Remarkable Retail

The Profitless Prosperity of Disruptor Brands

Episode Summary

For more than a decade, digitally-native, vertically integrated brands (Warby Parker, Allbirds, et al)--as well as other innovative direct-to-consumer (companies (from Wayfair to Rent-the-Runway to Poshmark)--have sucked up a lot of attention in the industry and attracted many billions of venture capital. Yet as more face the harsh light of the public markets we're learning that some are rather small businesses and most are losing quite a lot of money.

Episode Notes

For more than a decade, digitally-native, vertically integrated brands (Warby Parker, Allbirds, et al)--as well as other innovative direct-to-consumer (companies (from Wayfair to Rent-the-Runway to Poshmark)--have sucked up a lot of attention in the industry and attracted many billions of venture capital. Yet as more face the harsh light of the public markets we're learning that some are rather small businesses and most are losing quite a lot of money.


Does the recent meltdown of Casper suggest that the sky high valuations of DTC brands are about to crash back to earth, or should we be more sanguine about the "growth over profit" strategy that most are pursuing. In particular, we discuss why the idea that significant direct-to-consumer (DTC) companies could be built without physical stores was a flawed investment premise and why it's turned out to be so difficult to profitably scale many of these brands. We also remind listeners that vertically integrated DTC retail is far from new, and wonder why legacy brands (Duluth Trading, Lands' End) carry anemic valuations relative to the insurgent brands that are far smaller and continue to hemorrhage cash. 


But first we open up with the Top 3 retail stories that caught our attention this week, including continued strength in US retail sales despite waning consumer confidence, what to take away for the most recent batch of retailer earnings reports and unpack just what the heck happened at Casper.

Photo by Jp Valery on Unsplash

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!
 

Episode Transcription

Michael LeBlanc  00:05

Welcome to Remarkable Retail podcast, Season 3, Episode 17. I'm Michael Leblanc.

Steve Dennis  00:11

And, I'm Steve Dennis.

Michael LeBlanc  00:13

Steve, we got a solo episode again together, which is great. I love our solo episodes. And by the way, thanks to all the listeners and viewers who are supporting the podcast, we were getting some great downloads and listens. And I got some great feedback this week, from a very senior retailer, here in Canada who loves listening to us when he barbecues actually and just, and he said, you know, he were talking barbecue, of course, and he said, ‘You know, listen, I love your solo episodes as much as the guest episodes’. So, that's a great, great feedback from our, from our listeners. 

Michael LeBlanc  00:45

And thank you to our audience. And we intend to do more of both in season four when we get to season four, some solo stuff and some thoughts, and we're going to be on the road and NRF. So, we might do some stuff at the Big Show in January. So, lots coming up in Season 4, but for now, this episode is profitless prosperity, which is a great title, and we'll get to that in a bit, but first, let's get into the news of the week. So, results, earnings results coming out for October in the US. What are your thoughts on what you're seeing in retail results so far?

Steve Dennis  01:19

Well, a couple things. First, the US Commerce released their overall sales reports. And by the way, I think we just have to keep mentioning that the media just love to talk about month over month results for whatever reason,

Michael LeBlanc  01:31

Pointless.

Steve Dennis  01:32

As opposed to year over year results. But the year over year results were pretty darn impressive. The consumer can, at least in the US, is continuing to spend pretty robustly overall. If you dive down into some of the category data, not too surprisingly, apparel department stores had the biggest increases because they're comparing against pretty easy numbers. The home category keeps rolling along, you know, ecommerce or non-store it's not exactly ecommerce, but the non-store numbers, we're definitely seeing some moderation, which is to be expected. 

Steve Dennis  02:05

So, but yeah, really strong numbers, the thing that's really interesting to me, which I can't quite make sense of is consumer confidence is very low. So usually, you see consumer spending fairly well aligned with consumer confidence on top of, you know, just general mechanisms, macroeconomic factors. So sure, it's a little hard to kind of line up the numbers in terms of consumer confidence, but certainly with still lingering stimulus, you know, stock market is booming, the housing markets booming, people still aren't spending as much on services.

Michael LeBlanc  02:40

Pile of cash, yeah.

