Memo: Peloton, Just Do It.

Who knows? It’s likely that Nike will dismiss rumors of its potential Peloton takeover if they haven’t already. CNBC noted earlier that John Foley has “unwavering confidence” in the company’s future as a standalone company. Peloton is not the type to cede power to any external company but if they did, it would work wonderfully. Assuming the deal won’t happen, this is why it should have. This Bloomberg opinion piece was spot on:

Nike can be considered a luxury label if you look at the upper-end of its price ranges, with jackets and sneakers topping $500. That fits well with Peloton’s positioning, given its hefty price tags, with bikes starting at $1,495.

What Peloton needs more than anything is energized and engaged new users who will feel comfortable paying the full price for Peloton hardware while remaining engaged in the mobile app and virtual community that comes with it. Nike can offer this, especially now that American consumers are returning to gyms:

Nike has spent years investing in its virtual community by leaning heavily into a suite of apps that serve different customers and different needs. Its main Nike app is for straightforward shopping, Nike Run Club and Nike Training Club track workouts, and the SNKRS app is the go-to for sneaker heads closely following upcoming drops and releases. Being a Nike+ member, while free, activates a closer relationship to the retailer via product updates and exclusives. It’s easy to see how Peloton could fit into Nike’s fitness apps and propel a spin into paid memberships for Nike. The user bases of the two companies likely overlap but there are a number of cross-selling opportunities between the two. Peloton’s high-earning customers could level up Nike’s positioning as a luxury offering for those who want to buy in, while Nike’s vast reach will inject Peloton with efficient customer acquisition. It’s also easy to see why Peloton might need Nike’s assistance.

The Peloton brand isn’t what it was. In Peloton’s Diffusion, we wrote: “In diffusing its rabid base to gain as many customers as possible, it weakened the bonds between those in its core demographic.” The result of targeting mass adoption by lowering prices and increasing financing opportunities meant that the brand stands for less to its early adopters that turned the in-home cycle to one with a cultish following. It is reflected in its diminished apparel business. CNBC recently reported that it is slashing its apparel sales forecast for 2022. Still, Peloton’s product is still superior to any competitor on the market – for now. Echelon recently convinced the USPTO that Peloton’s patents for streaming and on-demand classes were not actually patentable. According to a recent Bloomberg report, there could be more to come.

The risk with Peloton’s strategy is that it could backfire if courts deem that its “revolutionary technology” isn’t so revolutionary after all. As in, what just happened with Echelon. Should this occur on a wider scale, Peloton risks finding itself out millions of dollars and without legal protections for the core of its business.

So if Peloton is losing brand equity, losing the rights to technological patents that differentiated it from competitors, and losing the battle against the resurgent interest in gyms – who better to reinvigorate interest in the product than Nike?

Nike’s been transitioning to a direct-to-consumer brand. In addition to its apps, it’s spent time investing in store concepts like House of Innovation, curtailing underperforming wholesale partnerships and tiering its products to create a fuller, richer experience for direct customers. Recent initiatives to bring Nike to Web3 have underscored the important of a DTC strategy. Nike has been busy filing trademarks for the metaverse, building a virtual Nikeland world on Roblox and it also acquired RTFKT, signaling a deeper investment in the metaverse.

As a result, Nike isn’t just an apparel company any longer. It’s a direct-to-consumer leader and a Web3 pioneer. With a Peloton deal, Nike would receive hundreds of thousands of screens to market its own products: physical, digital, and everything in between. But more importantly, it would properly position it against its foremost challenger: Lululemon/Mirror and Tonal’s continued rise in prominence.

Nike and Amazon’s pursuits of Peloton will likely end with little to show for it. Acquisition interest comes and goes. But if there was a partner suited to benefit from Peloton’s existing infrastructure, it would be Nike. In a recent deep dive into another retailer’s strategy, we explained that Nike was actually laying the groundwork for its involvement in the in-home digital fitness arena:

Nike is laying the groundwork for further expansion. The brand is currently going up against Lululemon in a patent spat over Mirror technology – demonstrating it’s fighting for ownership in a bigger Nike universe.

When Nike sued Lululemon for patent infringement over its Mirror technology in December, implications that Nike is planning its own investment in hardware and at-home fitness tech were apparent. The lawsuit accuses Lululemon of infringing patents, including exertion-level technology, user competitions and performance recordings. Whether or not Nike’s future in at-home fitness tech lies with Peloton, its aggressive move to challenge Lululemon and Mirror’s own strategy signals that Nike is at least threatened by the category’s rise encroaching on its turf.

John Foley is an independent thinker, a CEO that thrives on control and territorial leadership. It’s unlikely that he will cede any power to fitness’ top company. But if he did, it would be the most mutually beneficial relationships in business today. In Nike, Peloton receives a pipeline of new business and a reestablished footing in luxury fitness. In Peloton, Nike claims a stake what appears to be a multi-pronged approach to grow into owned physical spaces, owned digital channels, and a burgeoning Web3 space where the behaviors of IRL community and digital commerce collaborate in new ways. Even here, Peloton can help facilitate further innovation.

