Deep Dive: Two DTC Brands

Both companies set out to take on Nike and Adidas. The eventual divergence of their paths can be attributed to a number of differences in decisions: funding methods, geographies, early adopters, and design philosophies. But what ultimately set one shoe brand up for international dominance ($8+ billion market cap) and the other into survival mode ($100 million market cap) came down to this: comfort.

It can be easy to forget that Allbirds, at one time, seemed to be on the same trajectory as On. Wrote Rachel Syme in 2018 for the New Yorker:

In their initial wave of popularity, Allbirds became an essential part of the daily uniform of Bay Area tech entrepreneurs. But in the past year Allbirds have travelled outside the clean hallways of Silicon Valley headquarters and tipped into the mainstream. Mila Kunis wears Allbirds. So does Jennifer Garner. So do Park Slope dads and modern dancers and trendy teen-agers and kooky aunts and registered nurses and bartenders and pretty much every overworked, weary thirtysomething you see on the New York subway.”

The cascading effects of comfort as a variable would take volumes of essays to explain but here I will try to simplify as best I can. I wrote this about Allbirds in February of 2022 when it was still a $1.5 billion company. 

Allbirds is cozying up to wholesale. It’s an interesting paradox in omnichannel strategy that takes brand awareness and unit economics into consideration. The brands with sales velocity and stature to own their distribution can and will move towards an owned-store / DTC model. Brands working to reach profitability and scale are moving towards third-party retail wholesale partnerships.

In that essay entitled “Omnichannel Nirvana“, I opined that the strongest brands are pursuing DTC strategies while brands in need of sales growth are highly reliant on wholesale partnerships. The irony of the timing of this new report is that Allbirds is still pursuing wholesale and On Running is shifting in the opposite direction, according to this report in WWD.

The Swiss sports brand reported the strongest quarter in its history Tuesday morning with a jump of 46.5 percent in net sales to 480.5 million Swiss francs, driven in large part by its direct-to-consumer business.

As a result, the company will focus primarily on its own DTC efforts going forward and stick with the wholesale partners it already has without significantly adding to its stable. DTC accounts for 35 percent of overall sales.

The journey from performance to fashion statement encapsulates the evolving dynamics of consumer preferences and market trends. Nike, Adidas, and Reebok followed this pattern. Today, it is On Running. And I suspect that it will tilt the brand’s trajectory even higher.

Phil Knight, the visionary behind Nike, initially believed that running shoes were solely meant for sports. He found out that he was wrong. Over time, basketball shoes, epitomized by brands like Nike and Adidas, became the casual footwear of choice, transcending their functional roots to become fashion staples. Without many exceptions, the trend has pivoted away from basketball and returned to running shoes as the primary exhibitor of daily wear (and fashion in some cases).

Today, brands like Hoka and On Running, renowned for their exceptionally comfortable soles, are worn casually by the executive classes, a demographic that Allbirds once firmly held thanks to the early adoption by west coast venture capitalists alluded to in the introduction. This transition from performance to casual wear reflects the changing landscape of the athletic footwear industry and consumer priorities. The great contrast between the two brands began with comfort. People wear Hoka and On because it feels good to wear the shoe. Eventually, enough people wore them that their appearance became more socially acceptable outside of running circles. Like Hoka, On shoes have a particular look that was more unconventional than their counterparts at Nike and Adidas.

Good Steps and Missteps

The rise of On Running is noteworthy and generational. Founded in 2010 by Swiss Ironman champion Olivier Bernhard, On has experienced a meteoric rise in popularity, especially in the last few years. A significant boost in its profile came in 2019 when Swiss tennis great Roger Federer became a shareholder. In 2023, On announced $490 million in net sales in the second quarter, marking its sixth consecutive best-ever quarter. The brand’s appeal transcends its athletic origins, finding favor among various consumer segments, from tech workers to boomer parents and the athleisure crowd. Keys to its growth:

  • Product Innovation: On Running’s unique cloud-like cushioning technology has appealed to both serious athletes and casual wearers. Its focus on technological innovation in footwear has set it apart in terms of performance and comfort.
  • Market Positioning: On Running has successfully positioned itself across multiple segments, catering to both high-performance athletes and consumers looking for comfortable, stylish footwear. This dual appeal has broadened its customer base significantly.
  • Global Expansion: On Running has expanded its market reach globally, making significant inroads in Europe, North America, and Asia. This global presence has contributed to its growing revenue.
  • Brand Partnerships: The involvement of high-profile figures like Roger Federer has boosted On Running’s brand visibility and appeal. These partnerships have helped the brand gain credibility and attract a diverse range of consumers.

On’s shoes, known for their patented CloudTec soles, have historically been relatively firm, catering to a different runner preference than the traditionally softer American market. However, their recent models like the Cloudmonster and partnerships with athletes like Kristian Blummenfelt indicate a renewed focus on athletic performance.

