No. 299: Open Letter – Physical Retail 2.0


This year began with a letter to you. It was the very first letter written on 2PM’s new platform and one of the most meaningful of the year. The original “open letter” from January wasn’t communicated as an analyst or a writer, it was published as a peer. It was an expression of empathy and encouragement. But most importantly it was recognition of your task at hand, building steadily throughout perpetual change. It was a nod at your endurance and resilience. The successful DNVBs of the many that are out there, succeeded in making something out of nothing. And frankly, observers only really understand what that’s like if you’ve been through it. So this one is meant to close out the year with a few observations and some acknowledgment of some impactful, forward thinking. The most shared paragraph in that January letter:

You started your company in an age that required your retail independence. On day one, your brand couldn’t depend on wholesale purchases from Nordstrom or Target or Whole Foods or Wal-Mart. And that independence made you more practical in the long run. And now, those retail powerhouses are now knocking at your headquarters.

I went on to write that DNVBs will make the foundation of which the future of retail is built. Over the past year, we’ve gained a bit of clarity on what that could mean. Direct to consumer brands killed mall retail. Direct to consumer brands reinvigorated the mall. 

Riding on the efforts of your collective innovations – from Andy Dunn to Steph Korey, Tyler Haney to Kristin Hildebrand, Aman Advani to Emily Weiss, and Michael Dubin to Blake and Patrick – retail has taken a new shape. And in the process, we’ve defined and redefined the word direct in the DTC acronym.

More than ever, consumers demand fluid purchase experiences. Online-only retail was supposed to accomplish that but for the majority of retailers, that hasn’t been the case. In the most recent Member Brief: a neighborhood of goods, I argued that the sunk costs attributed to operating within the confines of online-only retail (eCommerce software, logistics costs, and acquisition costs) could motivate further investment into the same systems. But more and more of your peers are realizing that operating a technical, data-driven, physical storefront can accelerate growth, increase LTV/CAC ratio, bolster AOVs, and even fortify speedier shipping and returns.

The irony of the conversations around physical retail weren’t lost upon any of the industry leaders at the [2PM Executive Member table, that evening]. We were in the heart of Soho, Manhattan. If you walked a tenth of the mile in any direction, you’d see the physical manifestation of nearly every top 30 DNVB in the market: Casper, Glossier, Warby Parker, Bonobos, M. Gemi, Rowing Blazers, Aesop, Aether, Birchbox, Harry’s, Theory, and the list goes on. It seems as though every DNVB executive with a war chest (or profitability) is all-in on maximizing profitability through physical retail. Not just the quaint pop-up stores, full 13,000 sq. ft. acquisition and conversion machines. 

Member Brief: a neighborhood of goods

Revisiting Retail independence

Over the years, consumers have shifted from shopping to buying – we’re beginning to witness a shift backwards; American online retail never quite figured out how to duplicate the sensation of stumbling upon a must have while walking through a shopping center. Over the course of the year, we’ve seen the beginning of a tide towards the return to physical retail – a method of acquisition that most of us very vocally dismissed over the years. Sure, we have all seen our fair share of “guide shops”, showrooms, pop-ups, and stores-within-a-store. But while many brands tested the waters with physical footprints, we are now seeing a new level of commitment to a tech-enhanced, traditional way of acquiring customers.

The renaissance of brick and mortar retail could be representative of a few key macroeconomic trends: (1) the saturation of and wavering trust in social media platforms (2) and the inundation of online advertising. Both key tools in the growth of early vertical brands from 2007-2017, online brands have saturated every channel that attracts our attention.

A funny thing happened on the way to the retail apocalypse. Stiffening competition, surging online advertising costs and cheap mall space have prompted these so-called digital natives to embrace what they call “offline” in a big way. In their push to become retail’s next household names they’re venturing beyond the coasts and major cities into suburban America. It’s also an acknowledgement that 90 cents of every retail dollar in the U.S. is still spent at a physical location, and industry watchers don’t expect it to fall below 75 cents until the middle of next decade.

