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With the threat of a recession looming, the new year brings about a slew of challenges for retailers recovering from a year of supply chain bottlenecks and inventory surplus.
But not all of 2023 is expected to be gloomy.
The expansion of the metaverse is likely to continue its growth trend as more retailers find new opportunities to connect its virtual base with real-life experiences.
Despite their struggles, the resilience of malls persists with foot traffic recovering post pandemic, along with an additional emphasis on shopper experience for brick and mortar in general.
And circular fashion, which started as a shopper-conscious movement to help save the environment, is becoming big business.
These trends and more are expected to impact retail moving into 2023.
1. Bankruptcies on the horizon
Bankruptcy filings increased in 2019 and then surged in 2020 as the pandemic hammered retailers.
But headed into 2023, the markets have shifted. Federal stimulus payments have ended. Inflation and economic uncertainty have affected consumer spending.
Taken together, these changes could translate into fewer deals or no deals at all next year. The result could be a resurgence of retail bankruptcies. Retail Dive reported 17 bankruptcy filings in 2019. That nearly doubled to 30 in 2020. The trend eased in 2021, with just eight major retailers filing for bankruptcy that year.
And the number of retail bankruptcies continued its slide in 2022. Notable among them are Sears Hometown, an offshoot of the former retail giant. Bed Bath & Beyond also ended 2022 on shaky ground and within days of the new year warned it could file for bankruptcy.
But the decline in filings doesn’t mean all was well in 2022. Instead of bankruptcies, many companies and lenders turned to layoffs, mergers or other methods to ease debt loads and get access to cash.
At the start of Q4, nearly 20 other retailers were also at risk of bankruptcy, according to analysts. They include companies with national footprints like Party City and online home goods retailer Wayfair.
2. The metaverse grows (and continues to confuse)
The onslaught of metaverse activations in retail is unlikely to subside in 2023. Last year, the industry saw a variety of brands enter virtual spaces to promote their brand and connect with younger audiences. Gucci, H&M, Puma and Gap are just a few companies that dipped their feet into the increasingly hard-to-define metaverse.
With real-world revenue becoming a possibility in spaces like Roblox, the trend is likely to only grow. Despite 48% of teenagers in a Piper Sandler survey from April saying they aren’t sure of or aren’t interested in the metaverse, some analysts have a positive outlook on the concept. McKinsey & Company estimated that the metaverse could make $5 trillion in value by 2030, with an estimated $2 trillion to $2.6 trillion impact specifically on e-commerce.
Whether that estimate will become reality is yet to be determined, but retailers are investing in the space nonetheless. With around 58.8 million daily active users on the virtual world Roblox, the risk might be worth it to some.
3. A recession? Maybe. Uncertainty? Definitely.
Inflation appears to be settling down, but macroeconomic forces remain a threat to discretionary spending. Some economists argue a recession is inevitable, a consequence of efforts to slow demand and cool down prices. National Retail Federation Chief Economist Jack Kleinhenz isn’t one of them, saying early in the new year that “it’s too soon to say whether the Federal Reserve’s efforts to reduce inflation will lead to a recession.”
As retailers know all too well, however, it doesn’t take a full-blown recession to spook consumers whose household budgets have been squeezed for over a year. Still, in December, consumer sentiment bounced back “sharply” month over month, according to analysis from The Conference Board. People’s feelings about the present and the near future improved, though expectations “are still lingering around 80 — a level associated with recession,” according to that report.
Rising confidence is generally good news for retailers, although consumers in 2023 are likely to remain careful and choosy about what they spend their money on. And experiences will continue to compete, and often win, their discretionary dollars. Consumers are likely to elevate their spending on services at the expense of big-ticket purchases, for example, according to Lynn Franco, senior director of economic indicators at The Conference Board.
“This year starts with the possibility of easing inflation but also uncertainty,” the NRF’s Kleinhenz said in a statement.
4. DTCs continue to struggle with profitability
The wave of IPOs from direct-to-consumer companies in 2021 offered the public greater visibility into how they were performing financially.
Several DTC darlings, which launched with the intention of disrupting their respective categories, had one thing in common upon entering the public markets: their struggle with reaching profitability.
Warby Parker, Allbirds and Bark, which all went public in recent years, have reported mounting losses even as sales have grown. Even DTC brands that have been trading publicly longer continue to struggle with reaching, and maintaining, profitability.
DTC brands are often forced to grapple with high marketing costs associated with acquiring — and retaining — customers. With investors becoming more critical of the financial performance of DTC brands, companies will need to find ways to mitigate these costs, which often come at the expense of making money.
And while investors increasingly are no longer condoning the “grow-at-all-costs” mentality that was once accepted, e-commerce startups continue to attract VC funds. According to a December report from PitchBook, e-commerce startups raised $20 billion across 450 deals, as of Sept. 30, 2022. While that represented a 42% decrease from 2021, when deal activity was historically high, it marked a 44.5% increase over 2020.
5. Environmentally conscious retail gears up
In 2022, plenty of brands launched more recycled-material initiatives. That included programs to recycle used merchandise and the release of capsule collections made of existing recycled materials. Several big names invested in recycled materials startups, including Zara parent Inditex and Goldman Sachs Asset Management.
With consumer interest growing, 2023 could bring more sustainability initiatives from those startups and brands. Although the higher price tag for more environmentally-friendly retail products can dissuade some consumers from purchases, 60% of them said it was an important buying factor in a study by Simon-Kucher & Partners in 2021.
