No. 318: The Vertical Brand


Michael Rubin is always in the news. The founder and executive chairman of Fanatics is often courtside as the co-owner of the Philadelphia 76ers, placing bids for NFL teams, palling around with friend and rapper Robert “Meek Mills” Williams, or advocating for a cleaner justice system. But it all seems like a distraction; he’s quietly building a sports licensing monopoly. Behind the scenes, Kynetic is owned and operated by Rubin. It’s a fascinating company with a rich history; Rubin’s understanding of the internet’s marketing levers has helped Fanatics capture lightning in a bottle.

Shopping cart + Insatiable Demand + Product Exclusivity = Lightning

The parent company of Fanatics has built one of the more innovative and fundamentally-sound, online retailers in all of commerce. Valued at $4.5 billion, the private retailer is equal parts: marketplace, licensed manufacturer, and digitally-native brand. Rubin’s brand has amassed extraordinary power as a vertical retailer in its relatively short birth and rebirth. To better understand its evolution, review a corporate history that spans the majority of the online retail era. One can argue that Fanatics grew the first digitally native vertical brand.

vCommerce brands are born online. They cut out the middle by selling directly to consumer, maintaining 1:1 relationships with consumers. These brands manufacture, market, sell, and fulfill the products. They own the entire consumer journey.

The history of Fanatics is a complicated one. In 1991, Rubin founded KSR Sports, a sporting goods and footwear retailer. The company grew to $50 million in annual sales by 1995 but with razor thin margins. This pushed Rubin towards a v-commerce model, acquiring Apex One in 1996 and merging with Ryka in 1997 to form Global Sports Inc Commerce (GSI Commerce).

This reorganization moved Rubin and his team a bit closer to the licensed merchandising operation that we see today. But this period was more symbolic of another part of Fanatics DNA: logistics excellence. The company went on to move $100 million in GMV in 1999. Just two years later, GSI inked a deal with Dick’s Sporting Goods, Sports Authority, and Gart sports to provide their eCommerce solutions at scale. In a move that may have influenced Amazon’s early partnership with Toys “R” Us. From a 2017 Business Insider article:

Toys “R” Us may have set itself back when it signed a 10-year contract to be the exclusive vendor of toys on Amazon in 2000. Amazon began to allow other toy vendors to sell on its site in spite of the deal, and Toys “R” Us sued Amazon to end the agreement in 2004. As a result, Toys “R” Us missed the opportunity to develop its own e-commerce presence early on.

By 2002, GSI Commerce powered NASCAR’s first online store. The MLB, NHL, and NFL each followed suit by 2006. In a bit of irony, later that year – Toys “R” Us hired GSI to build its first native eCommerce experience after their failed Amazon experiment. After the NBA agreed in 2007, GSI became the first online retailer to partner with all major North American sports leagues.

To develop a brand around its professional sports focus, Rubin acquired the “Football Fanatics” name and operation in 2011.  Football Fanatics was founded by Alan and Mitch Trager as a brick and mortar retailer in Suburban Jacksonville in 1995. After the brothers had trouble scaling beyond that point, Rubin swooped in to acquire it for $171 million and $101 million in GSI stock. By this time, GSI was managing 2.5 million square feet of fulfillment space. eBay would go on to acquire GSI Commerce for $2.4 billion in 2012.

Shortly thereafter, Rubin purchased the rights to Fanatics from eBay. In full – Rubin retained the rights to Fanatics, ShopRunner, and Rue La La: incorporating Kynetic as the parent company to the three online retail properties. Within one year, Andreessen Horowitz and Insight Ventures valued Fanatics at $1.5 billion, investing $150 million into the company. Fanatics would go on to raise capital from Alibaba Group, the Softbank Vision Fund, and Silver lake Partners. It shouldn’t surprise that Fanatics is considered one of the top three in sports apparel licensing. So in that Toys “R” Us / Amazon moment, Dicks Sporting Goods is now a chief competitor and Sports Authority is done for good.

What’s more impressive than the company’s trajectory is how Rubin continues to find innovative ways to reach new, top funnel customers.

Fanatics and Rubin’s Systemized growth

Just one of the latest partnership innovations,  it was announced that a resurgent Kohl’s signed a long-term deal with Fanatics to distribute the sporting goods company’s licensed products through Kohl’s native channels. While Kohl’s stock price is not necessarily reflecting Kohl’s long-term investments, the department store is having its own renaissance. The brick and mortar retailer recently signed a deal with Amazon to handle service all returns, a play to cozy up with the eCommerce titan while improving a key performance indicator: increased foot traffic.

