Despite all the hype, after gobs of venture capital investment, several high profile IPO's and some big moves into physical retail, the OG's of the new wave of DTC are running into trouble. In this episode we dive deep into just what the heck is going on here and whether the hugely disappointing recent results from Warby Parker suggest a possible reset for the new breed of DTC brands.
Despite all the hype, after gobs of venture capital investment, several high profile IPO's and some big moves into physical retail, the OG's of the new wave of DTC are running into trouble. Most of the digitally native brands that were supposed to disrupt the retail industry (think Warby Parker, Stitch Fix, Allbirds, Caspar, and many more) may be growing the top-line--though not even Wayfair and Peloton can say that anymore--but their operating losses continue to grow.
Virtually all of them have seen their market valuations collapse in recent months. And the once promising pivot to opening stores must be called into question, particularly as the entire industry faces growing headwinds.
In this episode we dive deep into just what the heck is going on here and whether the hugely disappointing recent results from Warby Parker suggest a possible reset for the new breed of DTC brands.
But first we open up with the retail news that caught our attention this week, including earnings reports from Target, Walmart, Kohl's and Lowe's that were, to put it mildly, rather disturbing. We also discuss whether it's a great idea for Amazon to buy Kohl's or whether they'd just be catching a falling knife. As an added bonus we also learn that you haven't lived until you've visited a Las Vegas ER in the wee hours of the morning.
And lastly, don't forget that Steve's book has been selected as a Kindle Monthly Deal, which means that through May 31 the ebook version of Remarkable Retail: How to Win & Keep Customers in the Age of Disruption is just $1.99 in both the United States and Canada.
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Insider Intelligence Report
Steve Recent Forbes Relevant Articles
Store Expansion May Not Be A Slam Dunk For Struggling Digitally Native Brands
Wayfair's Earnings Disaster Portends More Trouble For 'Disruptor' Brands
Past Podcast Episodes We Reference
Understanding Customer-Based Valuation with Dan McCarthy
The Profitless Prosperity of Disruptor Brands
About Us
Steve Dennis is an advisor, keynote speaker and author on strategic growth and business innovation. You can learn more about Steve on his website. The expanded and revised edition of his bestselling book Remarkable Retail: How To Win & Keep Customers in the Age of Disruption is now available at Amazon or just about anywhere else books are sold. Steve regularly shares his insights in his role as a Forbes senior contributor and on Twitter and LinkedIn. You can also check out his speaker "sizzle" reel here.
Michael LeBlanc is the Founder & President of M.E. LeBlanc & Company Inc and a Senior Advisor to Retail Council of Canada as part of his advisory and consulting practice. He brings 25+ years of brand/retail/marketing & eCommerce leadership experience, and has been on the front lines of retail industry change for his entire career. Michael is the producer and host of a network of leading podcasts including Canada’s top retail industry podcast, The Voice of Retail, plus Global E-Commerce Tech Talks , The Food Professor with Dr. Sylvain Charlebois and now in its second season, Conversations with CommerceNext! You can learn more about Michael here or on LinkedIn.
Be sure and check out Michael's latest venture for fun and influencer riches - Last Request Barbecue, his YouTube BBQ cooking channel!
Michael LeBlanc 00:05
Welcome to the Remarkable Retail podcast Season 4, Episode 19. I'm Michael LeBlanc.
Steve Dennis 00:10
And I'm Steve Dennis.
Michael LeBlanc 00:12
Well Steve, great to be back on the mic with you. We had a bit of a, bit of hiatus, a bit of time off. That time off didn't exactly work out the way you had planned though. You mentioned on, on social media you were a little breathless. What's going on? I hear you I hear you, was it, did I hear this right? You had a tiger in your hotel room, and you wound up in a, in a (crossover talk) Vegas emergency room? Got it. Okay. What, what's going on?
Steve Dennis 00:39
I, I am mostly okay. I'm, I'm on the mend. But I was out in Las Vegas to do a speech, which I did. And I was supposed to then leave Las Vegas. Leaving Las Vegas in a Sheryl Crow like way to go to Hawaii. Instead of going to the airport to get on a plane for Maui, I ended up in the emergency room at about three in the morning. And you have not lived until you have been in a Las Vegas emergency room at three in the morning, you meet a lot of interesting people.
