabilized slightly. The set of challenges retailers faced as a result of the pandemic was different: Instead of mass temporary closures, retailers spent the year battling supply chain bottlenecks as demand came surging back from 2020, and introducing new perks to try and entice workers during a shortage.

As we look to the year ahead, we’ll be keeping our eyes on how the pandemic continues to impact retailers, along with these 10 trends.

Retailers (if they’re smart) invest heavily in their supply chains

The world’s supply chain underwent massive stress in 2021, unlike anything in modern commerce in its breadth, depth and pervasiveness. COVID-19 outbreaks, demand surges, capacity shortfalls, labor shortages and other confounding factors scrambled the ability of many to fully stock their shelves. Freight congestion could ease in 2022, but various pressures and high costs could persist beyond the year. 

After a year of emergency measures like air shipping and ship chartering (for those that could afford it), 2022 could be a year for evaluating, rethinking and investing in supply chains in the long term. But will that happen? 

As a recent paper by FTI’s Christa Hart, Ron Scalzo and Matt Garfield put it, “Retailers had designed their supply chains to address predictable and specific challenges but had not adequately invested and undergone the end-to-end structural transformation necessary to become truly agile.” Taking the largest risks out of their supply chains, the authors note, likely means diverting capital from other key projects to upgrade the technology and capabilities. 

Until recent years, supply chain has often been an unsexy, underfunded part of the retail organization. Nothing has illuminated the supply chain’s importance quite like the pandemic. With other risks in addition to the pandemic, as well as significant social and environmental imperatives, there is no better moment than right now to reinvent supply chains in the industry. 

Retailers must rethink their relationship with workers

Rare was the retail earnings call that didn’t mention labor in 2021. Retailers struggled not only to staff their stores but also their warehouses and logistics functions, adding to the industry’s supply chain woes for the year. 

Some have responded with higher wages and other perks to draw in candidates. But retailers still came up short. Holiday staffing was down 7.5% from 2020. Among the unemployed, health issues were the top reason for those staying out of the labor force, as well as mental health concerns and family responsibilities. 

Unions and labor activist groups have pushed for stronger pandemic protections for retail workers as well as better compensation for the risks to frontline and essential workers. At the same time, the National Retail Federation has worked to block the Biden Administration’s vaccine mandate aimed at reducing the spread of COVID-19. 

If labor remains tight in the U.S. in 2022, retailers may need more than creative perks to win recruits. The industry’s long-standing relationship with those that staff its stores and distribution centers may be up for renegotiation.

How last year’s flood of IPOs will shake out

Last year, a wave of IPOs swept the industry as retailers tried to get in on the hot stock market. The majority of the 18 retail public listings Retail Dive tracked in 2021 came from e-commerce companies.

As these brands entered the public markets, their financials became public as well. For some brands, these filings made clear just how hard it is to turn a profit while operating mostly online. While Warby Parker helped pave the way for other DTC brands, it’s struggled with profitability. Since fiscal 2018, the brand has either reported losses or broken even every year. Similarly, in Rent the Runway’s S-1, it said it has a "history of losses,” reporting a net loss of $171.1 million last year.

There were signs of trouble in earlier IPOs as well. Casper, another e-commerce darling that made its public debut in early 2020 before the pandemic was fully realized in the U.S., announced in 2021 that it would be taken private again. The DTC mattress brand in November inked a deal to be acquired by private equity firm Durational Capital Management.

Casper’s 2020 IPO was widely considered underwhelming and its stock price tanked just months after going public. While that price has ticked up since the low of $3.18 a share in March 2020, it has yet to reach its initial price of $14.50 a share. 

So far, many of the DTC brands that entered the public markets in 2021 appear to be mirroring the same struggles Casper faced when it comes to profitability. But 2022 could be the real indicator of whether the mattress brand's public market exit is a one off or a sign of what's to come for others.

Will apparel's comeback stick?

If 2020 seemed to be the year that finally finished off apparel sales, whose growth has been ebbing for decades, 2021 was the year that breathed new life into them.