Later this fall, Kohl’s will amplify hundreds of thousands of Fanatics’ SKUs through its native channels. As such, Fanatics will gain access to a new, primed audience. In return, Kohl’s can earn third-party revenue without holding inventory. It is the perfect corporate marriage: averages 40+ million visits per month, a number that dwarfs’s 5.2 million monthly visitors.

860 respondents; 18 years and older who purchased sport clothes in the past 12 months | Source: Statista

Earlier this year, Fanatics began selling merchandise on in a similar deal. That one supplied Walmart with coveted access to licensed apparel. In exchange, Fanatics’ products are in front of an estimated 305 million estimated monthly visitors. Unlike the Kohl’s agreement, Fanatics has a branded store on the Walmart site. This model resembles the company’s agreement with JCP, the middle-market retailer has begun to regroup by partnering with relevant brands like Fanatics.

A savvy move by CEO Doug Mack; these merchandising agreements are subtle signals to customers that Fanatics is a low-substitution brand. Mass-market retailers can barely compete in costly, licensed merchandising without a Fanatics co-sign. And in an effort to expand internationally, Fanatics also partnered with Coupang – South Korea’ largest online retail marketplace to launch a store within a store on the platform. This effort goes live this summer.

Consolidate and Capture

Rubin’s team built an extraordinary commerce play and retail brand atop key partnerships. This stack has helped Fanatics secure the rights to run the following stores:

  • The National Football League |
  • The National Basketball League |
  • Major League Baseball |
  • NASCAR |
  • Major League Soccer |

Meanwhile, the list of merchandising acquisitions haven’t slowed for Kynetic. In 2012, it acquired one of its main rivals, Fansedge; in 2017, it bought Majestic and Lids, the brick and mortar hat retailer.

With the exception of Kohl’s agreement (one that was surely influenced by Amazon’s counsel), Fanatics has succeeded in maintaining its branding across its growing portfolio of retail partners. This has helped them maintain direct relationships with consumers. Fanatics built a competitive advantage where there was none. While far from the traditional DNVB, it’s become one of the most successful digitally native brands on the market by protecting intellectual property, achieving manufacturing superiority, and emphasizing industry-leading fulfillment operations.

Rubin and Fanatics found a way to modernize a commodity product; Fanatics is now the premier retailer for sports apparel. And it has a growing legion of fans who see what Rubin envisioned a long time ago. To own the merchandising market: you need airtight contracts, a great consumer experience, brand equity. Most importantly, you need strong, organic demand to offset steep licensing fees. This lack of organic demand has served as a death sentence for smaller licensing retailers; there’s little margin available for traditional CAC. More than ever, consumers see a team name on the front of a shirt, a player’s name on the back, a league patch on the sleeve, and a brand label that says “Fanatics.”

Michael Rubin’s decades-long eCommerce evolution may not have the typical arc of DNVBs. But Fanatics shares digitally-native DNA and there is a tremendous amount to learn from an operation that maintains growth while paying for less than 9% of its traffic. Modern brands should license a page from the Fanatics playbook.

Read the No. 318 curation here.

Report by Web Smith | About 2PM

No. 317: The DTC Playbook is a Trap

Harry’s delivered a sizable outcome in their recent $1.37 billion exit. The men’s grooming company should be viewed as somewhat of a wake up call to DNVB leaders. Yes, Harry’s sold a simple product but it also disrupted the DTC playbook on its way to an exit. The company wrote and followed its own playbook, why don’t more digital-natives do the same? It has been reported that just 20% of Harry’s sales volume came by way of direct to consumer revenue. Everything about Harry’s ascension opposed the presumed operating instructions of the DTC era.

Yes, Target and J. Crew accounted for nearly 80% of Harry’s overall sales. But that isn’t only what sets Harry’s apart from the tendencies of other digital-natives. By all reports, Harry’s is a well-run business: the logistics operation is flawless, the company is reportedly profitable, and they’ve essentially retooled manufacturing for the demands of the DTC era. Simply put, Andy Katz-Mayfield and Jeff Raider have been extraordinary leaders.