Peloton has shed the market cap to make this $10 billion bet one that makes sense for the $230 billion brand. In the small chance that the sides see that they share many of the same goals, Nike will be as present in the home as it is in gyms, the metaverse, and sporting arenas everywhere. And Peloton, who has increased ad placements by 46% over the previous three months would have the total addressable market that money could not buy.

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

Memo: GoPuff and Basically

When a retailer launches a private label, it means they’ve achieved a critical mass. According to Placer.ai data, Gopuff’s launch of “Basically,” is right on time.

A lot can be said about the state of the retail industry, and the modern consumer, by looking at the companies that are expanding their store footprint most aggressively. Recent data from Placer.ai reported the top ten retailers to watch in 2022 based on their expansion plans. The list, which features fast food chains, Dollar Store spinoffs, and a store-in-a-store partnership, confirms that today’s customers are drawn to physical stores when there’s a reason to visit them, and the companies that best deliver are those that are most aware of current consumer trends: DTC, bifurcation, instantaneous delivery, and convenience.

Most notable on the list is Gopuff, which has turned some of its micro-fulfillment sites into customer outlets after building up a business based on ultra-fast delivery. Gopuff is expected to IPO this year, after Reuters reported it has hired banks to help it go public, with a valuation of close to $15 billion. The physical locations could make Gopuff even faster by bringing customers to the delivery point, cutting down on time workers take to get items to customers at home. The stores are not typical convenience stores, but ordering hubs, where customers use digital kiosks to place orders that are then fulfilled from the warehouse. To facilitate this omnichannel strategy, GoPuff acquired companies in a land grab, with 161 BevMo stores and 23 Liquor Barns now acquired.

The Gopuff model does what retailers like Target are trying to retrofit their stores to accomplish: functions seamlessly as order fulfillment centers by serving both in-person and online customers simultaneously and sustainably. One look at instantaneous delivery data shows that Gopuff is not optimizing for sub-15 minute delivery:

By building its retail business off the back of its delivery business, Gopuff is poised to meet customers exactly where they want to shop: either online, at home, with instantaneous delivery, or in person when they’re out already and it’s easier, or they want to avoid additional fees.

Getting customers to build a Gopuff habit both via delivery and physical retail will place the nine year old company in a league of its own. With the launch of Basically, – Gopuff’s private label – and the in-store model that only DoorDash’s Dashmart comes close to in function, and Gopuff could present a case for why it may lead the convenience delivery market in the years to come. According to YipitData, as of now, DoorDash leads with 45% to Gopuff’s 23%. Instacart and Uber have earned 16% and 15% of the market.

This could – and should be – a wake up call to grocery and convenience store chains that have slowly turned to delivery. From Grocery Dive:

Gopuff is hardly the first online retailer to move into physical stores, joining a long list that includes large companies like Amazon and niche players like Warby Parker. This underscores the importance of bricks as well as clicks to companies’ retail strategies, even as the pandemic has boosted online shopping. But a strictly digital ordering model for in-store shoppers is unique among grocery and convenience stores, and could prove to be a useful test of shoppers’ expectations for convenience and store experience.

Gopuff’s physical retail strategy isn’t the only one to watch.

DTC brands are the new mall brand. Placer.ai also lists Warby Parker and Allbirds, both of which IPO’ed last year. More stores are integral to both DTC brands’ plans as they’re massive money makers, with customers who shop both in store and online spending more than customers who only shop online. In last week’s member brief on Glossier, Skims, and Savage x Fenty, I explained:

Malls need them, and they’ve effectively built passionate customer followings supported both by savvy marketing and products that people want to buy.

That also applies to Allbirds and Warby who are representative of the future of mall retail: they have enough of a following online that customers seek them out, and they are both pushing to build enough of a national retail footprint to allow existing consumers to buy more impulsively (a benefit of owned retail). They are also benefiting from cheaper customer acquisition costs as new consumers are introduced to them through more efficient channels.

Beauty is a sales driver, but only for certain retailers. Ulta and Sephora have amassed an in-store beauty monopoly to the detriment of department stores. Retailers that have won their business have gained from their statuses as retail destinations for beauty fans. Placer.ai found that Kohl’s stores with Sephora locations inside drew more foot traffic than those without Sephoras. And Target is already expanding its partnership with Ulta after a successful start. What’s more interesting is what’s happening online in this space, much to the dismay of Glossier:

Notice the shift from brand eCommerce to marketplace eCommerce as a preference in beauty. As companies like Sephora, Ulta, and Walmart have grown their eCommerce presences, Glossier has avoided partnerships with them (both in-store and digital). Walmart recruited nearly 100 beauty brands over the trailing 12 months, Ulta has partnered with Target, and Sephora is within Kohl’s.

Retailers are following customer bifurcation. Two brands on Placer.ai’s list, Arhaus and pOpshelf, reflect the continued trend of consumer bifurcation. Furniture brand Arhaus is targeting high-income households, particularly those in suburban areas, as an alternative to RH, with 70 stores and showrooms so far. pOpshelf, meanwhile, is the Dollar General spinoff designed to appeal to wealthier, younger, suburban shoppers who turn the nose to the Dollar General but appreciate the treasure-hunt shopping experience known at stores like TJ Maxx.

