Emerging trends in direct-to-consumer (DTC) businesses to watch out for in 2024:
2023 proved to be a tumultuous year for various brands, with numerous companies laying off employees, filing for bankruptcy, or shuttering operations. Even as some brands struggled, others flourished, raising questions about the future of the direct-to-consumer (DTC) market in 2024. Here's a look at trends to watch for in the year ahead, focusing on the athletic sector and potential mergers and acquisitions (M&A) activity.
Heatwave of Competition in the Athletics Market
The athletics space, traditionally dominated by heavyweights like Nike and Adidas, has seen a handful of underdogs making their mark. Brands such as On and Hoka have gained market share by offering innovative footwear, part of their strategy to double net sales and exceed 60% gross profit margins by 2026. The competitive landscape suggests that 2024 will see continued battles for market dominance.
On, for instance, plans to release new speed technologies, expand apparel offerings, and enter the training category, all designed to gain more market share (1). Hoka has also been focusing on its DTC growth strategy and expects to become a $2 billion brand in the near term. Both companies are projects further growth and the emergence of new brands, ensuring that the athletics race will be keenly contested in 2024 (1).
Deals Challenge Dominoes
Merger and acquisition activity took a hit in 2023, dropping by about 20% from the previous year. Despite this, some significant transactions did materialize, such as L'Oréal's acquisition of luxury brand Aesop for $2.5 billion and Universal Standard's purchase of Henning (2).
As all good things must come to an end, the halt in M&A activity is likely to change in 2024, as the end of rate hikes, dampened macroeconomic volatility, and pent-up demand could potentially boost deal-making activity soon. Artificial intelligence may also impact the landscape, prompting an increase in tech acquisitions next year (2).
Bankruptcy Looms
The year 2023 witnessed a distressing number of bankruptcies and store closures, with many brands filing for Chapter 11. Companies like DTC sleepwear brand Lunya and Kristen Bell's Hello Bello entered bankruptcy proceedings, while brands like Scotch & Soda and Showfields turned to bankruptcy to restructure (3).
The downward economic spiral is unlikely to abate in 2024, with S&P Global Ratings predicting that many issuers may struggle, leading to more defaults and bankruptcies in the coming year (3).
Channel Expansion: A Double-Edged Sword
Digitally native brands are embracing a hybrid distribution model to scale up their businesses. By using pop-ups to test new markets and working with new wholesale partners, they can navigate between traditional and modern sales channels (4).
Brands such as Allbirds, Our Place, Care/of, Peloton, Avocado Green Mattress, and Glossier have all ventured onto e-commerce platforms like Amazon, seeking new customer bases (4). However, a complete shift towards wholesale is not the norm across the board, as some brands prefer to focus on their DTC channels for stronger margins (4).
Stores on the Rise
Despite the ongoing pandemic, the number of store openings soared, with major U.S. retailers increasing their store count in 2023 compared to 2022. Could 2024 prove another strong year for brick-and-mortar expansion? (5)
DTC brands like Vuori and Lululemon have aggressively expanded their store footprints, targeting 100 stores in 3 years and aiming for 55 new stores by the end of 2023, respectively (5). Furthermore, several brands that had previously sworn off owned retail have entered the market in 2023, such as Figs, Ceremonia, and Lulus (5).
Fighting for Funding
2023 saw global venture funding decrease by 24%, with fewer dollars finding their way to startups than in previous years. Smaller brands struggled to secure funding as the economic downturn and global uncertainties affected their prospects (6).
However, as one door closes, another opens. Down rounds are expected to increase in 2024, prompting companies to look for alternative sources of funding, such as crowdfunding and pitching to angel investors (6).
Founder Exits: A New Beginning
As brands grow, their needs evolve, and sometimes leadership needs to adapt accordingly. The year 2023 witnessed several co-founders stepping down from their roles, such as Allbirds’ Tim Brown and Brooklinen's Rich Fulop, to align their companies better with future growth initiatives (7).
With many brands looking to improve profitability as they mature in 2024, co-founder shake-ups could persist.
Price Point Expansion: Driving Inclusivity
As inflation affects shopping habits, companies are looking to expand their price offerings to cater to a wider demographic. Menstrual care company Thinx and lingerie brand Adore Me expanded their affordable collections in 2023, while luxury brand Goop introduced a cheaper skin care range aimed at a less price-sensitive segment (4).
Inclusive pricing strategies could dominate the DTC landscape in 2024, as more brands strive to cater to customers with varying financial means.
- On and Hoka, emerging contenders in the athletics market, aim to increase market share by launching new speed technologies, expanding apparel offerings, and entering the training category.
- Amidst a 20% drop in merger and acquisition activity in 2023, significant transactions like L'Oréal's acquisition of Aesop and Universal Standard's purchase of Henning took place.
- Distressing bankruptcies and store closures marked 2023 with brands like DTC sleepwear brand Lunya, Kristen Bell's Hello Bello, Scotch & Soda, and Showfields filing for Chapter 11.
- In a bid to scale up, digitally native brands are adopting a hybrid distribution model, using pop-ups to test new markets and partnering with wholesalers for wider reach.
- Boosted by the aggressive expansion of brands like Vuori and Lululemon, the number of store openings in 2023 surpassed that of 2022, suggesting another strong year for brick-and-mortar expansion in 2024.
- Faced with decreased global venture funding in 2023, smaller brands are expected to embrace down rounds and seek alternative funding in 2024.
- With growth initiatives in mind, several co-founders such as Allbirds’ Tim Brown and Brooklinen's Rich Fulop stepped down from their roles in 2023, setting the stage for founder exits to persist in 2024.
- As inflation affects consumer behavior, companies like Thinx, Adore Me, and Goop expanded their pricing strategies in 2023 to cater to a wider demographic.
- In the face of overall economic struggles, S&P Global Ratings anticipates more defaults and bankruptcies in 2024, a troubling forecast for many issuers.
