No. 294: Brands must hack culture

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NEW YORK — In just a few short years, Fab went from a $1 billion valuation to a $15 million fire sale.

Across eCommerce, success is more unpredictable than ever. When it comes to culture-driven products, things that worked in the past often do not work in the future – the sheer number of Avengers sequels notwithstanding. But despite the inherent unpredictability of our tastes and the complex way they interact, venture capital still places a heavy bet on pattern recognition. These patterns: be it a proprietary product, low-cost customer acquisition tactics, or the ability to reach scale fast – are hardly reliable predictors of success.

For example, Harry’s proprietary product is manufactured in its German factory. Insourcing manufacturing was a great initial way to differentiate their razors from Gillette’s low-quality but expensive razors. But, superior product quality has since become table stakes in the shaving market, with a number of startups all offering the same key features. Five years and $375 million venture dollars later, Harry’s has only 5% market share in the traditional retail sales market. It is a distant third in the online manual shave market. Not until Target provided its massive distribution muscle, did Harry’s growth begin to tilt upwards. To stay competitive in this mass market, Harry’s now needs to worry about the shelf space and brand marketing – just like the incumbent. 

Dollar Shave Club, with 21% of the online market share, was not profitable when Unilever bought it in 2016. Its media-beloved Youtube ad was viewed more than 25 million times since 2012. Social media was responsible for Dollar Shave Club’s awareness but that form of media also undid its staying power. The main lesson: awareness doesn’t equal conversion and fast user growth doesn’t mean profitability.

To hack growth, startups have to – first – hack culture.

In addition to the usual signals, venture capitalists should look into whether or not a company has roots in trend or subculture. A subculture is made up of people who are more informed and passionate about a topic than anyone else. They are likely to be beta-testers, source material, and advocates for a new product or service. Cycling brand Rapha started from cycling obsessives. Apparel brand Patagonia started from the subculture of social responsibility. A deep subculture entrenchment ensures that a company can maintain and enhance its difference as it scales. Long-term defensibility has more to do with whether a company can believably connect with a community through the shared things. This takes precedence over a proprietary product or its acquisition channels.

Success also has to do with what Japanese call kuuki wo yomu or, reading the atmosphere. In the October 2013 article titled Yes, Real Men Drink Beer and Use Skin Moisturizer, Bloomberg magazine quotes Mintel’s data on the 5-year rise in the global sales of personal-care merchandise geared to men. Harry’s was founded earlier that year, Dollar Shave Club two years prior. Both of them capitalized on the shift in the culture of modern masculinity, but neither of them invented it.

The shift was already happening. As sociologist Duncan Watts notes in his research on social influence: if a society is ready to embrace a trend, almost anyone can start one. But if it isn’t then almost no one can. The success of Harry’s or Dollar Shave Club didn’t have to do much with a spiffy video or on the German factory-produced razors. It had more to do with how susceptible men already were to the idea of grooming and how easily persuaded they were to invest in it.

Social influence is often mistaken for disruption.

The dynamics of how trends spread are shifting from (1) brands, media, and retailers pushing ideas to (2) mass market exploitation to the (3) networks of niches and taste communities. Both startups and VCs have to consider social processes that ultimately define success of their inventions.

In addition to engineering products and services, startups then need to engineer social influence in their market. The fastest way is to piggyback on the already existing social influence, and amplify it through go-to-market strategy that emphasizes social activity among a company’s initial following. This social activity then serves an ad for a product or service aimed at the mass audience. Luggage brand Away’s initial community of travelers – and their stories – became an ad for its products; rides of the Rapha’s Cycling Clubs are the ad for Rapha’s gear.

Social activity in a market accumulates social capital. How a social currency is going to be created and exchanged is the inherent part of business plan. It’s a business’ core value unit. And whether a company has the potential to build and trade in social currency should become part of venture capitalist’s evaluative criteria. Beauty brand Glossier’s currency is beauty preferences of its fans. Glossier’s currency is so strong that this brand is now creating the entire marketplace around it. Social currency builds scale, defensibility, and network effects.

To prevent social currency from being devalued due to the reverse network effects, companies need to maintain and grow their distinction as they scale. The best way to do this is through product and service diversification. A brand is an umbrella for a portfolio of unique products. Streetwear brand Supreme mastered the art of distinction, with a large part of its audience owning unique brand products. Product diversification increases the number of bets, reduces risk, preserves social currency, and organizes a company around the inherent unpredictability of people’s tastes.

The ultimate irony of the popular disruption narratives is that they venerate a deeply anti-social attitude. They celebrate an outsider and a renegade who “moves fast and breaks things.” But without social influence that creates the susceptible mood and allows the new products, services, and ideas to spread, there is no “disruption.” Instead of applauding the world’s outliers, we should direct our attention to the society that makes them thrive. There should be a sociologist among engineers.