Michael LeBlanc 01:12
Like a scene from a Fellini movie, no doubt, but, (crossover talk).
Steve Dennis 01:15
Yeah.
Michael LeBlanc 01:16
Or the movie Hangover, but, (crossover talk), -
Steve Dennis 01:17
Pretty much.
Michael LeBlanc 01:18
So, what was going on? What you were, you were breathless at the end of your presentation? You left people breathless? (Crossover talk), -
Steve Dennis 01:23
Well, usually I leave people breathless. This particular case, I found myself breathless and no, I had, I had some heart or chest pains and some shortness of breath. And I thought, hmm, this is not excellent. And being a, a fella of a certain age, I thought it was worth going to check out thinking I might be having some heart stuff going on. And it turns out my heart is fine.
Michael LeBlanc 01:45
Yay.
Steve Dennis 01:46
But I had pneumonia, or I have pneumonia.
Michael LeBlanc 01:49
Wow. (Crossover talk), -
Steve Dennis 01:50
So, I did not, I did not have that on my bingo card. And so, they said you know you should probably not go to Hawaii. You should probably sit on a different kind of beach with an amoxicillin colada with an erythromycin chaser. Those are antibiotics for you kids who aren't following along. And so, that's what I've been doing for the last, the last week and I am on the mend, but most definitely not in Hawaii.
Michael LeBlanc 02:15
Well, I've had the same, I've had a bit of touch of the same and a boy it sucks the energy right out of you. So, I hope you're feeling better. You sound good. You sound a little bit, you know, just for the listeners. You know, we're talking off mic if we want to talk a little bit about our voices sometimes, because we're all kinds of all over the place. But you sound good. I mean, it's, you know, that's a little brush with not fun stuff. So, you're going to have to book another time to get, to get to Hawaii and relax, I guess, in a different way.
Steve Dennis 02:44
Apparently, yeah, apparently. So, anyway, First World problems. But, you know, but, but thanks for asking. Well, I think, I think I can make it through the episode though, we'll see.
Michael LeBlanc 02:54
And it is a solo episode, we don't have a guest this episode, we have another guest, a great guest coming up on our next show, we interview the CEO of Naver, which is a super interesting company all around a whole bunch of tech and very innovative. But for this show, we wanted to dive into so much going on in retail. I mean, there's the, the we'll get to that, of course, in our you know, our news. And the news, I guess is kind of self evident in some way if you've been watching the stock market and results. But we wanted to kind of, I don't know, bring not conclusion to but really insight to the Digital Native Vertical Brand issues and the expansion of stores.
Michael LeBlanc 03:28
We've touched on it a couple of times, but we're going to do a bit of a deeper dive from a strategic level. So, we'll get to that in a few minutes. Let's talk about US. US monthly sales reports. I mean, we're seeing, you know, we're seeing some moderation, some rebalancing sales seem to be pretty strong, of course, lots of inflation. Man, we've seen some results from sales results or at least profitability results from many retailers that are, that are falling well short of expectations, and they're getting kind of punished in the in the stock market, yeah?
Steve Dennis 03:58
Yeah, it's been pretty ugly. Certainly, from a stock market perspective. There's a little bit of and I imagine as we get more earnings reports, we'll be able to, to make more sense of this but on the one hand, from an overall sales report, our sales increase status, you're right, I mean, a lot of inflation but Jason Goldberg, friend of the show did some, some calculations that show if you look at the year over year, sales increases, even with a, an attempt to adjust for inflation there’s still some pretty, pretty strong growth overall.
Steve Dennis 04:32
Definitely, you know, online sales, moderating a bit, you know, some other categories, kind of down trending a bit, but the overall picture is the consumer continues to spend. But then, we got Walmart and Targets' earnings, Kohl's earnings, Home Depot, Lowe's and a lot of very big retailers. And for the most part, their sales were pretty anemic or even in the case of Kohl's down quite a bit. And their profits were really, really hit. I mean, I think that was the thing that really sent the retail stocks into a downward spiral.