Why DNVBs continue to open physical stores

With every passing year, early brands must raise more to compete less effectively than the brands that launched just a year earlier. Facebook and Google’s cost data suggests that DNVBs have begun to max out these acquisition channels. As a result, shopping has become less leisurely. And solely transactional. Consumers want leisure. Physical retail embodies a social and tangible experience that America’s Amazon-driven format of online retail has yet to duplicate. And digital-first retailers are re-prioritizing those moments of consumer delight by investing in extending their DTC relationships by owning permanent storefronts in worthwhile locations.

Physical Retail 2.0

One of the most challenging tasks ahead, for the DNVB C-suite, is the mandate to build a product and sales funnel atop of a constantly evolving industry. One of the chief roles in the DTC c-suite is the leader charged with discerning between short-term trends and long-term shifts. There have been numerous instances over the last 5-7 years where brands underestimated new technologies or over-estimated the stability of precedent. To that end, physical retail is in its own renaissance. With the right technologies and logistics partnerships, DNVB peers are building more than consumer touch points. They are also building platforms for improved return logistics and quicker shipping mechanics.

Brands that own their own independent storefronts are capable of accomplishing several key goals without outright dismissing their previous investments into technology, advertising, and logistics. To that effect, those tools will only help brands become pioneers in physical retail 2.0. Whereas mall brands of old depended on analog advertising-alone and the unpredictability of foot traffic, physical retail 2.0 are benefiting from six categories of customer acquisition funneling:

  • online to offline
  • traditional to online
  • offline to geo-fenced retargeting to online
  • traditional to offline
  • online to retargeting to offline
  • online to physical returns to offline

For retailers, 2019 is shaping up to be a resurgence of the old. More of your peers will follow in the likes of Allbirds, Casper, Warby Parker, and Glossier. The data-driven physical store will allow mature DTC brands to reduce their dependencies on existing acquisition channels, while now-fully engaging with existing customers. Over the past decade, DTC brands did quite a bit of damage to traditional mall retailers by building direct relationships with potential customers.

Now, those same challenger brands are growing to compete in retail’s traditional environments. The successors of physical retail 2.0 will be: (1) the cloud-based systems that enable DTC brands to connected their experiences and (2) the brands that move first to supplant the traditional brands of old. Cloud commerce platforms (Shopify, BigCommerce, Adobe), a near-universal focus on monetizing consumer data, and the spirit of DTC innovation has provided an advantage over traditional retailers. Higher end shopping centers and malls are beginning to reflect this shift.

Read the No. 299 curation here.

Report by Web Smith | About 2PM

Member Brief: A Neighborhood of Goods

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If you asked anyone around the table at last night’s Executive Member Roundtable in Soho, one of the issues facing the maturing DtC industrial complex was an obvious one. There is a lagging effort in commercial real estate to attract these emerging brands – a growth trigger that could potentially revitalize stuttering malls by attracting a new cohort to Tier B malls. The irony of the conversations around physical retail weren’t lost upon any of the industry leaders at the table. We were in the heart of Soho, Manhattan. If you walked a tenth of the mile in any direction, you’d see the physical manifestation of nearly every top 30 DNVB in the market: Casper, Glossier, Warby Parker, Bonobos, M. Gemi, Rowing Blazers, Aesop, Aether, Birchbox, Harry’s, Theory, and the list goes on.

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No. 290: On DtC brand defensibility

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If you’ve seen a battle scene from a movie about knights, soldiers, and castles, you may understand the concept of an economic moat. If you watched an old war film lately, a moat is often depicted as a water-filled ditch. It typically helps to defend a fort, village, or castle. In that film, you may have seen projectiles fly toward the castle and cannons fire from atop, in return. Enemy combatants rush the castle only to encounter a deep and wide area of water, poison, hot tar, and sharp spears. As the castle faces fire on all sides, the offensive is often ineffective. The moat helped the castle defend its position. 

People don’t know what they want until you show it to them.

Steve Jobs

In traditional tech, there are moats all around us. Apple builds moats into many of their hardware devices. Your Macbook prefers its Safari browser (until you otherwise designate Chrome), Apple Car Play exclusively defaulted to Apple Maps until iOS 12, and your Airpods defaulted to Apple Music unless you specified Spotify. For physical goods, there are brand moats as well. The best example happens to be at Nike.