In 2020, 1.8 million adult consumers didn’t buy a stitch of clothing, according to research from The NPD Group. In 2021, more than 60% of U.S. consumers said their wardrobes needed to be refreshed, the firm found. In the first eight months of 2021, apparel retailers rang up $13.3 million more revenue than they did in 2019, or 10% more, according to The NPD Group Consumer Tracking Service. 

The momentum continued through the holidays, and researchers at e-commerce platform ChannelAdvisor, in an analysis of gross merchandise value, found GMV growth in apparel to be up 31%. That was partly due to higher prices. In December, Adobe found that online apparel prices were up 17.3% year over year and down just 0.4% month over month, a shift from previous years. Since 2014, online apparel prices rose by 9% or more during only three months (August 2016, January 2020, February 2020). For the eight months prior to December, they rose by over 9% every month, per Adobe’s report. 

The question now is: what to expect in 2022? Moody’s expects growth to temper somewhat in retail and apparel next year. But the resurgence of the pandemic has reintroduced a new level of uncertainty that could affect how people dress – and spend. 

And 2022 could be a year of reckoning for brands like Gap and Banana Republic that were among the few resorting to deep discounts at the holidays.

Inflation could come for consumers’ discretionary funds

Alongside a slew of other concerns consumers have, inflation has joined the list. In November, the consumer price index, a key measure of the cost of goods, rose at an annual rate of 6.8% before seasonal adjustment, according to data from the U.S. Bureau of Labor Statistics. 

While other industries not covered by Retail Dive may feel the impact of inflation more -- such as grocery and fuel -- it could also cause consumers to spend less on discretionary items. Already, online prices rose 3.5% year over year in November -- the 18th consecutive month of year over year inflation, according to data from Adobe's Digital Price Index. Coupled with supply chain headaches, some retailers have been hiking prices out of both need and opportunity. 

If the rising cost of goods persists and the Federal Reserve raises interest rates, consumers may lean into alternatives to credit cards such as buy now, pay later to purchase certain items, which could further impact retailers in 2022.

Retailers get money from other services

How do you define a retailer? The characterization continues to evolve, as companies move to diversify operations and cultivate diverse revenue streams. It also means not only offering products, but services. And, as is increasingly the case, business-to-business services. 

Take Walmart, for example. The retailer offered its delivery platform to other companies via Walmart GoLocal. "In an era where customers have come to expect speed and reliability, it's more important than ever for businesses to work with a service provider that understands a merchant's needs," John Furner, president and CEO of Walmart U.S. said in a statement at the time of GoLocal’s unveiling. Companies like Chico’s and Home Depot are now clients. 

Similarly, ThredUp’s back-end, “resale as a service” platform has helped partners like Madewell, Walmart, Everlane, eBay, Farfetch and Gap navigate resale. Analysts from Wells Fargo estimate that its third-party platform, which is forecast to earn up to $300 million by 2025, may be more lucrative than ThredUp’s secondhand clothing sales. 

Amazon, which is known for its lucrative AWS cloud unit, has also moved into other service offerings. The company began selling its cashierless technology to other retailers, which enables consumers to pay for goods in physical stores without waiting in line to check out. 

As the cost of running a store and e-commerce operations continues to increase, it is likely that these examples are only the start of retailers turning to other types of services to bring in sales in the coming year. 

Brands strive for the right balance of wholesale and DTC

What percentage of sales should come from direct-to-consumer channels versus wholesale is still a large topic of discussion in retail. Traditional retailers are increasingly shifting their business models to account for a higher mix of DTC sales, including well-known athletics brands like Nike, Adidas and Under Armour. While the strategy can lead to higher margins, it doesn’t necessarily make sense for all retailers to pursue. In fact, analysts with BMO Capital Markets in September last year questioned whether the channel was truly more profitable than wholesale.

The result is, in some ways, a shift toward the middle. Some well-established brands are cutting wholesale partners and beefing up DTC channels to reap the rewards of both models, while digitally native brands are finding value in expanding through choice wholesale partners in addition to their own e-commerce and stand-alone stores. DTC activewear brand Vuori, which has been profitable since 2017, attributed its financial success in part to an early start with strategic wholesale accounts, including Nordstrom and REI.

