DTC Briefing: Startups that hoped to reinvent department stores have shuttered in the wake of the pandemic
This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.
About a year before the pandemic hit, a number of hot new startups were raising millions in venture capital and snapping up leases in trendy neighborhoods like Soho and Chelsea, all of which had a similar goal: to reinvent the department store.
Between 2018 and 2019 three startups — Naked Retail Group, Neighborhood Goods and Showfields — all launched with the goal of creating a more modern retail experience that catered to the rise of direct-to-consumer startups. There was evidence that this model could scale: a more established competitor, B8ta, had raised $50 million, had grown to roughly 20 stores — and had even earned the stamp of approval from a traditional department store: Macy’s.
But, three years later, not all of these startups have stuck around.
As I reported last week, b8ta quietly shut down its U.S. operations after foot traffic cratered in the wake of the pandemic, leading it to close some stores and then shutting down the company altogether when it couldn’t come to an agreement with landlords. But Naked Retail Group also quietly shut down in December, a detail which hasn’t previously been reported but co-founder Justin Kerzner confirmed to me in an email. Kerzner said that Naked Retail Group shut down “for a number of reasons,” but declined to elaborate further. Kerzner also said that he is working on a new retail venture, scheduled to open in August, that will be a “completely different concept and category,” than Naked Retail Group.
While all of these startups took slightly different approaches to reinventing retail, all had the same general thesis. In their eyes, the traditional retail experience was inadequate in many ways for both brands and shoppers. But that also meant that in order to grow, they had to attract both brands and shoppers. That became a more difficult task during the pandemic when people were more reluctant to visit stores — especially ones that weren’t destinations for essentials like grocery and medicine.
The multi-brand retailers that managed to make it through the last two years of the pandemic are ones that were both well-funded and weren’t bogged down by a huge number of expensive leases. While the pandemic has significantly slowed down their expansion plans, executives at these startups are bullish that they can continue to cater to what shoppers want now.
“More than a disruption, Covid was an acceleration of inevitable processes,” Showfields CEO Tal Nathanel told me. “I feel like it cost me five years of my life, but we are actually — we jumped to the future like we are five years ahead.”
The rise of the new age department store
Before the rise of startups like b8ta, Showfields, Naked Retail and Neighborhood Goods, DTC brands had basically three options if they wanted to expand into physical retail: open their own permanent store, open a temporary pop-up or sell their products through a traditional retailer.
All of these solutions were expensive and inefficient for brands in their own ways: a permanent store might require hundreds of thousands of dollars and months to get up and running; to sell through a department store, brands would often have to send thousands of dollars of inventory upfront.
These multi-brand retailers wanted to offer DTC startups a cheaper, less time-intensive way to test out retail instead of spinning up their own stores. B8ta for example, charged retailers a monthly subscription fee to access its software, through which they got access to data like dwell time, rather than charging them rent. Naked Retail Group would let brands rent out space inside its Soho stores for just a few months at a time, charging brands between $15,000 to $20,000 a month for 150 to 200 square feet of space. It wasn’t cheap, but less expensive than renting out an entire store (the average retail rent in Soho pre-pandemic was around $350 per square foot, according to Cushman and Wakefield).
At the same time, these multi-brand retailers also claimed to offer a better, more exciting experiences for customers. They had access to the hottest brands, and offered in-store events like music shows or happy hours.
“I think they started to see, we can have a space and we can get multiple brands in a space and still drive buzz,” Rebekah Kondrat, founder of consultancy Kondrat Retail said. “Everybody kind of wins because no one brand is weighed down with this asset of a 10-year-lease or seven-year-lease.”
But according to Kondrat, while the flexibility of the space might be a big selling point for brands, it also creates some challenges.
“I have actually worked on a couple of projects trying to do something like this [and] it is difficult to get brands to commit, because in order to get brands to commit, they want to know who else is there,” Kondrat said. “It kind of turns into this Catch-22.”
While allowing brands to rent out space for just a few months’ time might be better for the brands, it means that these retailers don’t consistently have the same products in stock.
And while some of these retailers only carried products in a certain category — in b8ta’s case, for example, tech gadgets — it still made it more difficult for these multi-brand retailers to make the case as to why customers should come to their store, specifically.
These spaces were also designed as a place for customers to spend a lot of time discovering new brands, rather than picking up essentials and getting out as quickly as possible. That meant that it took longer for many of these multi-brand retailers to get back to pre-pandemic levels of foot traffic. And, in some cases, they aren’t even there yet.
“A lot of specialty retailers like us, we had a much slower recovery curve,” b8ta co-founder Vibhu Norby told me. With foot traffic still down below pre-pandemic levels, b8ta closed more than half of its stores last year. Though it was still on the hook for leases, the company hoped to negotiate a settlement with landlords. When that didn’t happen, the company had no choice but to shut down operations, as it had been hampered down by two years of pandemic restrictions.
