WE GAVE UP ON RETAIL, then it gave up on us.
We should have seen it coming, but what do our A&G startups do now?
In the past decade we’ve seen the massive deterioration of small and mid-level retail, largely due to the disruptive impact that e-commerce has had on consumer buying patterns. As a result, we’ve also seen a dwindling of trade shows, showrooms and reliable wholesale channels. At the same time we’ve seen online customer acquisition costs continue to rise, with customer demand segments looking like a fractal spinning through a huge universe of rapidly growing internet special interests. I recently wrote about this here.
For years I’ve cautioned every single Apparel and Goods (A&G) startup I talk to about the perils of an exclusive e-commerce model that lacks wholesale distribution channels. I would argue that while the millenial generation of entrepreneurs turned their back on wholesale retail, either through blind faith in e-commerce or heavy pressure from short-sighted investors, we’ve seen a compounding effect on the A&G industry.
- Consumer companies are becoming much more expensive to grow and scale because of the rising costs of online customer acquisition.
- If, or when, A&G startups finally ready their sampling/production cycles for traditional wholesale channels, they are underwhelmed because so many doors have closed, pre-orders are way down, trade shows folded, and showrooms dried up, i.e. distribution channels are sparse and much more competitive.
- This has forced companies to compete for customers online, further hurting traditional brick-and-mortar retail, and also further driving up the cost of online customer acquisition.
- Startups want to open their own exclusive flagships, putting further pressure on established neighborhood retailers and wholesale channels.
If it costs $40–60 to acquire a customer online at scale (and it very often does), many companies are dead in the water. Their unit economics may have fared much better through wholesale channels where they accept a simple 20–30% margin reduction with guaranteed revenue, exponentially less inventory liability, no customer acquisition costs, and a high probability of customer retention. Scale comes slower that way, but at least they live to tell the tale. Let’s also consider the rising cost of shipping. If it costs $10-14 to ship a $30 retail product, and we give free shipping on orders over $80, it’s a financial meltdown waiting to happen.
Unlike risky A&G startups who sell exclusively online, traditional retailers already have strong relationships with customers which were built over decades, with their buyers and style forecasters curating the next in ‘cool.’ Traditional retail catalogs, trade shows, in-store releases, and emails were efficient marketing tools that smaller brands could piggyback via wholesale orders. This piggyback could lead to a 50% reduction in customer acquisition costs compared to online. Unfortunately this is almost impossible to rely on moving forward.
We see the ‘deadpool’ of A&G e-commerce startups piling up every year. These startups often turn their backs on traditional wholesale channels. FAB, Gilt, One Kings Lane, Reflect.com, Shoedazzle, Beachmint (and its 5 brands), Beautyjungle.com. The list goes on. Many are already dead, but swept under the rug through a competitor’s acquisition at a price less than invested, so we never hear the bad news. Even the Zappos.com acquisition in 2009 can be seen not only as foreshadowing, but as a very thin exit, at a rumored 1x revenue.
OUR NEW REALITY
Niche retail shops are limited and expensive. Fringe culture shops are all but dead. Music stores are already extinct (save for a select few record and specialty shops). Cultural meeting centers like Pitcrew, The Heavy Metal Shop, Milosport, FTC, SHUT, and Fat Beats are treading water, at best. Boutiques like AB Fits, Beam & Anchor, A+R, and La Garçonne are battling upstream and downstream currents from startup flagship stores and big-box e-commerce. The big mall shops still exist, but undercut our startups with copycat products at better internal margins, e.g. Urban Outfitters. Then we go one step further to fast fashion, with exclusive products, tight turn-arounds, great designers and great manufacturing, our young companies struggle to compete.
We do see standouts like Poler Stuff, Outdoor Voices, Topo Designs, Kith, and Hourglass Cosmetics building nice momentum, but how will our young companies grow themselves into institutions like Lululemon, UnderArmour, TOMS, A.P.C., and Patagonia?
RESPECT THE LARGE WHOLESALERS
This is something that can’t be overstated. Even if working with wholesalers seems like a slog in the early days, when you’re at a size where you can attract big-box retailers, you will already have the expertise in wholesale systems, forecasting and operational workflows. Not only do large wholesalers use different systems, formats and labelling than e-commerce systems, they also operate on completely different timelines (often 1 year in advance).
While e-commerce companies can remain agile, customer acquisition is becoming more expensive. Companies can stifle their potential by not working with wholesalers. Wholesaling pays off with a direct connection to a new customer base, and often involves co-marketing opportunities and in-store features, as retailers are happy to be representing new and exciting brands.
This all means creating relationships with buyers very early in one’s lifecycle. The influential buyers are one of the golden tickets to sustainable growth.
MAKE TRULY INNOVATIVE PRODUCTS (through design sensibility or technology)
It all comes down to product and brand. Unless you have a truly defensible brand with outstanding unique products, it’s not even worth entering the market.
Without fantastic unique products, the economics can be overwhelmingly depressing. Gilt, Fab and One King’s Lane collectively raised close to $1billion in an attempt to create sustainable businesses. None had existing customer bases to start from; none had unique products; none were able to prove their staying power.
It can be much harder than it seems to design and manufacture the best products in our current import-only climate. Because all of our manufacturing has been forced overseas to risky factories in China, Indonesia and Southeast Asia, with huge language barriers and constant style miscommunications, some young companies can go out of business with a single container of products that arrives 2 months late, or gets shipped with an entirely wrong color or material. Look at a recent incident with Rip Curl, where their Chinese supplier manufactured snow outerwear in North Korea, likely without telling Rip Curl. It has since turned into a media nightmare all about ‘slave labour’ and the like. Quite practically, this could be the end of Rip Curl, one of the most important surf brands of the past thirty years.
This is aligned with producing innovative products. Adidas has been one of the best recent examples of differentiation. Are their products more innovative than Nike? Probably not. All casual running shoes perform the same core function, so Adidas has not changed the way we run or walk. What Adidas has done is use an entirely different voice, they’ve created a new narrative for a new style of customer.
CHANGE YOUR EXPECTATIONS
10 years or bust. Give your business a long-term outlook with realistic expectations around organic and referral-based growth. Furthermore, maybe your business is only meant to generate $7M in revenue per year, and that’s ok. Perhaps it’s unrealistic to think that customers will be as cheap to acquire as you try to grow from $7M to $100M per year. Maybe it takes you twenty years to get to $100M in a sustainable way, instead of five years in a ball of flames.
It took A.P.C. almost thirty years to exceed $55M in revenue.
RAISE A LOT MORE MONEY (and pray)
Warby Parker has raised over $110M. Lululemon raised over $100M before going public. Without truly innovative products, most of that money will go toward opening storefronts and expensive customer acquisition at negative margins. How long can you keep that up?
RESPECT THE MARGINS
Many A&G companies think that 30-40% gross margins at e-commerce are sufficient. To really compete and grow sustainably, 70–80% gross margins are needed. This makes the puzzle even harder to solve. How can we design and produce truly innovative and differentiated products at such generous margins? Alas, that’s the $100M question of the last decade. That and similar questions sent our domestic manufacturing abroad, perhaps never to return…
If you’re wavering to enter the A&G industry, or already having a difficult time making your margins, just fold up shop and find a segment with better wholesale channels like the food and beverage inustry, or better margins like enterprise services or cannabis.
Retail is not dead, and e-commerce isn’t only an uphill battle. Unfortunately we have almost entirely turned our backs on mid-level retail providers, and we will continue to pay the price for doing so. It seems like only the superfit companies will survive in the next decade. Never more can we ‘me-too’ into the A&G industry, as our system becomes more scattered, competitive and expensive to scale.