Harry’s accomplished a great deal in six years. The razor manufacturer was an early omni-channel pioneer: partnerships with Target and J. Crew were pivotal in their ensuing mainstream success. Collaborations with digital publishers like Uncrate reminded consumers that Harry’s was an elevated brand, something more than their competitors. Harry’s was one of the first to launch pop-up activations. Each of these decisions countered conventional wisdom at the time.

From a 2014 interview with CNBC: Warby Parker takes on Gillette

Raider and Katz-Mayfield believe the key to Harry’s growth lies in this vertical integration, or what they like to call v-commerce. Simply put, the company now owns the entire process—from R&D to manufacturing to selling direct to the consumer. “It creates this virtuous cycle that makes for really happy customers, and then they become our best advocates,” says Katz-Mayfield.

When Harry’s acquired their manufacturing partner, the company became one of the few truly vertical brands of the DTC era. This was also antithetical. But, it allowed them to iterate their core product quicker and streamline product iteration for their sourced products like skincare, soaps, and shaving additives. The result was a Target aisle that began to reflect that Harry’s was more than a product brand, they were a category leader. In this way, Harry’s began challenging Gillette in an asymmetrical fashion by becoming one of the first true DTC category brands. By designing appealing products in other product verticals, Harry’s gained an advantage. This leverage helped them to amass over 2.4% of the entire razor market. In short, Harry’s wasn’t just great at marketing and design – they disrupted their industry.

I’m bearish. It’s hard, only the disruptors will survive.

Anonymous Founder

Skepticism of the direct to consumer era of online retail isn’t new. General Partner of Great Oaks Ventures, Henry McNamara recently tweeted:

Henry McNamara on Twitter

DNVBs Valued @ $1B+ & Funding 👓Warby $1.75B- $290M raised (6x) 👟Allbirds $1.4B- $77M raised (18x) 🪒Harry’s $1.37B- $461M raised (3x)* 💄Glossier $1.2B- $187M raised (6.5x) 🛏️Casper $1.1B- $339M raised (3.5x) 🪒Dollar Shave $1B- $163M raised (6x)* 🧔Hims $1B- $197M raised (5x)

He later corrected his figure on Harry’s ($375 million in equity sold) but the point stands. Is investing in digital-natives worth it? Yes. But only if the brand is capable of disrupting prior growth tactics and brand positioning. Dollar Shave Club and Harry’s represent two of the most notable exits of the DTC era, both found ways to acquire customers and sell a growing catalogue of products to them. Both were valued between 4-6x the capital raised. These companies found innovative ways to market, distribute, and grow. In turn, they innovated their way to earned market share, at the expense of incumbents and other challengers.


It goes without saying that I’m bearish on DNVBs as a whole. As a whole, the industry tends to rely upon left-brain operators with systems and definite plans. But, I’m bullish on the challenger brands who’ve figured out that winning is often a result of rewriting the playbook. For the brands looking to grow to (efficient) critical mass or even an exit, the DTC playbook is a trap. The journey from zero to one is not one backed by b-school theory. Brands won’t be able to project tomorrow’s viability by analyzing yesterday’s LTV:CAC ratio, alone. But DNVB growth isn’t an art, either. Digital-natives will have to be more than beautiful design and savvy copywriting. The proverbial DTC playbook must be rewritten each time. If the DTC playbook were to be written, it could be boiled down to this:

There is no playbook. DNVB growth must be a malleable and agile operation. Brands must find opportunities where there were none. They must seek to do what hasn’t yet been done.

So yes, I am bearish on many of today’s DNVBs. Brands are merely following the paths of the brands before them and I believe that it hinders more than helps. Their path to their early-stage milestones are often unproven anecdotes written by investors who’ve likely never sold a physical product.

In a recent thread by Ryan Caldbeck on this same topic, the founder and CEO of Circle Up expressed his similar skepticisms with the following points:

    • I’m not that convinced that DTC is going to kill a lot of incumbents. If we look at share loss for Pepsi, Unilever, etc- much of that is not DTC, it is products/brands that meet unique needs of today’s fragmenting consumers.
    • I’m deeply skeptical that the DTC startups have nailed online marketing. Almost all of them are burning cash at levels unprecedented in CPG (most of $ for marketing). Does that mean they are good at marketing, or just that they have convinced venture capitalist to to give them money?
    • A question might be: can they sustain the innovation? I haven’t seen a lot of startups come out with more than a small handful of products. Most of the DTC companies are not using DTC for what I think it’s great at – which is iterating on product development.