Steve Dennis  02:41

Yeah, the savings rates are incredibly high. So, there's a lot of, kind of, capacity to spend. That's there, I think the willingness to spend is being driven, you know, partially by more people going out, traveling more going back to work. So that drives certain kinds of spending, and then certainly Home is, continues to be really robust. On the earnings front, a tremendous number of earnings reports. The past week, we're not going to go through all of them won't go through all of them, period, but we're also not going to get into a tremendous amount of detail, but you know, as you might expect, since sales have been strong, generally speaking, earnings have been strong, still pretty interesting that most of the retailers that reported, you see some report what I call rebalancing or moderation because of what you're comparing against. 

Steve Dennis  03:26

So, department stores look great, comparing against easy numbers, grocery and some other categories, not so great, because they're comparing against booming numbers, but overall, the picture is pretty strong. On the earnings front, what a lot of retailers commented on was that they were able to have improved margins because of the scarcity of supply. So, taking some price advances because of inflation. 

Michael LeBlanc  03:51

Yeah.

Steve Dennis  03:51

But, I think the margin picture is really more about it being fundamentally less promotional. I think the other part is some retailers, certainly in department stores are good examples. You know, they were really tight on expenses. They cut a lot of costs and so I think they're leveraging some of these sales increases to the bottom line. 

Steve Dennis  04:09

A couple other quick comments. There's definitely been this narrative and I think we talked about this a week or two ago, that maybe department stores are back because they're posting some pretty good numbers and actually, if you look at what Macy's reported, what Kohl's reported they are up on a two years, the so called two year stack, you know, comparing to the pre COVID numbers, they have improved upon those numbers, both in terms of sales and profitability. I'm still pretty skeptical that this really suggests a renaissance. I think there's a lot of pent-up demand, and 

Michael LeBlanc  04:41

You called last episode a dead cat, a dead cat bounce. 

Steve Dennis  04:45

a dead cat bounce. 

Michael LeBlanc  04:45

as the, as the Wall Streeters would like to call it? 

Steve Dennis  04:47

So, I, overall, I think the Kohl's numbers were a little bit more interesting than Macy's. Last two things I mentioned really quickly. TJX, TJ Maxx companies had a really good quarter. They have signaled though that there are some issues on the supply chain, because some of the, as you might expect, some of the manufacturers are prioritizing their full price channels. So, great quarter, maybe some, some headwinds on the horizon. Sorry, one of the things I mentioned, I forgot to mention earlier, Walmart targets numbers, really, really pretty strong. 

Steve Dennis  04:47

Yeah, I just don't see it because I don't think anything has fundamentally changed in the general appeal of moderate department stores overall, and, and nothing major has really changed at Kohl's or for Macy's. You know, Macy's talked about the Toys R Us thing and how their toy business doubled, while the toy business is tiny. So, what.

Michael LeBlanc  05:10

Yeah, it was nothing, yeah. 

Steve Dennis  05:11

Kohls is a little bit more interesting because of their partnership with Sephora that seems to be driving yet some incremental traffic. So that's, that's good. 

Steve Dennis  05:53

The interesting, they fit, thing they said, from the strategy standpoint is they really sounded like they're in pretty good inventory shape, because they really move stuff up, and have gotten a lot of stuff into their supply chain in their stores in anticipation of the holiday and both of them pretty much said they are not going to take price increases because of inflation, that they are going to preserve market share and that actually had some ripple effects in the in the stock market, but I think, you know, it's, it's to me, it's a smart thing to do when you're a strong retailer like that you're known for strong value, you can afford to take it on the chin for a quarter or two. So, I don't, I don't think we'll see inflation and you know, what the ripple effects of that will be competitively will be interesting to see.

Michael LeBlanc  06:39

Alright, so the third thing, and you and I both commented on this, you beat me to the punch on email, but Casper gets taken private by, I think, a private equity shop and it actually, it's funny because, not funny-haha, funny-peculiar because you and I were already planning this episode in advance of that. So, I think we actually moved, switched timing just because this is exactly what we were talking about. So, what were you observations about the news coming out of Casper?

Steve Dennis  07:07

Well, we won't get into this kind of profitless prosperity narrative around some of these disruptive brands in a second as part of the episode but yeah, Casper, you know, it's funny Casper has been one of the, the darlings of the digitally native vertical brands, as, as they're called, and raised a bunch of money growing very, very quickly went public, I think about two years ago and at one point was valued, you know, it was one of these unicorns valued well over a billion dollars there and I used to work in the mattress business. So, I have some sense of the economics there and every time I looked at their numbers, I was like, you know, a cool story, but the economics look really, really shaky, you know, tremendous amount of money on marketing, very low gross margins, and liberal returns very liberal returns, and you know, a ton of competition as well. 