“The nail in the coffin was the treatment from landlords overall, and whether or not they felt like your company mattered,” Norby said.
The future of multi-brand retail
Two of the next-gen department stores that are still operational, Showfields and Neighborhood Goods, are optimistic on their outlook for 2022 and beyond, even though retail traffic in many buzzy neighborhoods is not yet back to pre-pandemic levels.
Matt Alexander, CEO of Neighborhood Goods said in an email that “traffic is roughly in line with levels we saw in 2019, albeit with significantly higher conversion rates today.”
Neighborhood Goods has three stores open today — two in Texas, and one in New York City, though it only had one store open for the bulk of 2019. For the one store in Plano that was open for the bulk of 2019 “traffic was roughly 20% below its Q4 2019 levels in 20201. By contrast, however, overall retail and F&B sales were up 30% for Q4 2021 vs. Q4 2019 for that store,” he said.
Showfields’ Nathanel declined to comment on average, how many visitors Showfields is seeing a month. But in a recent pitch deck obtained by Modern Retail, Showfields was telling brands that it received an average of more than 18,000 visitors per month at both its New York City and Miami locations respectively.
Nathanel says the number does fluctuate depending on the month — Showfields saw a dip in traffic in December and January as the Omicron wave surged. In New York City in particular, he said, retailers are still hampered by the fact that tourism has yet to fully recover.
Both Alexander and Nathanel said that the strategies behind their respective stores haven’t changed all that much because of Covid. Neighborhood Goods, for example launched a new in-store concept last year called the Marketplace, which featured products from CPG brands like Fly by Jing and Parlor coffee incorporated into dishes at the store’s cafe. Alexander said that this was launched “in response to Covid to an extent, [in that] we saw a lot of CPG brands looking for new ways to acquire customers and build discovery [during the pandemic]” but that it was hard to say whether or not that would have existed without Covid.
Nathanel, meanwhile said that not much has changed for Showfields, though it has slowed down the retailer’s expansion plans. He said Showfields hoped to have maybe a dozen stores open by this point, and does plan to open four more stores later this year.
Kondrat, for her part, said that she would love to see the multi-brand retail model succeed, but that that retailers have to “really thoughtfully think about what product to carry, or how to lay out the space, so you don’t have a bicycle next to an erectile dysfunction medication.”
She cited Story — before it was acquired by Macy’s — as an example of a retailer that was successfully able to pull off a multi-brand model.
“I think there is a lot of room for this if the merchandising mix is right, and you place the store in the right market,” Kondrat said.
ThredUp continues to ride the resale boom
One sector that is continuing to see more consumer interested in the wake of the pandemic is online resale apps. ThredUp reported record revenue and record buyers, among other records, during its fourth-quarter earnings Monday afternoon. Some key stats to know from the earnings:
- Fourth-quarter revenue was $72.9 million, up 68% year-over-over. The number of active buyers and orders increasing 36% and 69% year-over-year, respectively.
- Losses, however, widened: ThredUp reported a GAAP net loss of $17.9 million, compared to $17.0 million during the same period last year. The company noted, however, that its GAAp net loss only constituted 24.6% of revenue this year, compared to 39.1% of revenue during the same period last year.
- ThredUp expects the resale boom to continue: this year, the company reported revenue of $251.8 million, but the company expects revenue to be between $330 million and $340 million next year.
While resale apps have a rosy outlook, it will take sustained growth in multiple categories — not only in revenue, but also in active users — as well as trimming losses, to maintain their growth longterm.
What I’m reading
- DTC jewelry brand Aurate is reopening stores after shuttering two of its brick and mortar locations during the pandemic.
- Sweetgreen had its first quarterly earnings report last week since going public. The fast casual chain. Net sales were up 63% to $96.4 million, but losses also widened.
- Thingtesting looks into the rise of celebrities investing in DTC brands like Olipop and Cloud Paper, and what they look for when considering what startups to back.
What we’ve covered
- Subscriber exclusive: Personal care brand Curie incorporated some of the best practices its learned from selling through QVC into its TikTok strategy. Combined, QVC and TikTok drove 60% of Curie’s sales in 2021, founder Sarah Moret said.
- Despite growing costs, Berlin-based HelloFresh continues to pull ahead of companies like Blue Apron and Home Chef. For 2022, HelloFresh expects revenue growth to come in between 20% and 26%, the company said during its 2021 earnings report.
- Breakfast and dessert food brand Belgian Boys announced that it had raised $7 million in its first-ever outside funding round, with participation from Kind founder Daniel Lubetzky.
Correction: This story has been updated with the correct number of stores Showfields plans to open later this year.