No. 318: The Vertical Brand

VB

Michael Rubin is always in the news. The founder and executive chairman of Fanatics is often courtside as the co-owner of the Philadelphia 76ers, placing bids for NFL teams, palling around with friend and rapper Robert “Meek Mills” Williams, or advocating for a cleaner justice system. But it all seems like a distraction; he’s quietly building a sports licensing monopoly. Behind the scenes, Kynetic is owned and operated by Rubin. It’s a fascinating company with a rich history; Rubin’s understanding of the internet’s marketing levers has helped Fanatics capture lightning in a bottle.

Shopping cart + Insatiable Demand + Product Exclusivity = Lightning

The parent company of Fanatics has built one of the more innovative and fundamentally-sound, online retailers in all of commerce. Valued at $4.5 billion, the private retailer is equal parts: marketplace, licensed manufacturer, and digitally-native brand. Rubin’s brand has amassed extraordinary power as a vertical retailer in its relatively short birth and rebirth. To better understand its evolution, review a corporate history that spans the majority of the online retail era. One can argue that Fanatics grew the first digitally native vertical brand.

vCommerce brands are born online. They cut out the middle by selling directly to consumer, maintaining 1:1 relationships with consumers. These brands manufacture, market, sell, and fulfill the products. They own the entire consumer journey.

The history of Fanatics is a complicated one. In 1991, Rubin founded KSR Sports, a sporting goods and footwear retailer. The company grew to $50 million in annual sales by 1995 but with razor thin margins. This pushed Rubin towards a v-commerce model, acquiring Apex One in 1996 and merging with Ryka in 1997 to form Global Sports Inc Commerce (GSI Commerce).

This reorganization moved Rubin and his team a bit closer to the licensed merchandising operation that we see today. But this period was more symbolic of another part of Fanatics DNA: logistics excellence. The company went on to move $100 million in GMV in 1999. Just two years later, GSI inked a deal with Dick’s Sporting Goods, Sports Authority, and Gart sports to provide their eCommerce solutions at scale. In a move that may have influenced Amazon’s early partnership with Toys “R” Us. From a 2017 Business Insider article:

Toys “R” Us may have set itself back when it signed a 10-year contract to be the exclusive vendor of toys on Amazon in 2000. Amazon began to allow other toy vendors to sell on its site in spite of the deal, and Toys “R” Us sued Amazon to end the agreement in 2004. As a result, Toys “R” Us missed the opportunity to develop its own e-commerce presence early on.

By 2002, GSI Commerce powered NASCAR’s first online store. The MLB, NHL, and NFL each followed suit by 2006. In a bit of irony, later that year – Toys “R” Us hired GSI to build its first native eCommerce experience after their failed Amazon experiment. After the NBA agreed in 2007, GSI became the first online retailer to partner with all major North American sports leagues.

To develop a brand around its professional sports focus, Rubin acquired the “Football Fanatics” name and operation in 2011.  Football Fanatics was founded by Alan and Mitch Trager as a brick and mortar retailer in Suburban Jacksonville in 1995. After the brothers had trouble scaling beyond that point, Rubin swooped in to acquire it for $171 million and $101 million in GSI stock. By this time, GSI was managing 2.5 million square feet of fulfillment space. eBay would go on to acquire GSI Commerce for $2.4 billion in 2012.

Shortly thereafter, Rubin purchased the rights to Fanatics from eBay. In full – Rubin retained the rights to Fanatics, ShopRunner, and Rue La La: incorporating Kynetic as the parent company to the three online retail properties. Within one year, Andreessen Horowitz and Insight Ventures valued Fanatics at $1.5 billion, investing $150 million into the company. Fanatics would go on to raise capital from Alibaba Group, the Softbank Vision Fund, and Silver lake Partners. It shouldn’t surprise that Fanatics is considered one of the top three in sports apparel licensing. So in that Toys “R” Us / Amazon moment, Dicks Sporting Goods is now a chief competitor and Sports Authority is done for good.

What’s more impressive than the company’s trajectory is how Rubin continues to find innovative ways to reach new, top funnel customers.

Fanatics and Rubin’s Systemized growth

Just one of the latest partnership innovations,  it was announced that a resurgent Kohl’s signed a long-term deal with Fanatics to distribute the sporting goods company’s licensed products through Kohl’s native channels. While Kohl’s stock price is not necessarily reflecting Kohl’s long-term investments, the department store is having its own renaissance. The brick and mortar retailer recently signed a deal with Amazon to handle service all returns, a play to cozy up with the eCommerce titan while improving a key performance indicator: increased foot traffic.

Later this fall, Kohl’s will amplify hundreds of thousands of Fanatics’ SKUs through its native channels. As such, Fanatics will gain access to a new, primed audience. In return, Kohl’s can earn third-party revenue without holding inventory. It is the perfect corporate marriage: Kohls.com averages 40+ million visits per month, a number that dwarfs Fanatics.com’s 5.2 million monthly visitors.

