Deep Dive: Two DTC Brands

Both companies set out to take on Nike and Adidas. The eventual divergence of their paths can be attributed to a number of differences in decisions: funding methods, geographies, early adopters, and design philosophies. But what ultimately set one shoe brand up for international dominance ($8+ billion market cap) and the other into survival mode ($100 million market cap) came down to this: comfort.

It can be easy to forget that Allbirds, at one time, seemed to be on the same trajectory as On. Wrote Rachel Syme in 2018 for the New Yorker:

In their initial wave of popularity, Allbirds became an essential part of the daily uniform of Bay Area tech entrepreneurs. But in the past year Allbirds have travelled outside the clean hallways of Silicon Valley headquarters and tipped into the mainstream. Mila Kunis wears Allbirds. So does Jennifer Garner. So do Park Slope dads and modern dancers and trendy teen-agers and kooky aunts and registered nurses and bartenders and pretty much every overworked, weary thirtysomething you see on the New York subway.”

The cascading effects of comfort as a variable would take volumes of essays to explain but here I will try to simplify as best I can. I wrote this about Allbirds in February of 2022 when it was still a $1.5 billion company. 

Allbirds is cozying up to wholesale. It’s an interesting paradox in omnichannel strategy that takes brand awareness and unit economics into consideration. The brands with sales velocity and stature to own their distribution can and will move towards an owned-store / DTC model. Brands working to reach profitability and scale are moving towards third-party retail wholesale partnerships.

In that essay entitled “Omnichannel Nirvana“, I opined that the strongest brands are pursuing DTC strategies while brands in need of sales growth are highly reliant on wholesale partnerships. The irony of the timing of this new report is that Allbirds is still pursuing wholesale and On Running is shifting in the opposite direction, according to this report in WWD.

The Swiss sports brand reported the strongest quarter in its history Tuesday morning with a jump of 46.5 percent in net sales to 480.5 million Swiss francs, driven in large part by its direct-to-consumer business.

As a result, the company will focus primarily on its own DTC efforts going forward and stick with the wholesale partners it already has without significantly adding to its stable. DTC accounts for 35 percent of overall sales.

The journey from performance to fashion statement encapsulates the evolving dynamics of consumer preferences and market trends. Nike, Adidas, and Reebok followed this pattern. Today, it is On Running. And I suspect that it will tilt the brand’s trajectory even higher.

Phil Knight, the visionary behind Nike, initially believed that running shoes were solely meant for sports. He found out that he was wrong. Over time, basketball shoes, epitomized by brands like Nike and Adidas, became the casual footwear of choice, transcending their functional roots to become fashion staples. Without many exceptions, the trend has pivoted away from basketball and returned to running shoes as the primary exhibitor of daily wear (and fashion in some cases).

Today, brands like Hoka and On Running, renowned for their exceptionally comfortable soles, are worn casually by the executive classes, a demographic that Allbirds once firmly held thanks to the early adoption by west coast venture capitalists alluded to in the introduction. This transition from performance to casual wear reflects the changing landscape of the athletic footwear industry and consumer priorities. The great contrast between the two brands began with comfort. People wear Hoka and On because it feels good to wear the shoe. Eventually, enough people wore them that their appearance became more socially acceptable outside of running circles. Like Hoka, On shoes have a particular look that was more unconventional than their counterparts at Nike and Adidas.

Good Steps and Missteps

The rise of On Running is noteworthy and generational. Founded in 2010 by Swiss Ironman champion Olivier Bernhard, On has experienced a meteoric rise in popularity, especially in the last few years. A significant boost in its profile came in 2019 when Swiss tennis great Roger Federer became a shareholder. In 2023, On announced $490 million in net sales in the second quarter, marking its sixth consecutive best-ever quarter. The brand’s appeal transcends its athletic origins, finding favor among various consumer segments, from tech workers to boomer parents and the athleisure crowd. Keys to its growth:

