THE JOURNEY YO REMARKABLE RETAIL

Steve helps organizations understand and respond to retail disruption by creating customer-centric, memorable and profitable growth strategies.

After Earnings Whiff, Maybe Warby Parker Can Learn Something From Old-School DTC Brands

Warby Parker is the latest “digitally native vertical brand” (DNVB) to disappoint investors, continuing a striking, but increasingly familiar, pattern of profitless prosperity from disruptor brands. In just the past few weeks, Stitch Fix, Allbirds, Figs, and the RealReal have reported strong sales growth, yet widening losses.

At the same time, many old-school direct-to-consumer (DTC) brands are killing it, generating substantial revenues and—I hope you are sitting down for this—actually making money.

It turns out, DNVB’s did not invent the vertically integrated, DTC business model. Companies like Williams-Sonoma, LL Bean, Lands’ End, Talbot’s, and more, were birthed in a pre-digital world and have grown to be significant, profitable businesses. While some had financial issues over the years (e.g. J. Crew, Sur La Table), dozens are far larger than the disruptor brands while sporting strong operating margins.

These, dare I say, “Analog Native Vertical Brands” created the familiar playbook that today’s newer vertically integrated, DTC brands now follow. They built their brands primarily without stores, instead using mail order catalogs (and starting in the late 1990’s, e-commerce) to generate demand. They leverage data science to acquire, grow and retain customers through targeted direct marketing. They design and control the manufacture of the overwhelming majority of their products. As profitable growth became more difficult to come by, they opened brick-and-mortar locations in the areas where they already had an established customer base.

It is not entirely fair to compare businesses that have around for multiple decades to brands that were started far more recently. To be sure, it is not uncommon for rapidly growing businesses to lose money while establishing themselves.

But as more of these disruptor brands don’t seem to be on a glide-path to profitability, it might be worth considering some lessons from the OG’s of DTC—most of which center on being far more disciplined in all investment decisions going forward, including:

Marketing. Become much more precise in all marketing efforts. If the marginal cost of customer acquisition is more than the customer lifetime value of customers acquired it’s time to throttle back on marketing and/or improve your prospecting models. If you are ignoring the cost of stimulating demand among existing customers in your customer lifetime models, you are fooling yourself. If a lot of customers in your file don’t buy unless you give them a big discount, maybe they aren’t that into you. The remarkable old-school DTC brands are masters of this.

Physical Retail Growth Strategy. Don’t open a bunch of stores until deeply understanding key performance drivers and developing a reliable store location prediction model. DNVB’s that claim they will open dozens, if not hundreds, of stores based upon a year of “success” in a handful of locations are often delusional. Doing well in SoHo, M Street or on South Congress doesn’t automatically mean your store format will translate profitably to dozens of other cities. There are good reasons none of the store expansion plans of the most successful DTC brands seem like moon shots.

Recalibrate Investment to More Realistic Potential. Don’t extrapolate “total addressable market” from the first few years of revenue. Most DNVB’s are struggling because they ignored the challenge of going from a niche brand to one of far greater scale and scope where success requires stealing lots of market share from established players. It is one thing to have customers find you. It’s another thing to have to discount heavily and pay Google, Facebook and the other advertising toll-booth operators vast sums to incentivize trial.

As much as digital disruption has transformed retail during the past two decades, many of the lessons of the past are just as relevant as ever.

A version of this story originally appeared on Forbes, where I am a senior retail contributor. I dissect the challenges of growing disruptor brands extensively in my book. We also took on “The Great DTC vs. Wholesale Debate” on a recent episode of the Remarkable Retail podcast.

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"The Store Operations Council enjoyed every minute of Steve Dennis's presentation on retail's future. He always keeps it real and speaks the language of retail experts."

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"The Store Operations Council enjoyed every minute of Steve Dennis's presentation on retail's future. He always keeps it real and speaks the language of retail experts."

Cathy Hotka

Principal

Cathy Hotka & Associates

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