Remarkable Retail

Dot Com Bomb: The Sequel? with Special Guest Daniel McCarthy

Episode Summary

This week we take on the question of whether we are on the cusp of a retail disruptor apocalypse, with the help of return guest Daniel McCarthy, Assistant Professor of Marketing at Emory University's Goizueta School of Business and leading expert on customer-based corporate valuation.

Episode Notes

This week we take on the question of whether we are on the cusp of a retail disruptor apocalypse, with the help of return guest Daniel McCarthy, Assistant Professor of Marketing at Emory University's Goizueta School of Business and leading expert on customer-based corporate valuation.

Before Dan joins us we briefly review the similarities between the first wave of online brands that subsequently melted down (remember and what we've seen with the latest crop of digitally native brands (Warby Parker, Allibirds, Stitch Fix, TheRealReal, et al ) that have seen their valuations collapse and continue to struggle to get on a glide path to profitability. 

Then Dan joins us to help dissect the underlying (and often challenging) unit economics of these fast growing brands, with a particular focus on Wayfair and Warby Parker. In addition to helping us understand how to better understand the relationship between customer acquisition costs and lifetime value, we learn about "CACulations" and the dangers of "spending up the wazoo."

But we open with a review of the biggest news of the week, which revealed that the holiday season was not so merry and bright when it came to actually making much money. Target shared some curbside enthusiasm, while delivering pretty tepid results. Best Buy and Macy's lost ground, while warning about a difficult road ahead. Kohl's was exactly the train wreck we've been predicting. We wrap up with hot takes on Nordstrom bailing on Canada, Hanna Andersen's cleverly named resale entry, and Walmart's doubling down on same day delivery.

We're headed to Las Vegas in March for another edition of Shoptalk. Retailers and brands can get a Shoptalk ticket for a reduced rate of just $1950 rate here using our special discount code RBREMARK1950.

About Daniel

Daniel McCarthy is an Assistant Professor of Marketing at Emory University's Goizueta School of Business. His research specialty is the application of leading-edge statistical methodology to contemporary empirical marketing problems. His research interests include customer-based corporate valuation, which he popularized, customer lifetime value, limited data problems, data privacy, and the marketing/finance interface. He is also actively researching the causal effect of actions and events on customer purchase behavior. His research has been accepted and published in top-tier academic journals, including Marketing Science, the Journal of Marketing Research, and the Journal of Marketing. His work has won numerous research awards, including the Lehmann, MSI Clayton, Gary Lillien Practice Prize, and MSI Young Scholar, and been a finalist for many others, including the Paul Green, Hunt/Maynard, MSI/Root awards. His work has been featured in major media outlets such as the Harvard Business Review, Wall Street Journal, FT, Fortune, Barronís, Inc Magazine, the Economist, and CNBC.

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 eCommerce Leaders podcast, and The Food Professor  with Dr. Sylvain Charlebois.    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!


Episode Transcription

Michael LeBlanc  00:05

Welcome to the Remarkable Retail podcast, Season 6, Episode 8 presented by MarketDial. I'm Michael LeBlanc. 

Steve Dennis  00:11

And I'm Steve Dennis. 

Michael LeBlanc  00:13

Well, something different for the people on this episode: a solo episode on steroids. We're tackling a structural issue in contemporary retail by both referencing a similar period in retail history. And we're adding academic depth and clarity with one of our leading subject matter experts in customer financial metrics. And one of our most popular guests in the history of the show, Daniel McCarthy, Assistant Professor of Marketing at Emory University.

Steve Dennis  00:36

Yeah, it's great to get Dan back. And I think that this episode, you know, we've talked about all the things going on around these various digital disruptors in many episodes. But we haven't done a deep dive for a while. And with Wayfair's news and Warby Parker's earnings and some other things that are going on, I think it's a great time to talk about that a bit more and get somebody like Dan to help us unpack some of the facts.

Michael LeBlanc  01:02

Let's start with the big story. It's kind of earnings season, and, you know, the puts and takes on what it does to the stock price aside. Any lessons that we're taking away from the prospects for 2023, based on the earnings that we're seeing coming out this week, Steve?

Steve Dennis  01:17

Yeah, I think the overall picture and I'll briefly touch on a few particular situations, but I think the overall picture was it, was, it's been pretty disappointing. Most retailers have been reporting, either flat to down comp store sales, which of course is, you know, one of the big metrics, and for the most part, the earnings are down, it's actually kind of interesting to me. You may remember on social media, when people were talking about it being a great holiday. 

Michael LeBlanc  01:24


Steve Dennis  01:25

The holiday season was. I was going like, well, you know, the sales look pretty good. I'm not sure the profits are gonna be that good. And as it's turning out, most of the retailers are not actually reporting very good earnings. And then the other thing that was that's been pretty consistent across the, I don't know, you know, 9, 10, 12 different retailers that reported in the past week was pretty much all of them guided, you know, either guided down or said, you know, this is a pretty uncertain environment. And we're not sure exactly how things are going to play out, but it's probably not going to be particularly good.

Michael LeBlanc  02:17

All right, well, let's get into some of the actual specifics. So, we saw Target, Kohl's, and Macy's with a, how do I describe the reaction to the Macy's (inaudible)? It's kind of like Alice in Wonderland. But anyway, you'll, you could talk about that.

Steve Dennis  02:19

Yeah, just really quickly on Target. I mean Target's, more or less, was a kind of a similar picture as, as Walmart, not quite as strong. But basically, flat comp store sales, the earnings were down quite a lot. Something like 43%, Brian Cornell, basically described it as that they, going forward, look to be facing a very challenging environment. So, you know, not super optimistic. They did, just as a quick aside, announced that they are going to be rolling out curbside returns, (inaudible) quite a lot of curbside pickup. But now you'll be able to, you know, just roll on up and, and do your return without having to go into the store, which I joked on social media, I love, this has sort of tickles my curbside enthusiasm. So, that was good.

