$20billsfor$15.com seeks first $1 trillion IPO valuation

On the heels of Lyft’s $24 billion initial public offering–and what could be $100+ billion valuations later this year when Uber and WeWork go public–$20billsfor$15.com filed its S-1 on Friday. In its filing the 2 year old company–which bills itself as the first “disruptive currency” brand–said it would seek to raise $200 billion to fund its massive growth. If successful, that would give the New York-based start-up an implied $1 trillion valuation, making it by far the biggest IPO ever.

The company, which was started by former Tufts University roommates Hogan Levine and Niraj Shaw in early 2017, has previously gone through three funding rounds, the most recent led by Softbank and Benchmark Capital. But the company continues to experience significant losses on what it calls its pathway to become “the Amazon of cash.” As the filings reveal, despite recently restricting orders to $100 and still only operating in the United States, in its most recent quarter $20billsfor$15.com racked up revenues of over $500 million with operating losses of just over $150 million.

In describing the company’s origins, Levine (known as “Jumbo” to his friends) remembers the time he and Niraj were having lunch in Carmichael Dining Hall during their senior year having just taken advantage of Tufts’ world-famous, but decidedly over-priced, salad bar. “You know what Wayfair (“Wayfair” is what Levine calls Shaw owing to how similar his co-founder’s name is to the CEO of the cash hemorrhaging home furnishings brand). Money just costs too damn much! And then Wayfair goes ‘truer words were never spoken brother!’ (Editor’s note: Levine and Shaw are not actually brothers). From there, you know, the business plan practically wrote itself.”

Neither of the founders would give the other credit for creating the company’s signature product line of selling $20 bills for $15, but both immediately knew they were on to something. “Everyone we talked to told us the idea was genius” said Levine “and they couldn’t wait for us to launch.” Despite early consumer enthusiasm, an initial run at a so-called “friends and family” investment round was a failure. “I literally went to everyone who came to my bar mitzvah and got turned down by every single one of them,” Levine said with obvious and deep frustration that would likely take 3-5 years of therapy to work through. “I remember one of my uncles saying to me ‘what are you some kind of idiot? The more you sell the more you lose, and that’s before overhead! You’re just another Uber, Lyft and WeWork wannabe.’ And when I replied ‘exactly’ he stormed out of the room muttering to himself.”

Shortly after graduation the two moved to New York City and set up shop in the Williamsburg section of Brooklyn in a small office above a SoulCycle. While the company has since taken 600,000 square feet of new office space in Hudson Yards, they never forget their roots. “The noise was unbelievable” recalls Shaw, “but Jumbo and I said if we can just get a few people to believe in our vision of selling $20 bills for $15 we knew brighter days lay ahead.”

Undaunted, the pair launched the $20billsfor$15.com site in the Spring of 2017 and became an instant hit. Soon the brand’s “money costs too much” radio ads became a satellite radio staple, helping fuel its hockey stick-like growth. But the nascent enterprise soon found themselves struggling to keep up with demand. “It seems like we were running down the street to the ATM like every 20 minutes to fulfill orders” recalled Shaw. “But we just remembered the page from our pitch deck showing that our addressable market was literally infinite and that kept us going.”

Fresh from a $25 million seed round from Maveron and Forerunner, the company enlisted noted management consultancy McKinsey’s help to develop a scalable supply chain strategy. By the end of 2017 the first of $20billsfor$15.com’s totally automated distribution warehouses opened, located across the street from the Bureau of Engraving and Printing’s Fort Worth, Texas facility. “This was really a game-changer for the brand” notes Levine. “We were running ourselves ragged having employees constantly going to the Chase by our office and maxing out their debit cards. Now, each morning we receive truckloads of fresh $20 bills and our robots take them from container to FedEx envelope in under 90 seconds.”