In a recent Member Brief, I wrote on the asymmetrical warfare that Caldbeck summarizes so eloquently, “A dynamic brand enables more than product success, it enables category success. As brands known for one thing enter the categories of other competitors, the companies with the most brand equity and marketing sophistication seem to be best positioned to make the leap from product company to category brand.”[1] But brand equity is just one component; Harry’s operational superiority and omnichannel sophistication has been on display over its six years as an independent company. It should be a message to younger companies that achieving an exit will take more than a beautifully-crafted facade that hides operational chaos (as is often the case).

As long as DTC brands attempt to follow what’s been done before them, you too should be skeptical of the industry. Many investors seem to look for a DTC Playbook to hand their portfolio companies. As if to say, “Here is how it’s done. Now execute the game plan!” But it’s likely that it will never be that way. As digital-natives begin competing in traditional retail’s territory, heritage brands should serve as a reminder. They had unique paths to critical mass, very few encountered the predictability that the DTC era seeks.

Rather than determining speculative best practices with few data points, DNVBs should review the small number of successes from the DTC era. There have been but a few unicorns minted and even fewer exits earned. Each company earned a place atop the market by responding to forces, maintaining agility, promoting executive autonomy, and thinking a few steps ahead of the curve. Not one company on McNamara’s shortlist got there by following a playbook. That should be the only guidance that earlier-stage founders need.

Read the No. 317 curation here.

By Web Smith | About 2PM


No. 316: The Rise of “O2O”

In a recent report in the Minnesota Star-Tribune, Jackie Crosby details Target’s latest plan with their recently rebranded media company – Roundel.

Target Corp. does more than just sell merchandise to shoppers. Since 2016, it also has operated a separate, in-house media company that creates digital advertising for a host of major brands and businesses, not all of whom sell products at Target stores.

According to the recently-named president of Roundel, Kristi Argyilan believes that the in-house agency “represents a different way of thinking.” Target serves as a bridge between its customers and nearly 1,000 business partners in a novel way: “We infuse math — the insights and analytics that make our media company successful, with magic — the great, guest-focused design and shopping experiences that differentiate Target.” Roundel develops ad campaigns for and about 150 digital platforms like Pinterest and Instagram.

Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

The Star-Tribune report noted that the retailer isn’t the only company reconsidering the strength of an in-house media business. Walmart debuted an overhaul to Walmart Media Group in recent months. In addition, Amazon generated $10 billion in advertising in 2018 per the report. With Target, the report indicated, a new advertising identity would show to potential new clients that offerings extend beyond display ads. For Roundel – data and advertising design aren’t the differentiators, the physical stores are. The agency’s hope is to pioneer the analytics to correctly determine online-to-offline sales efficacy.

Target gets you every time

Most of us underestimate the potential at the intersection of performance marketing and physical retailers like Target. Outside of Foursquare’s private data, there isn’t yet a sufficient means of quantifying the marketing influence that the internet has on the traditional DTC-era consumer who also shops in physical environments. I’ll try to explain with my recent, one-off anecdote.

On a recent visit to Target, I was searching for place mats when I walked past the Quip display along the main corridor. On a mission to spend no more than $30, I felt pulled to the display like a tractor beam. Without the physical display, a Quip purchase would have remained a long-term “maybe.” As such, I disregarded my $30 commitment and picked up a Quip box. But this funnel began long before that walk past the display of battery-powered toothbrushes.


  • Awareness of the product: I’d read about it in tech media and retail publications (top funnel), I’d seen the product in searches (middle funnel), and I’ve passively noticed a few retargeting advertisements over the past several months. None of this visibility moved me closer to the sale.
  • The packaging design: structurally unique when compared to the incumbent brands like Oral-B, Philips Sonicare. The box, itself, was taller. Target stockists have no choice but to place the product on the top shelf – prioritizing the Quip over the likes of traditional devices.
  • Branding: The colors popped and the design was superior, because the incumbent devices all possessed some variation of blue and white packaging.
  • Value: The price was 30-60% cheaper than the conventional, powered toothbrush.