Steve Dennis 05:08
It wasn't so much the sales, was more of, lot of what was revealed in the earnings in terms of increasing costs, you know, labor, supply chain, you know, you name it pretty much. But also, the outlook, and there's, there's definitely a sense that the consumers are, are slowing down, spending more on essentials as opposed to discretionary income. I think Brian Cornell, CEO of Target was talking about that. By the way. (Crossover talk) Yeah, I was going to say, to, to go on CNBC, after releasing those earnings and be willing to sit there and take questions. I mean, that's a brave, far braver guy than I.
Michael LeBlanc 05:49
Yeah, he, he didn't just take one for the team, the Target team. He took one for the industry, right? I mean, he's, he, he stood up and said, and it's kind of, you know, I had two thoughts. One is, you know, very impressive. He is very impressive leader. And he explained, you know, I think, if I can not put words in the mouth, but to paraphrase, he said, we got caught a little bit short with too much of this and too much of that, supply chain this, supply chain that.
Michael LeBlanc 06:11
What does, you know, interest me a little bit is, we all saw this, I mean, the retailers I talked to. Look, inevitably consumers are going to shift to services more than goods, I mean, inevitably, it's going to happen, right? It's just a matter of when and I guess, Omni in the first part of the quarter of the, the year kind of deferred that, but it's happening now, right? So, two things seem to be happening, concurrently. One I'm downshifting, because, you know, it's so expensive to fill my car full of gas, or my, put food on the table.
Michael LeBlanc 06:42
But at the same time, I, you know, I'm gonna go on a trip, and I'm going to do other stuff. So, you see that kind of mix of, of sales kind of naturally come back to the mean. Do you think there's a bit of that mixed in and maybe this supply chain becomes the, the whipping post for, ah it was supply chain, but you know, we just misjudged a little bit?
Steve Dennis 07:00
Well, I think on the revenue side, you're right. I mean, there are two things going on, as prices go up, people are just going to spend less like it's, you know, that is going to, or at least, you know, buy fewer units of certain things. So, I think that's just the way the world works. And that's probably where we're going to be for the foreseeable future. Like, I don't see that fundamentally changing in a big way, because of some of the, you know, the Ukraine war situation, and a lot of the other ongoing kind of COVID related things.
Steve Dennis 07:26
From a kind of rebalancing (crossover talk), of their spending, yeah, a shift to services away from products, I think was, was inevitable, just in terms of how consumers are going to make their choices with their limited dollars, you know, we don't have stimulus payments in this as much anymore. You know, as I often say, I think we've said probably 10 times on the podcast now, like, you're not buying more than one peloton, probably you're not redoing your, you know, your living room, more than once.
Steve Dennis 07:53
So, I mean, there's, there's an aspect of spending that got pulled forward, I think so. So, there's, there's a lot going, going on there. I think it's really the profitability side though. I mean, I think we're going to, you know, it's a little bit difficult to parse out what sales are going to look like when you've got inflation in there. So, I think it's going to be more important to pay attention to what retailers are saying about their units and their customer accounts. You know, that's sort of a more interesting thing, because the price inflation is going to make it a little bit harder to understand what's, what's going on.
Steve Dennis 08:24
But the, but the costs, I mean, I think that's a very, very significant issue. And, you know, also to what degree I think Walmart and Target and others have, for the most part, tried pretty hard not to have to raise prices much. And we're starting to see a lot more signaling of like, well, you know, there's, there's only so long we can really endure that.
Steve Dennis 08:44
The one other of this fact I thought was really fascinating in the Walmart earnings release in particular was that their inventory level was up over 33% at a time when their sales were based, I think they were up 2% or something. Doug McMillon seem to be pretty sanguine about their ability to get that back in line relatively quickly. But for a retailer as big as Walmart to have 33% more inventory and essentially, flat sales. I was like, Wait, I thought, I thought I misheard that.
Michael LeBlanc 09:16
I was in a, I was in a Canadian Tire store doing the tour for our friend Michael Schneider. Remember from Bunnings? He's from Australia, he's been on the tour here, he's been on the podcast, and we both stopped at the front of the Canadian Tire store and we were just amazed at how much merchandise was on the floor. Like, they, they had clearly just run out of space in the warehouses. And, and you know, a lot of these big retailers, they said, well, I'm going to err on the side of bringing more stuff in the less because when I get it, when I can get an OP filled, I'm going to fill it.