Read the No. 294 curation here.

By Ana Andjelic| Edited by Web Smith.  About Ana: named to Forbes CMO Next list, Ana was most recently the Chief Brand Officer of Rebecca Minkoff. She has earned her doctorate degree in sociology and worked at the world’s top advertising agencies. She’s also a frequently published author, public speaker and writer. She lives in New York City.

No. 293: Uber Eats vs. Postmates

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If your family is like mine, you’ve grown to depend on the last mile delivery industry. On any given week, we’ll receive Amazon Prime Now deliveries for grocery, meal kits from HelloFresh, or the occasional prepared meals from Postmates.  As last mile becomes a way of life for more consumers, the platform influence for these companies have grown.

For last mile delivery, 2019 will be a significant year. According to Postmates CEO Bastian Lehmann, Postmates will IPO after a $300 million late stage investment by Tiger Global at a $1.2 billion valuation. This raise was finalized just months after the news of DoorDash raising nearly $800 million (led by the embattled Softbank) at a $4.2 billion valuation.  According to data by RSG, Inc. the real battle for last mile delivery is between Postmates and Uber Eats.

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Market share of last mile drivers: February 2018 (Source: RSG)
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Growth: 2017 v. 2018 (Source: RSG)

Between 2017 and 2018, Postmates’ market share of delivery contractors rose from .5% to 8.7% and Uber Eats‘ share of the same measure has grown from .5% to 22.5%. In a recent report by Bloomberg, Uber’s quiet initiative to build virtual restaurants was revealed:

Uber Eats is still a secondary player in this segment, but it’s expanding the fastest. It kicked off in December 2015 in Toronto, following various food delivery experiments including Uber Fresh. The virtual restaurant program began quietly in early 2016, and by March it had spread to 10 cities. Today the company works with 1,600 virtual restaurants around the world in the 300 or so cities in which Uber Eats operates.

In a manner similar to Amazon’s growing private label catalogue, Uber Eats is employing consumer data to deploy new brands within their delivery app. According to Bloomberg, there is a unit of 300 employees focused on leveraging order data and supply gaps to build in-app restaurants. This accomplishes a few things for the Silicon Valley titan, one that’s struggled to find a path towards profitability.

  • This move increases delivery margins: by partnering with a restaurant and leveraging demand, Uber can negotiate a higher margin of the sale. Rather than delivery, service fees, and 10-15% share on each sale: Uber Eats can demand a 40-50% share of that delivery’s revenue (on top of delivery and service fees).
  • For the restaurants, they are generating a higher volume of orders and spreading fixed costs over new business.
  • This circumvents consumer dependence on Yelp and Foursquare rankings by instituting its own an-app system. Uber Eats can repackage mediocre restaurants into great first impressions.

By building digitally vertical restaurants, Uber has gained the ability to engineer product loyalty that competing platforms cannot yet compete against. Uber Eats’ explosive growth between 2017 and 2018 is a result of the logistics company incentivizing its regular drivers to become delivery hands and also by incentivizing Uber users to become Uber Eats users. By increasing supply and demand-side economics, Uber Eats has leverage to that Postmates cannot yet manufacture. This is essential when approaching existing restaurants and offering them a private label product opportunity.

The value of groceries to Uber is connecting consumers with retailers and in turn, identifying the optimal strategy for monetizing the platform and services Uber can provide across each transaction to match supply with demand.

Uber Wants To Deliver Groceries

Uber Eats is benefiting from their parent company’s top funnel to grow the consumer demand for these types of products. This will translate well to Uber CEO Dara Khosrowshahi’s commitment to reenter the grocery market. Using the aforementioned restaurant model and the vertical branding that Uber has instituted, Uber Eats is one step closer to distributing its own unique brand of meal kits. This is an efficient path to regaining a foothold in the hyper-competitive market of grocery delivery.

Read the rest of your curation here.

By Web Smith | About 2PM

No. 292: GOAT, the media brand

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Marketplaces are beginning to own demand. Today, a high school kid named Darius Bazley signed an endorsement with New Balance for $14 million.  When you make an agreement like this, you forfeit your ability to play NCAA basketball. In his case, it is by design. He’ll train for the next year in preparation for the 2019 NBA Draft. And in the meantime, he’s successfully monetized his early success and hedged against later injury or failure. He’s a millionaire without playing a single moment of NBA basketball.

In May, Bazley signed with the prominent agent Rich Paul, who represents LeBron James, John Wall and Ben Simmons among Klutch Sports’ 18 N.B.A. clients. This week, Paul revealed he has arranged for Bazley to spend the heart of the college basketball season — January, February and March — as an intern at New Balance.The internship, to be precise, is folded into a handsome shoe contract Bazley, 18, has landed with New Balance on the lure of his pro potential. According to Paul, Bazley’s multiyear deal will pay him $1 million “no matter what happens” with his N.B.A. career — and can pay up to $14 million if he reaches all performance incentives.