Michael LeBlanc  03:21

And you're gonna have our Star-, you're gonna have your Starbucks with that too, right? Our guest, Nancy King was telling us about all the things that were on the top list of demands, or requests, I should say, from customers that dealt with curbside. So,

Steve Dennis   03:30

Yeah, yeah. 

Michael LeBlanc  03:31

I love the idea of returns to the curbside. It's fantastic.

Steve Dennis  03:34

Yeah, I think that's pretty interesting. But then we move to the things that, a couple other companies that were definitely not so great. So, Kohl's reported, and I also mentioned on social media that people were like Kohl's had a surprise, bad quarter. And I'm like, who thought there was not going to be a bad quarter?

Michael LeBlanc  03:54

They are not clearly listening to this podcast, (crossover talk). 

Steve Dennis  03:56

Yes clearly, or just in general paying attention to anything in retail. But yeah, it was pretty bad. Sales were down 7%. Although they did say that Sephora, which they've been rolling out to, I think like 600 stores, or something was up 90%. And they've also quoted about how stores with Amazon returns are way up. So, I'm like, Well, if you add up all the business they're supposedly getting from Amazon returns, and Sephora being up 90%, yet you're down 7% overall, and like, I'm not sure exactly what that says about the rest of the store, but probably not good things. 

But the thing that really, really hurt them, you know, the sales decrease was bad enough, but their gross margin fell by 1000 basis points. You know, that obviously has a lot to do, which is why I thought it wasn't surprising at all that their earnings were bad, but they were just loaded with inventory and marking it down like crazy. And so that really hurt them and, and they basically said the outlook is, is, is not looking too great.

Steve Dennis   04:22

I just also should mention that Michelle Gass, the prior CEO has the best timing in the history of retail. She looks like a genius now. for, 

Michael LeBlanc  04:27

Yeah, yeah.

Steve Dennis  04:28

For leaving so anyway, but and then quickly, you alluded to this, I mean, Macy's reported, and they beat expectations, which is always to me. I mean, I understand how Wall Street works. But that is pretty funny. But objectively, the results were pretty bad. Their comps were down 3% flat for the year. As we've touched on a couple of times, they've got this Polaris Strategy, this three-year strategy to kind of turn around the company. The end of that three-year period was this quarter. And I went back and looked at how their sales compared to four years ago, answer flat, and I would say down if you were to adjust for inflation, 

Michael LeBlanc  04:47

Flat there you go, flat, (crossover talk) is the new up at Macy's.

Steve Dennis   04:51

Flat is the new up. So, to me, this is the running to standstill strategy, you know, you spend many years lots of money, try lots of stuff, and you end up in exactly the same place you were before. And I just want to wrap up really quickly on the earnings front. I mean, Best Buy's comps are way down, negative guidance. I mean, a lot of this has to do with how well they did during the depths of the pandemic. 

Michael LeBlanc  05:47

Yeah, (crossover talk).

Steve Dennis   05:49

And so, I don't think that's terribly surprising. And then I'll just mention this, we're going to talk about this more in just a few minutes, when we get Dan on, is Warby Parker, reported, and they've been opening a lot of stores, they're at 200 now and they're gonna open another 40 this year. You know, their results were greatly improved. 

The thing that I looked at, which is not a number that a lot of people pay attention to, and is maybe too inside baseball, but you know, here they are adding all these stores, you know, which are incremental growth, and then you know, some of their stores are now in their second or third year comp, which generally means pretty positive numbers, but their sales growth is only up 10%. It seems to me like if this were really working, it would be higher, but the other thing was if you look at gross profit dollars, that was only up seven just over 7% for the year and just over 5% for the quarter. And since part of the reason why they're not making any money has to do with all this overhead, all the sales and marketing and everything like that's the number that really needs to start to move if they're gonna get to sustainable profits. So, I think that's something to really, really focus on going forward but, but definitely some, some nice progress.

Michael LeBlanc  07:18

Well, a good roundup of, of current events. Now speaking of current events, we've got some news coming out of Canada last week. Kind of breaking news, I guess, breaking news-ish, Nordstrom exits Canada (crossover talk) a big deal on the heels of some bad earnings. They came to Canada in 2014 with what I call a measure twice cut once you know versus Target that said we're going to open 130 stores on May one they came in and opened over yours a slow roll of stores which was thought to be a good strategy you know to figure out the market and then grow. They opened their Rack concept stores in 2018 and they join a long list of retailers that have come into Canada,

Steve Dennis  07:59

An esteem list of failures,

Michael LeBlanc  08:01

They had great hopes but for a variety of reasons couldn't make it work Sam's, Sears, Target Lowe's, Bed Bath & Beyond and now, now Nordstrom they'll be gone and outta here. eCommerce shut down Friday and they will be gone in June. So, off they go into, into the yonder. 

Hanna Andersson, let's talk about Hanna Andersson. They came up with a resale strategy and probably the best name I've heard in a long time. What did you think of their strategy? (Inaudible). 

Steve Dennis  08:34

Yeah, I advocated for including the story not because Hanna Andersson is a huge brand. I mean, I'm sure probably people listening are going like Who the heck is that. but they are as if you don't know they're a children's apparel brand. But they are coming out with a new resale marketplace. And the name of it. Wait for it, “Hanna-Me-Downs”.

Michael LeBlanc  08:55

I love that. There we go.

Steve Dennis  08:59

Yeah, so that's it. I have nothing more to say other than that's just that just a (inaudible). 

Michael LeBlanc  09:02

That's enough. You don't need to say anything else. Well Hanna-Me-Downs, love that. Any, any last thoughts on any news that struck you, tickled your fancy, so to speak this week?

Steve Dennis  09:10

So well, one, one last thing that I thought was kind of an interesting tidbit. I guess this came out of Walmart's earnings announcement. They said that store filled delivery, on fulfillment of eCommerce orders has tripled in just under two years. And you know, this kind of fits with what we've seen from Target, and others really leveraging stores to be able to offer that same day next day delivery. 