Steve Dennis  08:00

I talked about their dream or re concept or their physical store concept in my book, I think that's really cool. Whether, whether I always wondered what the numbers look like on that, and it turns out, they look pretty terrible. So, the stock price has really, really collapsed. They were down to I think about $600 million in market value and now they're going private, then even lower numbers. So, this is a big run up, and a big run down. So, what we'll talk about a little bit in the episode is, you know, is Casper just, kind of, this this isolated example, or does it say something more about what's going on in the market, who hopefully gives them I mean, they definitely need an infusion of capital to keep going. They've been burning through cash and presumably, this will be an opportunity to get them off the public market stage and do some sort of restructuring behind the scenes at maybe a number that works better for the new investors.

Michael LeBlanc  08:54

Well, that's a great segue. That's our news, our new segment of the week, but it's a fantastic segue into our full episode, which actually again, we were already had this one on the on the dock to do, but the Casper news just kind of give it topspin so to speak because it really helps us focus, but it's really about, you know, disrupter brands, the new direct-to-consumer, these digitally native vertical, vertical brands, the DNVB's, you know, let's, let's take it from the top. What, in your mind, this disruption word came out, you're a disrupter used to be unicorn used to be whatever, what, in your mind, makes, makes a disruptor and who are these disruptors, who are these disruptors that you speak of, tell me a little bit more, how you're thinking about this? 

Steve Dennis  09:36

Well, some people may be familiar with, with kind of this idea of you know, the legacy brand and then the insurgent brand you know, some brand that that takes on the I guess it's the David and Goliath I guess, would be the other cliche by finding some sort of vulnerability in the big guys model. So, they reinvent you know, maybe they go after a particular weakness, some point friction or if you're nimble, you know, yeah, so, so there's a lot of different ways that can play out the way it's played out in retail. 

Steve Dennis  10:09

I think, number one, has been leveraging, obviously, the power of the Internet to go direct-to-consumer. So, in some cases, you've got the DNVBs. The digitally native vertical brands, which started as online only and we'll talk about the evolution, about, on that in a second, but you know, tended to go after a particular product, so Quip and toothbrushes Warby Parker and eyeglasses, Untuckit in menswear, and so forth, so they, they take a particular category, they go after some sort of product innovation, but the original premise was by going direct to the consumer, they can cut out a lot of the asset intensive aspects of retail physical stores, all this inventory, and have a direct relationship with the consumer not be reliant on a middleman. There's other direct-to-consumer models

Michael LeBlanc  10:58

and they tend to be very, and they tend to be very vertical, right, I mean, if you think of Untuckit, for example, 

Steve Dennis  11:03

Yes.

Michael LeBlanc  11:03

They basically have one value proposition; we sell shirts that look good. On top, I have a few 

Steve Dennis  11:09

Right. 

Michael LeBlanc  11:10

it's very, you know, living up to their name, we sell this, we don't go this way, right?

Steve Dennis  11:15

Yeah, cat-, category or product focus, and, and, you know, in the technicality of the DNVBs, they're vertically integrated. In other words, they have their own brand, and they design and control the manufacturing. Now you have other players that you could say were, are disruptors in the retail space, Amazon, obviously, right, but Amazon, you know, is not a digitally native vertical brand, they don't own and manufacture. They're a multi-brand retailer, as is Wayfair. There are others, right.

Steve Dennis  11:44

So and then, you know, there are other kind of disruptive consumer brands, I guess, from Uber, Airbnb, but more I guess, in the center of retail would be, for example, the resale players Poshmark thright, up those, those guys that are in the sharing economy, bringing supply and demand together, Rent the Runway, so there's a there's a slew of them and these brands have attracted a tremendous amount of venture capital and so they are disrupting the kind of normal or traditional structure of the retail industry by going to market in a different way and perhaps poking at a vulnerability or two of the, of the legacy players.

Michael LeBlanc  12:27

They also and, and this came out, I remember I was sitting with a bunch of traditional mattress retailers, and they were a little frustrated bay by they kind of had a sense for how big the business was and they were frustrated that mattress in this case, but other brands were sucking up all the oxygen of attention, if not sale, like how much it'll they were like, you know, they're a bit of the mosquito in the tent for sure. It's not fun when you're camping and have that mosquito on the tent, but they're like, you know, it's really, we can't get a word in edgewise because all everybody wants to talk about is, you know, these brands, so that, that was I felt that was problematic for a whole bunch of reasons from an attention perspective and immediate perspective.

