No. 310: The Bonobos Curve

The history of digitally native vertical brands (DNVBs) goes back just 12 years. However, the framing of the industry has evolved and so has its terminology. Appointed by Bonobos’ founder and current Walmart executive Andy Dunn in 2016, the DNVB acronym has given way to a simpler version: “DTC” or direct-to-consumer. It rolls off of the tongue and it’s all-encompassing – reporters, analysts, and sources like 2PM and Lean Luxe can apply the terminology across the board. For Bonobos and Dunn, there is symbolism in the paths of the company and the executive. It’s emblematic of the curve that many companies and executives will follow.

By the end of this, you may see how short-sighted the DTC descriptor can be. I believe that the acronym should be viewed as a title of a sales channel or perhaps an emblem of a retailer’s core competency. It’s a misnomer when product manufacturers are appointed the title DTC, as if it’s main channel denotes the character of the entire company. To the mere observer, the consumer has evolved. To operators within digitally native retail, it’s a complicated conversation.

Platforms like Shopify democratized opportunity for early-stage product manufacturers. Led by Tobias Lütke, the CEO led the burgeoning commerce platform at the onset of the Great Recession of 2008 and remains there today. Under his leadership, the company is trading at a $22 billion market capitalization. The timing of Shopify’s ascension is significant. By 2009, the Wall Street Journal was publishing articles like “Recession turns malls into ghost towns.” And given the lack of eCommerce presence for many of the brands that lived and died by big box retail, the macroeconomic effects on the worst recession of this lifetime thwarted brand sustainability. In some cases, the product manufacturers had to seek bankruptcy protection as overall consumer demanded dwindled between 2007 and 2010. This era of web-first retail was fortuitous, it happened at the weakest point for traditional brands in the last 60 years.

The retail industry has changed, not the consumer.

Younger brands had few if any places to turn to effectively market their products. With their lean teams and inexpensive architecture, these brands were capable of surviving the treacherous waters of American consumerism. In 2013, this is what the founding team for Mizzen + Main wrote for Wall Street Journal:

Startups like ours can focus our energy on developing our product, service and brand because of the platforms and tools available today. With the emergence of new web applications and plugins, the face of e-commerce is changing dramatically. A business can launch a product or service worldwide and reach millions without the massive infrastructure investment required just a few short years ago.

[…]

Platforms such as Shopify and Stitch Labs have enabled Mizzen+Main, along with myriad other companies, to focus on brand and product first — essentially democratizing e-commerce. That’s not revolutionary news, but with the robust, cloud-based add-ons available, we really can run an entire business with two partners in two states and nearly all systems run virtually. 

Most challenger brands focused on direct to consumer sales in 2007-2014 because distribution through the likes of department stores, Walmart, and Target were inside games navigated by industry veterans. Coupled with this historic economic downturn, there was little to no access to those channels. And when their were, ERP technology was difficult for newer brands to adopt. In short, those distribution deals were difficult to land.

In this way, direct to consumer sales efficacy was a sort of social proof for potential big box retail contracts. These contracts are much easier to land now; big box retailers invite breakout challenger brands to their shelves. This is enabling traditionally digitally native companies to expand their physical footprints by way of owned storefronts and wholesale agreements.


Bonobos Curve: the path of diffusion from a siloed direct to consumer (DTC) method to a holistic organization of online channels (native, marketplace), physical brand stores, and wholesale partnerships.


By the time that Andy Dunn wrote the heralded rise of digitally native vertical brands, his company successfully raised over $120 million with at least a dozen Bonobos Guide Shops and a nationwide partnership with Nordstrom. In his famed blog, he discussed this in detail:

While born digitally, the DNVB need not end up digital-only. This means the brand can extend offline. Usually its offline incarnation is through its own experiential physical retail, or pop-up strategy, or highly selective partnerships. In nearly all cases of partnerships with third parties, the brand controls its external distribution versus being controlled by it.