Nike works with youth leagues to outfit elite teams, providing young players (and their parents) incentives to purchase all of their wears from the brand. The sportswear manufacturing giant outfits the NFL, the NBA, and the vast majority of NCAA sports. When fans purchase licensed apparel, consumer psychology tips in favor of Nike.

Amazon Prime has become a funnel for the retailer’s private label brands and their high margin devices. Walmart has operated at such a low cost-basis, that their most loyal consumers have little to no market substitute. Shopify attract new merchants with little revenue and fosters them along their path to $20 million per year, introducing a suite of products to keep them from replatforming.

And then there’s Whole Foods Market, who – prior to acquisition – competed in a red ocean. They succeeded for a long time by building an economic moat around their brand and user experience. For decades, Whole Foods’ economic moat was a collection of subtle advantages: nicer fixtures, a wider assortment of organic foods, great lighting, and a knowledgeable floor staff. There was little to nothing technical about the retailer’s growth, but the collection of these advantages locked customers in. An economic moat can be built by more than a company’s technological advantages.

How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

Warren Buffett

The internet didn’t destroy the moat, it changed the definition. The smaller the niche, the less the competition. For products in a small niche, there’s less of a need for brand defensibility. But for product manufacturers in a red ocean, defensibility is the difference between stalling out and taking flight. Yet, brand defensibility is often deprioritized. In some cases, brands will focus on customer acquisition (at all costs), often at the expense of building a lasting economic moats.

Old consumer economy. Initially, there were three influences to consider when launching a product in this new consumer economy: brand, product, distribution, the hive, and acquisition model. Prior to the rise of direct to consumer retail, a brand’s moat consisted of these:

  • brand: the impression made upon consumers. The perception created around a physical good mattered most. This impression helped brands remain top of mind between their visits to their shopping centers or the occasional television advertisement.
  • product: the quality of the goods. The value created by the manufacturer influenced brand perception, customer satisfaction, and even word of mouth influence.
  • old distribution: where it is sold. The better the product, the more likely that a consumer could find it anywhere. This signaled that there was consensus around the quality and durability of what is being sold.

With this model, a brand’s trajectory and defensibility was mostly predictable. This was pre-internet: before the rise of the internet and digitally native vertical brands. With the proliferation of direct to consumer brands, influences have changed.

New consumer economy. With the internet, any retailer can market, sell, and deliver physical goods. Brick and mortar distribution is no longer defensible against upstart brands. The web democratized the ability to build product-based brands. In the new consumer economy, a brand’s moat is not only its features, price, and availability. It’s a consideration of product experience, technical advantages, and brand evangelism.

If you don’t land the first and loyal 100, your brand is less likely to earn the early adopters who look like the first 100. Without early adopters, you will not achieve the attention of the masses. The first 100 are the foundation. Without the support of the 100, the masses will not adopt. Made famous by Simon Sinek, heed the diffusion of innovation theory: the early majority will not try something until someone else tries it first. Brands are judged by this early majority.

No. 277: The Power of the 100

In the new brand economy, maintaining defensibility has become more complicated. In physical retailers, traditional luxury brands know their buyers’ preferences. Today, the savviest DNVBs are in direct contact with many consumers by way of customer service, email, and private messaging. They are using these channels, pricing strategies, branding to influence outcomes. Brands have optimized around, beautiful packaging (see: Lumi) fast shipping (See: ShipBob), and easy returns (See: Loop). And with these technological and brand advantages, they are siphoning the loyalty away from incumbent brands like Gillette, who are still operating under the rules of the old consumer economy.

Here are the revised influences:

  • brand: the reputation of the product manufacturer. But also, the impression made upon consumers by the most visible brand evangelists.
  • product: the value created by the product. But also, the value created by the ease of purchase, the fulfillment process, and the customer follow-up – post purchase.
  • new distribution: how is it sold? The better the product, the more likely that a consumer has a 1:1 relationship with the brand.
  • acquisition model: how does the brand achieve meaningful foot traffic? And what is the right combination of paid and organic growth? Is organic growth sustainable?
  • the hive: who is the product’s first 100? Has the brand experienced organic growth on the foundation of this digital community? Will the “100” defend the brand when skeptics criticize the product and brand?