And I think more and more there's this interesting battle that's emerging between Amazon trying to double down on their fast delivery but struggling to get the top line going there. While Walmart and Target are coming in and saying well, you know, we actually can leverage our stores in a pretty powerful way. So, more, more to come on this but I think you know, this, this shift is quite dramatic. From, from both Walmart and Target and a few others over the last two or three years.

Michael LeBlanc  10:03

Well, all right, let's leave it there. And now just before we get to our deep dive, into Dot Com Bomb: 2.0, and our special guest Daniel McCarthy, a few words from our presenting sponsor.

Michael LeBlanc  10:13

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Michael LeBlanc  10:49

All right, so our focus for this episode, as we talked about it at the beginning. Is it you're feeling like we're on the cusp of a retail disrupter melt down? And we're drawing parallels or similarities to what you and I experienced and saw in the late 90s when the internet bubble burst, like the first dot com burst. And, and let's, let's start into it, let's jump into that. Now, first, we shouldn't assume that everybody that is listening is familiar with that period and what happened? I mean, we're not a history lesson. But let's, let's spend a few minutes talking about the buildup in the late 90s. The craziness that happened then and ultimately, the collapse of a very, very popular, but very unsustainable business model.

Steve Dennis  11:47

Yeah, well, you know, the essence of it, which is I think, in many ways similar is there was this overall belief that eCommerce was going to change everything. And that large businesses could be built by becoming, you know, the Amazon of pet food, or the Amazon of whatever, because Amazon was clearly starting to shake things up. So, there are lots of businesses that were founded, and a lot of venture capital that went into these, these new disruptive business models, and including some of them that were able to go public. And so this happened quite quickly. And many of these companies got into trouble also, quite quickly, so that by the end of the 90s, most of them, being one of my favorites you know, had this high trajectory, advertised on the Super Bowl, and then, or a year later, were out of business. So, there was quite a wipeout of quite a lot of companies that were very high profile, and it kind of came out of nowhere to grow-, grew quickly, attracted investment dollars and then collapsed.

Michael LeBlanc  12:54

It really, you know, one of the cultural milestones to that period is how many dot coms were advertising on the Super Bowl, if you remember, because, you know, the model was like, (crossover talk) right, I mean, it happened to you know, this is happening again, right. So, it's interesting, similar parallels. I mean, there was no, remember the concept was land grab, right? We can, there's no limit to the amount of money we're gonna, we can spend, even though it looks totally crazy now, because the market is going to explode. But it was very, very early days in dot com, like the late 90s. But if that was the, if that was prevailing wisdom, or thought, or why people were betting on these companies is that, you know, it's so new, that you can spend unlimited amounts of money, and it will all pay out, and it will all be fine. So, that was the vibe. I mean, you look dot com Just millions and millions and millions of dollars spent in the acquisition when they couldn't even ship a product like these are even early, 

Steve Dennis  13:41


Michael LeBlanc  13:42

Days in logistics, right? (Crossover talk) The list is full of detail.

Steve Dennis  13:51

Yeah, well, I think that's the, that's the thing. I mean, I think many of these companies turned out to be I mean, some, you know, some patterns we can talk about a little bit more are, are repetitive. But it also was, to your point, very early days, you didn't have nearly the kind of eCommerce penetration that you did today, a lot of the technology, I mean, it's the pre-smartphone era, right? So, there's no such thing as mobile, really, the cost of processing power, the ability to get third party fulfillment, like and, you know, none of those things really existed or if they existed, they were much, much higher cost. So, the economics of creating a brand and the economics of fulfilling that demand, even if you could get it were pretty challenging, but mostly it was just the, you know, the market was not developed enough for these to be, you know, billion dollar plus kinds of businesses.

Michael LeBlanc  14:41

Okay, so that's a bit of a history lesson. Now we're not 1999. Today many, many things have changed. So let's, let's touch on, you know, fundamentally what's different about today. So, one thing for example, is you know, the delivery infrastructure and the experience of people who know how to deliver single units is much broader, there's a broader talent pool. So, we should probably touch on a couple of things that are different today, before we get back into some of the parallels that did remind us of that era?

Steve Dennis  15:09

Well, I think just the main thing, from a consumer standpoint is customers, you know, for the most part are used to using digital technology to find products, learn about products and transact. To your point, the cost structure, the availability, to do certain things like, you know, very targeted digital marketing is way more advanced, the cost of data processing is down, you can do a lot of stuff in the cloud, you know, etc., etc. So, I think the fundamentals of what is necess-, you know, what was necessary back then are the same, but the receptivity of the consumers, and the technology in infrastructure is definitely well advanced.

Michael LeBlanc  15:52

So, why are we talking about this today? I mean, if we, if we page back, just pre-COVID, it was the retail apocalypse, right, which again, was this exuberant narrative talking about physical retail was, was dead, which was, again, wrong. What are we talking about today? What, what are you feeling and seeing? I mean, we, we, we talked a little bit about it in the opening, when we looked at some of the results, but really hone in on why we think this is an impor-, another important moment in the history of retail?

Steve Dennis  16:19

Well, two things. One is, and this is maybe a little bit more beside the point, but I do, I do find it a bit ironic that with all the talk of the physical retail apocalypse, it's even, you know, on the table, that we're saying, Well, you know, actually, if you look at the facts, as we've touched on a few times, so I'll go through this very quickly, you know, it's very clear that eComm's growth has been much higher than sales through physical stores. But in the US anyway, physical stores have had positive growth since 2008. So, that's 14 straight years, for the US. 1000s of stores continue to open every year. And now, you know, in a kind of interesting, ironic twist, many of these disruptor brands that we'll talk about in more detail in a second, are turning to brick-and-mortar as (crossover talk) for they're getting to grow. So, there's an irony that I just feel compelled to point out. I also, you kind of flagged this early on, or a few years ago, in my book that I actually think that many of these business models are pretty sketchy. 