While the investment in distribution infrastructure worked out, the company’s foray into artificial intelligence has not gone according to plan. Taking a page from brands like Stitch Fix, $20billsfor$15 hired nearly 50 data scientists to use machine learning and other advanced predictive analytic techniques to better target consumers that would be interested in getting a $20 bill for $15. As CMO Natalia Kontentizking observed “after months of running different models and pressure testing different assumptions we learned that, with the exception of die hard Donald Trump supporters, everyone was a great prospect.”

Despite its early success $20billsfor$15.com has its share of detractors. Some claim the company’s negative gross margins are unsustainable. Others argue it needs to get more aggressively into private label. But noted retail mentalist Stephen Douglass takes issues with that criticism. “The future of shopping is about authentic, immersive experiences that are repeatable, not antiquated concepts like cash flow or EBITDA. What could be more experiential than getting a crisp $20 at a steep discount? Rinse and repeat is what I say, eh?”

The company has its fans on Wall Street, which has long-favored rapidly growing companies with no discernible path to profitability. Over a Blue Apron supplied lunch of harissa chicken on a bed of saffron infused quinoa, long-term Wall Street analyst Ryan Scozzi told us he’s impressed by the company’s highly reliable earnings forecasting. “They sell $200 million, they lose $50 million. They sell $2 billion, they lose $500mm. I like investments I can understand.”

For now Levine, Shaw and team are enjoying the ride but eagerly await the IPO, which is tentatively scheduled for April 30th. As Shaw sums it up “brother, we just so need that cash. So much cash.”

Another store bites the dust: Why retailers like Shopko fail

Last week, Shopko, the long-beleaguered department store chain, announced it would begin a complete liquidation. It now joins a growing list of once-prominent retail brands (Payless Shoes, Toys “R” Us, Gymboree) that first tried to shrink to prosperity, only to finally admit that the real issue was lack of customer relevance and that no turnaround was possible.

An announcement of yet another store—or entire company—biting the dust barely qualifies as news anymore. Struggling retailers have been taking an axe to their store fleets for several years in a largely vain hope that many fewer stores would make them dramatically more competitive. While overbuilding, too much debt and/or the shift to e-commerce are often blamed for this large-scale rationalization of space, by and large the big culprit continues to be many retailers’ failure to meaningfully differentiate themselves and keep pace with shifting customer desires.

With Shopko’s announcement, at least according to a leading research firm, the U.S. is on pace for more store closings this year than last. While this seems to support the popular retail apocalypse narrative, it is more accurate to say that the boring and mediocre middle continues to collapse. As I have pointed out before, retail continues to grow, and dozens of retailers continue to successfully open stores. So there clearly is ample evidence that many retailers failed to get the retail apocalypse memo. Nevertheless, it is a virtual certainty that hundreds of additional stores will close in the coming months.

While unsustainable capital structures (Neiman Marcus) or gross mismanagement (J. Crew) can explain a handful of situations where retailers have gotten into trouble, the vast majority of declining sales, anemic profits and major store closings are concentrated among brands that continue to swim in a sea of sameness. As long as we have retailers that continue to provide (at best) an average experience when consumers have many superior alternatives, we will continue to see share migrate from boring brands to remarkable ones. And while closing stores may improve some poorly performing companies’ operating losses we must keep in mind that, with rare exception, every retailer that has gotten into serious trouble in the last few years has a revenue problem, not a too many stores problem.

Over the course of my career I have been part of senior management teams that made the decision to close many hundreds of stores. I have personally told quite a few people that their store was closing and that they would be out of work. I helped lead the liquidation of a chain of about 100 stores. It is never easy and I am keenly aware that I often got the far better end of the deal–sometimes much more out of luck than merit.

Regardless, in every situation I was directly involved in, or have solid knowledge of, these brands didn’t go out of business–or shrink to a shell of their former glory–because they were legislated out of business or because some new competitor came totally out of left field and radically disrupted a once winning value proposition. What happened then, and what is mostly happening now, is rather simple and straightforward.

  1. We neglected to understand how our core customers’ priorities and shopping journeys were changing.
  2. We failed to see that what was once scarce (information, distribution access, product availability, etc) no longer was.
  3. We believed a slightly better version of mediocre would be sufficient to win.
  4. We watched what was happening rather than acting decisively, including being willing to compete with ourselves.

