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DTC brands are recalibrating their physical store strategies

Digitally-native brands have been bullish about growing their physical retail presence for the past couple of years. Now many of them are pulling back their initial growth plans.

Shoe brand Allbirds is planning to close between 10 to 15 “underperforming” stores, roughly a third of their fleet, nationwide in 2024. Athleisure brand Outdoor Voices, on the other hand, shuttered all retail stores. Mattress company Purple said during an earnings call this month that it plans to slow down its store opening and focus on making its existing fleet more profitable. 

Driven by rent discounts and high demand for discretionary goods during the pandemic, direct-to-consumer brands have been hyper-focused on growing their store count over the past couple of years. Now, landlords are putting a stop to the deals they offered tenants during the pandemic, and at the same time, retail sales for discretionary items aren’t as strong as they used to be a few quarters ago. As a result, DTC brands are making adjustments to their physical retail strategies to improve their balance sheets.

“What’s at the heart of the matter is that you’ve had over-expansion with companies that honestly had too aggressive plans,” said Polly Wong, president of marketing firm Belardi Wong. “The cost to build, maintain and operate retail stores is the most expensive line item on your [profit and loss statement].”

Several DTC brands had ambitious plans to expand their store footprint, which led to increased costs. For instance, Allbrids grew its store count to 58 by the end of 2022 from 35 in 2021 and 22 in 2020. Allbirds’ store expansion plan led to a rise in SG&A expenses, which was $166.7 million or 56% of its net revenue in 2022 compared to $122.2 million or 44% of its net revenue in 2021.   

Allbirds wants to kickstart its growth and free up cash by closing stores. The brand’s decision to close stores would have a financial impact of around $7 million to $9 million. The company said it is mainly looking to close newer and larger stores with more apparel offerings.

Wong said physical retail is still a crucial part of a brand’s long-term strategy. In fact, she said 80% of sales still happen in physical stores. However, with lower demand for discretionary goods, the focus for many brands is now on profitability as opposed to top-line growth.

“Stores cost you money. They’re an investment before they become profitable,” Wong said. “If you open up too many stores at once, you’ve got a lot of investment out there that’s not profitable and it brings the business down.”

During a presentation at ICR, Purple CEO Rob DeMartini said that stores were the “toughest part” of the brand model. The company, which currently has 60 Purple brand stores, intends to slow down expansion until its existing footprint is profitable. Purple’s sales had been especially slow in 2023.Its wholesale sales dropped nearly 12% in 2023 compared to last year, while DTC sales — which includes sales through Purple’s own stores and website — were down about 10%.

“We’ve got a third of those [stores] that are problematic for one reason or another and we’re trying to put our finger on it because it’s the same co-tenancy, it’s the same quality of location and yet two-thirds of them are working and a third of them aren’t,” DeMartini told ICR attendees. “They’re great brand beacons, but they’ve got to make some money.”

Taryn Jones Laeben, founder of advisory and investment firm IRL Ventures, said the tough funding environment has also contributed to the strategy switch. According to data from Crunchbase, $5 billion of capital went to fund DTC businesses in 2021. In contrast, just $130 million of capital went into the category in 2023.

The dramatic decline in funding is having a long-term impact on how brands are choosing to spend their money, Laeben said. “When a DTC business looks at how much cash they have in the bank, all they’re thinking about is how to conserve that cash and spend it as slowly as possible,” she said. “It’s very hard to justify retail expansion, if you are in cash conservation mode, even if you could make a case for long-term viability and profitability of the channel.”

When brands received funding in the past, many of them utilized that capital to expand their physical store fleet. For example, Outdoor Voices nabbed $34 million in a series C funding round back in 2018. At that time, the company said it planned to use its fresh funds to grow its store fleet. Now, Outdoor Voices plans to focus solely on its online roots as it plans to shutter all of its stores, even those that have only been open for only a year or two.

Although brands are shedding their losses by cutting down their stores, they are also losing their spot at valuable real estate locations, said Rebekah Kondrat, founder of Rekon Retail. Many of these stores are located in trendy neighborhoods with high foot traffic — spots that might be hard for brands to get again. Once brands start to get their footing stabilized, it could be hard for them to relearn the skills needed to manage stores.

“I think they might be surprised to learn how their online sales are affected in these markets where their stores are closing,” Kondrat said. “Retail is like a muscle that needs to be exercised. And so, if you stop exercising any muscle it atrophies.”