Steve Dennis  17:02

So, flash forward now. And the reason why this is kind of gaining momentum, from my perspective, and is very timely, is, you know, many of these companies, whether we're talking about Warby Parker, Stitch Fix Allbirds, Rent the Runway, etc., many of these companies have been around for a dozen years, many of them have not gotten close to being profitable. And as we're seeing some of the earnings continue to come out, you know, many of them are really continuing to struggle. And so the question is, you know, what has, you know, how many of them are really at risk? What has to happen for them to get on a better trajectory? And what lessons can be taken away for, you know, for all of retail, but particularly people in the direct-to-consumer space?

Michael LeBlanc  18:08

When you think about how we got here, is it that businesses, investors, and people didn't learn the right lessons out of Dot Com Bomb, so to speak, and, you know, you and I sit at a lot of conferences, and we, you know, I remember the day, right, here's Warby Parker presenting and it was an all-new way of doing business, and they're gonna, you know, so it kind of brightens you up, because you're a big advocate of trying new things. I mean, you're, you're you are very much a fan of, you're better off of this. There's more risk and staying still and moving ahead. So, how do you merge these two things? I want to try something different. But at the same time, you want to, you know, Oops, the model isn't quite working, but you don't want to inhibit innovation and growth at the same time, (crossover talk) about that, right?

Steve Dennis  18:50

No. Well, I think fir-, first of all, you know, the, the, the fundamental idea that new technology and changing consumer preferences can create new business opportunities. I mean, that's, that's always been true, right? It's just become increasingly true. As, there's a fragmentation of demand. And as new technologies emerge, and as you know, like we said earlier as eCommerce and mobile technology, you know, a lot of these other things just have fundamentally bigger potentials and, and bigger underlying economics. But I think there are a couple of fundamental flaws in the overall investment thesis. The first fundamental flaw was that eCommerce was going to, you know, take over retail,

Michael LeBlanc  19:16


Steve Dennis   19:17

And therefore, you know, that led to this idea that these businesses, number one, could be built to be much bigger than they actually are without any kind of physical store premise, which I'll come back to in a second. The second issue is that it was pretty easy and inexpensive to build a brand online. So, I think there was a fundamental misunderstanding about how big these businesses could be as sort of a SaaS model. People are familiar with that, as opposed to more of a traditional omni-channel kind of business. And that, you know, you could create these great brands. 

Steve Dennis   19:44

And one of the things that really got a number of businesses confused in the early days was how quickly they went from, you know, no sales to 50, or a $100 million in sales. And they did that largely through word-of-mouth, and the very cheap cost of customer acquisition. And we're gonna talk more about cost customers, with Dan in a few minutes. So, but, but I think there was just this, this, this business model, the underlying investment thesis, was pretty flawed. And so that led them to think that the total addressable market was much bigger than it's turned out to be. The cost of getting these businesses beyond 50, or $100 million, from a marketing standpoint, turned out to be quite expensive. And then which we'll also touch on a little bit later, Apple changed their privacy, you know, the cookie-, cookie-less thing, you know, and just in general, every brand was moving to a much more performance oriented marketing. The cost of marketing, as you know, has grown, you know, probably, you know, 10 times from where it was four or five years ago.

Michael LeBlanc  21:18

And it's hard as, as one of our guests has said, and continues to say, Scott Galloway, it's like, you can't, it's hard to win in the Meta, or Facebook or Google world today the way you used to, because, 

Steve Dennis   21:35


Michael LeBlanc  21:36

It's almost like a utility now. It's almost like a cost of doing business. And you've got to do it. It used to be that you could develop some expertise at it and be miles ahead of anyone else that, that, that, that, you know, the, the differentiators has become the table stakes, you just got to be good at these things. But it's hard to gain an advantage. Therefore, it's hard to and Dan talks about this, it's hard to, you know, it's hard to get a lower cost of customer acquisition, because everybody's kind of paying, you know, everybody's doing it now, right?

Steve Dennis  21:54

Yeah, and I think, I think there were two walls that got hit that one of which relates to that it, which is, you know, it's one thing and it kind of gets back to what I was saying about kind of the early success that many of these brands had. It's one thing to kind of quickly sort out the like, perfect fit customer, you know, the ones that basically find you and are likely to stick and you probably don't have to promote as heavily. But there's a point at which and I think every one of these brands has pretty much had to varying degrees, where you've got to go find customers. 

Michael LeBlanc  22:09


Steve Dennis   22:10

And you've got to actually steal away pretty good customers from other brands. So, you know, if your Bonobos, you know, maybe you find that quick 40 or $50 million, which is nothing in the scheme of things, among customers that are not really happy with their choices love to shop online, and are willing to pay a premium price, you know, there's that, that, that perfect fit center of the bullseye customer. But then at a certain point, you're basically going after the Nordstrom customer, right, and maybe, 

Michael Leblanc  22:18

Right, right. 

Steve Dennis   22:20

You know, most of those customers like it pretty well. But also Nordstrom is pretty good at bidding up keywords to get in front of those customers. And so you, you have this dilemma of paying more and more to basically bribe those customers to try you. And chances are the customers are going after it at a certain point, you know, whether that is you know, 75 million, 150 million, are not as inherently valuable, which is what we'll touch on with Dan in a second. The second thing was this really this idea that online shopping was not going to take over the world, it turns out whether we're talking about Warby Parker or Wayfair, or Bonobos, there's a lot of customers that really want to touch and feel and see the product in person. As their growth flattened out, you know, again, this idea that you can build these huge brands online only turned out not to be the case, you needed a physical presence. So, now the second kind of hurdle to overcome and, and we'll see how well this works out because it's still early days, is that brick-and-mortar expansion was necessary to grow. And now that's a whole different animal in terms of, 

Michael LeBlanc  22:59


Steve Dennis   23:00

Capital investment, in terms of what it takes to manage this, just like we got into on our, with our interview with Mitch from, Leap. So, a lot of the fundamental issues here were not really anticipated. And so, we're seeing many of these brands really hit a wall. And you can pretty much go through the list. There are a few exceptions, which maybe we can talk about. But if you go down the list of the highest profile, digitally native vertical brands or new DTC brands, most of them have seen their, their valuations, at least the ones that are public, down 70-80- 90% in the last year. So, that's something that really makes this even a more urgent conversation.