Steve Dennis 09:32
Yeah, I've heard that. I think we may have I can't remember if we did this on mic or not but we, I've been hearing for a couple of weeks about this, this sort of glut of inventory. And in the case of, well actually I was talking to a guy in Las Vegas that works for one of the off-price retailers and he was saying there's just an enormous amount of a product that is in the system right now.
Steve Dennis 10:05
Much of it was fall merchandise or is full merchandise that landed late. So, having coats to sell as we go into Memorial Day here in the US is not the optimal inventory. So, it's the, it's not just the dollar value of the inventory, it's also the mix. But I think you're gonna see some good deals coming down the pike at TJX, and Burlington, some of those, some of those stores.
Michael LeBlanc 10:28
And, you know, standing head and above all of this is Kohl's. You mentioned at the beginning. I mean, their, their numbers were epically bad. And that's kind of lead you to think about, maybe there's another suiter that who knows, they could have already had their hat in it, but, but you seem to be advocating for a particular outcome.
Steve Dennis 10:47
Well, two things here. One is, and I hate to be like I told you so. But remember, there, there's been this stuff for several months now that you know, department stores are back. And, and I remember saying various things on social media. I was like, oh, I don't know, dead cat bounce. In fact, it's in one of my predictions. And all of a sudden, all those people about the department stores being back are pretty quiet as the results start to come out. Yeah, their sales were down quite a bit.
Steve Dennis 11:12
And if you look at where their sales were, compared to 2019, pre COVID, they've gone nowhere. So, that was certainly disappointing. But yeah, they've been in the market, or have been in the news quite a lot about potentially being taken over. They appear to be for some recent comments they made in the latter stages of discussions with a few players like, (crossover talk), -
Michael LeBlanc 11:35
JCP and Hudson's Bay and a few others. But you, (crossover talk), -
Steve Dennis 11:38
Yeah, it's not, it's not clear who's still in the running. But my idea in particular, was that Amazon should buy them. I know, some people think that's a genius idea. Some people think it's a terrible idea. But in a nutshell, (crossover talk), -
Michael LeBlanc 11:49
I got two words for you on that, but I'll let you finish.
Steve Dennis 11:52
Well, here, here's, here's my thought. One is, I believe, just fundamentally, for Amazon to continue to maintain its growth, they have to get much greater market share in apparel, accessories, home a lot of the you know, categories that are at the center of what Target, Walmart, Kohl's offer, you know, particularly to move in sort of the more fashion side.
Steve Dennis 12:16
Like they're, they've got the biggest apparel business, I think, on the planet right now. But it's mostly in basics. And so, for them to grow, I think the biggest obstacle is they don't have a physical presence, which is why they're going to, they're about to open this Amazon style store. So, if you believe the premise that to unlock, you know, billions of dollars of potential, one of the big limitations is physical presence, buying Kohl's gets them, I think it's, you know, 1100 stores, some of which might be turned into distribution centers, (crossover talk)
Michael LeBlanc 12:47
Parking lots, oh sorry distribution centers.
Steve Dennis 12:48
But you know, distribution gets them a lot of, of, you know, built in business, vendor-based, a lot of scale, very quickly, I could see them putting Amazon Go stores at the front, which would drive a lot of traffic. So, I think, I think there's a lot of things that, that could accelerate where they need to go to anyway, by like, five or six years. They can do it at a very, you know, like a trivial price for them. So, to me, it's almost a no brainer. The big question, which many people have pointed out is, Amazon is demonstrably terrible at running physical stores. So, okay, so, you know, this, this runs the risk of being Whole Foods, you know, part two.
Michael LeBlanc 13:29
Wow. I mean, my two words are falling knife. That's my two words because how I described their acquisition of Whole Foods, I mean, they've done you know, with all due respect, they've not, not done anything with Whole Foods. Now, they have ventured out on their own with their fresh concept stores, which seems to me, you've had some experience wandering through them with, you know, less than spectacular execution. But let's give them a bad day on that one.
Steve Dennis 13:54
Now, Michael, the only way I think this would, would work, which is a big if, is whether Amazon leadership would really understand that they have to move from the sort of left brain thinking come much more right brain thinking, which they have not revealed. I mean, if you look at the stores they have, including what they've done with Whole Foods, there's plenty of evidence that they have not been able to do that.