Assuming that the economy continues to hold steady and Tier A and B malls continue redeveloping real estate to attract this new wave of brands and their followers, we will see the curve continue and with rare exception. Even companies like Glossier, who are notably opposed to diverging from DTC marketing, have begun to invest in physical retail. And there will be more. In this way, the retail has boomeranged. The retail industry has changed, not the consumer.

Below, is the “Bonobos Curve.” This is the behavioral path toward sales maturity that the brand winners of this era will pursue. As such, many of the most successful brands have relationships with Nordstrom, Macy’s, Target, Walmart, or direct partnerships with progressive mall development companies.

A typical path followed by DTC brands | Souce: 2PM

Few brands will remain online-only. In a recent conversation with Betakit, Shopify discussed their plans to address the “Bonobos Curve”:

The pair see vast opportunity for Shopify to grow in the brick-and-mortar retail market. It’s Shopify’s goal, stated Black, to span the entire ecosystem to meet the needs of all its merchants. He emphasized that it doesn’t matter if merchants approach Shopify from a Shopify Plus standpoint or from Shopify Retail, the company hopes to create seamless solutions that span both markets.

Legacy product marketers, like P&G, have equipped their brand management teams to infuse their operations with many of the same tools and practices that their challenger brands counterparts made popular. It’s true that those challenger brands will mature with online retail operations as a core competency. Given the age of many of today’s founders, digital-first competency will be as natural as walking or eating.

But DTC was never the goal of these retailers and consumerism hasn’t evolved as much as we’d like to believe. Brand traction was the goal for many brands like Bonobos and platforms like Shopify, WooCommerce, and BigCommerce leveled the digital playing fields for a while. Time will tell who holds the advantage as brands compete on traditional grounds but Andy Dunn is now a Walmart executive. And Bonobos is a Walmart brand with flagship stores and Nordstrom distribution. This represents the end of the curve and the closing of the Book of DNVB.

Read the No. 310 curation here.

Report by Web Smith | About 2PM

No. 309: Hudson Yards is Not For Everyone

Non omne quod nitet aurum est: all that glitters is not gold. This is a widely used line derived from Shakespeare’s The Merchant of Venice – a story of a merchant who must default on a loan. To understand the new era of high-visibility retail developments, you have to understand the times that we are living in. The 41 page report by the Schwarz Center of Economic Policy Analysis (SCEPA) details the funding initiatives, costs, and opportunity for Hudson Yards. There is a passage that summarizes the gist of the entire document:

The cost overruns and revenue shortfalls of the Hudson Yards project stem from the realization of financial and economic risks common to large development projects. While well known in multi-faceted development projects, the cost of these risks were not included in the project’s budget, leaving the city to bear the responsibility if they materialized.

The start of the one million square foot Hudson Yards development was billed “the largest private real estate development in the United States by square footage” [note]. In the midst of 2008’s Great Recession, developer Tishman Speyer ceded the rights to the property to developer and Miami Dolphins owner Stephen A. Ross, the magnate who also owns a sizable stake in Gary Vaynerchuk’s 880 person Vaynermedia agency. While completing the deal, Ross reduced his company’s risk by introducing stalling mechanisms to give the economy time to recover before the clock began on the costly project. The rights were purchased during the 2008 downturn and the development team broke ground in 2012.

The idea of Hudson Yards was born out of recession. This is important to note, 2008 was a frightening time for retailers and consumers. The previous downturn allowed direct to consumer brands to take advantage of the physical retail shortcomings of incumbent product marketers.  Like many of the higher end mega-developments that are now in the works, Hudson Yards is both a barometer for our consumer economic health and a localized antidote for the next downturn. Originally intended to attract commercial partners with tax benefits, Ross’ development eventually extended the commercial benefits package to retailers – incumbent and challenger brands alike. These brands include: Rhone, Mack Weldon, Milk & Honey, Stance, B*ta, Batch, M. Gemi, and a yet-to-be-announced deal with Wone. On page 18 of the New School’s SCEPA report:

Another factor feeding the revenue shortfall was the IDA’s decision to extend PILOTs to retail development projects. With PILOTs were originally designated only for commercial developments, the extension of the tax break for retail development was not included in C&W’s 2006 revenue projections.