Steve Dennis  13:08

I think there are a bunch of things there. I have a client that refers to some of these brands as mosquito brands. You know, they're small and annoying, and you want to swat them away. 

Michael LeBlanc  13:17

Yeah, yeah.

Steve Dennis  13:17

but, I do you think, yeah, they, well, there's a lot of things going on, you know, from a media perspective, they're, they're fun to write about usual-, right because we've got something new and cool, maybe have a really charismatic founder or whatever the venture capital is (inaudible). So a lot of energy behind promoting the story and trying to get that next round of financing and get that consumer attention, but I think the thing that is that is disruptive to the to the whole cycle has been that many of these brands of course, not only and Casper is a good example are Warby Parker, you know, they have a strong value equation, you know, we are 10, 15, 20% less expensive than the competition and they're also putting a tremendous amount of marketing out into the industry to try to create their brands but, but drive that business very aggressive with discounting. 

Steve Dennis  13:21

So the combination of the lower prices and all this marketing puts a tremendous amount of pressure on the existing players and I've talked to clients I've worked with and others about well you know, what do we do when we have this company coming in that is sucking up a lot of the attention that's, that's putting a lot of marketing out there that's pricing at an economic prices and starting to steal share from us do we try to swat them away like that mosquito or do we say you know, they these guys aren't for real and we'll, and we'll stick it out, but, you know, if you're, if you're in the home furnishings business and you watch Wayfair go from nothing to whatever they are now 10, 15, $20 billion, you know, they're a big player, some of these other players, as we'll probably talk about a little bit, you know, they they're definitely punching above their weight. They're not necessarily huge businesses at least yet.

Michael LeBlanc  15:10

Yeah, it's interesting because on the ground, some of these businesses, because they all inevitably, interestingly turn their minds to physical retail, you know, we'll get to that a little later. But they pay top dollar in the malls, they come in, they take they take, take, they have the top dollars behind them for marketing, they see it as a marketing tactic as much as anything, they go in the in the premium places and, and, you know, as, as you've been saying, as we see these IPOs come out, as we get more information, we start to get both the size of the business and the profit lists. And this is why this episode is profitless prosperity, because they're growing, but, you know, they're coming back down to earth a little bit for some of them, because the, you know, basic unit economics 

Steve Dennis  15:52

Yeah.

Michael LeBlanc  15:53

Still matters, right?

Steve Dennis  15:54

Well, we'll see, you know, there has been a lot of speculation, and I'm guilty of a lot of it, that many of these brands that were private, were, were spending, you know, crazy amounts of money on marketing and building out all their infrastructure, in many cases might not be pricing at a sustainable rate to to grow, grow market share and so they're like, there's rocket ship in terms of sales, but what else is going on in the market? So, as we start to see, and we've got, I think, you know, 12, or 15, something like that of these pretty significant DNVB's that are now public, well, now we're getting to see what, what the picture looks like and at least in terms of current profitability, most of them are continuing to lose a lot of money. 

Steve Dennis  16:36

Of course, the question is, because, you know, Amazon lost money, lots of companies have Tesla loses money, there's plenty of companies that, that look to be enduring brands that have lost money for an extended period of time. So, it's hard to really tease out how much of this is kind of the normal growth curve, that will allow them to be these powerful brands versus basically, you know, kind of, the emperor has no clothes, that there's just a lot of hype around these. 

Steve Dennis  17:04

So, I think it's, it's hard to tease out, you know, we had Dan MacCarthy, back with us a few episodes ago to look at some of the unit economics. And I think some of that kind of analysis is very helpful to try to figure out what the long-term prospects look like. But yeah, I mean, it's, it's, it's pretty scary, really, to see, particularly some of these brands that, you know, Wayfair is 17, 18 years old. You know, so it's not like it's a new, new company, some of these brands are more than 10 years old. So, you would expect they would be maybe more on a glide path COVID On the one hand, you know, changed a lot, you would generally think for E commerce driven brands, that that would be a good thing for their business. But if you look at Warby Parker's numbers, and some of these other companies, not so much.