That shift toward the middle is likely to continue, with more brands attempting to find the right balance between DTC and wholesale channels in the year ahead. In fact, Coresight Research predicted last summer that brands would rely on a hybrid model between the two for the next three years.

The purpose of a store continues to evolve

Two decades of e-commerce growth and even more years of declines of malls and the department stores that anchor them, have led retailers to drastically shrink their store fleets in recent years.

Around this time in 2019, retailers had forged plans to permanently close more than 9,000 stores, far surpassing openings. Last year, retailers like Nordstrom chose not to reopen some of the locations that had been locked down for weeks due to the pandemic. 

Last year was different. The number of closure plans declined year over year, according to Coresight Research. But retailers, in an effort to make those stores really count, are also rethinking store formats – even abandoning flagships in some cases – and switching their locations.

It’s not just Nike, which has already made a name for itself with highly experiential and neighborhood-based stores. Even dollar stores are experimenting. After a successful debut, Dollar General recently announced an expansion of its PopShelf concept, a higher-end discount store with a treasure hunt appeal and higher price points, to 1,000 locations over the next four years. Macy’s and its more upscale business, Bloomingdale’s, are both trying out smaller format stores in strip centers that are more likely to have a Kohl’s or Target. And Shoe Carnival, after a concerted effort to close down underperforming stores, is now opening and remodeling stores, in an effort to upend the discount footwear market.

In a quest for greater market share, private labels continue to proliferate

Gone are the days when retailers attached their names to cheap, plain and low-quality private label brands. Now retailers treat private labels as profitable growth engines that allow them to nab more market share. Retail generalists, home retailers, athletics retailers and others have all launched their own private brands and they don’t appear to be slowing down anytime soon. 

Target grew its roster of private brands to 48 last year -- 10 of which are worth at least a billion dollars. With eight brands already introduced last year, Bed Bath & Beyond previously said it plans to launch at least 10 private labels as part of its broader three-year turnaround plan. Players like Foot Locker, Dick’s Sporting Goods and Peloton have also implemented their own private label strategies.

With inflation taking hold, private labels may be positioned for growth as shoppers care more about getting the most for their buck. When the cost of goods outpaces the growth of wages, private labels may become more appealing to price-conscious consumers.

Apple’s iOS updates rattle retailers’ marketing strategies, especially for DTC brands

With Apple’s public release of the iOS 14.5 update earlier this year, the company required all apps to adopt the AppTrackingTransparency framework. Through the update, apps needed to ask for user’s permission to track them or access the device’s advertising identifier.

This created problems for marketers and retailers, especially for direct-to-consumer brands, which historically rely on third-party data for customer acquisition and retention. 

“Something we're seeing that's very difficult on the DTC side is that the iOS 14 updates are making it very difficult to find successful return on investment like we once saw," Alex Song, CEO of growth acceleration platform DojoMojo, told Retail Dive in 2021. "What that means now is everyone actually has to scramble and search out new marketing channels that are going to yield more profitable return because unfortunately, in this moment in time … the good old Facebook, Instagram channel as a marketing arena is not as available or dependable as it once was."

Companies are having to turn to alternative marketing channels like email, SMS and even print advertising to try to get consumers to shop with their brands

While the widespread rollout of vaccines in the U.S. offered some relief to consumers and retailers, the industry was faced with a new set of challenges in 2021. From supply chain constraints to labor shortages, retailers — including DTC brands — navigated another turbulent year.

However, digitally native brands continued to grow. Several brands jumped on one of the hottest markets in history, filing for initial public offerings. Others raked in more capital through funding rounds.

Even still, many of the problems that plagued DTC brands for the past few years continued in 2021 — and will likely persist in the year ahead. 

As more brands entered the public markets, it became increasingly apparent how many e-commerce brands struggle with turning a profit. Finding the right balance between DTC channels and wholesale partnerships will be top of mind for both digitally native brands and traditional retailers.

And with the pandemic still present, DTC brands will need to navigate more challenges in the year ahead.

Here are six trends Retail Dive is watching in 2022:

1. DTC deals continue

Last year ushered in a wave of companies looking to go public. Retail Dive tracked about 20 major retailers filing paperwork to go public, via initial public offering, direct listing or de-SPAC transaction — several of which were direct-to-consumer brands.