  • Product Innovation: On Running’s unique cloud-like cushioning technology has appealed to both serious athletes and casual wearers. Its focus on technological innovation in footwear has set it apart in terms of performance and comfort.
  • Market Positioning: On Running has successfully positioned itself across multiple segments, catering to both high-performance athletes and consumers looking for comfortable, stylish footwear. This dual appeal has broadened its customer base significantly.
  • Global Expansion: On Running has expanded its market reach globally, making significant inroads in Europe, North America, and Asia. This global presence has contributed to its growing revenue.
  • Brand Partnerships: The involvement of high-profile figures like Roger Federer has boosted On Running’s brand visibility and appeal. These partnerships have helped the brand gain credibility and attract a diverse range of consumers.

On’s shoes, known for their patented CloudTec soles, have historically been relatively firm, catering to a different runner preference than the traditionally softer American market. However, their recent models like the Cloudmonster and partnerships with athletes like Kristian Blummenfelt indicate a renewed focus on athletic performance.

Allbirds, on the other hand, initially captivated the market with its sustainable Wool Runner shoes. Founded in 2016 with a sustainability bend, Allbirds quickly gained popularity, especially in tech hubs like Silicon Valley. However, as the company tried to expand rapidly into new market segments and product lines, like running shoes and apparel, it faced significant challenges. The materials used in its running shoes were not well-suited for intensive activity, leading to durability issues. Its apparel line, made entirely of merino wool, was criticized for being too warm and uncomfortable. Furthermore, Allbirds’ expansion into younger consumer demographics and other product categories without sufficient market research diluted its brand image and confused consumers about what the brand stood for. Keys to its struggles:

  • Segmentation Missteps: Allbirds’ expansion into running shoes and apparel was not well-received. The materials used in their products, while sustainable, did not meet the performance and comfort expectations of the new segments they targeted, particularly in the athletic footwear market.
  • Brand Dilution: The rapid expansion into various product lines and market segments diluted Allbirds’ core brand image. This lack of focus led to confusion about the brand’s identity and diminished its appeal to its original customer base.
  • Pricing and Product Quality: The higher price points of Allbirds’ new products, combined with quality issues, especially in terms of durability and suitability for athletic use, led to customer dissatisfaction and lower sales.

Looking ahead, for Allbirds to reemerge successfully, a pivot in strategy may be crucial. Transitioning from a sustainability-focused brand to one that emphasizes comfort could open new avenues. Developing and patenting exceptional soles, akin to On Running’s CloudTec, could help Allbirds regain a foothold in the market. This focus on comfort, combined with its existing commitment to sustainability, could potentially redefine its brand identity and appeal to a broader consumer base. This strategic shift requires not only technological innovation but also a deep understanding of consumer preferences and market trends.

Asia As The Next Emerging Market For Running

Asia’s burgeoning market for running and athletic footwear presents significant growth opportunities for brands like On Running and Allbirds. The impact of this growth on comfort categories can be substantial, offering new avenues for market expansion and product innovation. Here are a few key points:

Rising Health Consciousness: In many Asian countries, there’s a growing trend towards health and wellness. This shift is driving an increase in activities like running, which in turn boosts the demand for high-quality running shoes. Brands that can tap into this health-conscious market with products that offer both performance and comfort are likely to see success.

Expanding Middle Class: Asia’s expanding middle class is fueling consumer spending on lifestyle and wellness products, including athletic footwear. This demographic is not only looking for functional products but also values comfort and style, blending their needs for athletic and casual footwear.

Urbanization and Lifestyle Changes: Rapid urbanization across Asia has led to lifestyle changes that blend fitness activities with daily life. As a result, there’s a growing preference for versatile footwear that serves both athletic and casual purposes, which is where the comfort category can greatly benefit.

Online Retail and Digital Engagement: The superiority of eCommerce platforms in Asia offers brands an effective channel to reach a broader audience. These platforms also provide valuable consumer data, enabling brands to tailor their products and marketing strategies to local preferences, including comfort-oriented features.