Michael LeBlanc  17:58

It, not so much the Peloton's of the world. Yeah, and you know, what I sometimes think about so we should talk about Casper getting, you know, going private is, is, you know, eventually and a lot of these investors want their liquidation moment. You know, they want something to happen to these brands. In Canada, there was a mattress brand that was a competitor, Canadian competitor to Casper, it got bought by Sleep Country, which is the biggest mattress retailer in the country. So that's not a bad outcome, in some ways for some of these brands to be, kind of, bought and folded in, you know, everybody gets their money's worth at some rate. 

Michael LeBlanc  18:32

The question in my mind, and I don't know, either of us know the answer to this, is Casper the thin edge of the wedge, you know, the camel's nose in the tent, or is it an outlier, it got taken private for way less valuation, right than it was prior, so is that a sign of things to come or is that, kind of, an outlier and, you know, other businesses have more, are more solid and have a better future?

Steve Dennis  18:53

Direct-to-consumer brands are not new, William Sonoma, Sur La Table and just a whole host of these mail order catalog businesses, basically. LLB, Lands' End, I mean, these were direct-to-consumer vertically integrated, not digitally native, analog native, I guess, new acronym, that have been around forever and guess what they started direct-to-consumer online, but online back then was the catalog and then, here's the crazy thing, they opened stores. When they opened stores, they discovered that their mail order catalog business got better when they opened stores and then when they, things moved on-, online, more they discovered that stores help their online business. 

Steve Dennis  19:35

So, all of this was very known 20 plus years ago. So, it's really not I mean, obviously a lot has changed, but the whole concept of direct to consumer and the vertically integrated brand is pretty common. Certainly, many of these brands are going about it in a different way because they can pick their real estate today. They are fundamentally built, built on one platform and so the omni channel harmonized piece of it is easier for them, they don't necessarily have to break down the silos and fix, fix things that that have existed in the incumbent brands, but a lot of that model is very true. So, to answer your question, I do think, you know, there's been a lot of reports that, that Casper has been a little bit of a mess, in terms of operating. 

Steve Dennis  20:22

So some of this can be chalked up to execution, but I think the broader lesson, and when we look at some of these businesses is to ask the question, Well, number one, how big is the addressable market really, because many of these brands found that it was fairly easy to find like that perfect customer, but then, you know, in the end, those customers were basically finding them because they had a perfect value proposition for a certain amount of customers and its customers are using organic ways to find them. So, that first 10, 20, $30 million of revenue came pretty quickly, but then you get to the point where you have to go find customers and when you're really trying to find customers, number one, it gets really expensive. Number two, you're typically trying to steal that customer away from somebody else. 

Steve Dennis  21:07

So, like bonobos, in their, in their second or third stage of growth, they're basically trying to get the Nordstrom customer, right, and Nordstrom is

Michael LeBlanc 21:14

Right

Steve Dennis  21:14

knows who their customer is. And they're going to try to hold on to them. So, it starts to become really expensive to grab that next level of customers. And or you then decide as many have to go the wholesale route to try to expand, which is, you know, not exactly direct-to-consumer, but that's a technicality. Or, as we've seen, a lot of them are opening stores. And I think the hard thing to tell right now, except maybe you could argue for Warby Parker is most of these brands are fairly early in their store opening cycle. 

Steve Dennis  21:50

And most of them open. You know, you mentioned this earlier, a lot of them open, they pay premium rents. They're in, you know, the kind of locations that are kind of a layup, like, if you have any kind of business, you open up next to the Apple store in Soho, or you go into one and it's not hard to figure out where those first 20, 30, 40 locations are like they're all going down to Austin, like you can find. There's the Yeti store, there's the outdoor store. Yeah, I mean, it's, you know, that, that part is not too complicated, but plenty of brands that are really niche brands, they never get beyond 40 or 50. Stores like nobody talks about keels, you know that brand, you know, being 800 stores, right? I mean, people understand that it's got its niche, a very good niche. 

