What 2022’s downturn in deals signals about DTC exits

Last year, some of the biggest direct-to-consumer players in the industry were involved in major deals.

Razor brand Billie was acquired by Schick maker Edgewell. Milk Makeup and Obagi forged a deal with a special purpose acquisition company, or SPAC, to go public. Allbirds, Brilliant Earth, Rent the Runway and several other e-commerce companies filed initial public offerings. And Casper inked an acquisition deal with private equity firm Durational Capital Management resulting in it being taken private again.

Across the industry, there were more than 75 major deals in 2021, according to Retail Dive data.

The market at the time was “on fire,” Alex Song, CEO and founder of Proxima, told Retail Dive last year. 

However, deal activity has slowed significantly since then. In 2022 so far, there have been just under 40 major retail deals, a roughly 50% decline from 2021’s year-end total. And of those deals, a fraction involved digitally native companies.

So what’s behind the sharp decline in deals and what does it signal about the future of DTC exits?

A different market

Lingering uncertainty, which has caused retailers to slash their guidance for the quarters ahead, has wreaked havoc on the public markets.

Across all sectors, IPOs have fallen 74% in the first nine months of this year compared to the same period in 2021 as a result of inflationary pressure, market volatility, surging interest rates, and risks from COVID-19 and Russia’s war on Ukraine, according to EY.

“What we need is stability in the market,” Rachel Gerring, IPO leader in EY Americas, said in a statement. Last year’s IPOs “have severely underperformed in the aftermarket, significantly impacting companies’ desires to go public as they navigate ongoing market volatility.”

The market, however, is not only seeing a slowdown in traditional IPOs, but also a decline in de-SPAC transactions. 

Going public by way of special purpose acquisition companies rose in popularity last year. In 2021, there were 613 SPAC IPOs in the U.S. across sectors, up from 248 in 2020 and just 59 in 2019. As of July this year, the number of SPAC deals has come down to 70. 

These type of deals “played out to the point where they’ve shown themselves to not be as valuable as brands maybe thought they would,” Rebekah Kondrat, founder of Rekon Retail, said. “The brands are not getting what they thought they would get, which is, a capital infusion, yes, but additional support and additional resources — a lot of the brands that entered into those arrangements have been a little bit left out in the cold and are suffering the repercussions of that.”

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There’s a push from the acquirer, the SPAC, to gain efficiencies, which sometimes can mean budget cuts resulting in the brands needing to adapt the way they operate.

“Let’s face it, it’s no secret. We’ve seen S-1 filings. DTC brands sometimes don’t spend money in the wisest way,” Kondrat said.

In some cases, she added, a SPAC would come in and cut things to the point where it’s “too much change too fast and [the brand] either diminished to be a fraction of what they once were or completely went away,” she said. 

And acquisitions, which have long been the most popular exit option among DTC brands, may also be the “safest and most viable option at this point,” said Brian Ehrig, a partner in the consumer practice at Kearney.

This year, brands like Blue Nile, 11 Honoré and custom wedding dress company Anomalie were all snapped up.

One of the biggest draws of an acquisition for DTC brands is access to resources, leadership and infrastructure they didn’t have before.

“Things like access to vendors, access to supply chain, the ability to place larger buys and get more favorable pricing,” Kondrat said. After being acquired, brands often will have different teams in place to handle things like operations and opening stores. Kondrat said she’s seen brands that try to undertake those things “themselves, but then that obviously forces a great deal of bandwidth constraints. Then they kind of take their eye off the ball, which is making great products and selling it to their customers.”

According to PitchBook, across DTC brands there were 298 acquisition deals in 2021, up from 220 and 259 in 2020 and 2019, respectively. And while acquisitions may be the best route for brands right now given the market volatility, there has still been a sharp decline in those deals this year as well.

What’s behind the downturn in deals

While last year’s frothy market welcomed a number of deals in the retail industry, this year’s environment paints a different picture.

The end to government-provided stimulus payments, inflation and overall economic uncertainty have caused some consumers to pull back on spending, making for a weaker market and fewer deals.

“Consumer confidence is not great,” Ehrig said. “There’s just a tougher value proposition about what’s the forecast for next year and the year after.”

Investors’ projections of “an assumed consumer behavior that hasn’t quite happened” is also contributing to larger companies pulling back on acquisitions and brands putting IPO plans on ice, according to Kondrat.