Despite what often counts as news these days, store closings, retail bankruptcies and entire liquidations are not a recent phenomenon. In fact, as a reminder of the ebb and flow of retail winners and losers over the past 50 or so years, Walmart CEO Doug McMillon keeps a photo of the top retailers over the decades on his phone. Shift happens.

What IS new is the ever increasing pace of change, how radically the power has shifted to the consumer and the complete untenability of remaining stuck in the boring middle.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

Ulta and Sephora keep defying the ‘retail apocalypse’

It seems like more and more brands didn’t get the ‘retail apocalypse’ memo. As many in the media shout “bring out your dead,” it turns out quite a few major retailers keep cruising along despite being heavily invested in  physical stores.

Sephora, which already has more than 1,100 locations (free-standing and within JC Penney stores), recently announced plans to open 35 new stores this year. As part of LVMH, the beauty retailer’s details are not broken out, but its continued strength in both physical and digital channels is often highlighted in its parent company’s reports.

On the heels of Sephora’s news Ulta Beauty’s shares climbed as the retailer beat on earnings and announced stellar same-store sales growth of 9.4%. The company expects to open roughly 75 new stores each of the next three years.

So amidst all the doom and gloom, what exactly is going on here? We know that the pockets of strength in brick-and-mortar dominant retail are not isolated to the beauty category. In fact, the majority of the 2,400 new stores already announced for the United States this year are in other sectors. So at one level many of the doomsayer pundits simply have their facts wrong. Physical retail continues to grow. Malls aren’t all going away. Thousands of brick-and-mortar stores will open for years to come. The real issue is that the difference between the have’s and have not’s is widening, and merely being good enough no longer is.

As we should know by now, talking about averages and making sweeping statements about entire industries is, at best, misleading and often next to useless. While physical retail is growing far more slowly than online shopping, that does not automatically spell doom for brands that are deeply invested in actual stores as Ulta, Sephora and dozens of others continue to prove. So what allows these brands to thrive?

Below I highlight a few areas that map against some of my 8 Essentials of Remarkable Retail.

1. Eschew the boring middle. Most of the retailers that are in trouble are stuck in the middle, neither offering strong value and convenience, nor offering anything unique and truly experiential. Ulta and Sephora knew they could not out Amazon Amazon, so they chose to be more remarkable in other ways.

2. Harmonize shopping. Both brands have embraced the blur between digital and physical channels and have worked hard to root out the friction in the customer journey. More importantly, they “amplify the wow” by providing value-added services, including mobile apps that customers truly love (both brands have 4.9 ratings).

3. Become digitally-enabled and human-centered. Ulta and Sephora are both leaders in using digital marketing channels and leveraging technology to be more effective and efficient. Yet they also know that people buy from people and do a great job of balancing technology and customer service delivered by good old sales associates.

4. Get personal. Increasingly brands that treat different customers differently are standing out. Ulta has begun leveraging its loyalty program data to enhance the relevance of their targeted offerings. Sephora has long been a leader in personalization, particularly with features built in to its industry leading app.

5. Deliver a memorable experience. Both brands do a good job demonstrating that you don’t have to be ultra high-end to be remarkable. But you do have to be intensely customer relevant, offer unique products and services (see Ulta’s Kylie Jenner partnership), provide a distinctive environment and execute flawlessly.

Physical retail isn’t dead. But it certainly is—and will continue to be—very different. For brands that seek to embark on a journey from boring to remarkable there is plenty of nonsense to ignore. But there are also many excellent examples of retailers that could have been crushed by Amazon or the other forces of digital disruption and instead have not only survived, but are doing quite well.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

Four truths and a lie from this year’s ShopTalk

Once again ShopTalk proved itself to be the must-attend retail event of the year. The 4th annual conference was both bursting with people and content, having grown to more than 8,000 attendees, five tracks and a solid number of prominent main-stage speakers across four action-packed days.