Cultural Trends and Brand Perception: In many Asian markets, Western brands are often perceived as status symbols. Brands like On Running and Allbirds can leverage this perception, emphasizing their unique value propositions in comfort and sustainability to appeal to a wide range of consumers.

Influence on Comfort Categories: The emphasis on running and athletic footwear in Asia is likely to have a trickle-down effect on comfort categories. Consumers who prioritize performance in their athletic wear also seek comfort in their everyday footwear. This overlap creates opportunities for brands to develop products that cater to both needs.

Asia’s growing market for running and athletic footwear is the key area for future growth in this segment, with significant implications for the comfort category. Both can effectively tap into this market by balancing performance, comfort, and style, and adapting to local preferences, stand to gain a significant competitive advantage in this rapidly evolving market landscape.

Allbirds will need to refocus on its core strengths while also innovating in product comfort and performance. Developing and patenting new technologies for soles, similar to On Running’s approach, could help turn it around. This strategic shift should be accompanied by a renewed focus on understanding and catering to its target segments’ needs, particularly around comfort, sustainability, and performance.

The stories of On Running and Allbirds in the athletic footwear industry offer valuable lessons in brand positioning, market segmentation, and the importance of aligning product offerings with consumer expectations. While On Running has successfully navigated these challenges, Allbirds has faced hurdles. However, with the strategic pivot mentioned above, Allbirds could potentially reclaim its position in the market. In the same New Yorker article, Syme wrote: “I have never been the kind of person who selects my shoes based on their orthopedic function.” The irony for high flying running shoe brands like Hoka and On is that this was their appeal before appeal was their appeal. And with that, more consumers prioritized comfort over appearance. Even Adidas and Nike have taken note.

Over four years, emerging sportswear companies Hoka and On Running spent the equivalent of what Nike spends in two weeks to grow their market shares — and added $3 billion worth of revenue over that period, according to TD Cowen. (Business Insider, 2023)

Allbirds can learn from this. Nike is focused on China to continue growing market share. The athletic footwear industry continues to evolve, and brands that can adapt to changing consumer preferences while maintaining a clear and consistent brand identity are likely to succeed in this competitive landscape. This is the tale of the two DTCs. 

By Web Smith | Edited by Hilary Milnes with art by Alex Remy and Christina Williams

Strategy: Goodwill, Brand Altruism, and Circularity

In a world increasingly conscious of its consumption footprint, the need for sustainability in retail has never been more pronounced.

Since its inception in 1902, Goodwill Industries has stood as a bastion of communal thrift and charity, where gently used items find new life in the hands of appreciative consumers. Known for its sprawling network of thrift stores, this nonprofit giant has long championed the cause of reducing waste and enabling job opportunities for those in need.

Fast forward to the digital age, and Goodwill, under the innovative leadership of Matt Kaness as the CEO of GoodwillFinds.com, is poised to translate its century-old mission into the lexicon of eCommerce, at a time when circularity is within the mission scope of every major brand.

For more than a decade, it has faced mounting competition from the likes of ThredUp, Poshmark and Etsy’s Depop, online platforms specializing in previously owned clothes. (New York Times)

Goodwill, a brick-and-mortar stronghold, has now successfully ventured into the online marketplace, aiming to carve its e-niche amidst the likes of the platforms quoted above. This bold pivot not only reflects a strategic adaptation to contemporary shopping trends, but also presents an untapped opportunity for brands to align with Goodwill’s enduring legacy of sustainability and social impact.

According to Statista, 61% of Americans know Goodwill. Poshmark comes in a distant second. So where do brands fit in? The strategy could be: reducing waste by partnering with the oldest and most known retailer in resale, benefiting others while reducing inventory exposure to your brand. As Kaness himself has stated, “There’s so much competition coming into the market now,” reflecting the urgency for Goodwill to evolve and stake its claim in the online resale market, a space brimming with for-profit contenders. By partnering with Goodwill, the goal for brands is not added revenue. Rather, brands can pass off their unsold or returned inventory to Goodwill, writing down losses in a charitable way while inching closer to the altruism that we hold so dear.