DTC darlings made their public debuts in order to capitalize on one of the best markets in history. Warby Parker, founded in 2010, in late September entered the public markets via direct listing. And shortly after, Allbirds went public through an IPO.

Brands pursued other exit avenues as well. Supergoop, Beyond Yoga and Sweaty Betty all inked deals to be acquired last year. And shaving brand Billie in November was acquired by Schick maker Edgewell for $310 million. The deal came less than a year after P&G called off its deal to acquire the DTC razor brand following action from the Federal Trade Commission. A separate deal between Edgewell and Harry's was canceled in 2020 on similar antitrust grounds.

Casper, which made its public debut via IPO in early 2020 before the pandemic was fully realized in the U.S., inked a deal in November to be acquired by private equity firm Durational Capital Management.

As DTC brands mature, more exits will likely be on the rise as well.

2. Reaching profitability will remain a goal for many brands

As more DTC brands entered the public markets last year, their financial information became public as well. For many, the reports further highlighted just how hard it is for retailers to turn a profit selling goods almost entirely online. 

Despite sales increases, Warby Parker either reported losses or broke even in the last three fiscal years, reporting a net loss of $55.9 million in 2020. In its latest quarter, the eyewear brand reported its operating and net losses more than doubled, to $92 million and $91.1 million, respectively.

And Rent the Runway, Lulu's and Casper's filings have shown similar struggles around profitability. 

But not all DTC brands operate at a loss. For example, Solo Brands — which includes Solo Stove, Chubbies, Oru Kayak and Isle paddle boards — reported in its latest quarter that net revenue was $69.4 million, while net income was $2.1 million. And activewear brand Vuori, which in October raised $400 million at a $4 billion valuation, has been profitable since 2017, according to the company.

The divide between DTC brands operating profitably and at a loss could grow increasingly prominent as more companies enter the public markets, offering a glimpse into their financial makeup.

3. The need to move offline grows

While digitally native brands, by definition, launched online, many are seeing value in brick and mortar.

The role of a physical store can not only serve as a place for consumers to test products in real life before purchasing, but also as an additional marketing channel, which can help alleviate the high advertising costs associated with acquiring customers exclusively online. Those high marketing costs, oftentimes, also come at the expense of profitability for many DTC brands.

Last year, Allbirds continued its physical expansion, opening stores in Denver, Chicago and the Boston area, while DTC intimates brand Knix opened its first U.S. store in September. Boy Smells, known for its candles, partnered with Nordstrom last year to house its fragrance product launch.

And this year already, Fenty said it plans on opening stores in five U.S. cities, while Billie announced a deal to sell its products inside of Walmart.

Partnerships with DTC brands also help the traditional retailers, like Walmart, Target and Nordstrom by attracting younger consumers with these popular brands.

As e-commerce becomes increasingly saturated with competition, DTC brands will lean more on brick-and-mortar retail to stand out.

4. Brands search for balance when it comes to wholesale versus DTC channels

A number of brands last year announced their intentions for a higher mix of DTC sales, including Nike, Under Armour and Adidas.

Nike, for example, in 2010 had a DTC business that made up just 15% of the retailer's total revenue. A decade later, the retailer grew DTC to represent 35% of its business. Over the last couple of years, Nike has shut down a number of its wholesale accounts, which reportedly included Urban Outfitters, DSW, Macy's, Zappos and Dillard's. The athletics retailer is now projecting DTC to make up 60% of its revenue by 2025.

But in a September report, BMO Capital Markets analysts questioned whether a shift to more DTC sales is truly more profitable than wholesale, pointing to the potential of DTC channels leading to lower sales dollars overall.

On the other hand, many direct-to-consumer brands are seeking out partnerships with traditional retailers as a way to expand their brick-and-mortar presence. For example, Casper has added more than 25 retail partners, including Costco, Nordstrom, Target and Sam's Club.

Striking a balance between the two channels will be key for retailers in the year ahead. Coresight Research's Deborah Weinswig noted in a July report that the firm expects "brands to continue to rely on a hybrid wholesale-DTC model for the next three years, but with growth in the proportion of DTC exposure and an increase in DTC businesses."