Michael LeBlanc  24:34

You know, we talk about these very visible companies that are operating in this model. The ones that intrigued me and we got into this with our guest, Simeon Siegel, are all the brands, consumer brands, that decided they were going to go direct -to-customer and, and just bypass retail. Remember, that was the late thing in the late 90s. The disintermediation of retail, it doesn't work because you didn't change, you changed one set of costs for another, but you know, it's expensive to ship a pack of toothpaste to a home directly as Crest, Procter & Gamble, like initially, that was the enthusiasm (crossover talk), right? Everything, retail was useless now. I guess my last comment was, as I again, reflect on what you're saying, it really gets back to what we talked about buying versus shopping, right? If your assumption is everybody wants something very efficiently to the doorstep and never wants to shop and has no interest in shopping, and just wants to tick the box on a list, dot com is wonderful. But we know and I think it's one of the fundamental mistakes that many people assume is, many people want more out of shopping. It's cultural, it's social, right? I think that for me, you know, brings this all together.

Steve Dennis  25:35

Yeah, I think that was a fundamental misread. The other thing I would say quickly before, before we bring Dan on is one of the you know, direct-to-consumer, as you well know, you know, it's a pretty old business model in a lot of respec-, respect, you know, mail order catalog companies, 

Michael LeBlanc  25:49

Sure, sure. 

Steve Dennis  25:51

(Crossover talk) who pioneered, pioneered, the space. And so one of the things we know about what makes for a good direct-to-consumer business, and we know this, from the direct marketing days of mail order catalogs, is you've really got to be able to manage your outbound marketing costs against your total average order value, because you know, it basically cost the same, to pick an order, pack the order, and send it through the mail, certainly more differences on the postage side. So, there are certain kinds of businesses that you know, regardless of whether we're talking, you know, new age businesses, or old school businesses, that lend themselves to being good direct-to-consumer businesses, you know, independent of having a brick-and-mortar footprint. 

Michael LeBlanc  26:19


Steve Dennis   26:20

So, when we look at some of the winners and, and losers or, or companies that are challenged, you know, if you have infrequent purchases, like you do with Casper and Wayfair, it's a lot harder to leverage that expensive acquisition cost and make money, right? If you have a business that has very expensive shipment costs, like furniture, it's very hard to get the unit economics to work. On the other hand, if you're a company, like for example, On Running, which is a newer company, you know, it's fairly inexpensive to ship a pair of shoes, they have a pretty good gross margin to begin with. So, that gets your order value up, serious runners buy multiple pairs of shoes every year. So, even though you're fairly focused, you can get good repetitive sales or another business that's done quite well started around the same age as is Hims & Hers, the sexual wellness brand, very, you know, it's a subscription base. So, if you know, if you can get the retention, you get a reliable course of revenue, you don't have to keep spending a ton to acquire customers, 

Michael LeBlanc  27:15


Steve Dennis   27:16

Over and over again. And it comes in a tiny little box, it costs nothing to ship, and it's got a relatively high average order value. So, the sum of these things, and I guess that's maybe the last comment I'll make about what people got wrong. I think a lot of the investors and the entrepreneurs acted as if these new DTC type brands were plowing totally new ground. And they weren't there's some underlying economics of a direc-, a good direct-to-consumer business that we've known for a long time. And one of the reasons why I've been negative on many of these companies is they didn't seem to get that.

Michael LeBlanc  28:16

Well. We've had our great discussion. And we've referred to some of these metrics in this business model before Dan's been on the, on the podcast before. Let's hear from him today. Daniel, welcome back to the Remarkable Retail podcast, my friend, how are you?

Daniel McCarthy  28:29

I am doing well. It's great to be back.

Michael LeBlanc  28:31

This is your second appearance on the podcast. You were very, very popular. So, we had to have you back on because of course we needed another popular episode, kidding. We, (crossover talk) gotta drive traffic, you were the best. Yeah, you're not clickbait. But you know you were, you're very popular with our audience and, and your insights are so valuable. So, when we're thinking about what we're going to talk about today, Steve and I, we thought, one, only one name came to mind and, and it was yours. So, thanks again.

Steve Dennis  29:00

And that person wasn't available. So, you're number two.

Daniel McCarthy  29:04

I'm glad to be number two.

Michael LeBlanc  29:05

Well, you're number one in our hearts. Listen, listen, let's, let's assume that not everybody's heard our first interview with you and or don't, may not know about you. So, tell us a little bit about who you are and what you do for a living?

Daniel McCarthy  29:20

Yeah, I kind of wear a couple hats. One hat is, as an Assistant Professor of Marketing. And so, I spend a lot of my time writing academic papers and teaching about customer lifetime value and how to be able to predict it well. So, you got a customer base, you got some transactional data. We want to know who's going to be doing what, when and for how much and, and then we also want to know how that kind of drives overall valuation in health at the company level. 

So, you take companies like Wayfair, like Warby Parker, you know, they've got a customer base, and they've released some data and we want to be able to take that and be able to say, you know, this business is healthy, and this business is not. And so the kind of the way I'll go about it is by predicting customer adoption, retention, repeat purchase and spend and contribution margin, tee that up with an understanding of how much companies are spending to acquire customers in the first place, and then using that to drive estimates of overall valuation of what revenue is going to be in the next bunch of quarters, or even just kind of more, more narrowly, you know, what is customer lifetime value? You know and how's that been evolving over time. And so, they call it customer based corporate valuation, I’ve written a few papers about it. So yes, that's kind of hat number one.