Steve Dennis 14:18
So, they would absolutely have to have a really big mind shift. And, and I think really trust Michelle Gass and her team to, to run it the way they need to while adding what Amazon can add. But if they try to like Amazon Kohl's, fundamentally, I agree with you, then, then it's a falling knife. Yeah, this could allow them to get to, to a lot more overall growth and advertising growth, which is otherwise going to take them you know, I mean, how fast can they build out these, even if these Amazon style stores end up being, you know, really the way they want to do it, it's going to take 10 years to get to (crossover talk), where Kohl's is.
Michael LeBlanc 14:58
De minimis. Yeah, it's de minimus, I have more confidence that Fresh can be built up quicker and bigger but lots going on in, in the retail world. And now let's, let's flip over to what we're going to talk about for this episode. What we are going to talk about for this episode, which is a little more, you know, around this idea because you know, particular to the results is what they are for the big you know, Walmart's and Targets. You know, looking at the numbers from the DTC, DNVB's again, we'll clarify that I mean, Allbirds down 70%, WP Warby Parker down 60%. Things are not going so well from that perspective,
Steve Dennis 15:35
You know, if you were to take and I haven't made a list of every single one, but you know, at this point, we do have quite a few of these so called disrupter brands, including brands like Stitch Fix, Chewy, Poshmark, TheRealReal, Peloton, well different model but you know, these brands that were you know, the future of retail, all of them are down massively over the past like six months or so.
Steve Dennis 15:57
So, (crossover talk) we saw this train wreck. Well, Casper collapsed and how to be bought out. So, so, we have seen kind of this new reality. And we'll talk in a few minutes, I guess about kind of what its reset is and what it looks like going forward. But, but this, this kind of revaluation of these businesses really started to occur late last year. It's they've not done well, this past week is kind of all retail but, but really, this all happened before the Target, Walmart thing, which kind of sent the rest of retail down. You know, they had, they had already fallen quite a lot. And so, they got hurt a little bit worse. But the, the big moves really started to happen late last year, and earlier this year.
Michael LeBlanc 16:35
Yeah. And, and you know, you and I were talking off mic about some really interesting stuff about Warby Parker. And they're pretty, let's call them their OG strategy. I mean, they're really one of the originators of the bricks and mortar strategy where you have an online business for several years, and then your growth plan is through brick-and-mortar stores. Now, as we kind of have the benefit of looking now after a few years, I mean, how many stores does Warby Parker have?
Steve Dennis 17:00
I think they're close to 160 now. And they're aiming to get to 200 by the end of the year. And I think they said in their, in this past quarter they opened eight. But they've, they've had several dozen stores for, for multiple years. Because you're right, they were, they were really one of the first to realize the value. And along with probably Bonobo's and thredUP, I mean, there aren't you know, there just aren't that many of them that have more than, you know, 15-20 stores.
Michael LeBlanc 17:28
You know, are you seeing out of that at this point? Any evidence that tells you, I think definitively is a very strident word, but that open, - being digital native vertical brand, opening stores is the solution? Like are you seeing any evidence, at least in the Warby Parker case that, that there, that may be helpful?
Steve Dennis 17:48
Well, part of the reason why I wanted to talk about this, and it was also part of what I wrote in Forbes this past week, is I'm really starting to wonder like, I think I'm the last guy or certainly on a shortlist of people, that would be arguing that physical retail is not important, right? I've been pretty much taking the opposite side of that fact for a decade. And, you know, I also I mean, I go, I talked about this in keynotes, I go into this, in my book, we've talked about it on the podcast, I think it was pretty obvious that, that these brands, many of these brands can't say every single one.
Steve Dennis 18:25
But that many of them that were founded on this premise that you could build profitable, meaningful brands online only, like I always thought that was a faulty premise, but for reasons maybe we can go into a little bit more. But in any case, it's like well, I think particularly if you're in the apparel kind of business or any business that is more premium priced, more sensitive to fit, that you're just limiting your market by not having a physical presence.
