Tuesday, October 26, 2021

Why Warby Parker, Allbirds digital is betting on stores ahead of public debuts

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A Warby Parker store in The Standard, Los Angeles, California.

Michael Buckner | fake images

Retail favorites Warby Parker and Allbirds went online and paved the way for other brands to follow their playbooks and expect similar success.

Now, they are betting big on real estate, not the web, to fuel future growth, documents filed with the Securities and Exchange Commission show. The fact that they reap the benefits of brick-and-mortar stores could set the way for other first-line businesses.

The two companies have become synonymous with the term “direct to consumer” in the retail industry. The strategy involves avoiding wholesale channels, such as department stores, to forge stronger relationships with customers. DTC companies have few or no physical locations.

Dozens, if not hundreds, of brands have debuted and tagged in the DTC category in recent years. Products range from makeup and pajamas to toothbrushes and deodorants.

As Warby Parker and Allbirds prepare to make their respective public market debuts, they have entered a new phase of expansion with aggressive goals. Investors and analysts will hold them accountable.

The success of his next moves, including the planned launch of more brick-and-mortar stores, will likely have implications for brands that follow in his footsteps.

For one thing, both companies lose money. It’s unclear when, if ever, it will become profitable. Allbirds’ net loss totaled $ 14.5 million in 2019 and grew to $ 25.9 million in 2020.

Warby Parker broke even in 2019, and its net loss last year was $ 55.9 million.

While opening stores carries additional fixed costs, traditional retail is still the best channel for finding new customers. Warby Parker and Allbirds are betting on the stores as they prepare to go public.

Allbirds goes public through an initial public offering, while Warby Parker is using a direct listing. In the latter, the shares are not made public by a team of underwriters.

An online-only model is only sustainable for so long, experts say. The success or failure of these companies’ public debuts could spur other IPOs or lead retail companies that have followed a DTC model to seek other exit strategies.

“There was an initial euphoria that there was a new model where stores were no longer needed,” said Jason Goldberg, director of business strategy for advertising firm Publicis. “As the stores and the traditional business model was all old school, and the new way of doing things was going directly to the consumer … creating a website and inventing a great product.”

Companies are finding out if the model is not sustainable, Goldberg said.

“There is a certain phase of your baby’s growth where you can be successful without stores, and it can be very easy to acquire customers,” she said. “But no digital native brand has achieved a billion dollars in annual revenue without a store. You need those stores as a profitable channel of customer acquisition at some point.”

Allbirds’ New York City retail store is located in the trendy SoHo neighborhood of Manhattan.

Source: Allbirds

Emory University assistant professor of marketing Dan McCarthy controls companies like Casper Sleep, Figs, Revolve and Peloton while overseeing Warby Parker and Allbirds. All have relied predominantly on the Internet for sales.

But they have also struggled to make a profit, which could cause potential investors to pause.

“If it can’t turn a profit, I’m sorry, it’s not going to be a worthwhile stock in the long run,” McCarthy said.

Mattress maker Casper turned its DTC strategy around when it started selling at other retailers like Target. Since then, it has also opened more than 70 of its own stores. It’s further proof that a business initially driven by web sales sees the benefits of real estate.

Allbirds, the sustainable footwear brand that started in Silicon Valley, said it “just scratched the surface” of its potential to open stores, particularly in the United States.

The company had 27 retail locations around the world as of June 30, according to to SEC filing.

“As our fleet of stores expands, we expect our growth to accelerate, compared to 2020,” Allbirds said. “We believe that our new stores will also be highly profitable, have attractive payback periods, serve as good capital investments, and be well positioned to take advantage of the recovery in physical retail from the pandemic.”

The company said e-commerce accounted for 89% of total sales last year and stores the rest. Its physical stores were closed for weeks in 2020 due to the Covid crisis. Through June 30, shoppers who visited both a physical location and the website spent 1.5 times more money than a customer who only went to a store or bought only online, Allbirds said.

The company pointed to its Boston Back Bay location to show the benefits of opening a store. In the three months after the store debuted in March 2019, web traffic in the area increased 15%. The company saw 83% more new customers in the neighborhood.

To reap the benefits of stores, businesses may not need to target expensive markets like New York City or Los Angeles. Web Smith, founder of 2PM, recently wrote in a note to subscribers That direct-to-consumer brands should take a closer look at store openings in second- or third-tier cities, such as Columbus, Ohio, for locations.

“The DTC industry is a club and clubs have rules made to be broken,” Smith said. “For retailers who have the courage to think outside the box, opportunities to move forward can be found far from cities and strategies from the status quo.”

Meanwhile, eyewear maker Warby Parker said it had more than 145 stores as of June 30. The company plans to open 30 to 35 locations this year and aims to expand at that rate annually.

“Our retail stores are highly productive,” the company said in to SEC filing, adding that their average sales per square foot are $ 2,900. By comparison, Apple has been reported to be the top-earning retailer in terms of this metric, generating more than $ 5,500 in revenue per square foot.

“Our retail stores serve as valuable marketing vehicles to introduce our brand to new customers and drive repeat purchases, and in turn, positively impact our sales retention rate,” said Warby Parker.

The company offers in-person eye exams at 91 locations. The service gives some people more reason to make the trip.

Warby Parker said his e-commerce business accounted for 60% of net revenue last year. Stores made up the remaining 40%.

“Almost each and every one of these first-generation retail companies has stalled,” Goldberg said. “And they are exploring some kind of store model to continue their growth.”

‘It used to be all about shopping malls’

The online sales model can be just a starting point for Warby Parker, Allbirds and the companies that follow their path.

Forerunner Ventures founder Kirsten Green says she doesn’t use the term direct-to-consumer or DTC to describe companies like Warby Parker, Allbirds, Bonobos and Birchbox today.

“These are just businesses that started online because it was efficient,” he said. “You could set up a site, start courting customers, and start learning why you had all these touchpoints to track customer behavior.”

Those experiences have made this “new generation” retailers smarter about opening stores and avoiding overbuilding, Green explained. Rapid expansion has caused problems for businesses in the past and has led numerous businesses to bankruptcy court to get out of leases.

“It used to be all about shopping malls,” Green said. “You could come up with a mall strategy and put 200, 400 stores … Now, I think we changed that equation, and the initial engine is to build the online presence.”

For the likes of Warby Parker and Allbirds, the benefits of opening more stores come with higher fixed costs and the liability of a lease.

But many companies have found ways to manage those costs. Target, for example, has pioneered using its big box locations as mini fulfillment centers to get the most out of its real estate.

Encourage shoppers to pick up orders online from their parking lots. Target leverages its stores, in turn, to reduce costs associated with shipping and transportation.

“You can build a business of a certain size online,” Green said. “But the reality is, if you really have scale in mind, you will have to think about finding the customer where the customer is. And they are in a lot of different places.”

Warby Parker and Allbirds have decided that they need to expand their offerings to move toward profitability. The success of their public debuts will have implications for other companies that followed their online-first model, according to Publicis’ Goldberg.

“It is a positive statement for the model that this first class [of DTC brands] it is starting to have exits, because so far there have been some good acquisitions … but the market was not very mature for these IPOs, “he said.

“Now that the market is seemingly starting to tolerate some of these ideas, and especially if they succeed with these unit economies, that will involve a second full wave of digital native companies trying to follow in those footsteps,” he said. .

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