Memo: Full Stack Retail

While many seem to be counting eCommerce out, retailers and manufacturers are preparing for a future of increased direct-to-consumer volume and the logistics systems that support it.

Over the past two years, we have witnessed disruption after disruption. A shipping canal blocked, union employees standing down en masse, the U.S. postal service slowing to a halt, an international bridge protested by truckers, and a container ship on fire with 4,000 vehicles. Over this time period, freight forwarding has increased 500% in costs, retailers have begun to acquire trucking and container resources. Shopify has invested and divested in warehouse management, and Amazon has become the number one buyer of commercial real estate. Technology and retail brands must be more than that to survive the turbulent change that defines this era of retail.

The spread of the ideals of Full Stack Retail is well underway. It’s becoming a go-to strategy for enterprise retailers who want to manage costs, quality control, and , and American Eagle Outfitters is reaping the benefits of its operational investment. Over the span of three years, we have covered: AEO’s bold pivot, two expensive acquisitions, and its big bet on expanded competency.

Deep in the archives of the company’s transactional history, American Eagle Outfitters set the stage for how it would do business nearly 25 years later. From 1997:

American Eagle Outfitters integrates its merchandise production and sourcing. When American Eagle purchased Prophecy in May 1997, it gained the ability to monitor the production of its clothing and to improve its sourcing. The company hopes the end result will be lower costs and more timely delivery of clothing to its stores.

The 45 year old, Pittsburgh-based apparel company moved to mitigate supply chain disruptions and increased freight costs by purchasing two logistics companies, AirTerra (for an undisclosed sum) and Quiet Logistics for $350 million. While eCommerce companies like Amazon and Shopify have added to their empires by bringing warehousing and shipping operations in-house, it is still surprising for a mall retailer of AEO’s size. But the unexpected decision was fitting for unprecedented times. Here’s what we published in October 2021 on the idea:

The world’s supply chains were already in a precarious state before the pandemic. Now, after a period of extreme disruption, manufacturers can’t meet demand, resulting in a chain reaction of delays and out-of-stock products. While out-of-stock inventory can signal high demand and appeal for a brand, eventually the allure runs out when there’s no back supply. This is an all-too-common symptom of our current supply chain disruption that AEO is working to minimize. Similarly, companies like Walmart, Target and Amazon are investing in cargo ships to avoid delays facing other businesses.

The AEO pattern of acquisitions breaks a decades-long cycle of reducing costs by offshoring blue collar business functions.

We predicted that more retailers would take similar steps to insulate their supply chains, improve their own ability to respond to fluctuations in demand. Now, American Eagle wants to be part of that adoption. Nine months later, and a new Business of Fashion report revealed the outcome of American Eagle’s bet on logistics. It says it’s shipping orders faster and cheaper. The next move is to spin that success into a separate business, providing logistics services to retailers as they continue to face problems as a result of pandemic disruptions.

Let’s unpack exactly what American Eagle bought that it’s in position to facilitate a logistics outsourcing business to those companies who are not yet capable of insourcing like AEO has.

Quiet Logistics uses robotics to fulfill shipping orders for eCommerce brands by sourcing inventory as close to the customer as possible, cutting down on delivery windows as well as creating a more efficient supply chain.

AirTerra is a last-mile delivery service that helps smaller-volume retailers combine deliveries in order to get access to less expensive deliveries typically reserved for the biggest retail companies.

The majority of small retailers and challenger brands still lack the ability to manage either process at a high level and now, American Eagle operates it for its own operation. This particular set of skills separates the haves and the have-nots. This was exacerbated over the pandemic, as big-box retailers with deep pockets were able to work around slow ports and delays by chartering their own ships and planes to make deliveries on time and fulfill inventory shipments. In contrast, smaller retailers were left to fend for themselves as the cost of cargo dramatically rose over the months between March 2020 and January 2022. Freight management and interest has changed drastically as a result of the pandemic.

Now, Airbus – the world’s second largest aircraft manufacturer – says that it expects its global freighter fleet to climb to over 3,000 aircrafts by 2041, to account for eCommerce outpacing general cargo over the next two decades.

Over the next two decades, Airbus estimates, world air cargo will increase by 3.2% annually from the pre-crisis baseline of 2019.

But it puts the growth rate for e-commerce at 4.9%, far higher than the 2.7% of general cargo, and Airbus expects e-commerce to account for 25% of traffic in 2041 compared with the 2019 level of 17%.