Steve Dennis 18:51
Now, whether that's your own stores, or wholesale or whatever, that's another thing we could talk about. But, you know, I believe that I remember talking to Andy Dunn, the guy who started Bonobos, like 11 or 12 years ago, and I believe strongly that, that that was going to be in their future. And you know, I wasn't the only one. So, you know, I've believed this for a long time. And, and to your point, Warby, Bonobos, a few others did start on this strategy a long time ago.
Steve Dennis 19:18
And I think, you know, the belief was that, you know, this expands the addressable market. And as I mentioned, the belief, which I think has become an even stronger belief over the last few years, given some of the changes in digital marketing and iOS and, you know, all that kind of stuff that (crossover talk), we're looking at. Now that rent, you know, rent is the new cost of customer acquisition. You know, that was an efficient way to market and acquire and retain customers.
Steve Dennis 19:45
And, you know, in some cases, it's a way of lowering returns. And so, you know, there's a bunch of reasons why physical stores made sense or could make sense. The thing that is to me, so concerning about Warby Parker, is, as I said, you know, had a, in a number of stores for a long period of time, they have been at this for 12 or 13 years now. And if you look at their most recently quarterly earnings, you'll see that overall, the brand hasn't really grown very much, since 2019, despite having opened dozens of stores, which you think just the stores themselves would add a lot of revenue.
Steve Dennis 20:22
You would think the shift to more online would add a lot of revenue, you would think that, you know, having a big customer base with supposedly, these great NPS scores would allow them to retain customers much better. And you would think that, you know, again, being all these years in having a lot of commerce stores that you'd see some, you know, strong profitability developing.
Steve Dennis 20:46
Instead, what we've seen in the last few quarters, is their sales growing at a pretty anemic rate for the sort of brand they are, and their profitability, profitability getting worse. So, because they don't give enough detail, to really unpack what's going on very specifically, I would just say, well, this suggests that perhaps the store strategy isn't working nearly as well as we expected.
Michael LeBlanc 21:11
Now they have created and it may be, I don't know, maybe category specific, because they did ignite an entire kind of, problem being a pioneer here, they did ignite many, many competitors into the same model. And then, of course, the existing competitors, the big eyeglass makers who are doing business with the opticians have reacted. So, it's not like it, they, they've been operating in a static environment from a competitive set either, right?
Steve Dennis 21:37
Well, I think that's an issue with a number of these brands, right? It's not, it's not static. And so, if you create a new category, or innovate in a category, you are likely to attract, you know, imitators or, and I guess you're likely to have some of the folks that you're competing with, start to react against that. I think I told you off mic that I have a client that is got a significant part of their business that is in a category that's got several of these disruptors and, you know, he used to refer to them maybe still does, as mosquito brands that they were like, sort of annoying, because they would get a lot of attention, and maybe still some business, but they were not likely to amount to anything.
Steve Dennis 22:18
But as they got to a certain size, you know, you start to say, Well, gee, you know, maybe there is a little bit more of a market for, you know, this sort of design or this sort of price point or, or whatever. But yeah, (crossover talk), it can change to a bigger point that it can change some of the dynamics in terms of how things are marketed, how you respond. And that could ultimately make you think, well, maybe the totally addressable markets not quite so big, because, you know, we're not going to be able to get the kind of share that we originally thought.
Michael LeBlanc 22:45
Where do you think we are in terms of this evolution of DTC and digitally native vertical brands? I mean, there's this new, you know, analog native vertical brand idea. And if we had to sum it up, as we kind of, you know, land the plane, so to speak in this, in this episode, you know, how are you thinking strategically about how this is all going to sort itself out?
Michael LeBlanc 23:04
I mean, clearly, there's innovation happening, we love innovation and retail, sometimes successful, sometimes not. But as you start to see this explosive growth kind of slow down, where do you think this is all going to set out? And what lessons are there to be learned for, for the retail industry from this from this particular period of time?
Steve Dennis 23:22
Well, there's, there's a few different things. I mean, one is, you know, we just need to kind of clarify a little bit of the nomenclature, because direct to consumer, you know, as a strategy has been around for a long time, and vertically integrated brands, like, like Lands End, J Crew. You know, I can go back many of them mail order catalog companies were largely vertically integrated mono brands.
Steve Dennis 23:46
And they were direct to consumer and that they were mail order catalog, and then eventually, they became digital. So, that's what I call the analog native vertical brands. And there's also you know, you can be direct to consumer, and not be vertically, vertically integrated, or you can be direct to consumer and have more than one brand. So, direct to consumer, just the old way of thinking about it is that you go direct to consumer, you're not going through traditional retail.