Daniel McCarthy  30:33

Hat number two is kind of moving away from the ivory tower and just doing this stuff for real. So, I'm also an entrepreneur. With my adviser Wharton Marketing Professor Peter fader, we've now started not one, but two companies. So, the first company, Zodiac, did all this sort of modeling. Oftentimes, it was for direct-to-consumer disrupter type brands, typically, on behalf of the marketing departments at those companies, one of our clients was Nike. And so, we kind of grew the company and sold it to Nike. And we're able to kind of carve into the non-compete that we could start a second company that kind of focuses more purely on this concept of customer based corporate valuations. So, between those two companies, we've probably brought this model to sort of models that we'll be talking about to life in maybe 350 or 400 companies. So, we have some perspective, just actually seeing this stuff in action across a broad swath of the sort of categories you know, that we'll be focusing on.

Michael LeBlanc  31:54

It's a great mix of academic rigor and science, if I can put it that way and the practical and hands on. Who typically is your, you mentioned that some companies that would hire you understand that I imagine there's lots of other people trying to value businesses who reach out to you and say, I remember what we said you know after we talked to you, it’s like, how else would you evaluate these companies? Like it seems so straightforward, but it's still not that common, right? So, people want a deeper look into the numbers. Yeah.

Daniel McCarthy  32:22

Yeah. So, Theta, Theta is the new company, we kind of have two broad customer groups right now. One is private equity and then the other is the companies themselves. So, we had that non-compete, but the non-compete expired. So, we've got the ability to kind of go back in and do the tactical marketing stuff again. But you're absolutely right. I think on the private equity side, they understand that it's important, like they, they've done all this work, typically, they're, they're ignoring the customer, if they are kind of incorporating customer related measures, they're usually taking whatever the company has provided them at face value, what can often happen is they'll kind of get to the final stage of the diligence process. And the target company plunks the whole transaction log into the data room, and they just kind of look at it, and they stare at it like, huh, you know, seems like that could be valuable, but I don't know what the hell to do with it in a week, you know, in two weeks,

Michael LeBlanc  33:21


Daniel McCarthy   33:22

So, however, it is long before they have to put in their bid. And so, what we'll do is we'll kind of go in and do a sprint to kind of take that information, take that data and convert it into useful insight about unit economics.

Steve Dennis  33:34

So that's great to kind of give us this high-level approach. Maybe we can now dig into a few specific examples. So, Wayfair, as we talked about, in the intro to this segment reported, I think what, at least from my perspective, was pretty much a train wreck of a quarter, their sales were down a lot. They lost 5 million active customers and had a pretty sizable operating loss, I think, by any stretch of the imagination, but which did you, do you agree it was a problematic quarter? And then in particular, what are you looking at to try to understand whether this business can get on a positive trajectory? Or is it really significantly underwater?

Daniel McCarthy  34:15

Yeah, Wayfair is a great example. I think how this approach can be valuable is that you have a lot of companies that are growing quickly and losing money. And, you know, we're not going to say that every company that loses money is a bad company, it could be that they're able to grow their way into profitability. But to be able to do that, what you need is operating leverage, you know, that that growth is going to bring about better margins and, and really, that is what customer lifetime value analysis is intended to do is to say, when you acquire the next customer, are you making a bunch of money or not? 

And if you're making a bunch of money, kind of on the margin, then even if you have a whole bunch of overhead that's kind of encumbering overall profitability now? Well, you know, if you acquire a bunch more customers, you will be profitable in the future. And so, at Wayfair I think the tough part is they've done a great job of growing, but they have not done so with good customer lifetime value you know, with good economics. 

And they've kind of secondarily been hit, especially over the past couple years, with this real whiplash that's kind of been driven by COVID. And that they had a really sharp increase in revenue that was spurred on by COVID, shutting down all the furniture stores at a time when furniture stores represented something like 85% of all furniture purchases in America. And so, it just created this humongous windfall, you know, increase in demand, and even Amazon you know, which is kind of one of the big digital competitors to Wayfair, they were prioritizing other categories. And so even other furniture e-retailers weren't, weren't, weren't in the game anymore.

Daniel McCarthy  36:04

So, fast forward to today, what we've now been observing, and I actually wrote a whole academic paper on this is a lot of the increase in demand that they saw, obviously, the, the share expansion that they got, you know, that they got kind of got to keep, but what's been happening now is all of those furniture stores are open again. And at the same time, a lot of the demand for the category was the pull forward demand, that everyone did their home remodeling, they bought that desk for their work from the home office, and they don't need to buy another desk anymore. And so, in the same way that we perhaps were overshooting the baseline, you know, kind of what we would have expected demand to be in the absence of COVID. Now we're kind of under shooting that baseline. And so, they're kind of getting hit on, on a number of different fronts at the same time. 

Daniel McCarthy   36:50

I guess the other front that's been hurting them is the privacy related changes, you know, so one thing that we've been observing is that their CAC has been going, their customer acquisition costs have been going through the roof. There's been debate about how exactly we should calculate their CAC, and what the CAC-ulation should be, sorry.

Steve Dennis  37:13

Oh, wow.

Michael LeBlanc  37:14

I like that, (crossover talk).