American Eagle’s plan is to boost its own business by creating delivery solutions that can help challenger brands compete. From the Business of Fashion:

American Eagle wants to use that platform to build an “open marketplace” where retailers share warehouse space, delivery trucks and more. By pooling resources, small and mid-sized businesses would pay less for logistics, making them more competitive with giants like Amazon and Walmart.

Convincing rival retailers to cooperate won’t be easy — many have already invested in their own warehouses and delivery networks and won’t want to share. But new logistics models are gaining traction as e-commerce fulfilment costs rise: Shopify has its own end-to-end fulfilment platform that promises two-day delivery and fast returns, and FedEx partnered with Salesforce last year to offer a similar service.

This is a lighter-version of Full Stack Retail in action; American Eagle saw the writing on the wall. Front office retail and back office supply chain and logistics have become equally important as retail evolves to account for growing omnichannel complexities. Companies must deliver goods quickly and efficiently, keep products in stock and meet higher customer expectations. Companies like Amazon and Shopify have helped small and medium-sized retailers to compete with incumbent brands. Now, American Eagle Outfitters is now throwing its hat into the ring to facilitate its own platform. Chances are slim that it will become a competitor on the same level as two companies that have dedicated years to perfecting fulfillment, but it’s proof that there’s space in the field for more competition. The market no longer punishes companies that own vertical systems – it rewards them.

As long as American Eagle can do both without sacrificing its core product, it appears that it’s setting itself up for a superior system of front office and back office diversification: a new profit center (a win), a fortified supply chain (another win) and a competitive logistics strategy that will get stronger over time (another win). Look for leading retailers like Nike and Adidas to follow suit. Supply and logistics management are no longer Amazon and Walmart’s territory alone.

American Eagle Outfitters is in the shipping business. And the most innovative companies are preparing for a future of increased shipping volume buoyed by a retail future where digital sales and physical sales compliment one another without stressing the whole.

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

Memo: Middle Class Opportunity

In what can only be characterized as a leading indicator for shifting economic tides in retail, the middle-class brand is beating the S&P and leaving a trail of upper-scale competitors in its wake. It’s emblematic of the slowing bifurcation of consumers and the retailers that support them. This is from our report on the Gilded Age 2.0, a period that seemed to last for about four to five years (2017-2022). 

While history doesn’t repeat itself, it does rhyme. The economically-disadvantaged deliver food, novelties, alcohol, and commodities to urban sprawls and gated suburbs – within the hour. Across the country, the net worths of the top 1% have become noticeable as conspicuous consumption of products and services have risen; the rise of platforms like StockX, Hodinkee, and Uncrate demonstrate this. For the top .01%, there are more 40,000+ square foot homes than there were in the Roaring 20’s. Retail is responding to economic realities of today. Wealth is galvanizing; retail strategies should adjust to meet the shifts head on.

As well-funded resale sites like The RealReal, thredUp, and Poshmark battle it out online, spending big money on marketing while rapidly losing valuation, a decidedly offline company is quietly winning. Its success is emblematic of the power the long middle wields in retail today. That power is only growing as bifurcation trends putters out.

Winmark owns franchises of secondhand shops across the United States to include: Plato’s Closet, Play It Again Sports, and Once Upon a Child. You’ve probably never heard of its parent company but you have at least driven by one of the shops in a suburban strip mall. Forbes profiled the company, which is a profitable, public, billion-dollar business that goes so far under the radar that it doesn’t do earnings calls. Twenty investors own 80% of the company:

Call it the tortoise of the resale wars. The company, which went public in 1993, before hardly anyone was shopping on the internet, has taken a slow-and-steady approach. New stores are opened at a modest pace, allowing the company to be selective about the franchisee applicants it accepts. It hasn’t overspent on splashy marketing.

The resale industry (formerly known as second-hand shops) is growing fast. The segment could double to $82 billion by 2026, according to an industry-funded report—fueled by a generation of young shoppers interested in buying unique pieces in an affordable, environmentally friendly way. It’s getting an added boost at a time of soaring inflation and supply chain issues, with many shoppers flocking to thrift stores after encountering high prices and out-of-stock items at big-box retailers.

Winmark’s business model is the right one for the moment. It offers affordable, practical goods for middle class Americans who, as Once Upon A Time franchisee Diane Hubel says, need to be efficient with their dollar as inflation has spiked and wages remain stagnant for most. It even offers them a way to make money in return by selling off stuff they no longer need. And because the products are secondhand, the supply chain problems plaguing other retailers don’t exist within Winmark’s portfolio of retailers. The stock isn’t guaranteed, which can be a disadvantage, but it’s reliable in that it can typically provide some option, even if it’s not the first preferred.