Steve Dennis 24:11
So, so, there's a lot of kind of overlapping diagrams here between these, these names and what shorter brands were talking about, you know, as relates to what we're mainly talking about today, with the so called digitally native vertical brands, I think, you know, there's also some different flavors there, right? There's the, the, the Warby Parker, I would say even you know, Peloton sort of brands which are relatively complicated business models.
Steve Dennis 24:37
You know, they were originated as online only brands which caused them to take a particular marketing approach, allow them to be more data informed, allowed them to have a lot of growth without investing a lot, if anything originally in physical retail. It now seems like those brands, you know, they have become much more complex. Their operating model has shifted from something that is, you know, sort of asset light to more asset intensive.
Steve Dennis 25:08
And that creates more risks, you know, remains to be seen to what degree Warby, Allbirds, Peloton, and all these other ones, they each have their own particular challenges, but in general, you know, they're at a very different place in terms of their operating model than they were five or six years ago. So, I think we're, we're getting into, you know, much more maturity, much more of a shift towards greater risk because of the, the investment in physical assets, a lot harder to market and acquire and retain customers at the level that many of these brands need to to ever be profitable.
Steve Dennis 25:43
So, there's a whole set of things that are, that are going on there. I think if you look at sort of the old school, DTC brands, that was an interesting report from insider intelligence that I guess we could put a, a link to. They did a lot of analysis kind of quantifying the old DTC brands versus these newer ones. And it's still the case that the old school DTC brands, you know, like, like the Lands' End, and like the LL Beans are way bigger than all these digitally native brands combined.
Steve Dennis 26:15
But the thing I found, found most interesting is that they've all been growing pretty quickly, mainly, because many of them are just kind of riding the, the wave of eCommerce growth, even though many of them do have stores. But the growth rates are really starting to converge. And I think that just suggests that many of these digitally, (crossover talk), -
Michael LeBlanc 26:33
What do you mean by that, converge? And what do you mean by growth rates converge?
Steve Dennis 26:37
Well, so, if you look at the year over year growth rates, across the, I forget how far back they went, like 15 years or something, you saw really, really high growth rates for these digitally native brands. And the analog native brands, if we can use that terminology, but these sort of OG DTC brands, you know, they had above average growth, but mainly that was because of the, they were writing the growth in eCommerce.
Steve Dennis 27:00
But the digitally native vertical brands had, you know, 40-50- 60%, sort of growth rates. But those growth rates are coming down a lot. And in fact, they're coming down to almost the same rate that the old school brands are experiencing. So, they're kind of growing with the industry, I guess, is another way to look at it, which just suggests to me. Now some of that is probably you know, some brands that have gone away. But I think it just really suggesting that we're really entering more of this maturing period for the industry overall.
Steve Dennis 27:31
Now obviously, you got some brands that are new and still having hyper growth but when you start to think about the Warby Parker's, the Bonobos, the thredUPs', you know, these Stitch Fix, you know, these brands that have been around, Wayfair, you know, brands have been around more than 10 years, it looks like you know, even if we didn't have, you know, what's going on in the economy right now, it looks like growth is going to be pretty hard to come by, number one.
Steve Dennis 27:55
Number two, they are going to be affected by inflationary pressures for a period of time. So, that's going to make profitability even more challenging. And then you just got this whole new dynamic, not for Wayfair, but for most of the other brands, of having made all this investment, and continuing to make all this investment. I think you mentioned, you know, Allbirds coming to Canada, you know, so there's still a lot of stores in the pipeline. Madison Reed, I think is going to open 30 stores this year. So, so, lots of these kinds of products and pretty big bets.
Michael LeBlanc 28:24
And Allbirds isn't going exactly into the back streets, they're going in, in Toronto, they're going into Yorkdale. Top shopping mall in the country. And in Vancouver, they're going into Kitsilano Beach, which is a, a wonderful area, but again, not, not cheap real estate by any means. So, there's still investment dollars, there's still buzz happening like it's, it's, it's fascinating to watch really as these, as you to use your words, as all these forces and things coincide and start to merge with each other.