New York’s newest mini-city is just one of a number of developments popping up around the country. But Hudson Yards is perhaps the most vulnerable; it’s an experiment with the most to lose. Far from a private development, a city rife with public transportation and infrastructural shortcomings has and will be footing the bill for the one million square foot property. This tax burden is distributed to all New York residents but the development will directly benefit upper-middle class residents and visitors alike.

What Hudson Yards represents

In the The First Roundtable, 2PM explained:

Physical retail is rebounding because DNVBs are achieving great success with shoppers that are moving up market or, sometimes, down market (Boxed, Brandless, Dollar General). Additionally, data-driven customer acquisition is extending to physical retail. This is making it easy to account for investments into physical marketing and retail.

Hudson Yards is not for everyone, despite Ross’ recent, disingenuous public relations attempts. This fact should be by design and it likely would have been had the deal gotten done without taxing the middle class. A recent Forbes article mentions the high-end retailers like Cartier, Dior, Fendi, and Michelin-starred restaurants. And the financial service providers like BlackRock and Point72. It goes on to cite a range of $2 – $30 million for condos on the property. Ross’ wager is one that brands, developers, and retailers should take note of. This is one of the first developments to be built after the lessons of the last downturn: the middle class withers, the poor get poorer, and the wealthy remain so.

America saw the growth of middle class malls for nearly 60 years and those malls are now failing. Hudson Yards is built for a polarized consumer economy where middle class retail is penalized for their lack of focus. And the timing couldn’t be better for the brands in the direct to consumer economy who focus on upper-middle to upper class consumers.

The Overton Window

In a masterful article chock full of polymathic thought, David Perrell weaves a narrative that blends political, economic, and psychological research. His flowing essay connects the evolution of mass media, commerce, higher education, and politics in a way that is rare for publishers today. The three pillars that he discussed: commerce, higher education, and politics. One line summarizes the entire piece:

Commerce and media are interdependent. You can’t understand commerce without understanding the media environment.

This is a capstone belief for 2PM readers. Perrell goes on to discuss the current vulnerability of many traditional CPG brands who’ve – thus far – depended on mass media and traditional ad buying to generate demand for their product. At first, the rise in availability of information gave rise to challenger brands. For a window of time, obscure brands could compete with larger conglomerates by pursuing 1:1 relationships with consumers.

This era of connectivity gave rise to brands who took advantage of an Overton Window-like time for the consumer web (2007-2016). As diffusion increased, so did the difficulty in which brands met when acquiring new customers (rising CAC). In one essay, Perrell directly communicates the collapse of the Overton Window in the context of American politics. But unbeknownst to him, he also communicated the collapse of the Overton Window in the context of DTC retail and the advertising that propelled it. Compare the two paragraphs in What the hell is going on?

(1) The media’s monopoly saw its first cracks with the rise of cable, and now, due to the internet, the Mass Media environment is going to crumble. The internet — where everyone can find, select, edit, and distribute content — has already left its mark. The Overton Window has been shattered. The media is no longer a barrier against diverse thought and opinion.

(2) By creating unlimited shelf space and reducing information asymmetries, power in the internet age is shifting from suppliers to customers. The world is increasingly demand driven. Customers have more choices than ever before. They can buy anything, at any time. Through the internet, brands can serve a long-tail of unmet consumer needs, which weren’t served by big box retailers.

The web democratized information but, also, pop cultural and socio-economic distraction. We used to watch the same television shows at the same hours of the night. We’d view the same advertisements. And the America of late was a mostly centrist-thinking political body. The ideas to the left and to the right of the Overton Window went mostly unobserved – for a time. Today, the areas outside of the window dominate our conversations. As such, America used to vote for candidates that represented ideas within an Overton Window of acceptable belief. As 2016’s political race would suggest, America is more polar than ever. This one part of American consumerism is indicative of the whole.

