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

Sign In

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.

Read more by signing in. Not a member yet? Learn more here.

No. 297: The DtC industrial complex


There is an entire eCommerce branding industry that fosters the ideation, launch, and early growth of direct to consumer (DtC) brands. When you notice a new digitally vertical native brand in 2018, there’s a platform aura around many of them. First you’ll notice the early PR sensationalism that they can only garner if they graduate from the right school or leave the right corporation. Then, the founders must live in the right city, have the right investors, and pay the right $25,000 per month public relations retainer.

Savvy consumers first notice that the brands are using Shopify or BigCommerce. Then these savvy target customers ask: Red Antler? Brand Value Accelerator? Partners & Spade? Gin Lane? And then on to the excellent packaging presence. Lumi? That other one? In many (but not all) cases, the table stakes aren’t the physical products anymore. You can argue that in the world of DtC 2.0, the actual product is prologue.

After working with Warby Parker, Partners & Spade struck up a relationship with DTC razor brand Harry’s (before it had launched), Shinola, Hims and Peloton. For an already established brand like Peloton, Partners & Spade worked on their first national advertising campaign, but for a brand like Harry’s, the firm got in early on and helped debut the brand to the world (and has since launched Harry’s secondary brand for women, Flamingo).

Adweek, November 19, 2018

The DtC industrial complex enveloping challenger brands has, thus far, insulated many of them from the reality of attrition-by-market forces. Venture funding is the lifewater of the industrial complex. When brands launch today, many of them are hitting the ground running with $3.5 million to $17.5 million in funding. This means that the days of organic social proof (proving the efficacy of the actual product) are – for the most part – behind us. Our opinions are told to us, en masse, by the best molders of minds in the marketing today. This is not to say that new brand products aren’t great. Or that there isn’t opportunity ahead. Below is the estimated compound annual growth rate through 2022.

2PM Data

Screen Shot 2018-12-03 at 11.37.52 AM
US: DTC compound annual growth rate (2016-2022)

You’ll notice that consumer packaged goods, beauty, and food & personal care are each expected to grow tremendously. This coupled with the abundance of capital and the relative ease founding a DNVB in 2019 means that it’s likely that we haven’t yet observed peak volume of challenger brands competing in stale categories.

From No. 290: brand defensibility:

  • 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?

If there is a concern, it’s that the practice of launching a DNVB has ambitious founders shifting resources from within the company walls to outside of them. Brands can outsource product engineering, the brand message, the media relationships, and the customer acquisition. All while ignoring the benefits of the “product’s first 100” for day one, hockey stick-like growth: a strategy that has worked for Warby Parker, Harry’s, Away but very few others. A strategy that is often fueled by that pesky abundance of early stage capital. An amount of capital that’s often justified by the costs of the industrial complex. As we the cycle? Founders are raising to address an amalgam of costs that were once viewed as optional and eventual. But today, they are essentially table stakes to play the game on day one.

The winners will surely include a small handful of consumer brands that overturn the market dominance of their categories’ legacy brands. But if you’re looking for volume, the real winners of the DTC era are the agencies surrounding the products. They are crafting the narratives of the products that we are told by every editorial tastemaker and affiliate-driven publisher to never live without. Those deskside founder interviews aren’t cheap, I know. These are the products that expertly target us on every platform. And when we convert, we get the lovely welcome to the family email. This optimizes for LTV / CAC ratio. And then we receive it; the well-designed box takes our breath away and the nestled card with the well-tested social media CTA that gets us to bite.

This is the experience wished upon us by every challenger brand that adorns the publications that cover consumerism. And only then do we realize that every experience has hints of another. Not because the agencies aren’t expertly executing, they are. But because there are only so many ways to make categories – that weren’t exciting in the aisles of Target stores – revolutionary across the consumer web. There have been tremendous products launched into the stratosphere of consumer America. Few products have impressed me more than the agencies that build them.

Read your latest curation here: No. 297.

Report by Web Smith | Executive Membership