Familiarity, appeal, and price were factors in my decision to purchase. But Target isn’t the only retailer that is competing to develop an O2O-capable, in-house media business. Walmart has overhauled its team – with the anticipation of a long period of growth. And Amazon generated $10 billion in advertising in 2018. Display advertising through Target, Walmart, and Amazon has been used to offset the rising costs of traditional advertising services like Facebook and Google. We expect this to grow. Digiday+ recently surveyed 71 media buying executives in March 2019. Nearly 80% anticipated increased spend on, 20% of the executives were planning to spend more on, and 14% were scheduled to spend more on through their reinvented advertising house.

Web Smith on Twitter

Target is a retail marvel, you walk in for one $20 item and you leave $140 poorer. There isn’t a brick and mortar retailer that is better for certain DTCs. It’s the ultimate retargeting ad.

Fostering DTC brand relationships has been a strategic advantage for the Minnesota retailer; no marketplace retailer has more of them. There are few companies with DTC recruitment initiatives to match Target’s recent partnership speed. The retailer selects rising brands, markets them with prime real estate, and presents great products within an environment known for soliciting impulsive purchases. Even so, the largest DTC brands have taken the digital-to-physical sales funnel into their own hands.

The online-to-offline Sales Funnel

In No. 272: A Path Forward, I discussed the positives of DTC brands operating within existing retail developments, improved sales potential, foot traffic KPIs, and the decline of Tier B and C malls.

There are 1,100+ malls in America and approximately 320 are graded Tier A. We have an oversupply of malls but that does not mean that traditional, anchored shopping centers no longer have a place in modern consumerism. Tier A malls have yet to see their best years. We expect their footfall traffic KPIs to grow, while B and C tiered malls continue a drift toward repurposed real estate.

O2O or “online-to-offline” commerce is a strategy that develops consumer affinity through digital channels and then brings consumers into physical settings to purchase in-store. The brand treats online and offline channels as complimentary offerings. The advantage of this model is three-fold: these retailers can assess consumer behaviors, share payment information between online and offline channels, and targeted consumers can be served at the top of the digital funnel for eventual offline purchase (or vice versa). Facebook’s foray into Instagram eCommerce was more defensive than analysts have so-far remarked.

We compiled a list of 14 brands that have publicly reported revenues in the Top 1000 and one retailer who has yet to publicly report revenue. The following DTC brands have almost exclusively avoided marketplace wholesale deals in exchange for focusing on direct sales through physical locations.

BrandNumber of StoresDNVB Ranking May '19
Sold in Target StoresTop Retail City

Flagship Address
Warby Parker8612
Not YetNew York121 Greene St, New York, NY 10012
8YesNew York627 Broadway, New York, NY 10012
Away551Not YetNew York10 Bond St, New York, NY 10012
Parachute576Not YetNew York129 Grand St, New York, NY 10013
Adore Me433Not YetNew York2655 Richmond Ave, Staten Island, NY 10314
Allbirds346Not YetNew York73 Spring St, New York, NY 10012
Rad Power Bikes3
84Not YetSeattle1128 NW 52nd St, Seattle, WA 98107
Everlane222Not YetNew York28 Prince St, New York, NY 10012
Glossier 234Not YetNew York123 Lafayette St, New York, NY 10013
Helix Sleep127Not YetNew York1123 Broadway #613, New York, NY 10010
Boll & Branch145Not YetNew Jersey1200 Morris Turnpike #D135, Short Hills, NJ 07078
MeUndies147Not YetLos Angeles3650 Holdrege Ave, Los Angeles, CA 90016
Kuiu154Not YetDixon 1920 N Lincoln St #101, Dixon, CA 95620
Shinesty 159Not YetBoulder1990 N 57th Ct A, Boulder, CO 80301
Rogue16Not YetColumbus1011 Cleveland Ave, Columbus, OH 43201

Whether through advertising agencies like Roundel or through their own channels, these brands have benefited from a growing means of commerce: online-to-offline. With the exception of Casper, which is partially owned by Target, these top digital natives have insourced all brick and mortar sales to their direct channels. As the ability to attribute sales improves, we anticipate an increased use of O2O for customer acquisition. For performance marketers who are judged by conversion rates and return on ad spend (ROAS), O2O is a welcomed opportunity to develop new methodologies for sales attribution and new advertising models to increase targeted foot traffic for retailers straddling the digital and the physical.

Read the latest curation here.

Report by Web Smith | About 2PM