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Memo: On The Fourth Day of Quarantine
These are interesting times that require historical perspective. The influenza outbreak of 1918 coincided with the final year of The Great War, one of the first times in recorded history that soldiers were shipped – en masse – to new countries. First recorded at Fort Riley, Kansas in March of 1918, 24 countries recorded cases by October of that year. Global conflict exacerbated the transmission of the virus and the lack of care that many received due to shortages in available medical professionals. Like an accelerant, the free flow of soldiers contributed to the epidemic.
Censorship by the United States, United Kingdom, Germany, and France led to uninformed populations. However, there was no censorship in Spain. So when the country’s King took ill, the free and open communication influenced a false impression that this strain of the influenza originated in Spain. And so, the moniker of the Spanish Flu was born. Misinformation and censorship were partly responsible for the spread the global epidemic. Inaction was the other.
In one example, consider Philadelphia. One of the worst cases of the 1918 epidemic occurred after Dr. William Crusen, the city’s public health director, allowed a parade to continue as scheduled despite fair warning. On September 28, 1918, that parade drew 200,000 to Philadelphia’s streets and within 72 hours, the city’s 31 hospitals were filled. Every bed was taken. The parade was called to sell war bonds.
The actions of city authorities across America seemed largely dictated by military and business priorities rather than health concerns and nowhere perhaps is this better demonstrated than in the example of New York. [1]
Censorship, a prioritization of local commerce and events, and a lack of clarity in national leadership are but a few of the parallels between today’s public health crisis and the epidemic of 1918-1919. However, that is where the comparisons end. Buoyed by the end of a global conflict, the Dow Jones Industrial Average returned nearly 11% in 1918 in the year that the Spanish Flu killed nearly 1% of the American population. One hundred years later and this same economy is tied to a global economy of such magnitude that the Dow Jones Industrial average suffered a 2,000 point fall over four days despite a relatively small presence of the virus within the borders of the United States.
The magnitude of impact on the globalized economy has yet to be realized as cities continue to quarantine citizens and retail and grocery supply chains crack under pressure. The concept of a global supply chain didn’t exist in the early 1900’s. But it did exist in 2003 during a deadly outbreak of severe acute respiratory syndrome (SARS) in China. That virus impacted nearly 9,000, killing 774 before being contained. In the process of combating this crisis, 2003’s epidemic exacerbated supply chain concerns in ways that would influence how retail was practiced in the then-developing country.
Alibaba and SARS in 2003
Today’s economic interconnectivity leaves markets susceptible to global crises. We are bearing witness to this today with a number of events, conferences, and trade shows cancelled out of precaution of spreading the COVID-19 strain of coronavirus. Events like Facebook’s F8, Shopify’s Unite, Austin’s South by Southwest, and Columbus’ Arnold Fitness Festival are each responsible for hundreds of millions in economic impact. They were cancelled, mostly without contention or uproar. And despite living in age of digital fluency, the Spring of 2020 has illustrated how dependent the international business community is on in-person transactions, interactions, and business development. There are parallels to draw.
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In 2003: the Canton Fair (China) saw an ~80% drop in attendance. Alibaba built Taobao and Alipay – partly in response to SARS. This launch moved Alibaba away from its initial B2B intentions and towards its P2P marketplace model of today. 2003 sales: $10M 2005 sales: $1.2B
International supply chains and air travel propels markets forward. In this same way, epidemics are more likely to become pandemics. China’s business community learned this lesson at the turn of the 21st century.
China’s Canton Fair in 2003 was a pivotal moment. The China Import and Export Fair is a trade event held each Spring – since 1957 – in Canton (Guangzhou), China. That April, Alibaba Co-Founder Jack Ma faced a difficult decision. With the 93rd Fair set to begin, Ma’s promise to 50 clients was at risk of being broken, Guangzhou was a SARS epidemic zone but Alibaba was responsible for the sales and marketing of goods sold by these 50 clients.
In 2002, eBay invested US$30 million for a 33 percent stake in Each Net, marking the first foreign company to enter into China’s e-commerce sector. [4]
Like Philadelphia in 1918, the Guangzhou government permitted the fair to go on despite the risk to the public. Many of the fair’s exhibitors were reluctant to take the risk. The year prior, the Canton Fair featured 135,000 exhibitors and $19.7 billion in goods traded. That next year, 2003 saw an 85% drop in attendance with just $3.8 billion traded. Ma determined that it was in Alibaba’s interest to attend the event, keeping the commitment to the company’s 50 clients. This decision endangered employees, nearly killing one of them after her return from Guangzhou to Alibaba’s Hangzhou headquarters.
During quarantine, the headquarters were sealed off with a heavy iron chain. A tent was set up downstairs to take charge of diet, temperature checks, disinfection, and care. Jack Ma’s house was guarded night and day. [2]
The result? Nearly 500 associates and nearby medical workers were quarantined. The world’s largest business-to-business marketplace was under siege and for the first time, Ma permitted the majority of his employees to work remotely. This, though broadband communication was in its nascent stages in China. Ma used the pandemic to directly address two concerns. Ebay was beginning to encroach on Alibaba’s growth. And through the frustrations of that year’s Canton Fair, Ma understood that too much of retail was dependent on traditional retail channels. In that eight days of quarantine, the Alibaba team engineered the solution.