Human beings aren’t born altruists and turned into monsters by money. From the cradle, we’re greedy and needy. We turn to altruism as a result of penury, circumstance, or good breeding.

Chuck Thompson, The Status Revolution

The following memorandum is free to copy. It outlines why such an alliance not only enhances a brand’s circularity credentials but could potentially redefine the ethos of returns in the modern retail paradigm. Not only will you do good by instituting this type of strategy for your brand, you will be of the first to capture the tax benefits and earned media associated with pursuing sincere altruism.

****

MEMORANDUM

To: [Brand’s Leadership Team]

From: [Your Name], [Your Position]

Date: [Current Date]

Subject: Strategic Partnership with Goodwill for Enhanced Circularity and Returns Management

Introduction

This memo outlines the strategic advantages of partnering with Goodwill Industries as a pivotal component of our brand’s circularity and returns strategy. With an emphasis on sustainability and waste elimination, this collaboration will not only support [Brand’s] environmental commitments but also boost our brand image and customer loyalty.

Aligning with Circular Economy Principles

In the evolving retail landscape, the integration of circular economy principles is a business imperative. A 2PM quote on Circular Fashion noted: “Many of us walked Goodwill’s aisles out of necessity. I rocked $3 T-shirts with pride. Today, I could have probably sold a few of the same pieces for 30 times the price that I purchased them.” In the current market, consumers do not view thrift store resale as detrimental to brand equity. This is slightly different than the view of partnership with stores like TJ Maxx, Ross, and other bargain retailers.

By aligning with Goodwill, we can ensure that returned or unsold products are responsibly recycled or resold, reducing environmental impact and supporting local communities. This approach aligns with consumer expectations for sustainable practices and positions us as industry leaders in ecological stewardship.

Brand Image and Customer Loyalty

Partnering with a respected and recognized organization like Goodwill can significantly enhance our brand’s image. Goodwill’s mission resonates deeply with the growing demographic of socially conscious consumers. By publicly aligning with Goodwill, we communicate a clear message of ethical responsibility, potentially increasing customer loyalty and trust.

Goodwill’s Mission and Public Perception

Goodwill has long been synonymous with charitable work and sustainability. As it adapts to the digital age with platforms like ShopGoodwill.com and GoodwillFinds, it demonstrates a commitment to innovation and relevance in the e-commerce space. Aligning with such a dynamic and positively perceived brand can elevate our own sustainability narrative.

Communication Strategy

Our partnership with Goodwill should be actively communicated to our customers, showing our commitment to reducing waste. Leveraging Goodwill’s foray into eCommerce, we can promote our partnership through both physical and digital channels, creating a comprehensive narrative around our shared values of sustainability and social responsibility.

Tax Implications

Donating unsold or returned merchandise to Goodwill can provide us with tax benefits. These donations can be written off as charitable contributions, potentially reducing our taxable income. It’s crucial to consult with our tax advisors to optimize the benefits and ensure compliance with IRS regulations.

Operational Considerations

Integrating our returns with Goodwill’s donation system may require logistical adjustments, Matt Kaness and team at Goodwill are already working on a solution to assist with this measure. The long-term benefits, including reduced waste management costs and the potential for tax deductions, make this a viable strategy. By streamlining this integration, we can enhance operational efficiency and bolster our sustainability goals.

Goodwill’s eCommerce Presence

Goodwill’s expanding online presence provides an additional platform for us to redirect returns and unsold items. As stated in the New York Times, Goodwill has already achieved significant online sales growth, demonstrating the viability of this channel. By leveraging this, we can contribute to a more significant online inventory, potentially reaching a wider audience.

Challenges and Recommendations

While Goodwill’s decentralized structure presents challenges, these can be navigated through clear communication and collaborative strategies. We recommend establishing a dedicated team to manage the partnership and ensure a seamless integration with Goodwill’s systems.