Daniel McCarthy  37:16

PhD in that. The most recent figures again, these are all illustrative, but they say, you know, 7% of our repeat sales is what we're spending for ad, on ad spending to generate that revenue. And so if you kind of back that out, the amount that they're spending to initially acquire customers has gone from something like 40 bucks to upwards of 100-110 bucks. So, it's just gotten a lot more expensive. A big question now is, is this just the, you know, the unwind of COVID. And, you know, we'll kind of be back to 40 bucks, once this has kind of worked itself through. Part of me believes that a bunch of this is secular, you know, that they just are not able to target as well, because, because of the apple changes, and because this is a category where you know, there is a relatively longer customer acquisition funnel. And so, the benefit of being able to target the same person, again, is higher here than it would be for a category where, you know, you get hit with a Facebook ad, and either you buy or you just don't buy. So yeah, the fact that something like I think they said in the last quarter 60% of their revenue is coming through, through mobile. Yeah, I think that's exactly the sort of thing you know, will lead this to be a bigger issue for them, then, perhaps for another digital disrupter. 

Steve Dennis  38:44

Can I ask you more? And this, this comes more from, from intuition, because that's, I think, you know, I was, and I maybe I'm overly burdened, or, or my, my view is masked by having worked in the furniture business years ago, and knowing some of the, some of the challenges, particularly on the logistics side, which I know is not, not your area of expertise. But one of the things that struck me about many of these brands, not just Wayfair, was that a lot of what seemed to be causing them to gain market share was very, very low pricing relative to typical competitors, and really, really heavy marketing. And I'm wondering, you know, you obviously are getting down more to some specific things, but just as a general, I guess, guidance in terms of people looking at these companies, can you, can you really parse out how much of the underlying economics are related to just on economic pricing as well as just greatly exaggerated marketing expense even beyond just the everything you pointed out about cost of customer acquisition?

Daniel McCarthy  39:50

It was certainly a lot of the marketing spend that translates into a high cost of customer acquisition. I think to your point it also translates into a lot of marketing expense for repeat purchases. And, and that's a real issue, you know, I think that, in general, the magic of CLV is that the initial acquisition is expensive, once you've brought them in the door, that the repeat purchases are cheaper, you know that you just don't have to market as much to get a repeat order as you did for the initial order. And that, that no longer becomes the case, it becomes much less the case if the company is spending up the wazoo on repeat orders, too. So, that operating leverage, it doesn't quite, you know, swing to the positive. And I think that's also why, you know, here we are, I think Wayfair gets something like 80% of its orders from, from repeat customers. And so, you think, well, shouldn't we have seen that operating leverage by now? 

Steve Dennis   40:23


Daniel McCarthy  40:24

And yet, we haven’t? You know, I think, to the former point about the pricing that I don't, you know, I haven't done the web scraping analysis of looking across different, different companies selling the same product. But, you know, certainly the margin profile is also quite compressed when we move away from the marketing spend. Yeah, I think that their gross margin used to be around 20, call it 25%. Now, it's up around 29%. But when you factor in, you know, customer support, merchant processing fees, you know, other variable overhead, and then, you know, the, the, the ad spending for the repeat orders, the contribution margin is in kind of the lowest teens. And so, it's just hard to, you have to bring in a lot of revenue dollars to hurdle over the CAC when your contribution margin is that low?

Michael LeBlanc  41:44

Well, Steve, by the way, I think we have a new title up the wazoo, Wayfair (crossover talk). That's a new title for the episode. Dan,

Daniel McCarthy  41:49

A technical term, 

Michael LeBlanc   41:51

A technical term. Dan, let's, let's, let's pull the lens back a little bit. I mean, there's a whole host of companies who would have challenges around privacy that's not unique to any one company. And as well, a lot of companies who've seen products brought forward, I was talking to some retailers this week, he said, Listen, there's no demand, people don't need another TV or another treadmill. They already bought one. Any general lessons that you can impart, kind of a parting words to our audience around how to best put into play these principles as an operator and, and make the better decisions that need to be made probably for this year and in years to come?

Daniel McCarthy  42:32

I always say I mean, step one is just to know what your numbers are, you'd be surprised how many companies just don't know their numbers. And it's not trivial to get them. It's not that hard. But it's not like you just kind of snap your fingers and they magically appear; you really need the right data. You need the right definitions for the measures. And then you need the right models to be able to predict customer behavior and, and see how it all rolls up. So, you know, it's good to know. Yeah, this is kind of where we are in terms of payback periods. What is our contribution margin? How has our CAC been evolving over time and across our different channels? What is the customer lifetime value? And how has that been evolving? You know, over time and across channels. And I think that can help you understand where the heat in your business is coming from, you know, and, and how it all kind of rolls up when you look at, just how it rolls up at the overall company level? You know, are we healthy from a unit economics standpoint? 

Daniel McCarthy   43:40

And as our marketing budget evolves, and as the customers that we acquire is it that composition? Is the mix of the customers changes in directions that we would kind of expect it to like moving more towards paid channels? Will we continue to have good economics for our future cohorts? So yeah, I think that that's the sort of thing that has been somewhat surprisingly lacking. Even for I think, companies like Wayfair, at least based on the public disclosures that they've provided. I think once you have that in place, and hopefully that will kind of beg the next set of questions like, wow, you know, this is doing really well or wow, this part of our business is really not healthy. You know, what should we do about that? And, you know, I think that’s step, number one is kind of the important first one.

Steve Dennis  44:16

So as we, as we move to closing here, I'm curious whether you've got any, you know, whether we call them disruptor brands, new DTC, whatever, but, but are there particular retail brands that you look at and say, wow, you know, here's a company that's really done it right. Or here's a company that some of our audience might really learn from, from taking a look at their strategy or, you know, at the same time, other companies that you're just wow, you know, really, really concerned about any kind of shortlist of companies that you find particularly interesting and instructive?

Daniel McCarthy  44:46

Yeah, I think a couple of examples that could be an interesting one, I know we had spoken about, I think Warby Parker, on the last podcast, and I think that, you know, they've been holding up a bit better. You know, we had said that they were overvalued as of their direct public offering. But, (S) Good call, (crossover talk) down a lot. Yeah, you know, I’ll put out this other analysis when they started to trade down to 11, you know, where they said, if that original analysis was even kind of directionally correct. There could be room for upside. And yeah, thankfully, it kind of moved back into our valuation range on the upside. So yeah, so we've been more constructive on them, because their economics have been better. I think it's still a bit bloated in terms of overhead. But you know, the customers, they keep coming back. So yeah, I think that there's real indications of good product market fit from that standpoint.