5. Holding companies open opportunity for brands eyeing the next step

As brands mature, they begin to eye their next step. For brands ready to move forward, but unable to generate the revenue necessary to enter the public markets, DTC "holding companies" may be the answer.

Companies like Very Great, Pattern Brands and Win Brands Group are betting on the power of building multiple brands under one umbrella. Pattern Brands (formerly Gin Lane, the branding agency that helped launch to market several brands like Harry's, Hims, Ayr and Stadium Goods) created Open Spaces and Equal Parts and this past June raised $60 million to purchase brands in the home goods space, including home accessories brand GIR ("Get it Right").

Harry's itself, after failing to be acquired by Schick maker Edgewell, has gone all-in on acquiring brands and building its portfolio. The razor brand — which already sold products under the Harry's, Flamingo, Headquarters and Cat Person names — in March raised $155 million to help it add more brands to its portfolio. In December, Harry's announced it entered into an agreement to acquire body odor brand Lumē.

In the year ahead, more companies will likely launch adjacent brands under their umbrellas or acquire new ones in order to extend their reach with consumers.

6. Brands reimagine marketing strategies in the wake of Apple's iOS update

Apple's iOS 14.5 update rolled out last year, requiring all apps to adopt the AppTrackingTransparency framework. This meant apps needed user's permission to track them or access the device's advertising identifier.

This created a problem for DTC brands, which historically leaned heavily on third-party data for customer acquisition, retention and insights. It's making it more difficult for brands to clearly see the return on their investments, Alex Song, CEO of growth acceleration platform DojoMojo, told Retail Dive last year. "[T]he good old Facebook, Instagram channel as a marketing arena is not as available or dependable as it once was."

Now, companies are turning back to other forms of marketing, like SMS, email and print in order to get consumers to shop with their brands.

If several retailers were in survival mode in 2020, then 2021 had been a year of tech innovation for many.

Retailers learned to keep up with fast-paced, digitally savvy consumers. Eager to gain consumers' attention, they boosted their presence on popular platforms, like Snapchat and TikTok, and adopted new capabilities in a relatively short amount of time. 

With those initiatives came massive funding for the space. In the first three quarters of 2021, funding for retail tech startups in the U.S. reached $26.8 billion, according to CB Insights' retail tech report in October. Compared to all of 2020, retail tech funding has increased 35% in 2021 so far.

As Retail Dive continues to cover the evolution of the retail tech space, here are five trends we'll be on the lookout for.

Consumers will continue to lean on buy now, pay later options

Installment options may not be a new phenomenon, but the payments space saw widespread adoption last year. BNPL allows consumers to pay for an item in smaller amounts within a certain timeframe, often interest-free. Its momentum will likely continue well into 2022.

BNPL's offerings can be quite attractive, especially to young consumers who may not have the funds to pay for big-ticket items upfront. About 18%, or one in five, consumers turned to BNPL for their holiday shopping, according to a survey from NerdWallet. Of the respondents who've used BNPL during the holidays, 36% are millennials, 22% are Gen Z, 18% are Gen X and 3% are baby boomers.

Retailers of all sizes have adopted the service in response to growing demand. 

Amazon, in August, partnered with BNPL provider Affirm. Target announced in October that it is adding installment payment options through Affirm and Sezzle. Even merchants at Wix can offer shoppers Klarna's Pay in 4 and Pay in 3 options at checkout.

In its latest attempt to expand globally, Klarna debuted a browser extension in December that lets consumers use its services with all online retailers regardless of whether they're affiliated with the fintech firm or not.

If inflation persists, consumers may have even more reason to use BNPL services. The consumer price index, a barometer for the cost of consumer goods, increased 7% over the last year — the highest 12-month uptick since June 1982, according to the U.S. Bureau of Labor Statistics.

Social commerce will play a crucial role in consumers' purchasing journeys

When Adam Mosseri, the head of Instagram, announced that e-commerce was going to be one of four key areas the app is pivoting to, it was somewhat of an anecdote for what was happening to social media platforms as a whole. 