At first, commoditized information helped challenger (DTC) brands compete against incumbents. But costlier advertising and distracted consumers are tipping the scales to incumbent forms of retail and brand promotion. For developments like Hudson Yards and other efforts by developers like Macerich, the bet is on the need for physical retail to acquire customers. In smaller markets like Columbus, Ohio – developments, like the Easton Town Center, have proven the appeal of this elegant simplicity. And DTC brands have flocked to this premium real estate.

Physical Retail 2.0 (PR2.0) will be defined by the public / private partnerships like the Hudson Yards development. With the consumer web becoming louder, more volatile, fragmented, and less reliable for pure direct-to-consumer (DTC) brands, PR2.0 is two bets: (1) traditional retail infrastructure and attracting DTC brands to develop new behaviors for higher-end millennial consumers (2) consumer web fatigue. In a recent conversation with Digiday, here is what Ken Morris of Boston Retail Partners told Hilary Milnes:

Retail has needed to change, and brands that are popular online are forcing that change with temporary stores and leases that require flexibility. Landlords and developers are no longer in a place to turn that down, and if you need proof, look at Hudson Yards. The most massive retail development made adjustments to get digitally born brands on the floor.They drive foot traffic, point blank. And malls need foot traffic.

Hudson Yards: the present, not future

For Stephen A. Ross’ development to withstand traditional market forces, it will have become a mecca to upper-middle to upper class consumerism. But while many publications are posing the question: will it work? A better question is: how soon? The $20 billion dollar retail project was funded by taxpayers to serve a greater purpose than the leisure and window shopping that’s been reported on. Hudson Yards was imagined at the end of a bull run and built to survive the next. Founder of Stray Reflections, a global macro research advisory, Jawad Mian recently published a series of tweets on the upcoming period of IPO liquidity for Silicon Valley investors.

In the thread, he is speaking directly to skeptics of our system of privatized high growth companies. Companies that IPO later in their cycles than earlier ones of previous generations and he raises some serious concerns. With surgical precision, he narrates through the credit bubble of 2007 and the commodity bubble of 2011. Then he notes the speed upon which unicorn investments (valuation of $b+) are crowned today: Bird, the scooter company, became a unicorn in less than 12 months. He cites the 10-fold increase in VC-stage investment by mutual funds between 2016 and 2019.

And lastly, he cites Saudi Arabia’s late-stage presence in US startups to the tune of $15 billion since mid-2016. Softbank’s Vision Fund, a home to some of SA’s sovereign wealth, has nearly $100 billion under management. It is no surprise that America is home to over 250 unicorns. In contrast, China is home to 168 unicorns worth $628 billion on an aggregate $11 billion in Chinese investment since 2000.

With a highly influential IPO window on the horizon, Mian’s concerns are founded. What happens if the values of Uber and Lyft don’t hold up in the public market? And how would their market vulnerabilities affect the growing influence of foreign, late-stage investment into American tech companies? Mian concludes with parallels from 2000, 2007, and 2011 but regardless of the successes of decacorn tech stocks, it is easy to see that late-stage investments are masking vulnerabilities in the private-to-public pipeline. This while the entire concept of the gig and freelance economies raise sustainability questions. For developments like Hudson Yards, the aim is to be above these pesky questions.

A 2PM reader recently shared a story about a new resident of a Hudson Yards condominium. His two bedroom apartment needed room for a couple and their two dogs. He came to find that the space was inadequate for his family and his belongings – so he also bought a unit across the hall. Hudson Yards was not designed with everyone in mind. And the financing of the property is so entangled that – while it was built for the higher class – everyone will eventually play a role in propping it up (if they haven’t done so already).