Most presentations and panels that I attended were strong. Yet a few speakers unfortunately hit speed bumps when their talks veered into shameless self-promotion, parroted trite expressions (“we put the customer at the center of everything we do”) or set forth declarations as bold new insight when they were merely observations that are obvious to anyone who’s been paying attention the past few years.

Nevertheless, as the dust settles, I came away with a few key points.

TRUTH: Embrace the blurThe delineation between physical and digital is increasingly a distinction without much of a difference . Most consumer’s shopping journeys involve a digital channel and the growing role of mobile makes the lines ever more blurry. While this has been true for years, many brands at ShopTalk seemed to finally be accepting this and taking necessary actions.

TRUTH: It’s about markets, not just physical locations. Just weeks after his brother Blake died, Nordstrom co-president Erik Nordstrom, in a refreshingly modest and honest fireside chat with CNBC’s Courtney Reagan, spoke of the company’s strategy to harness the power of stores and online to be more relevant on a market-by-market basis. He under-scored the reality that for many retail brands the store is the heart of an increasingly complex shopping ecosystem and that the customer is really the channel.

TRUTH: Physical retail isn’t dead. But it is very different. In some ways it seemed like attendees were officially cancelling the retail apocalypse. Sure many stores are closing: sometimes out of irrelevance, sometimes out of gross mismanagement or insanely leveraged capital structures, sometimes out of a needed correction to the ridiculous overbuilding of retail capacity. But Walmart, Target and many other brick & mortar centric retailers are showing new signs of life by treating their stores as assets, rather than liabilities. As just one example, investments in using the store as a key part of the supply chain (ship from store, order online/pick up or return in store, etc) are helping neutralize some of Amazon’s (and other’s) perceived superiority.

TRUTH: The problem is you think you have time. As many presentations centered on artificial intelligence, machine learning, robotics and the like, it seemed clear that the pace of technology adoption is only accelerating. Similarly, talks on shifting consumer behavior served as a stark reminder that customer wants and needs are growing ever more dynamic and more difficult to predict. And news of recent mass store closings and bankruptcies make it clear that those retailers that don’t move quickly and decisively are likely destined to die.

LIE: A slightly better version of mediocre is a compelling strategy. While I won’t name names, at least one retailer that featured prominently in the program may need more than a miracle on 34th Street to make them meaningfully relevant again. As the collapse of the middle continues apace, it seems increasingly obvious that some brands are making only incremental changes–or merely moving to where the puck is. What passes for innovation at some retailers might close competitive gaps, but whether it gets them to being truly remarkable is very much an open and critical question.

In addition to catching up with old and new friends, one of the things I like most about ShopTalk is the ability to get a robust and fairly comprehensive snapshot of where retail stands: the good, the bad, the ugly and, sometimes, the head-scratching. Regardless, I come away better educated, inspired and hoping that more retailers will see the light.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.  

Macy’s and JC Penney earnings offer evidence of the stall at the mall

On the basis of early results (and specious or unreliable indicators), many industry observers predicted this would be the best holiday season in a long time. It turns out, eh, not so much. In fact, at least one guy was pretty skeptical all along.

But you don’t have to be some sort of retail savant (I’m not) or have the gift of prophecy (I don’t) to have seen this coming. While the idiotic U.S. government shutdown, along with every retailer’s favorite scapegoat (the weather), had a largely unexpected dampening effect, anyone who was paying attention could have predicted that retailers with highly customer-relevant and remarkable offerings would do comparatively well and that those stuck in the boring middle would continue to struggle. Which brings me to Macy’s and JC Penney, the two mall-based department stores that reported earnings this week.

Under the newish leadership of Jeff Gennette, Macy’s has embarked on a number of new initiatives, which my fellow Forbes contributor Walter Loeb recently outlined. While I applaud the company’s willingness to try new things, its results continue to be decidedly uninspiring. As sales continue to go nowhere, Macy’s has resorted to what just about every other retailer that can’t seem to get on a path to being truly customer relevant does—namely, cut costs and close stores. As the saying goes, when all you have is a hammer, everything starts to look like a nail. w

JC Penney recently reported fourth-quarter earnings and managed to top analysts’ estimates. And when we say “top,” we mean they were not quite as horribly sucky as anticipated. Same-store sales were down “only” 4%, and operating losses were only somewhat awful. And, you guessed it, the company also announced it was going to close a bunch of stores.

