Digital Native Retail Is Caught in a Crossfire

The tables have turned on digital native retail brands that thrived during the pandemic, when they seemed to be ushering in a new era in which retailers were no longer shackled to bricks-and-mortar stores as e-commerce proliferated.

The heady days of 2021—when e-commerce briefly zoomed to a 60% share of retail—have reverted to something closer to the pre-pandemic normal, with online retail’s share now plateauing at around 14%.

The digital native brands that emerged and blossomed during the pandemic—think Wayfair, the online home furnishings brand with ubiquitous TV commercials starring Kelly Clarkson—now are caught in a crossfire of headwinds that are threatening the survival of many of them.

According to an analysis last month from S&P Global Market Intelligence, Internet and direct-marketing retailers now have the highest median market signal of a one-year probability of default of any retail sector.

The grouping that includes digital native brands registered an 8.1% probability in the metric as of February, higher than other retail sectors including home furnishings, apparel, accessories and luxury goods, department stores and consumer electronics.

As many as a dozen digital native brands may be on the verge of filing for bankruptcy, like Forma Brands—an umbrella for cosmetics brands Morphe, Bad Habit, Jaclyn Cosmetics and Playa Beauty—which filed for Chapter 11 protection in January.

The beauty brand company, which is carrying nearly $900M in debt, is finalizing an acquisition deal with lenders in which creditors will provide $33M to take over its online platforms and wholesale operations, according to a statement released by the company.

Digital native brands have awakened from their dream year in 2021 to find themselves in a competitive landscape in 2023 filled with potential hazards: rising costs, slumping consumer spending, a horde of bricks-and-mortar competitors expanding their e-commerce fulfillment networks—and impatient investors who are pushing them to start generating profits and threatening to pull the plug.

When they thrived in the nadir of the pandemic, it was easy to overlook the fact that online-only retail is the most expensive of all retail platforms because everything involves shipping. The assumption was that e-commerce would continue growing, eventually delivering pure-play digital natives to the promised land of profitability.

As physical retail strongly rebounded in H2 2022, it became clear to digital native brands that their fastest route to profits was by opening bricks-and-mortar outlets.

“Digital native brands have to go to bricks and mortar to grow,” Barrie Scardina, Head of Americas Retail for Cushman & Wakefield told GlobeSt. at ICSC last fall. “It’s very expensive to grow online. The cost of customer acquisition is very high, the cost of shipping is high. Having a [physical] store gives you a broader opportunity to grow faster.”

“Almost every digital native fashion brand we work with is demanding bricks and mortar retail,” she said. “We’re spending a lot of time on digital native brands.”

But as capital for physical store openings increasingly gets harder to find, the path to profitability for digital native brands now is being cut off at a time when they need it the most.

A survey last year conducted by Ipsos for Publicis Sapient and Salesforce revealed that pure-play e-retailers are twice as likely as bricks-and-mortar retailers to be unprofitable.

More than 70% of the pure-play digital natives said in the survey, which was conducted in June, that that their rush to expand e-commerce fulfillment during the pandemic was “less than optimal” in terms of the costs incurred to grow their online platforms.

Two results from the June survey foreshadowed this year’s abrupt wake-up call for digital native brands: 96% of the retailers who responded in the middle of last year believed that the e-commerce share of retail would continue to grow, and 85% thought “the pandemic has forever changed the nature of retail.”

A lot of things have changed, but what we’ll call the Amazon Axiom is still valid: it took more than eight years for the e-commerce titan to generate a profit after it debuted in 1994 as a pure-play online bookseller and rapidly expanded its retail offerings in the years that followed.

The money didn’t start rolling in until Amazon established a bricks-and-mortar logistics network from coast to coast.