In this way, this ostentatious development is as close to recession proof as one can be. This, thanks in part to the influence of the challenger brands and their cohorts of wealthier millennials. As the consumer web continues to diffuse conversations, preferences, and opinions beyond the Overton Windows – Hudson Yards and the developments that will mimic it may become the safest places for DTC brands to expand in America’s number one retail market and beyond. But all that glitters is not gold. Hudson Yards was designed to become a haven for those who have, the types of consumers who can thrive throughout the natural cycles of our market-driven economy. Few retail developments can say the same.

Read Brief No. 309 here.

Report by Web Smith | About 2PM

Additional Reading: 

(1) Stephen Ross is building New York City’s Next Must-See Destination 

(2) Private Equity Firm Eyes China Malls

(3) The Mall is Making a Comeback

(4) Hudson Yards isn’t the future of retail

(5) Billionaire Stephen Ross believes that Hudson Yards is For Everyone 

(6) Hudson Yards: open to all but not for all

(7) Manhattan’s Opulent New City 

(8) The Cost of New York City’s Hudson Yard’s Development [41 page .pdf]

No. 308: Legacy Brands Can Redefine DTC

On Procter & Gamble and why they should further invest in physical retail. If 2019’s Las Vegas’ Shoptalk convention is any indication, the brand representation may mark a shift away from self-sustaining, direct-to-consumer (DTC) brands. Legacy competition for consumer packaged goods (CPG) looks to regain the momentum that the DTC era has hindered. Prominent DTC brands are fewer and far between, this year. At Shoptalk, Bonobos is traditionally present but the brand is now owned by Walmart. Dollar Shave Club, another mainstay, is now owned by Unilever. And Trunk Club is now owned by Nordstrom. This is symbolic, in and of itself. Like many brands in the DTC space, they are increasingly dependent on traditional retail channels to achieve critical mass.

Of this year’s Shoptalk attendees, fewer are there to represent top 100 or so DTC brands. Here is a short list of the digitally vertical brands in attendance: Allbirds, Brandless, Boxed, Dirty Lemon, Everlane, Frank + Oak, Glossier, Harry’s, Mack Weldon, Mizzen + Main, Native Deodorant (Procter & Gamble), and Tuft & Needle. Of these, few have shunned wholesale retail and even fewer have shied away from physical retail development. While these companies have moved upon the traditional landscape with major retail partnerships, acquisitions, or physical retail growth, traditional powers have been slow to account for the resulting changes.

In the most recent Member Brief, we published The Target Report:

Target, Walmart, and Amazon (TWA) are each facing the commoditization of online grocery sales as new challengers continue to hinder TWA’s market cap growth. To address these challenges, each retailer is adopting product marketers and DTC brands are sources of new business and loyal customers. In each case, TWA are positioning themselves as practical homes to fashion, beauty, electronics, and lifestyle brands. Amazon is aggregating. Target is curating. And Walmart is acquiring. 

While the grandeur of DTC brands may be dwindling, legacy brands like Unilever and Procter & Gamble (P&G) are reinvesting into DTC era solutions. Between 2010 and 2019, CPG challenger brands established a momentum that traditional companies have had to counter. As of yet, traditional companies have yet to mount a true offensive against challengers and the retailers that have courted them. According to Happi Magazine, P&G is responsible for 18% of Walmart’s in-store sales. This number is up from 15% in 2016. This number has grown, thus far, despite Walmart’s heavy investment into DTC operations, exclusive CPG partnerships, and private label development.

2PM Data: P&G CoNTEXT

Revenues of the leading beauty CPG manufacturers in billions (2016)
EBITDA forecast of Procter & Gamble Co in millions (2018-2020)
Brand equity of the leading personal care brands worldwide in millions (2018)
Procter & Gamble’s net sales worldwide by business segment in millions (2014-2018)

P&G is at a crossroads. The 182 year old consumer brand earned its highest revenue figure in 2012 and has yet to reach those heights since, though they have successfully cut expenses and bolstered profits. Even so, P&G’s 2018 net income figure was the second lowest in their last 13 years. This diminished position corresponds with the growth in DTC retail sector. This growth along with the continued development of well-marketed private label CPG brands at big box retailers has resulted in increased substitution for traditional products from marketers like P&G and Unilever.