Steve Dennis  22:35

So, I think it's, it's very hard to understand, I mean, all we know is that many of them have opened these stores. And overall, they're still losing money. But it's pretty hard to tie together, how much of that is related to their store expansion. How much of that is related to this fundamentally, pricing issues or overspending on marketing or

Michael LeBlanc  22:57

Or the, or the business model itself, you know, what I thought is interesting and to be fair, you know, we often kid about the whole Marc Andreessen, who needs stores, stores are gone. You know, one thing I think that is evolved over the past 10 years that I reflect on often is 10 years ago, 15 years ago, AI is as one of these brands could really take advantage of the platforms, whether it's Facebook or Google and if you develop some expertise, you had direct marketers, you had direct response marketers, you really in those early days, you could really have leverage and use those to drive your business quite successfully with a, you know, a row asked is a very common measure, you know, return on ad spend 

Steve Dennis  23:36

Yes. 

Michael LeBlanc  23:36

Now, you know, it's hard to find advantage for anybody of any size and so it feels like in a world 10 years ago, I don't need a store, but now I need stores because I can't gain advantage on Facebook. So, I'm going to try and gain advantage by opening a store and a high mile street or in a, in a very prominent shopping mall. The, the luggage company, Away, just opened up in Yorkdale. Here in Toronto, it's a beautiful store, it's really well done. I just think that they let like, listen, we yeah, we'll do all the social media stuff that you'd expect us to, but it's hard to gain attention or leverage in the way we did even 10 years ago. Do you, do you, do you ever think about that as, as one of those, kinds of, things that's changed in the overall macro environment that is pushing towards physicality?

Steve Dennis  24:22

Well, I think, I think for certain types of brands, the physical store was inevitable, I think what, what Marc Andreessen got, got wrong. And the first, the first, you know, the investment premise behind a lot of these retailers was there was an under appreciation for the value that stores add. So in the case of some of these brands, you know, they got to a certain point, but then they did and I happen to have access to a couple or I've seen, I can't say who it is, but I've seen information from a couple of these brands, and pretty much they said, well, here are these interested consumers, but they want to go try it on, or they want to go understand why does this sweater $150 or whatever.

Steve Dennis  25:05

So, you know, there was a point where in order to penetrate that, you know, to get to make the size, the total addressable market bigger. Yeah, they had to have physical stores, that was the thing that was missing. And I think if you really understood the difference between online shopping, which is basically running errands, versus something that's seeking a solution, you just knew that when Marc Andreessen said it had to be nonsense. So, I think there was just an under appreciation or like this technology blindness to the value that physical stores could add. But the thing that you bring up, I think, is very important as well, because it was much easier 10 years ago, to, to build a brand online. It just wasn't that costly. 

Steve Dennis  25:48

I remember I had a client about five, six years ago, where I said to them, Well, the good news is, you're doing pretty well. The bad news is Facebook is going to figure this out and, and so I don't know, I don't know enough about I say, oh, you've got six months, you have two years, but there's just no way that, that Facebook and you know, Instagram and Twitter didn't, didn't have much of an advertising model back then. So, it was inevitable. 

Michael LeBlanc  26:09

There's no way that, there's no way, I saw the same thing again, I didn't know enough to predict when, but it was, it was when not if, that they were going to say hey, all you guys riding for free off the bus? 

Steve Dennis  26:20

Yeah, I call it I don't know, maybe. Yeah, I don't know if I stole this from somebody else, but I call them like the marketing tollbooth operators, right. It's like when you eventually, eventually you figured out like, well, where I want to go is on this road and you own the tollbooth, well, it's, like, well, how badly do you want to go and right, and it, and basically, you auction it off and so I think the phenomenon is a little bit maybe, inside baseball, it's a little bit of Dan McCarthy's work, I think gets at this. But just to sort of picture it is, you know, if you can find that first batch of customers pretty easily, or they essentially find you, you've got really low cost of acquisition, the customers that love you, the best tend to spend more, and they're probably not as price sensitive.

Steve Dennis  27:03

So, that's a beautiful customer lifetime value segment, right or cohort, then as you start to try to build the base more, you start to have to pay to find them and target them and now you're competing with whoever is also competing with them. So, your marketing costs start to go up. When you think about those additional cohorts, you start to add, they're not the most perfect fit for your business model. So, their total lifetime spending is likely to be lower, and they probably are more price sensitive. So, the worst case scenario you have is your cost acquisition keeps going up and the marginal value of the customers you're bringing in is going down. 

Steve Dennis  27:42

And essentially what I think's happened to Casper has happened at Wayfair has happened at some of these other companies is they're now realizing that yes, the more, we're spending more to bring them in, but the incremental value of the customers we're bringing in is not economic. So that has to be reset, the store investment conceivably does a few things. One, it, it increases the total addressable market, it may bring down your acquisition cost, you're paying, you know, rent is sort of the new customer acquisition costs. And it's become a cliche, but that's, that's, yes, true and in some categories, probably not away, but certainly in a lot of apparel categories. As we know, the return rates are really high online. 