Amid the generally bad news—which comes, I might add, as Sears (its neighbor in hundreds of locations) hemorrhages market share—was one bright spot: The company did manage to reduce bloated inventory levels by some 13%.

New CEO Jill Soltau also said that the company “has the capacity to produce improved results.” You know, kind of like I have the capacity to complete a triathlon. So good luck and Godspeed to us both.

As Macy’s and JC Penney close the financial chapter on 2018 and try, yet again, to reset their overall cost base, there are five things that need to be kept front and center as we move forward.

1. The stall at the mall is real, and there is no going back. As I’ve written about many times, the moderate-department-store sector has been losing share for decades, first to discount mass merchants and category killers and then (mostly) to off-price retailers. The format is structurally disadvantaged. Accept the things you cannot change.

2. Stop blaming Amazon. To be sure, the growth of online, and Amazon in particular, has added extra challenges, but most of the share losses in the past decade have not been to online-only players, and as mentioned above, both these brands were struggling way before Jeff Bezos had impressive biceps. And by the way, I’m pretty sure there is no law against Macy’s and JC Penney having really good digital capabilities (see Neiman Marcus, Nordstrom et al.).

3. Get out of the boring middle. If you continue to swim in a sea of sameness, you are going to drown. If you continue to chase promiscuous shoppers, your margins will stay low. If you continue to try to be a slightly better version of offering average products for average people, your best-case outcome is average results. Better is not the same as good. You have to choose to be truly remarkable.

4. It’s a customer-relevance problem, not a cost problem. Given the structural issues facing mall-based retailers, as well as the broader shift to online shopping, we often jump to the conclusion that brands like Macy’s and JC Penney can shrink their way to prosperity. This is fundamentally wrong and, in most cases, ultimately destructive. It also belies the fact that plenty of “traditional” retailers have managed to thrive by opening stores and foregoing massive cost-cutting. Time and time again we see that brands that get into big trouble have a problem being customer relevant and memorable yet decide instead that they have a too-many-stores and too-much-staff problem. This is not to say that Macy’s and JC Penney can’t thrive with less square footage; they can and should optimize their store fleets. But there is plenty of business to be done directly in and, more importantly, by leveraging brick-and-mortar locations. As we move ahead, the overwhelming majority of Macy’s and JC Penney’s efforts must be about growing share with their target consumers through improved relevance.

5. Aggressive trade-area based goals. We need to get away from the hyper-focus on comparable-store sales and realize that online drives offline and vice versa—and that the store is the heart of most brands’ customer ecosystems. Accordingly, the metric we should pay most attention to is how retailers are gaining share (customer relevance) and profits on a trade-area by trade-area basis, regardless of channel. If Macy’s and JC Penney are going to be around for the long term, they likely need to be growing at least 3-5% in every trade area where they have stores and be growing faster than inflation overall. Closing many more locations risks impacting both customer relevance and necessary scale economies.

In the next year or two, things are likely to remain especially noisy as the long overdue correction in commercial real estate settles out and the weakest competitors make their way to the retail graveyard. And even if that were not true, both Macy’s and JC Penney face significant structural headwinds as well as daunting operating challenges making their way out of the boring middle—although, to be fair, Macy’s is definitely further along.

Despite the noise, from where I sit, one thing is clear: Neither brand will cost-cut or store-close their way to prosperity. If revenues don’t start to consistently grow faster than industry averages (and that’s likely to come with relatively flat physical-store sales and online growth of at least 15-20 %), then both chains will continue to lose relative customer relevance, and a downward spiral is likely inevitable.

A slightly better version of mediocre is rarely a winning strategy.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.