Allbirds, on the other hand, initially captivated the market with its sustainable Wool Runner shoes. Founded in 2016 with a sustainability bend, Allbirds quickly gained popularity, especially in tech hubs like Silicon Valley. However, as the company tried to expand rapidly into new market segments and product lines, like running shoes and apparel, it faced significant challenges. The materials used in its running shoes were not well-suited for intensive activity, leading to durability issues. Its apparel line, made entirely of merino wool, was criticized for being too warm and uncomfortable. Furthermore, Allbirds’ expansion into younger consumer demographics and other product categories without sufficient market research diluted its brand image and confused consumers about what the brand stood for. Keys to its struggles:

  • Segmentation Missteps: Allbirds’ expansion into running shoes and apparel was not well-received. The materials used in their products, while sustainable, did not meet the performance and comfort expectations of the new segments they targeted, particularly in the athletic footwear market.
  • Brand Dilution: The rapid expansion into various product lines and market segments diluted Allbirds’ core brand image. This lack of focus led to confusion about the brand’s identity and diminished its appeal to its original customer base.
  • Pricing and Product Quality: The higher price points of Allbirds’ new products, combined with quality issues, especially in terms of durability and suitability for athletic use, led to customer dissatisfaction and lower sales.

Looking ahead, for Allbirds to reemerge successfully, a pivot in strategy may be crucial. Transitioning from a sustainability-focused brand to one that emphasizes comfort could open new avenues. Developing and patenting exceptional soles, akin to On Running’s CloudTec, could help Allbirds regain a foothold in the market. This focus on comfort, combined with its existing commitment to sustainability, could potentially redefine its brand identity and appeal to a broader consumer base. This strategic shift requires not only technological innovation but also a deep understanding of consumer preferences and market trends.

Asia As The Next Emerging Market For Running

Asia’s burgeoning market for running and athletic footwear presents significant growth opportunities for brands like On Running and Allbirds. The impact of this growth on comfort categories can be substantial, offering new avenues for market expansion and product innovation. Here are a few key points:

Rising Health Consciousness: In many Asian countries, there’s a growing trend towards health and wellness. This shift is driving an increase in activities like running, which in turn boosts the demand for high-quality running shoes. Brands that can tap into this health-conscious market with products that offer both performance and comfort are likely to see success.

Expanding Middle Class: Asia’s expanding middle class is fueling consumer spending on lifestyle and wellness products, including athletic footwear. This demographic is not only looking for functional products but also values comfort and style, blending their needs for athletic and casual footwear.

Urbanization and Lifestyle Changes: Rapid urbanization across Asia has led to lifestyle changes that blend fitness activities with daily life. As a result, there’s a growing preference for versatile footwear that serves both athletic and casual purposes, which is where the comfort category can greatly benefit.

Online Retail and Digital Engagement: The superiority of eCommerce platforms in Asia offers brands an effective channel to reach a broader audience. These platforms also provide valuable consumer data, enabling brands to tailor their products and marketing strategies to local preferences, including comfort-oriented features.

Cultural Trends and Brand Perception: In many Asian markets, Western brands are often perceived as status symbols. Brands like On Running and Allbirds can leverage this perception, emphasizing their unique value propositions in comfort and sustainability to appeal to a wide range of consumers.

Influence on Comfort Categories: The emphasis on running and athletic footwear in Asia is likely to have a trickle-down effect on comfort categories. Consumers who prioritize performance in their athletic wear also seek comfort in their everyday footwear. This overlap creates opportunities for brands to develop products that cater to both needs.

Asia’s growing market for running and athletic footwear is the key area for future growth in this segment, with significant implications for the comfort category. Both can effectively tap into this market by balancing performance, comfort, and style, and adapting to local preferences, stand to gain a significant competitive advantage in this rapidly evolving market landscape.

Allbirds will need to refocus on its core strengths while also innovating in product comfort and performance. Developing and patenting new technologies for soles, similar to On Running’s approach, could help turn it around. This strategic shift should be accompanied by a renewed focus on understanding and catering to its target segments’ needs, particularly around comfort, sustainability, and performance.

The stories of On Running and Allbirds in the athletic footwear industry offer valuable lessons in brand positioning, market segmentation, and the importance of aligning product offerings with consumer expectations. While On Running has successfully navigated these challenges, Allbirds has faced hurdles. However, with the strategic pivot mentioned above, Allbirds could potentially reclaim its position in the market. In the same New Yorker article, Syme wrote: “I have never been the kind of person who selects my shoes based on their orthopedic function.” The irony for high flying running shoe brands like Hoka and On is that this was their appeal before appeal was their appeal. And with that, more consumers prioritized comfort over appearance. Even Adidas and Nike have taken note.