860 respondents; 18 years and older who purchased sport clothes in the past 12 months | Source: Statista

Earlier this year, Fanatics began selling merchandise on Walmart.com in a similar deal. That one supplied Walmart with coveted access to licensed apparel. In exchange, Fanatics’ products are in front of an estimated 305 million estimated monthly visitors. Unlike the Kohl’s agreement, Fanatics has a branded store on the Walmart site. This model resembles the company’s agreement with JCP, the middle-market retailer has begun to regroup by partnering with relevant brands like Fanatics.

A savvy move by CEO Doug Mack; these merchandising agreements are subtle signals to customers that Fanatics is a low-substitution brand. Mass-market retailers can barely compete in costly, licensed merchandising without a Fanatics co-sign. And in an effort to expand internationally, Fanatics also partnered with Coupang – South Korea’ largest online retail marketplace to launch a store within a store on the platform. This effort goes live this summer.

Consolidate and Capture

Rubin’s team built an extraordinary commerce play and retail brand atop key partnerships. This stack has helped Fanatics secure the rights to run the following stores:

  • The National Football League | NFLShop.com
  • The National Basketball League | NBAShop.com
  • Major League Baseball | MLBShop.com
  • NASCAR | NASCARShop.com
  • Major League Soccer | MLSStore.com

Meanwhile, the list of merchandising acquisitions haven’t slowed for Kynetic. In 2012, it acquired one of its main rivals, Fansedge; in 2017, it bought Majestic and Lids, the brick and mortar hat retailer.

With the exception of Kohl’s agreement (one that was surely influenced by Amazon’s counsel), Fanatics has succeeded in maintaining its branding across its growing portfolio of retail partners. This has helped them maintain direct relationships with consumers. Fanatics built a competitive advantage where there was none. While far from the traditional DNVB, it’s become one of the most successful digitally native brands on the market by protecting intellectual property, achieving manufacturing superiority, and emphasizing industry-leading fulfillment operations.

Rubin and Fanatics found a way to modernize a commodity product; Fanatics is now the premier retailer for sports apparel. And it has a growing legion of fans who see what Rubin envisioned a long time ago. To own the merchandising market: you need airtight contracts, a great consumer experience, brand equity. Most importantly, you need strong, organic demand to offset steep licensing fees. This lack of organic demand has served as a death sentence for smaller licensing retailers; there’s little margin available for traditional CAC. More than ever, consumers see a team name on the front of a shirt, a player’s name on the back, a league patch on the sleeve, and a brand label that says “Fanatics.”

Michael Rubin’s decades-long eCommerce evolution may not have the typical arc of DNVBs. But Fanatics shares digitally-native DNA and there is a tremendous amount to learn from an operation that maintains growth while paying for less than 9% of its traffic. Modern brands should license a page from the Fanatics playbook.

Read the No. 318 curation here.

Доклад Веба Смита | Около 2 часов дня

Данные участника: Retail Media

Note:  this report has been updated with a full version of the top reporter index. The TRI will be updated as a separate database.

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No. 317: The DTC Playbook is a Trap

dtcplaybooktrap.jpg

Harry’s delivered a sizable outcome in their recent $1.37 billion exit. The men’s grooming company should be viewed as somewhat of a wake up call to DNVB leaders. Yes, Harry’s sold a simple product but it also disrupted the DTC playbook on its way to an exit. The company wrote and followed its own playbook, why don’t more digital-natives do the same? It has been reported that just 20% of Harry’s sales volume came by way of direct to consumer revenue. Everything about Harry’s ascension opposed the presumed operating instructions of the DTC era.

Yes, Target and J. Crew accounted for nearly 80% of Harry’s overall sales. But that isn’t only what sets Harry’s apart from the tendencies of other digital-natives. By all reports, Harry’s is a well-run business: the logistics operation is flawless, the company is reportedly profitable, and they’ve essentially retooled manufacturing for the demands of the DTC era. Simply put, Andy Katz-Mayfield and Jeff Raider have been extraordinary leaders.

Harry’s accomplished a great deal in six years. The razor manufacturer was an early omni-channel pioneer: partnerships with Target and J. Crew were pivotal in their ensuing mainstream success. Collaborations with digital publishers like Uncrate reminded consumers that Harry’s was an elevated brand, something more than their competitors. Harry’s was one of the first to launch pop-up activations. Each of these decisions countered conventional wisdom at the time.

From a 2014 interview with CNBC: Warby Parker takes on Gillette

Raider and Katz-Mayfield believe the key to Harry’s growth lies in this vertical integration, or what they like to call v-commerce. Simply put, the company now owns the entire process—from R&D to manufacturing to selling direct to the consumer. “It creates this virtuous cycle that makes for really happy customers, and then they become our best advocates,” says Katz-Mayfield.

When Harry’s acquired their manufacturing partner, the company became one of the few truly vertical brands of the DTC era. This was also antithetical. But, it allowed them to iterate their core product quicker and streamline product iteration for their sourced products like skincare, soaps, and shaving additives. The result was a Target aisle that began to reflect that Harry’s was more than a product brand, they were a category leader. In this way, Harry’s began challenging Gillette in an asymmetrical fashion by becoming one of the first true DTC category brands. By designing appealing products in other product verticals, Harry’s gained an advantage. This leverage helped them to amass over 2.4% of the entire razor market. In short, Harry’s wasn’t just great at marketing and design – they disrupted their industry.