“There’s kind of this signal going out to investors or to potential acquiring companies that, ‘Oh, things are not going well.’”

Rebekah Kondrat

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Founder of Rekon Retail


“It’s almost as though the markets and the VCs and the investors are reacting as though the consumer has stopped shopping, and that, in fact, has not happened yet,” Kondrat said. “I think it’s this projection of what the next consumer behavior will be — that everyone’s assuming there’s going to be a pullback.”

Retailers across the industry have turned to layoffs in recent months as a means to cut costs. The biggest companies in retail, including Walmart, Gap and Victoria’s Secret, announced plans to let go of portions of their workforces, and digitally native brands like Glossier, Allbirds and Warby Parker have also cut staff.

“There’s kind of this signal going out to investors or to potential acquiring companies that, ‘Oh, things are not going well,’” Kondrat said, noting that while these actions appear unfavorable, there are still some DTC companies right now posting sales gains.

The Honest Company, for example, reported a 5% year-over-year increase to net sales in the second quarter, while shrinking its net loss and operating loss. But for several DTC brands, the most recent quarter painted a different picture of growing losses and, for some, falling sales.

“Until there’s some more clarity, the next at least half a year, if not longer, is going to continue to be fairly depressed from a deal making environment,” Ehrig said.

What brands need to prove in order to exit

For those brands that, despite operating in an uncertain environment, still want to pursue that next step, they will need to demonstrate a number of things to investors before staging an exit.

For years, DTC brands benefited from easy-to-access venture capital, which pushed a grow-at-all-costs mentality.

“There was, at one point, a very strong push to infuse a brand with a ton of capital, performance market the crap out of it, and then push it to exit, whether that’s through IPO or acquisition,” Kondrat said last year.

But following the wave of direct-to-consumer brands going public last year, thus making their financial performance more publicly available, there has been greater scrutiny around companies operating in an unprofitable manner.


“You’re really separating the wheat from the chaff in terms of who really has the strong relationships with their consumer, and who are the ones that are having to constantly spend huge marketing dollars to continue to drive customers to their sites or to their stores.”

Brian Ehrig

Partner in the consumer practice of Kearney


Warby Parker, Allbirds and Casper, up until it was taken private again, have not made it out of the red since going public.

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Brands “need to prove really the same thing that they’ve always needed to prove. But now it’s even more critical,” Kondrat said. “Maybe the difference is: While profitability has waxed and waned in its importance when it comes to investment or exit …  now what I think investors and larger companies looking to acquire are looking for is certainly, ‘Are you profitable, or do you have a very clear path to profitability?’ so they can feel really confident in the decision to acquire.”

It’s critical that brands are able to prove their product market fit and have a strong value proposition for customers, according to Kondrat and Ehrig.

“They have to really focus in on what their story is to prove what their value truly should be. That’s going to mean telling a really strong story around the consumer and the kind of relationship that they have with them,” Ehrig said. “You’re really separating the wheat from the chaff in terms of who really has the strong relationships with their consumer, and who are the ones that are having to constantly spend huge marketing dollars to continue to drive customers to their sites or to their stores.”

For brands, now is the time to ‘tighten your belt’

While an exit is a logical next step for brands that have reached a certain size, unless the need for capital is imminent, they aren’t necessary.

“We’re in a situation where if you’re a brand and you don’t need to exit, do not exit. Sit tight. Tighten your belt,” Kondrat said. “Do what you need to do to continue to serve your customers. They’re still out there. They’re still buying things.”

Brands should use this period to create greater efficiencies to move closer to reaching profitability if they haven’t already.

“For DTC brands that haven’t reached that ‘holy grail’ — you know, being profitable and having a solid story — they should really focus on getting their house in order, getting their costs in the right place and really focusing on their core products or services, as well as their core consumers, so they can get themselves into the right place,” Ehrig said.

However, despite uncertainty, not all deals need to be put on ice if a brand has truly checked all of the boxes needed to exit and needs access to capital and resources.

“Down cycles doesn’t mean that every sector has to be down. So if you have a great story, I think that people are looking for places to park capital. There’s still a lot of capital out there that needs to be put to work,” Ehrig said. “While it’s not the most attractive market, one could make the argument that if you have a great story, you can make it happen.”

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