A practical example of competition

In this recent post by Harry’s, their team addresses Gillette head on:

In the face of competition from companies like Harry’s, Gillette has lowered its prices for certain razor models. Yet, Harry’s may still be the best value if you’re looking for a 5-blade razor with a flexible head, lubrication strip, and trimmer blade—the key features many guys consider to be most important for a great shave.

How long have you been overpaying for your razors?

At Target stores, Harry’s maintains the majority of the mindshare in the men’s skincare aisles. Often in spite of Gillette’s legacy of long-term performance. And today, Procter & Gamble disclosed that the company is downsizing it’s valuable Gillette real estate in Massachusetts. Presumably, the P&G label is preparing to more efficiently compete with online-first brands that are eating into their market share.

A moat for DtC brands is the competitive advantage earned by focusing on brand, product, distribution, acquisition, and the hive – the brand’s most visible customers and product activations. This competitive advantage fuels incremental growth in established industries.

I’ve compiled two distinct lists of the DNVBs that have emerged in industries that are highly competitive: luggage, skincare, supplements, digital media, and athleisure. These brands aren’t notable because of their lack of competition; rather, they are notable because they rise above tremendous competition. Paul Munford, founder of Lean Luxe, reports on direct-to-consumer brands. He made the following selections:

  1. Away
  2. Rapha
  3. Soylent
  4. Outlier
  5. Wone
  6. Bevel
  7. Hodinkee
  8. Monocle
  9. Casper
  10. Rxbar

And here is 2PM’s list (more at our DNVB Power List):

  1. Away  | revenue leader in the carry-on travel DNVB industry
  2. Casper | revenue leader in the DTC mattress space, distributorship through Target
  3. Harry’s | leader in the men’s shaving, effectively growing into other verticals.
  4. Chubbies | top performer in the men’s casual space
  5. Glossier | leader in makeup, a substantial amount of traffic driven organically
  6. Hodinkee | there isn’t a more credible community of watch journalists
  7. Four Sigmatic | the leader in alternative coffee sales
  8. Mizzen + Main |combines DtC commerce with a targeted physical retail presence
  9. Serena & Lily | leader in DTC furniture, organically driven by quarterly brochures
  10. Wone | redefined ultra-premium in athleisure by selling out of $320 leggings.

One similarity that our lists seem to share: brands’ focus on its customers. And not just traditional customer service but the incorporation of customer feedback in many of their decisions. Above and beyond price and product, a brand’s hive can influence its defensibility.

A common mistake made throughout the consumer economy is the belief that customers are won and lost on features and price – alone. It’s a product manufacturer’s responsibility to build 1:1 relationships with consumers who are power users. In our recent report on Nike’s physical retail efforts, we began with this:

I walked into the Melrose store and I didn’t think that it was for me at all. I’m not the millennial luxury consumer. And that’s who Nike’s after. The Los Angeles retail fixture is very specific to the area, in aesthetic and in offering. Every square foot of the store is built for Instagram. And for a moment, I realized that though I am a millennial, I am not the millennial that Nike pines for. This store is for them.

No. 289: Nike and hyperlocalization

A defensible product becomes consumer’s first choice. Building a community around this is very difficult but this is what separates defensible brands from the brands without it.

A common misconception is that a brand with a strong economic moat has no competition. Quite the opposite, brands with the strongest means of defensibility often have numerous competitors vying for increased sales and brand equity. What sets the one apart from the many? A focus on relationships, value, and retention – not acquisition, alone. The conversation begins when the purchase is made.

As more brands focus on DtC commerce, an economic moat does more than protect the product manufacturer from growing competition. Without an economic moat, existing customers may depart for alternative options based on price, merit, and availability. In this context for brands, defense can be the best offense.

New to 2PM? Read the latest subscriber curation here.

By Web Smith | About 2PM