Daniel McCarthy   45:05

I say, you know, the other kind of thing that I've been following is just kind of the overall plumbing, like the ecosystem, that kind of underlines, underlies all of these businesses. And I think one thing that could be good to have on the radar screen are companies like Pipe that will basically treat the customer as a securable asset that can be leant against. You know, it's this growing kind of ecosystem of revenue-based financing, if you've got a good customer identifier, companies, they don't want to have to raise equity if, if, if they can avoid it. So, effectively, they can kind of sell the revenue from those customer contracts in exchange for, for a loan. And to the extent that we've got a whole bunch of old cohorts that can give us a really good sense of the repayment profile of those customers. You know, I think everyone can potentially win. So, it's, it's, it's a space that's been growing. Yeah, I think that they tend to be very short-term loans. Yes, it's just kind of you know, something to, to just keep, keep an eye on.

Steve Dennis  46:42

It’s a super interesting conversation. I feel like we could go for hours here, just trying to unpack some of these, these trends and all your knowledge about him. But it's great to get you back on the mic with us. And we're going to stay on top of all the work that you are putting out there in the world. But thanks for joining us on the Remarkable Retail podcast.

Daniel McCarthy  47:02

Thanks for having me.

Michael LeBlanc  47:05

Well, as always, Dan delivers. He drops the knowledge man, I mean, his approach. It's funny, I said in that interview, and you and I both said in the last one, how does, how else to look at some of these numbers. But it really does anchor our dialogue in this cost of customer acquisition. And Dan puts an exclamation point on how important that is. All right, so now we've talked about, we've talked about some of the challenges, we've talked about some of the winners who's doing things right, my Teresa's of the world. As you look forward, we're here in the spring, or early spring of 2023. We've talked about the tide going out that was one of our principal understandings of this season. What do you think about the future? And the future, let's just cast our minds ahead to this calendar year and shortly beyond what's yours, what's your prospects for success? And what do you think is going to be different?

Steve Dennis  47:51

Three things to focus on, one is very much what, what Dan was talking about is, as we get more data on these companies in subsequent quarters, do we see these underlying dynamics move in a positive direction? And clearly, when you look at Wayfair, and a few of these other brands, their current numbers don't look so good. So, do we start to see them really address those underlying issues? And if they don't, you know, that's very, very problematic. 

Steve Dennis  48:14

I think the second thing broadly, is, you know, it comes back to balance sheets for some of these companies, it seems the case that they're not going to get a lot of help from the economy. And it's very difficult, at least at the moment, I don't see any reason that it is going to change very quickly. It's a very difficult funding environment. So, if these companies start to run short on cash, they're not likely to be able to raise money at, at favorable rates, or under favorable circumstances, which I think and part of my prediction is, you see some of these brands get acquired, because they just can't get there from here. 

Steve Dennis  49:27

And then the third thing, and I still think we're in early days, except with maybe Warby Parker, going back to the comment that that it's ironic that so many of these brands are, are really setting their fortunes and their prospects on physical stores, you know, how well are these companies able to profitably expand? I just think with most of them, they haven't opened enough stores or had them open long enough to really know whether they've got a lot of upside there, or it's pretty limited you know, in terms of number of locations.

Michael LeBlanc  49:30

It's an interesting point because Warby has been, you know, this is not a new concept, but it's just take Warby Parker, they've had stores for, I don't know, a better part of almost a decade, do you think the model would be either proved or disapproved at this point, but it seems to be that we need more stores to continue to prove the model out or to evolve to where we are or is that what you're thinking or is that what you’re keep a close eye on it?

Steve Dennis  49:51

Yeah, well, Warby Parker claims, I mean, on the one hand, they seem to be suggesting the stores are not quite as performing as well as they would expect. but they generally say that the model is working. 

Michael LeBlanc 49:56


Steve Dennis   49:57

And they're confident that they can expand this, maybe, you know, one of the things I wonder about with all these businesses, it's, you know, it's one thing to open 10-50-100 stores. It's another thing to get to 900 like Warby Parker says, and there's plenty of brands, Coach, being a good example, Michael Kors that way overshot the runway, on their store expansion. So, I would think by now Warby Parker has a pretty good idea of that. Most of the other companies that have way under 100 locations, you know, just like Casper talked about, I think, opening 800 stores when they had only, opened like 15. And, you know, that turned out to be just impossible. So, I think, you know, paying more attention, particularly as we get into next year, on what we're learning from this store expansion from these brands, I think that's really going to be a telltale sign.

Michael LeBlanc  51:01

All right, well, a fascinating discussion and more to come basically, as we kind of continue to watch and, and see how it evolves over the course of the year. Let's leave it there. A great episode, and we'll talk about it more I'm sure on episodes to follow. If you like what you heard, please follow us on Apple Spotify or your favorite podcast platform so you can catch up with all our great interviews, including “Organized for Growth”, our interview with Satish Malhotra, CEO of The Container Store. New episodes of Season 6, presented for another season by our friends at MarketDial will show up each and every Tuesday. And be sure and tell all your friends and colleagues in the retail industry, all about us.

Steve Dennis  51:38

And I'm Steve Dennis, author of the bestselling book, ‘Remarkable Retail: How to Win & Keep Customers in the Age of Disruption’. You can learn more about me, my consulting and keynote speaking at

Michael LeBlanc  51:53

And I'm Michael LeBlanc, Consumer Retail Growth Consultant, keynote speaker and producer and host of a series of retail trade podcasts including this one. You can learn even more about me on LinkedIn and you can catch up with Steve and I in person at Shoptalk in Vegas, March 26. And a month later in Barcelona at the World Retail Congress April 25.

Until then, safe travels everyone.


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