Retailers such as The Real Real and Rent the Runway are even joining organizations dedicated to minimizing the industry’s impact, such as the American Circular Textiles policy group.
6. Another tricky year for malls
In the 20th century traditional indoor malls enjoyed a few heydays. But those days are gone, as smaller, more conventional strip-style centers attract not just discount stores but even the longtime anchors of malls themselves. Department store giant Macy’s, for example, enters 2023 having sped up its development of its nascent off-mall fleet.
“Some things – like Twinkies and Paul Rudd – never fade away. It is the same with mall loans.”
Manus Clancy
Senior Managing Director, Trepp
Last year seemed to be something of a reprieve for malls (and physical retail in general), as traffic bounced back, in large part thanks to COVID-19 vaccines. Indeed, malls have been surprisingly resilient, despite the rise of e-commerce, and high numbers of retailer and mall REIT bankruptcies and store closures, according to experts at Trepp, which provides research and technology to the structured finance, commercial real estate and banking markets.
“Mall loans continue to defy logic,” Trepp Senior Managing Director Manus Clancy said. “Some things – like Twinkies and Paul Rudd – never fade away. It is the same with mall loans. Investors have been predicting copious mall defaults and losses since 2017. There have been some, but nothing like the number most expected (including us).”
How malls fare in 2023 depends on a number of factors, including whether there is a recession and how severe it will be, according to Trepp. Nick Egelanian, president of retail development firm SiteWorks, expects more mortgage defaults, special loan servicing, sales and liquidations, and a “steady reduction in operating performance and malls in operation.” Some malls will be redeveloped, not necessarily successfully, he said by email.
“All in a continuance of the final phase of a 40-year decline that will leave only 150 to 200 top performing fortress Specialty Retail malls in operation in 10 to 15 years,” Egelanian said.
7. Marketing gets more complicated
Marketing has never been simple, but a confluence of factors will make the task even more challenging in 2023. The threat of a recession means marketing budgets are also at risk as some organizations may be on the lookout for costs to cut. Marketing is traditionally one of the first departments to get the ax, and retailers are already coming off of a string of corporate layoffs in the back half of the year, which have followed them into 2023.
Even without slashed budgets, a series of obstacles face retail marketers in the year ahead. The deprecation of third-party cookies and anti-tracking updates from Apple and others are making data collection more difficult just as more shoppers have turned to the internet for purchases. In fact, Gartner in December predicted that a majority of consumers would withhold critical data from marketers going forward. At the same time, Twitter’s takeover by Elon Musk has turned a major ad platform for many retailers and brands into an uncertain investment, causing companies to reevaluate the website and scramble to redistribute ad spend.
And the collapse of major brand ambassador partnerships — like Nike and Kyrie Irving, and Adidas and Kanye West (also known as Ye) — highlights the need for increased scrutiny of influencers. The situation also leaves brands with tough choices to make on what to do with the designs and remaining product from failed relationships.
8. Is Amazon in crisis mode?
As we turn the page to 2023, time will tell. But 2022 delivered some challenges already. The company responded, in many cases, by pulling back in several areas.
One area was physical stores. America’s leading e-commerce company backed away from brick-and-mortar retail in 2022, closing all of its 4-star, Books and Pop Up stores. Amazon instead shifted its focus to grocery, apparel and technology through its Just Walk Out concept.
Amazon in November acknowledged that some people in its retail operations and device division were being laid off ahead of the holiday season. Reports at the time indicated that as many as 10,000 people could be let go.
Earlier that month, the company paused hiring in its corporate workforce. Amazon cited the economy as the main factor for its decision. Reports also emerged that the company planned to scale back unprofitable enterprises. Most of those units fell within Amazon’s retail operations business.
Amazon CEO Andy Jassy said in a statement in November that “more role reductions” are possible as the annual planning process continues into the new year. That started immediately in January, with Amazon increasing its layoff count to impact more than 18,000 roles, primarily in its Amazon Stores, and People, Experience and Technology divisions. The company also started the new year with an $8 billion term loan, as an “uncertain macroeconomic environment” pushed it to use a variety of financing options over the past few months.
9. Resale brings in revenue — and risks overexposure
Over the past few years, resale went from a venture that was supported by people who were shopping sustainably, to a full-fledged strategy by retailers to bring in an additional revenue stream.
A recent report by WD Partners found that 92% of respondents said they shop, buy, sell or trade secondhand items at least once a year. Additionally, nearly half said they’d be “more likely” to go to a big-box store and 40% to a department store if they sold used items.
Walmart, Ikea, REI, Amazon and Home Depot all have a secondhand presence. The RealReal, ThredUp and Nuuly Thrift are also players. But this past year saw some surprising entries into the market on different ends of the spectrum: fast-fashion retailer Shein launched Shein Exchange in October while Rolex debuted a pre-owned program in December.
And there is a good reason for retailers of all types to consider resale as an option: money. The secondhand apparel market is expected to reach $82 billion by 2026. But, what happens to this corner of the market when there are an abundance of platforms? Will consumers continue to buy? Will retailers have a continual stream of products that are in a good enough condition to make it work?
For now, the audience is there. “The last 10 years of resale were dominated by marketplaces, but brands and retailers are driving the next wave of secondhand,” James Reinhart, ThredUp CEO and co-founder, said in a statement earlier this year. “We’re still in the very beginning of this trend, but the acceleration of resale adoption is a positive signal with enormous benefits for the planet.”
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