Alibaba launched Taobao, its peer-to-peer marketplace and Alipay, two systems remain pivotal to the corporation’s growth. This moved Ma’s original vision away from Alibaba the B2B company and towards the marketplace of today. At 8 A.M. on May 10, 2003, Taobao went online after the fourth day of quarantine. The homepage read: “Think of those who start a business in trying times.”
Many countries around the world issued travel warnings for businessmen traveling to China, and thus many turned to Alibaba’s online business to source Chinese goods. Starting in March 2003, Alibaba’s B2B e-commerce business added 4,000 new members and 9,000 listings each day, a 3-5x increase over the pre-SARS rate. [3]
Just 17 years later and China’s online retail economy is the envy of the world. At nearly 37% penetration and growing, analysts estimate that the rate with reach 63.9% by 2023. It’s evident that online retailers like Alibaba (and JD.com to a lesser extent) used the crisis to move their countries into eCommerce leadership position.
There were 600,000 internet users in 1997 and nearly 80 million by 2003, according to the peer reviewed journal. Consider this excerpt from a [4] 2006 study on eCommerce growth in China.
The first online sale in March 1998 symbolised the beginning of China’s e-Commerce (OYCF, 2000). US$40 million were generated in 1999 in China, opposed to US $8 million in 1998. The total value of consumer online purchasing reached US $38.6 million in 2000. […] Moreover, according to Easyspace Ltd. Company, the market’s value is projected to expand to US$23 billion within 3 years, in contrast to the current value of US$500 million per year (World IT Report, 2003).
Compared with American and European markets, China’s e-Commerce capacity lags behind (Zhang, 2002). For example, consumer e-Commerce revenues for the first quarter of 2002 in the America was US $17 billion; whereas in China, e-Commerce revenue is projected to reach only US $4.8 billion by 2004. However, this is understandable. Consumers in developing countries tend to purchase goods offline due to a number of factors that affect e-Commerce development. In China, the trade tradition is represented with ‘‘pay off in cash on good’s arrival’’ on a face-to-face basis. [4]
This is an incredible excerpt. In 2002, China’s gross receipts in online retail were projected to reach $4.8 billion by 2004. The United States reached $17 billion by 2003. In the same year that America’s market surpassed $17 billion in sales, Alibaba hovered around $10 million – a far cry from American giants like Ebay or Amazon. By 2003, Amazon reached $3.92 billion in net sales. But by 2005, Alibaba leaped from $10 million to $1.2 billion. Today, these numbers are drastically different: China is leaps and bounds ahead.
- China (2019): $1.935 trillion (Alibaba leads)
- United States (2019): $611 billion (Amazon leads)
The Bigger Picture: America and DTC Penetration
Within five years of the SARS epidemic, China’s retail significantly shifted from physical retail to online channels, expanding the total addressable market (TAM) for: marketplace retailers, Chinese brands, and foreign brands hoping to do business within the country.
Ma used eCommerce as a hedge against catastrophe. Never again would a cancelled trade show or business conference impact Alibaba’s sales in the way that it had in 2003 and he was correct. In 2002, China’s penetration rate was 1/4th of the United States. Today, China is at 36.6% penetration while America lags behind at 11.2%. One country prioritized a balanced blend of offline and online retail, another remained focused on the types of events and retailing that has been gravely impacted by today’s public health crisis.
There is a lot to be gleaned from Alibaba’s growth between 2002 and 2005. In the age of global interconnectivity, opportunities can be found in times of crisis. China’s retail and delivery infrastructure is now more established and capable of operating throughout pandemic scares, including the most recent. Alibaba is once again ahead of the curve.
In contrast, America has seen steep declines in travel and associated commerce activity. This has begun to impact small and large businesses alike, emphasizing our preferences for physical retail. But online sellers of essential goods and services are beginning to see a surge in demand as more consumers shop from home. A state that has yet to be impacted by the current coronavirus outbreak, Ohio has been witness to a surge in online retail activity.
And while anecdotal, history suggests otherwise. Alibaba faced considerable headwinds when it scaled from $10 million to $1.2 billion in gross merchandise value (GMV) in two years. Broadband infrastructure was in its nascent stages and Chinese culture preferred physical marketplaces, a preference shared by many Americans today. The SARS epidemic coincided with the proliferation of broadband connections, allowing consumers to experience what could be done from the safety of quarantine within their homes. Duncan Clark, author of the new book on Alibaba was recently quoted:
This is just when people began to be offered broadband connections, and people began to experience what they could do when they were stuck at home. […] This was the genesis.
Many of the impediments to online retail adoption that hindered China do not exist in the United States. Our broadband infrastructure is superior and 5G technologies are in early stages of adoption. It is only a matter of consumer education and preference. On the fourth day of quarantine, Alibaba changed how an entire country consumed products and services. It’s time that America begins to do the same.
Report by Web Smith | About 2PM
No. 318: The Vertical Brand
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.
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.
Report by Web Smith | About 2PM