In America, sneaker culture has been a catalyst for many notable shifts in media, sports, education, and business. Shoe promotion began with a marketing concept that continues to evolve. Almost 100 years ago, Converse sneakers debuted with little to no fanfare. This is the way things remained until four years later when pro basketball player Chuck Taylor made a few design suggestions. His celebrity endorsement set a marketing precedent that continues today. Without Mr. Taylor, there would have been no Michael Jordan or Kobe Bryant or Lebron James – basketball athletes who we can attribute billions of dollars in economic impact.

People find meaning in sneakers, so their choices are driven by brand identity.

Elizabeth Semmelhack

With this storied foundation, ne of Y-Combinator’s 100 most promising startups is responsible for one of the most meaningful maneuvers in online retail marketing.

The precursor to GOAT was a startup called GrubWithUs and it was failing despite $7 million in capital raised by cofounder and CEO Eddy Lu. GOAT, short for greatest of all time, was a last minute hail mary that scored. Thanks to a resale promotion of Kanye West’s then-popular Adidas shoe, the eCommerce reseller and database exploded in popularity in 2015.

After four months of operation, in November of 2015, the then-nobody company launched a Black Friday campaign discounting the hottest styles of the year at retail prices. “That year we were talking about the Turtle Doves, the Supreme Fives,” said Lu. “The internet picked it up and it kind of blew up, and every kind of blog picked up this Black Friday campaign.” Over 100,000 users installed the app to take advantage of the sale, causing the newly-launched startup app to crash repeatedly. 

Business Insider

This fueled a new fundraise of $5 million in 2016. And an additional $80 million over the next two years. In March of 2018, GOAT merged with legendary sneaker reseller Flight Club, a New York City retailer credited with pioneering the online reseller space. Partly to bolster its street credibility but mostly to better compete against StockX, a sneaker stock market of sorts. Funded by Quicken Loans and Cleveland Cavaliers owner Dan Gilbert and decidedly more connected in the sports world, the StockX app has raised $50M in the past few years.

Kyle Kuzma’s Partnership with GOAT

You may not have heard of Kyle Kuzma but the second year player hit the ground running as an NBA rookie in the 2017 season by averaging 16.1 points in 31 minutes for the Los Angeles Lakers. In the final year of a two year Nike deal, Kuzma is permitted to wear any shoe with a Swoosh. And given that the NBA recently loosened its dress code for the 2018-2019 season, athletes can now wear any color of sneakers during their games. To recap, GOAT partnered with a young, up and coming player that:

  • plays for the most visible NBA franchise
  • plays in one of GOAT’s most pivotal markets (Los Angeles, California)
  • plays beside the most visible player in the NBA (Lebron James)
  • is permitted by his current contract to work with GOAT (Nike)

GOAT, the media brand. By partnering directly with an NBA basketball player, GOAT is cutting out many of the media companies that have grown to become gatekeepers for sneaker culture. Rather, GOAT is laying the groundwork to control its own content. They can determine the shoe featured and the day that it’s worn. In doing so, they can optimize around the varying degrees of serendipity that these types of partnerships influence. The result: greater organic predictability as their stable of athletes continues to grow through and beyond the NBA.

In covering Wish’s good fortune, 2PM discussed the unpredictability of these types of arrangements in depth in No. 276:

With Lebron’s recent signing, the new face of the organization will move the Los Angeles Lakers from number five to number one overall in jersey sponsorship value. The anticipated $25 million in advertising value that Wish is set to generate in 2018-2019, on top of other advertising efforts, may finally push Wish into a mainstream media conversation dominated by few.

In that article, we assess the value of Lebron James’ arrival in Los Angeles. GOAT’s arrangement with Kyle Kuzma took advantage of this increase in value for the Los Angeles Lakers. Given his exclusivity with Nike, Kuzma will likely work closely with James (who has a lifetime deal) to feature shoes that will further increase the resale value of select Nike shoes.

Kuzma is currently entering his final season of a shoe deal with Nike. The first brand ambassador for the GOAT app, he will be seen in pre-game and on court in shoes that will be featured on the homepage of the site. In theory, this will not only drive traffic for the shoe reseller, it will increase the value of the shoes that have been injected into the LA Lakers storylines.

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GOAT’s September search analysis: a needed shift towards Nike business

The NBA’s brass has been incredibly creative, allowing their players to forge their own futures outside of their time on the court in ways that have been increasingly beneficial for the league For Kuzma, this is a smart partnership. But it is also a new door into the NBA’s marketing machine. Self-expression isn’t just about pre-game any longer. And for GOAT, an app that got its start by way of an Adidas craze, the Kuzma partnership allows them to hedge with deeper ties to Nike.

Learn more about GOAT here. And read the no. 292 curation here.

By Web Smith | About 2PM