Then there’s the profitability. Winmark will not build an unprofitable operation.

Winmark has dabbled in e-commerce, but only when the prices are high enough to make it profitable. For instance, at Music Go Round, which sells things like used saxophones and electric guitars, the average order value is over $250, so it launched a website to sell goods online. It has no such plans for clothing stores like Plato’s Closet or Once Upon A Child, where the average item costs under $10.

As laid out by Forbes, Winmark’s online competitors are not profitable and their valuations have been sliced their IPOs. It’s likely that if they were still private, they would avoid IPO altogether:

These DTC competitors were revolutionaries of an antiquated secondhand market but the business mechanics are hard to make work. They’re learning that now, and the boom times are over. Winmark is leaner — it doesn’t have to invest in the extensive process of listing secondhand items for mass consumption.

All of this makes for a story of a retailer who is winning in difficult times. It’s not flashy. It hasn’t raised venture capital. But it’s there for a middle class that is finding themselves against market forces working against them. It’s a bleak outlook right now for many — meaning simpler, down to basics businesses are finding themselves in better position than the recent years defined by consumer bifurcation and the companies appealing to a luxury consumer.

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

Also read: Sak Pase, a reflection on our last several weeks and the recent missionary trip that I was fortunate enough to embark on.

Memo: The Daily Harvest Ordeal

You’re damned if you do; you’re damned if you don’t. Keep this old adage in mind as you read on.

In the four weeks leading up to the recall, Daily Harvest was riding the high of positive press; it was the flavor of media attention that direct to consumer brands clamor for. The Forbes treatment highlighted the equity partnership between Daily Harvest and Blake Griffin, Carmelo Anthony and other notable athletes through the Patricof Co investment vehicle and advisory platform. Each of those involved were a part of the Series D financing which was announced in Q4 2021 and closed in Q1 2022. The Fortune treatment focused on the spectacular achievements of CEO Rachel Drori, the former marketing executive turned consumer goods founder. You know the narrative by now:

Daily Harvest saw exponential growth through the pandemic, when people all over the world turned to their freezers with newfound appreciation. When the crisis started in the U.S., Drori began doubling up on inventory and appealed to her network of farming suppliers to keep fruits and vegetables flowing to Daily Harvest kitchens. (3)

She is now worth $350 million after just seven years of building a retail operation whose revenues lived up to the marketing and branding hype. The DTC Power List estimates annual revenues at $158 million and that is likely on the conservative end. When a brand is on that type of press track, they will do anything to preserve it. Here is a short timeline of events:

  • April 28: Daily Harvest announced the launch of Crumbles (positive)
  • May 28: Daily Harvest announced partnership with Blake Griffin (positive)
  • June 15: Daily Harvest founder is featured in Forbes (positive)
  • June 21: Daily Harvest is featured in Eater, NBC News, and others (critical)

It’s the worst-case scenario for a CPG brand in the fastest growing sectors in direct to consumer retail. Earned media (in Forbes and Fortune, for that matter) are rare. Few brand CEOs would be willing to put that to a premature end to face more complicated matters. But one could argue that it may have been the only option. There is also a counter-argument, however.

As early as April, Daily Harvest customers were reporting severe stomach discomfort, liver pain, and gastrointestinal problems that landed some in emergency rooms. The issue was traced back to the product announced in April. Almost immediately, the conversation shifted from recipes to criticism on Daily Harvest’s subreddit.

Two weeks ago I tried the crumbles for the first time. That night, I had debilitating stomach pain, like nothing I had ever felt before. It was so bad I had to go to the ER as a last ditch effort to alleviate and manage the pain. After a CT scan, IV, meds, and a week on a bland diet I thought perhaps it was some sort of bug.

Several days later I tried a flatbread from them and had a fever the next day. I thought it was related to the previous bout of illness.

Fast forward to yesterday, I decided to try the crumbles again. Lo and behold I am awake with the exact same horrible stomach pain. Luckily I have prescription meds from the last time this happened and do not need to go back to the ER.

Before issuing an official recall on Sunday, the team seemed to have a faulty approach to customer service outreach, with NBC reporting that it had reached out to at least one customer to advise they throw out the lentils and offering a discount code days before there would be a statement released. What became clear is that the problem was more widespread than Daily Harvest’s team likely communicated through its social media presences. In the days before issuing a recall, Daily Harvest was in an unenviable position. There was the positive press that they hoped to amplify to help them reignite the growth that they’d gained over the pandemic. There was also the negative sentiment that they knew to address.