Conclusion

A strategic partnership with Goodwill will bolster our circularity initiatives, enhance our brand’s social responsibility profile, and resonate with our customers’ values. It’s a forward-thinking step that not only aligns with our sustainability goals but also makes sound business sense. I recommend that we further explore this opportunity and engage with Goodwill to define the framework for a successful partnership.

Action Items:

  • Establish a task force to explore partnership feasibility.
  • Engage with financial advisors to assess tax implications.
  • Initiate dialogue with Goodwill to explore collaborative opportunities.

I look forward to your feedback and the opportunity to discuss this proposal further.

[Your Signature] [Your Name]

***

The more that resale becomes ingrained as part of the consumer experience – buy-wear-sell-repeat – the more customers and brands are likely to think about the life cycle of their products. And that’s significant. Consumers will grow closer to brands, no matter where they find them, and in doing so, they may alleviate some of the environmental impact caused by textile waste. This is the solution that we’ve been awaiting.

If you can’t prevent returns, encourage them.

By Web Smith | Editor: Hilary Milnes with art by Alex Remy and Christina Williams

Memo: Shopify Owns DTC

But what does that really mean? Increasingly, it’s something different than you may think. Let’s face it: October’s Nike Strength launch was underwhelming. Part of the reason was the site’s basic build on Shopify. That’s no Shopify diss; it’s representative of the state of direct-to-consumer retail.

Not only is Shopify’s year-over-year command of the DTC Power List impressive, it’s also indicative of the changes ahead. We are at the cusp of a transformative era in eCommerce technology, shaped in part by Shopify’s growing market share. Shopify’s ascent is a testimony to its robust platform, offering businesses the tools for seamless online store creation and management. While this surge underscores a democratization of eCommerce, providing both enterprise brands and small merchants with a streamlined path to digital sales, it also prompts a critical analysis of investment strategies in the online retail sector.

The convenience of Shopify’s lower barrier to entry may have inadvertently led to reduced investment in bespoke online retail infrastructures, posing a strategic dilemma as omnichannel retail and digital marketplaces continue to dominate consumer interactions. Examining Nike’s launch of Nike Strength on Shopify or True Classic’s expansion into physical stores, we uncover a complex landscape of opportunities and challenges.

In 2022, True Classic partnered with third-party platform Leap to open five pop-ups in Los Angeles, San Jose, Chicago and Washington, D.C. While the pop-ups will remain open, the company said it is taking its physical retail operations in house, enabling it to outfit its stores with an “elevated, approachable branding that resonates with their consumer.”

For a company of True Classics’ size and velocity, Shopify is a great solution that is relatively low cost and infinitely scalable. It doesn’t get in the way of other plans. Today, more than ever, brands see DTC as part of the strategy and in some cases, it’s the least significant of a multi-pronged approach. What does that look like? One recent example is Mars’s partnership with Uber on a Skittles ad.

Mars is displaying interactive Uber Journey Ads and Post-Check Out Ads to consumers taking a ride in an Uber vehicle or waiting for their Uber Eats order. The ads will enable consumers to seamlessly interact with the Skittles website and add Skittles products to their Uber Eats shopping carts. (CSA)

As marketing channels continue to merge with sales channels, we may see less of an emphasis on traditional marketing funnels (Meta or Google > Shopify.com > checkout) and more content-driven online destinations like the aforementioned Skittles site. But without this level of marketing and sales ambition, this architecture is no longer typical of DTC operations.

The Advantages of Shopify’s Market Share Growth

Lower Barriers to Entry. Shopify has revolutionized the eCommerce industry by making online store setup accessible and cost-effective. This advantage is palpable when observing Nike’s decision to employ Shopify for NikeStrength.com. The move suggests a strategic pivot, wherein agility and time-to-market are prioritized for new ventures. By lowering the technical and financial thresholds, Shopify has enabled countless organizations to partake in the digital economy with maximum agility and minimal investment.

Data derived from a recent Shopify study that they plan to use for information distribution.