Social media sites accelerated efforts to allow consumers to purchase products without leaving the platform. Instagram did just that by introducing Shops on Instagram in May. Pinterest and Snapchat, on the other hand, have been investing in augmented reality tools and beefing up brand partnerships.  

These platforms have good reason to invest in shopping capabilities. Slightly over half (51%) of consumers surveyed by NPD said content shown on their Facebook and Instagram feed influenced them to make a purchase, according to a June report. In a list of platforms where shoppers discover and learn about items, Facebook (41%), Instagram (35%) and Pinterest (21%) ranked on top.

The social commerce space has plenty of room to grow. The industry's scale in China is a reflection of what social commerce in the U.S. could be. Social commerce sales in the U.S. are just about one-tenth the size of China's $351.65 billion industry in 2021, according to data from eMarketer.

Brands will normalize the use of augmented reality

When product samples were taken off shelves and fewer people went to stores, retailers had to figure out a way to get people to try and discover their products. For many, augmented reality became the solution.

A lot of earlier AR initiatives revolved around the beauty space. Brands have increasingly formed partnerships with try-on tech firms such as Perfect Corp and Modiface or platforms with AR capabilities like Snapchat and Pinterest.

While AR or AI have grown more popular in recent years, consumers have been slow to adopt the technology into their shopping habits. In 2020, just 20.1% of consumers said they've used AR or VR to test makeup, according to data from Euromonitor.

But with the number of brands launching AR tools and experiences, consumer adoption may soon catch up. Late last year, Snapchat teamed up with six companies in various industries, including retailers like Walmart and Hollister, to create virtual stores in the app during Black Friday. Brands like Fendi, Dior and American Eagle also ran AR shopping lenses on Snapchat around the same time.

Livestreaming will live up to its potential

Though the idea of showcasing a product's qualities in front of a camera is nothing new, livestream shopping saw what some might consider a revival in 2021. Coresight Research estimates that the livestreaming market would reach $6 billion in 2021, and in 2023, it could reach $25 billion.

Social commerce and livestreaming are somewhat tied together.

Retailers and social media platforms have partnered on multiple occasions to launch shoppable livestream shows. Walmart has enlisted popular influencers to host livestreams on TikTok multiple times. Similarly, Facebook teamed up with Anne Klein to launch the platform's live shopping feature and Petco for a live shoppable fashion show for pets.

And like social commerce, livestreaming is already a multibillion-dollar industry in China. There, the market was estimated to be worth $305 billion in 2021, according to KPMG and research firm AliResearch cited by Coresight.

Retailers will be pressured to deliver goods faster

Retailers this past year have been exploring faster ways to deliver goods to consumers' doorsteps. 

Walmart has teamed up with automotive company Ford and startup Cruise for self-driving deliveries as well as investing in drone services for deliveries. Target, on the other hand, has been testing faster shipping methods and has even added new features to its same-day services to make shopping trips run smoother and speedier.

Industry giants have set customers' expectations high, which might push other retailers to keep up in the coming months. Already, Chico's FAS and The Home Depot have become clients of Walmart's white-label delivery service, dubbed Walmart GoLocal. The service allows retail clients to use Walmart's fulfillment capabilities, including delivering orders to customers in as quickly as two hours.

The demand for speedy delivery has also presented an opportunity for non-retailers like ride-hailing company Uber to diversify their sources of revenue. Uber has worked with retailers like Hims & Hers, Bed Bath & Beyond and Costco to deliver goods.

For the past several years, Retail Dive has closed out one year and welcomed the next through an interview with Doug Stephens, a consultant to many retailers with a decidedly futuristic outlook. Last year, the pandemic had scrambled many retail givens, and therefore many previous predictions for the industry. The pandemic isn't over, and new strains are threatening the recovery that many retailers experienced this year. Still, 2021 was a year of recovery, with clear signs that physical locations remain an important way to engage with customers.

But not just any stores. In this podcast, I sit down with Stephens as he goes over not only the elements of a successful store, but also the all-encompassing mindset that retailers must have in order to make a store worth running. Thanks for listening.

Resource links:

• How money shapes retail
• How Nike execs think through its digital ecosystem
• Retail has more — but slower — growth ahead in 2022: Moody's