The response evolved from:

A small number of customers have reported gastrointestinal discomfort after consuming our French Lentil + Leek Crumbles, the email said. As included in our cooking instructions, lentils must be thoroughly cooked to an internal temperature of 165°F.

…to a response that included:

We launched an investigation to identify the root cause of the health issues being reported. We’re working closely with the FDA and with multiple independent labs to investigate this. We are working with a group of experts to help us get to the bottom of this—that includes microbiologists, toxin and pathogen experts as well as allergists.

Daily Harvest worked to balance corporate growth and stability with consumer accountability. I’d argue that their scenario is more complicated than the general public understands. Once the Food and Drug Administration (FDA) is involved, it is never an amicable scenario for the product manufacturer. Today, I interviewed an anonymous source with first-hand experience on dealing with the Administration:

When [the FDA] is involved, your brand instantly loses its voice. Nothing you say or do is right and everything bit of messaging goes through them. They prefer that your brand suffers and they will assure that it does. This is how they deflect blame with product defects.

There’s an ideal playbook for responding to a potential recall without losing consumer trust. You’d think that it looked like this: act quickly, be overly-cautious and be transparent. In 2015, Jeni’s Ice Cream – another 9-figure revenue CPG brand – had a listeria scare that could have been deadly. The way the company responded felt right but it had severe penalties.

In 2015, Jeni Britton of Jeni’s fame experienced a public backlash of her own. With the help of CEO John Lowe, the first of 16 appearances of Polymathic Audio, Jeni’s executives navigated a national listeria crisis by acting quickly, being overly-cautious, and being transparent. In many ways, while noble and morally-praised, it backfired. Nearly seven years to the day that a similar article ran on Eater about Daily Harvest, they published this on Jeni’s $2.5 million loss (the company was bootstrapped at the time).

Ohio-based ice cream company Jeni’s Splendid Ice Creams has traced the source of its listeria outbreak. Last month, Jeni’s —  which operates multiple scoops shops in addition to a national wholesale business — initiated a voluntary recall of all of its products after a random sample from a pint of ice cream showed that Listeria bacteria was present. A week later, the company announced that it destroyed over half of a million pounds of ice cream, which is estimated to have cost the company $2.5 million

Lowe, Britton and team destroyed their inventory and publicly sacrificed themselves at the altar of public opinion and made matters worse for the company. The news proceeded to package their company with Blue Bell Ice Creams, a separate company that allowed deaths caused by their own listeria outbreak. Blue Bell employed an opposing strategy: deny, stall, and keep quiet. While Jeni and her team did what was morally right, preventing sickness by recalling their own products, they dumped gasoline on an otherwise regional story and likely angered the FDA in the process (by going around them to publish a blog). Just three years later, an NBC News report recounted the ordeal:

Lowe and Britton Bauer decided the only way forward was to fully tackle the problem — and to do it with complete transparency. “We decided to pull all of our ice cream — not just that lot, not just that flavor, but everything, and shut down our scoop shops,” says Lowe. “We couldn’t — fathom the idea that somebody could walk into our scoop shop the next day and be injured.” The Jeni’s team also released a blog post about the recall on their website.

The sentiment of the NBC Report was simple: “Jeni’s commitment to complete transparency and damage control was costly.” In that report, you won’t find a single mention of the FDA who was reportedly angered by the approach of the Jeni’s team. I came to find a common thread by researching brand responses with FDA oversight. The government agency often prevents you from communicating effectively to consumers. In return, the brand is often dealing with an angry customer base, a media sentiment that reflects customer concern, and few allies willing to stand by the brand (until it is beyond its troubles).

There are lessons to be learned from any story involving CPG brands, harmed consumers, and the government agency enacted to be the buffer between consumer and the consumed. The first lesson is that there is no completely right way forward. Daily Harvest was lambasted by social media for being unnecessarily coy in their responses. Jeni’s was nearly bankrupted for being too transparent. You’re damned if you do; you’re damned if you don’t.

Rachel Drori and Daily Harvest will find a way through this. If Jeni’s story was any indication, it’s possible to rebuild trust with customers. Few remember 2015 at their countless scoop shops around the country. One takeaway from Jeni Britton’s work to rebuild her namesake brand is to over deliver until trust is rebuilt. The brand in question may build new brand advocates in the process.

By The 2PM Team: Art, Editing, Data, and Research