Steve Dennis  28:25

So, another big driver of opening stores is to try to get the return rates down. I've talked and written about, kind of, how this had to evolve. So, I don't think any of this is tremendously unexpected. In fact, I, the other day I posted on LinkedIn, you may have seen it, that I think COVID kind of pushed this reckoning down the road by about 18 months, because so much shifted online, and the cost of acquisition came down. But now as it's starting to go back, cost of digital marketing is sky high. Again, it's, it's a different environment going, going forward. 

Steve Dennis  28:59

So, I think it's going to take us a little while to really sort out. You know, I don't think Casper is necessarily the canary in the coal mine. But I think it speaks to some, some issues. And the more quarters we get from, from some of these brands that haven't been published too long, the more that file for IPOs, we'll just get a closer look and become a lot more clear what to look for. But we're in this kind of little bubble where the recent results are decent because of the move to e-commerce. And I think there's a lot of investors that just kind of have faith that will all work itself out.

Steve Dennis  29:33

But last thing I was going to say though, I would encourage people if they care about this, to take a look at some of the established brands, and what their numbers look like because I've been saying I just can't get my head around these 5, 6, $7 billion valuations for some of these brands given the size of the business and the trajectory of their losses. You can go out and look at a great former client direct-to-consumer brand called Duluth Trading Company. Duluth Trading Company's been around for a while. They have, I think 65 or 70 stores, vertically integrated brand and you know, they, I think their operating EBITDA margins are something like 12, 13%. 

Steve Dennis  30:14

So here's a business that's, you know, six $700 million, just way bigger than all birds. Yeah, you know, considerably bigger than Warby Parker, and has 6070 stores like untuckit bonobos, and others do are and some of them are moving to that number. And you know, they're, they're cranking out pretty good money and I don't think anybody thinks they're a hyper growth story at this point. So, you know, they're not apples to apples, but I think you can look at, at American Eagle, you can look at some other companies that are essentially vertically integrated direct to consumer brands, and have a frame of reference and ask yourself, well, if if Duluth Trading Company is valued, much less than Allbirds, you know, is Duluth Trading Company 

Michael LeBlanc 30:58

I want valued, yeah. 

Steve Dennis  30:59

Or is, is Duluth just miss-, because there's something about

Michael LeBlanc  31:04

Miss alignment in the universe, right? You kind of 

Steve Dennis  31:06

Right. I mean, it just, obviously, Allbirds and these other companies Rent the Runway, whatever, pick your favorite one. They're all you know, early in the maturity curve. But, you know, you have to be able to work your way to being a fairly sizable business with decent EBITDA margins, you know, in the not-too-distant future or the, you know, the discounted cash flow, not to get into financial theory, but like, it doesn't stop something's one of those numbers is got to be wrong. So, but but, but it's, you know, it's as 

Michael LeBlanc  31:37

That's well put, that's well put. 

Steve Dennis  31:38

but it's typical with, you know, these and you've said it many times these, these stocks are valued on the story and, you know, the way the stock market works, you know, the venture capitalists want to IPO it and, you know, there's some people that just will buy any super sexy stock and so the greater fool theory, I guess, is what you call it, or they're hoping, you know, Unilever bought Dollar Shave Club, at what now it's like to be a crazy price. Walmart bought Jet at a really crazy price and Bonobos and some others. So you know, you just, you don't want to be the one left holding the bag because you don’t know when the music stops or whatever. 

Michael LeBlanc  32:20

It is a game of musical chairs and it's funny, I got to put my hand up, I bought Rivian stock last week. You know, there's a stock that came out IPO more valuable than Ford, they haven't made a truck yet basically. 

Steve Dennis  32:31

Right.

Michael LeBlanc  32:31

In the market. So, but I bought the stock and you know what, it's, okay, it's a beautiful truck, by the way. Talk about a great story and, and, you know, I wanted to end this episode on a positive note because I think out of all this out of these brands, some may get taken out, some may not survive. Ones like Warby Parker may consolidate, they may have the strength to bring in several like there's a lot of paths to success for many of these brands and, and what I love about it, listen, I love talking about them. I think they're doing interesting things. Sometimes the business model looks a bit shaky, sometimes I just don't I don't get it and sometimes I'm, you know, I'm wrong, and, and somebody sees a lot of great things in them and sometimes they don't succeed, but it is, you know, we wish I wish them all the best, I find it fascinating in one way shape or another and I think I think there's hope for some of these brands in one way shape or another, so I like to remain optimistic about some of these brands and Godspeed.