Over four years, emerging sportswear companies Hoka and On Running spent the equivalent of what Nike spends in two weeks to grow their market shares — and added $3 billion worth of revenue over that period, according to TD Cowen. (Business Insider, 2023)

Allbirds can learn from this. Nike is focused on China to continue growing market share. The athletic footwear industry continues to evolve, and brands that can adapt to changing consumer preferences while maintaining a clear and consistent brand identity are likely to succeed in this competitive landscape. This is the tale of the two DTCs. 

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

Member Brief: Omnichannel Nirvana

The two sides are seeking omnichannel nirvana.

As Nike focuses on its direct-to-consumer strategy, hurting department and specialty stores in the process, Allbirds is cozying up to wholesale. It’s an interesting paradox in omnichannel strategy that takes brand awareness and unit economics into consideration. The brands with sales velocity and stature to own their distribution can and will move towards an owned-store / DTC model. Brands working to reach profitability and scale are moving towards third-party retail wholesale partnerships.

A cycle seems to be forming: digitally-native and traditional brands that reach critical mass by working with wholesalers may eventually resign to a digital-first strategy.

This is just another sign of the vulnerable state of the DTC playbook and follows this macro-trends shaping retail right now. In just one week since publishing, two key commerce trends and their ripple effects outlined by 2PM on Tuesday began playing out in real time. From the Digital Commerce Global Summit presentation:

Physical-to-digital: Retailers are pulling back from third-party retailers

A leading strategy for brands of all sizes and status is to intentionally and carefully create a wholesale network that allows for inventory control and partnership over the spray-and-pray approach of retail generations past. Third-party retailers will play a smaller and different role than before as brands focus on their owned channels. Case in point: Nike will be 70% direct by 2027.

Digital-to-physical: DNVBs are opening owned shopping experiences

For online brands, expansion is happening at the store level. Physical stores heighten the brand’s online halo and if done well, are money makers. The risk is avoiding over-retailing. In step with this expansion, the mall will be remade in DTC’s image.

Allbirds’ earnings this week underscored its need to rethink its physical store and wholesale strategies. According to CNBC, shares fell after the brand posted mounting costs that ate into profits. Retail store openings were a top expense. To recoup sales, Allbirds said it would be selling through third-party retailers, naming Nordstrom as its wholesale partner. A recent WWD article explained:

The company will start wholesaling primarily in the U.S. as well as a small number of European retailers, with Asian stores in the plans for the future, Zwillinger said. He said the stores will not be given access to the full Allbirds assortment but select products most appropriate for their market segments. They will be limited in what they can sell on promotion to maintain Allbirds’ pricing integrity that it has maintained for the past five years, Zwillinger said.

To return to its DTC roots, Allbirds will need to grow its business and build stronger brand equity while maintaining the unit economics (pricing integrity) that CEO Joey Zwillinger cited in his comments to WWD. Nike has had a decades long advantage and it is an unfair comparison but this reversal is how it’s currently rebuilding its distribution model. According to NPD Group, Nike, along with Adidas and Skechers, is its own best retail channel.

Nike’s direct retail strategy is vast and nuanced, factoring in store concepts, gaming, apps and Web 3.0. Its plans to own the customer at every interaction is hurting retailers that have come to rely on it. Footwear News cited an urgency to consolidate distribution at Nike headquarters:

For Nike, an aggressive DTC strategy has led the brand to terminated wholesale accounts with retailers like Zappos, Dillard’s, DSW, Urban Outfitters, Shoe Show and more, leaving many retailers without the ability to sell one of the most popular brands in stores. Nike has also cut back on the amount of product it is offering in existing vendors, like Foot Locker, in order to consolidate distribution.

Foot Locker shares fell as it reported a grim outlook on the heels of losing some of Nike’s presence in stores. And other retailers like DSW and Urban Outfitters and Shoe Show have faced similar market pressures after news of Nike’s departure. While the brands are along their own cycle, the stores that rely on them are experiencing their own renaissance. It won’t be doom nor gloom for most.

If my assumptions are correct, the omnichannel void left by the largest, most established retailers will be filled by the up and coming class of modern brands like Allbirds and NOBULL. And then five, 10, or 20 years from now, the same stories may be written about these modern brands looking to build their futures – this is the new shape of the symbiotic relationship between brands, physical retailers, and evolving distribution strategies.

On one end: profitable, enterprise traditional brands are in the news for moving away from wholesale and towards DTC. And on the other end: yet-to-be profitable digitally-native brands are in the news for moving towards department store wholesale in search of profits and scale.

They’re each trying to achieve a sort of omnichannel nirvana.

By Web Smith | Editor by Hilary Milnes with art by Christina Williams

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