Redefining Direct to Consumer

A rendering of their franchise opportunity

There is a remarkable opportunity for P&G to leverage their products in inventive, new ways. The Cincinnati-based company recently launched Tide Cleaners, a franchise retail experience and service center for dry cleaning. Franchisees gain access to the most recognizable brand in home goods and Tide gets a new retail channel to sell products, build affinity, grow top funnel advertising, and realize service-driven revenue streams.

Tide, one of P&G’s most recognizable brands, has been repurposed to present an on-demand laundry service. Tide Dry Cleaners allows customers to select their desired service in-app, pay, and then drop off their clothing at the storefronts to be picked up when push notified. Customers will return to find their clothes washed, dried, and folded. These dry cleaning storefronts now run in Cincinnati, Boston, Chicago, DC, Philadelphia, Denver, and Dallas. This new retail experience begs the question: why not expand into vertical retail with physical “Everyday” storefronts?

One example of Procter & Gamble’s existing DTC efforts

On “P&G Everyday” and defensibility. As of 2018, Harry’s and Dollar Shave Club (Unilever) won over 12% of Gillette’s market share thanks to their direct model and partnerships with retailers. Procter and Gamble would further benefit from the development of a DTC physical retail model. By owning their in-store “Everyday” experiences, P&G would be able to meet a few objectives that would be useful as Amazon, Walmart, and Target continue to develop competing home goods brands to address their own profitability concerns.

  • Physical stores could reduce dependency on Walmart and Target as primary sales channels while giving P&G more leverage to negotiate better terms and in-store marketing collateral at Target and Walmart or on Amazon (currently an advertising partner).
  • By going direct to consumer, these owned storefronts would cut P&G’s dependency on wholesale relationships, promoting higher margins per sale.
  • With owned storefronts, P&G would be capable of launching their own delivery services and last mile operation.

While “direct to consumer” is the buzz phrase of this era in retail, physical storefronts are once again becoming critical components in a healthy customer acquisition ecosystem. But brand manufacturers can no longer rely upon big box retailers to run the way that they did prior to this era. Digitally native brands are prioritizing physical retail to reduce customer acquisition costs and build long-term loyalty. As a result of this shift by internet-first retailers, big box retailers like Walmart and Target have prioritized partnerships and acquisitions with these brands to drive their customers to their stores.

Walmart Inc. hopes to boost profits by charging for in-store and online advertising by some of the retailer’s biggest suppliers, including Procter & Gamble Co.

Will P&G Pay to Advertise in stores?

The DTC era of retail has begun to place marketers like Unilever and P&G at a disadvantage. Just ten years ago, P&G owned the grooming and beauty aisles at stores like Target. In some stores, Harry’s and Flamingo installations are the most visible. In others, its Native’s deodorant or Casper’s pillows. As third-party retailers like Walmart reevaluated shelf space and in-store marketing, P&G began to lose control of their product presentation. But their commitment to direct-to-consumer business models is a sign that this disadvantage may be short lived.

In addition to the Tide Dry Cleaner franchise system, P&G is experimenting with digitally-native brands. In addition, the company continues to test new online retail formats with BigCommerce. But it’s the direct store format that could offer physical retail growth and brand defensibility amidst the continued evolution of retail. A P&G owned storefront wouldn’t just be a place to own relationships with old customers. It would serve as a space where P&G’s new digitally-native brands could test for and acquire new customers. Direct to consumer retail isn’t limited to online channels, DNVBs are innovating in this way. Marketers like Unilever and P&G can do the same.

Read the No. 308 curation here.

Report by Web Smith | About 2PM