I’m bearish. It’s hard, only the disruptors will survive.

Anonymous Founder

Skepticism of the direct to consumer era of online retail isn’t new. General Partner of Great Oaks Ventures, Henry McNamara recently tweeted:

Henry McNamara on Twitter

DNVBs Valued @ $1B+ & Funding 👓Warby $1.75B- $290M raised (6x) 👟Allbirds $1.4B- $77M raised (18x) 🪒Harry’s $1.37B- $461M raised (3x)* 💄Glossier $1.2B- $187M raised (6.5x) 🛏️Casper $1.1B- $339M raised (3.5x) 🪒Dollar Shave $1B- $163M raised (6x)* 🧔Hims $1B- $197M raised (5x)

He later corrected his figure on Harry’s ($375 million in equity sold) but the point stands. Is investing in digital-natives worth it? Yes. But only if the brand is capable of disrupting prior growth tactics and brand positioning. Dollar Shave Club and Harry’s represent two of the most notable exits of the DTC era, both found ways to acquire customers and sell a growing catalogue of products to them. Both were valued between 4-6x the capital raised. These companies found innovative ways to market, distribute, and grow. In turn, they innovated their way to earned market share, at the expense of incumbents and other challengers.

THE DTC PLAYBOOK IS A TRAP

It goes without saying that I’m bearish on DNVBs as a whole. As a whole, the industry tends to rely upon left-brain operators with systems and definite plans. But, I’m bullish on the challenger brands who’ve figured out that winning is often a result of rewriting the playbook. For the brands looking to grow to (efficient) critical mass or even an exit, the DTC playbook is a trap. The journey from zero to one is not one backed by b-school theory. Brands won’t be able to project tomorrow’s viability by analyzing yesterday’s LTV:CAC ratio, alone. But DNVB growth isn’t an art, either. Digital-natives will have to be more than beautiful design and savvy copywriting. The proverbial DTC playbook must be rewritten each time. If the DTC playbook were to be written, it could be boiled down to this:

There is no playbook. DNVB growth must be a malleable and agile operation. Brands must find opportunities where there were none. They must seek to do what hasn’t yet been done.

So yes, I am bearish on many of today’s DNVBs. Brands are merely following the paths of the brands before them and I believe that it hinders more than helps. Their paths to their early-stage milestones are often unproven anecdotes written by investors who’ve likely never sold a physical product.

In a recent thread by Ryan Caldbeck on this same topic, the founder and CEO of Circle Up expressed his similar skepticisms with the following points:

    • I’m not that convinced that DTC is going to kill a lot of incumbents. If we look at share loss for Pepsi, Unilever, etc- much of that is not DTC, it is products/brands that meet unique needs of today’s fragmenting consumers.
    • I’m deeply skeptical that the DTC startups have nailed online marketing. Almost all of them are burning cash at levels unprecedented in CPG (most of $ for marketing). Does that mean they are good at marketing, or just that they have convinced venture capitalist to to give them money?
    • A question might be: can they sustain the innovation? I haven’t seen a lot of startups come out with more than a small handful of products. Most of the DTC companies are not using DTC for what I think it’s great at – which is iterating on product development.

YOU SHOULD BE BEARISH

In a recent Member Brief, I wrote on the asymmetrical warfare that Caldbeck summarizes so eloquently, “A dynamic brand enables more than product success, it enables category success. As brands known for one thing enter the categories of other competitors, the companies with the most brand equity and marketing sophistication seem to be best positioned to make the leap from product company to category brand.”[1] But brand equity is just one component; Harry’s operational superiority and omnichannel sophistication has been on display over its six years as an independent company. It should be a message to younger companies that achieving an exit will take more than a beautifully-crafted facade that hides operational chaos (as is often the case).

Пока бренды DTC пытаются следовать тому, что уже было сделано до них, вам тоже следует скептически относиться к этой индустрии. Многие инвесторы, похоже, ищут учебник по DTC, чтобы передать его своим портфельным компаниям. Как бы говоря: "Вот как это делается. Теперь выполняйте план игры!" Но, скорее всего, так никогда не будет. В то время как выходцы из цифровых технологий начинают конкурировать на территории традиционной розницы, бренды, принадлежащие к наследию, должны служить напоминанием. У них были уникальные пути к критической массе, и лишь немногие из них столкнулись с предсказуемостью, которую ищет эпоха DTC.

Rather than determining speculative best practices with few data points, DNVBs should review the small number of successes from the DTC era. There have been but a few unicorns minted and even fewer exits earned. Those that do exit are often quiet, EBITDA-driven brands that represent “scalable profit.”  Great examples of this are Schmidt’s Naturals or Native Deodorant. These retailers earned a place atop the market by responding to forces, maintaining agility, promoting executive autonomy, and thinking a few steps ahead of the curve. That should be the only guidance that earlier-stage founders need.

Read the No. 317 curation here.

Веб Смит | Около 2 часов дня

Editor’s Note: Edgewell backed out of the Harry’s acquisition in February 2020, some eight months after breaking the news.