Omnichannel Synergy. True Classic’s retail expansion illustrates Shopify’s potential to enhance the omnichannel experience. Their stores, armed with digital-first technology, are positioned to bridge the gap between online convenience and tactile brand encounters. This synergy is highlighted in a recent Inc. article, noting that brands like Bark and Bala are abandoning a pure DTC model in favor of a hybrid approach that amalgamates physical retail and online channels.

“We don’t consider ourselves a DTC brand,” said Kislevitz, whose company produces Bala Bangles – fitted exercise weights that strap to the body. “I’ve found that there’s a really virtuous ecosystem in an omnichannel approach,” he continued. (Inc.)

The virtuous cycle of in-store and online interaction creates a comprehensive brand ecosystem that can amplify customer reach and loyalty.

Potential Downsides of Shopify’s Dominance

Underinvestment in Online Retail. Despite advantages, there’s an inherent risk that Shopify’s ease of use could foster a minimalist investment approach in online retail infrastructures. Brands might neglect the development of distinctive and innovative online experiences like the one found at Skittles, leading to a market saturated with cookie-cutter stores that lack differentiation. Leaders must recognize that while solutions like Shopify are instrumental in launching online platforms, they are not a panacea for the competitive digital marketplace that demands uniqueness and brand identity. And while many are pursuing  omnichannel strategies, when DTC-first strategies become popular again, brands may want more sophistication or individuality.

Omnichannel and Digital Marketplace Competition. The omnichannel model’s evolution calls for a reassessment of the direct-to-consumer approach. As noted in the Inc. article, the economic logic behind bulk shipments versus individual fulfillment cannot be ignored. This realization is prompting DTC players to diversify their sales model. Shopify’s ease might initially attract brands, but the demand for a more diversified, omnichannel strategy soon becomes evident, compelling brands to expand beyond digital-only models.

Case Studies: Nike and True Classic’s Strategic Moves

Nike’s Choice of Shopify. Nike’s foray into Shopify for a specialized product line reflects an agile, project-specific strategy rather than a wholesale platform shift. It illustrates that even established brands see value in leveraging Shopify’s simplicity for certain segments, without committing their entire online presence to it. This decision is strategic, targeting rapid deployment and flexibility over the heavy investment and bespoke customization of their main site.

True Classic’s Brick-and-Mortar Strategy. Contrastingly, True Classic’s physical retail venture, detailed in the Chain Store Age article, signifies a strategic pivot to ‘owned and operated’ locations. This move enables the brand to envelop customers in a controlled, brand-centric environment, supplementing their online presence with a tangible experience. The brand’s commitment to immersive, in-store digital engagement reveals a sophisticated understanding of modern retail dynamics, where the physical is propelled by the digital to propel the business forward.

Founded in 2019, True Classic is now focusing its efforts on rapid expansion of brick and mortar retail, a natural next step to engage their customer in person as well as reach a new audience, the company said.

The contrast here is stark and telling. True Classic leans into the value of customer intimacy that physical stores can cultivate, betting on the allure of in-person experiences to strengthen brand loyalty. Nike, conversely, leverages Shopify’s agility to extend its brand reach without the commitment of extensive infrastructure changes. Both approaches underscore a critical strategic understanding: that the future of retail is not a one-size-fits-all, but a tailored fit to brand identity and customer expectation.

These are two businesses at two different stages; both are using Shopify for contrasting reasons. Shopify’s expanding market share heralds an accessible entry point into the eCommerce realm, yet it simultaneously prompts industry leaders to deliberate on the long-term implications of such a model. The convergence of ease and ubiquity must not deter us from investing in distinct, immersive online and offline brand experiences. It’s incumbent upon us to forge strategies that leverage the strengths of platforms like Shopify while pursuing a holistic omnichannel vision. This dual approach will ensure that we not only thrive in the current marketplace trend but also maintain preparation for its future, one that may segue back to one where brands are proud to be categorized as DTC and run their businesses as such.

By Web Smith | Editor: Hilary Milnes with art by Alex Remy and Christina Williams