The bottom line? Rightsizing is still underway as overly stretched retailers with weaker online presences and less relevant brand names shrink their footprint. Waiting in the wings is a new class of retailers that more closely mirror today’s consumer, with digital innovation in stores and omnichannel cachet becoming top competitive advantages.

The internet has reshaped class and how the affluent shop. What the Placer.ai data shows is just how great the influence of eCommerce on retail real estate seems to be.

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

Memo: Shopify, Fulfillment, and Disruption

This isn’t as much a story about Shopify as it is one about supply chain disruption and the assessment of the company’s risk tolerance. Logistics and fulfillment is now one of those disciplines that require a company’s full measure of attention and discipline. Amazon could do it, while Shopify cannot.

Shopify’s fulfillment network – and its ambition to compete with Amazon in the fulfillment game – has suffered a setback. Shopify is shrinking its network of warehouse and fulfillment partners by about half. We learned of the plan to scale back the strategy last week after an existing partner notified 2PM of the impending change. He noted: “Any merchants that use custom packaging, do wholesale, or kitting, won’t be serviced by the new offerings.” A recent report by Insider made it official.

The move is telling in terms of where Shopify sees itself in the grander retail landscape. Shopify’s goal has long been to build an “army of rebels” that can compete with Amazon’s larger machine. That’s worked well as a retail movement and Shopify has had a considerable past year. Brands use it to launch and build their businesses and the company has become synonymous with direct to consumer retail. It’s positioned itself as the anti-Amazon, a market position that has served it well. But there are some areas where Amazon’s moat provides undeniable advantage.

Retail logistics is a monstrous undertaking in the best of times. The past year has been one of the worst. Supply chain disruptions have increased by 88% over 2020, with 47% of disruptions impacting the US, Shopify’s chief market. We provided this breakout below:

 

On December 27, we wrote:

While Shopify has the advantage now, Amazon’s network of fulfillment systems is quickly becoming essential. Shopify’s great rival, may eventually become its most necessary partner.

Shopify cannot absorb the increasing complexity of the shipping industry, not even with world class software. Why? Because it’s a people and vehicle business. Software can optimize manpower; it cannot replace it. There are rules and external forces that dictate the state of shipping, deliveries and returns that even the best software cannot overwrite. When disruption becomes that dictator, the best-equipped machines are needed. Amazon is that machine. It’s built a business, and a moat, designed to maintain optimum performance even in the worst of times. Also from December:

Through years of investments, Amazon has created its own cargo shipping fleet and is leasing planes, along with the opening of an Air Hub in Cincinnati, to avoid out-of-stock problems that have begun plaguing other retailers at this stage in the holiday shopping season. Amazon has stretched its business in myriad ways, but its advantages are no longer just product and digital-driven.

Shopify Fulfillment Network is nowhere near DOA, according to Insider’s report and insider reports. The company is eyeing third-party acquisitions. It will likely retool, with a smaller warehousing footprint and a heightened focus on one of eCommerce’s biggest pain points: returns. Now for Shopify, returns may not be one piece of a massive fulfillment network but rather the selling point of a slimmer, software-driven operation.

Returns is one of retail’s modern problems that could be greatly improved with more capable software. In the post-returns marketplace, we suggest that with enough returns volume, a marketplace or returned goods could thrive. But first, Shopify or a Shopify partner like Loop would need to become the de facto solution for returns administration. The following is a relevant snippet from that report:

After analyzing dozens of warehousing operations and interviewing countless owners, one thing became clear: There is an elegant marketplace opportunity disguised within an unglamorous industry. In a recent discussion with a top independent third-party logistics CEO, he said:

“With the exception of our two largest clients who use Loop, the rest of our clients all use our WMS/OMS to facilitate their returns. We’re a drop in the bucket doing $150M in GMV last year. But right now no one we ship for is using Shopify’s internal system to facilitate the process.”

Shopify’s fulfillment setback is a reminder of why Amazon is the rare, full stack retailer: marketing, search, buy, ship, return. This strategy shift is a chance for Shopify to better navigate its next moves, not as Amazon’s replacement but its potential partner. In December’s Bloomberg feature on Tobi Lutke’s leadership style, a former Amazon executive was the source of the quote: “Shopify made us look like fools.” That response was short-sighted. Retailers are buying containers by the dozen, they are building new 500,000 square foot fulfillment facilities, or  outright renting entire container ships. Logistics is now an all or nothing proposition and few have exemplified this new reality than Amazon, who Shopify should just partner with at this point. We ended our memo on this Bloomberg report with a different takeaway:

While Shopify has the advantage now, Amazon’s network of fulfillment systems is quickly becoming essential. Shopify’s great rival, may eventually become its most necessary partner.

Everyone needs a frenemy in their life.

By Web Smith | Editor: Hilary Milnes | Art by Christina Williams