Steve Dennis 28:52
Yeah, and I think the question is, and I think, you know, the what we saw on the stock market over the past six, seven months, and you know, I don't want to make it all about the stock market, but I think investors, least the public market investors, but I've heard similar things about the private market investors are starting to say like, when are you guys going to, like show a glide path to profitability?
Steve Dennis 29:12
I think as you know, more and more results come out. People are going to be like I'm not too confident that, that there is a glide path to profitability, at least on the schedule, we well, it's it's probably an issue of these, these businesses don't look to be nearly as big as we thought they were going back a few years. But also, the timing or the risk associated with getting to profitability, seems to be much more challenging.
Steve Dennis 29:36
And I do think in the case of the investment in physical stores, and really what I was trying to get at with Warby Parker in particular, is if Warby Parker, who I think by all you know, I'm a customer, I think they've done a ton of impressive things, you know, if Warby Parker is struggling to get to profitability, this far in you know, with the with the premise that the physical store strategy was going to be the thing that would really make the difference. (Crossover talk), they're, if they will look like they're getting there anytime soon, what does this say about a lot of these other brands? And, you know, they're not apples to apples in, in every case, but, you know, you can make the argument in Allbirds case. You know, Allbirds is a pretty narrow product mine. So it's like, (crossover talk), -
Michael LeBlanc 30:25
They're, they're the definition of specialty. I mean, (crossover talk) you know, all, all this discussion makes me ask you one question, who wins in a fight the crazy guy or the smart guy? That's when we crashed. I just finished We Crash. But it's funny as you, as you think about, you know, reflect on, on what are the private equity folks doing? Eventually, they want to make some money, right? They're like, okay, let's get going here. where's the, where's the glide path to our liquidity moment and getting a little darker too, see?
Steve Dennis 30:53
Yeah, and I think, I think the thing that will happen, or, you know, what to look for going forward is, you know, where do we start to see, like, I have to assume in the case of not just Warby, but some others, you know, they're going to have to really get serious about taking a look at their gross margins, which is, you know, tough in an inflationary environment, but it, is their pricing strategy, really, really where it needs to be, they're going to have to start to really look at their SGMA.
Steve Dennis 31:20
Overall, you know, we've already seen a few of these brands reduce headcount in a pretty significant way, you know, they're going to have to really look at how they're spending their marketing dollars. You know, most of these companies have very, very high advertising expense. And as we got into in the, in the Dan McCarthy episode, you know, there's a lot of dynamics there that are look pretty shaky.
Steve Dennis 31:41
And, but, you know, if they start to pull back on marketing, if they raise their prices, you know, what does that due to demand, right? Probably not positive things. So, it's a very, I think we're at a really, we would be at a very interesting moment anyway, with a lot of these brands given the, the cycle where you know that where they are in their maturity cycle. But when you layer on top of the macroeconomic headwinds, buckle up, that's, that's my advice.
Michael LeBlanc 32:11
Buckle up, buttercup. All right, so, that was a great episode. And to the listeners, we've got a couple more episodes to wrap up season four, we've been renewed for season five. And we'll look forward to speaking again next week.
Michael LeBlanc 32:27
If you liked what you heard, please follow us on Apple, Spotify, or your favorite podcast platform so you can catch up with all our great interviews, like our discussion with Target SVP Nancy King on their innovative approach to harmonize retail. New episodes will show up each and every week. And be sure and tell your friends and colleagues in the retail industry all about us.
Steve Dennis 32:44
And I'm Steve Dennis, author of the best selling book, 'Remarkable Retail: How To Win and Keep Customers in the Age of Disruption'. You can learn more about me, my consulting and keynote speaking at stevenpdennis.com.
Michael LeBlanc 32:58
And I'm Michael LeBlanc, producer and co-host of the Conversations with CommerceNext podcast, The Voice of Retail podcast, keynote speaker and host of the all new, Last Request Barbecue cooking show on YouTube. You can learn even more about me on LinkedIn, or meleblanc.co.
Safe travels everyone.
SUMMARY KEYWORDS
brands, stores, crossover, retail, profitability, big, sales, bit, Kohl, DTC, pretty, Warby Parker, thought, year, business, starting, consumer, episode, growth, talk