Steve Dennis  33:26

Absolutely, yeah, some someone's been absolutely turned out to be, to be great brands. I mean, the only thing that really, I find a little bit sad is when the venture capitalists or the you know, the investor world supports these brands to kind of a crazy degree. And it puts unfair pressure on retailers big and small to compete, because basically the venture capitalists are subsidizing this crazy amount of marketing. And in many cases, these, these, you know, unsustainable pricing prices. And so on

Michael LeBlanc  34:02

levels, the playing it unlevel playing field, basically because these, these brands pay outsized amounts for the technology, they're buying for the people that they're hiring for the stores that they're leasing for the on and on and on. So, I think it is, there is a distortion element to it. That is, that is net negative, I think, to the industry in some way, shape or form.

Steve Dennis  34:22

But the flip, but I do think the flip side of that is that these disrupter brands, you know, they are they make hopefully, some of the legacy brands stronger, because they, they show new and different ways to do business, you know, whether that's more asset light model, you know, more showroom model or whatever. Most of them to me are great depictions of, of what I call harmonized retail, right, they didn't, they built it as one brand, in many channels, not omni channel, multi-channel that you have to integrate and deal with all these silos. They vary, most of them are very customer data driven.

Steve Dennis  34:58

So, I think there's a time to be learned from retailers big and small, but a more traditional type of retailers by, by looking at what these companies do to be customer centric, to really zoom in on the customer journey to think about go to market strategies in a, really in a really different way and you know, that brings great value to the consumer, for sure. And in many cases, I think that just sharpens the saw for, for other retailers. So, I'm all in favor of more, more innovation. But I do think at some point, you know, you're not really prosperous. If you don't make any money.

Michael LeBlanc  35:34

Great way to wrap. Listen, it's been a great discussion and I think we'll come back to this as things evolve over the years, but really nailed it, I think in terms of this, trying to understand their role in this big retail ecosystem that you and I love. So, why don't we leave this episode there, we've got a couple more episodes left in the season, a reminder to all of our viewers to be sure and check out our YouTube site, we generally post the content from this episode that you're listening to the next day, or the day after and sometimes there's some bonus easter eggs and then you just get to see me and you, kind of, in live and, and maybe watch that over your cornflakes in the morning. 

Michael LeBlanc  36:13

So yeah, there you go and my lack of my lack of speaking of Dollar Shave Club, I cancelled my subscription. I think everybody can tell a little bit, but there you go. 

Steve Dennis  36:23

Makes you look very rugged. 

Michael LeBlanc  36:24

All right, listen. I guess. All right, well, let's leave it there and that's a wrap on this episode. 

Michael LeBlanc  36:30

If you liked what you heard, please follow us on Apple, Spotify, Amazon Music or your favorite podcast platforms. So, you can catch up with all our great interviews, subscribe so that just automatically shows up. Tell your friends and also new, new insights and new episodes will show up every week. So, tell your friends because that will help us share the word, the good, the good, the good wisdom. Now, be sure and check out, and be sure to check us out on our new YouTube channel, not so new anymore. We've got a couple episodes up there and just look for Remarkable Retail.

Steve Dennis  37:01

And I'm Steve Dennis. You can check out more of my work at my website, stephenpdennis.com or on Forbes or on Twitter and please check out my second edition of my book, ‘Remarkable Retail: How to Win & Keep Customers in the Age of Disruption’. Available just about everywhere books are sold.

Michael LeBlanc  37:21

And I’m Michael LeBlanc, Producer and Host of The Voice of Retail podcast and a bunch of other stuff. You can find me on LinkedIn, learning about me on meleblanc.co.

Michael LeBlanc  37:31

All right, Steve, great episode. Look forward to chatting again next week. Be safe and have a great rest of your day.

SUMMARY KEYWORDS

brands, stores, business, numbers, consumer, casper, retailers, retail, customers, bit, episode, pretty, marketing, ipo, Warby Parker, companies, spending, price, opened, Marc Andreessen