Why Digital Warby Parker and Allbirds are betting on stores ahead of public debut

Why Digital Warby Parker and Allbirds are betting on stores ahead of public debut

A Warby Parker store in The Standard, Los Angeles, California.

Michael Buckner | Getty Images

Retail darlings Warby Parker and Allbirds have taken to the internet and paved the way for other brands to follow their playbook and hope for similar success.

Now they’re betting big on real estate – not the web – to fuel future growth, according to filings with the Securities and Exchange Commission. The fact that they take advantage of physical stores could be the way forward for other internet-centric businesses.

The two companies have become synonymous with the term “direct-to-consumer” in the retail industry. The strategy is to avoid wholesale channels, such as department stores, to build strong relationships with customers. DTC companies have few or no physical locations.

In recent years, dozens, if not hundreds, of brands have debuted and labeled themselves in the DTC category. Products range from makeup and pajamas to toothbrushes and deodorants.

As Warby Parker and Allbirds prepare for their respective public market debuts, they have entered a new phase of expansion with ambitious goals. Investors and analysts will hold them accountable.

The success of its next steps, including the planned rollout of more physical stores, will have implications for brands that follow in its footsteps.

On the one hand, both companies are losing money. It is not known when – if ever – it will become profitable. Allbirds’ net losses totaled $ 14.5 million in 2019 and increased to $ 25.9 million in 2020.

Warby Parker broke even in 2019 and suffered a net loss of $ 55.9 million last year.

Although opening a store comes with additional fixed costs, physical retail is still the best channel to find new customers. Warby Parker and Allbirds are betting on stores as they prepare to go public.

Allbirds goes public through an initial public offering, while Warby Parker uses direct listings. In the latter, the shares are not made public by a team of underwriters.

According to experts, an online-only model is only sustainable for so long. The success or failure of these companies’ public launches may lead to further IPOs or large retail companies that have followed the DTC model to examine other exit strategies.

“It was the initial excitement that there was a new model where you didn’t need a store anymore,” said Jason Goldberg, director of business strategy for advertising firm Publicis. “The traditional kind of stores and business models were all old school, and the new way of doing things was going straight to the consumer… slap a website and invent a cool product. “

Goldberg said companies are looking to see if the model is not sustainable.

“There is a certain stage in your baby’s development where you can be successful without a store, and it can be very easy to get customers,” he said. “But no digital native brand has a billion dollars in annual revenue without stores. You need those stores as a profitable customer acquisition channel at some point.

The Allbirds New York retail store is located in Manhattan’s trendy SoHo neighborhood.

Source: all birds

Emory University’s assistant professor of marketing Dan McCarthy oversees companies like Casper Sleep, Figs, Revolve and Peloton, just like Warby Parker and Allbirds. They all depend primarily on the Internet for sales.

But they also struggled to turn a profit, which could put potential investors on hold.

“If you can’t make any profit, I’m sorry, you won’t be a valuable stock in the long run,” McCarthy said.

Mattress maker Casper was inspired by its DTC strategy when it started selling at other retailers such as Target. Since then, he has also opened more than 70 stores. This is further evidence from a business initially powered by web sales examining the benefits of real estate.

Allbirds, a sustainable footwear brand that got its start in Silicon Valley, said it has “scratched the surface” of its ability to open stores, particularly in the United States.

According to an SEC filing, the company had 27 outlets around the world as of June 30.

“As our store fleet grows, we expect our growth to accelerate from 2020,” Allbirds said. “We believe our new stores will also be very profitable, have attractive payback periods, be good capital investments and be well positioned to take advantage of the recovery of physical retail after the pandemic.”

The company said e-commerce made up 89% of total sales last year, and stores made up the rest. Its physical stores were closed for weeks in 2020 due to the Covid crisis. Allbirds said that as of June 30, shoppers were spending 1.5 times more money to visit both a physical location and a website than a customer who only visited a store or made purchases. online shopping alone.

The company highlighted its Boston Back Bay location to show the benefits of opening a store. In the three months since the store opened in March 2019, web traffic in the region has increased by 15%. The company saw 83% more new customers in the neighborhood.

To reap the benefits of stores, businesses may not need to target expensive markets like New York or Los Angeles. 2PM founder Webb Smith recently wrote in a note to customers that direct-to-consumer brands should take a closer look at opening stores in second- and third-tier cities for locations like Columbus, Ohio. .

“The DTC industry is a club and there are rules clubs must break,” Smith said. “For retailers who have the courage to think outside the box, the opportunities for success can be found well outside of cities and status quo strategies. “

Meanwhile, eyewear maker Warby Parker said it had more than 145 stores as of June 30. The company plans to open 30 to 35 locations this year and aims to grow at this rate each year.

“Our retail stores are very productive,” the company said in an SEC filing, with average sales per square foot of watches at $ 2,900. For comparison, Apple is cited as the most profitable retailer in terms of this metric, generating more than $ 5,500 in revenue per square foot.

“Our retail stores serve as valuable marketing vehicles to introduce our brand to new customers and make repeat purchases and, in turn, positively impact our sales retention rate,” said Warby Parker. noted.

The company performs in-person eye exams at 91 sites. The service gives some people a reason to travel.

Warby Parker said its e-commerce business represented 60% of its net sales last year. Stores accounted for the remaining 40%.

“Almost every one of these first generation retail companies has reached a plateau,” Goldberg said. “And they’re exploring a certain flavor of a store model to continue growing.”

“Before, everything revolved around the mall”

The online sales model can only be a starting point for Warby Parker, Allbirds and the companies that have come their way.

Foreigner Ventures founder Kirsten Green says she no longer uses the term direct-to-consumer, or DTC, to describe companies like Warby Parker, Allbirds, Bonobos and Birchbox today.

“These are just businesses that all started online because it was efficient,” she said. “You can build a site, you can start attracting customers, and you can start to learn because you have all of these touchpoints to track customer behavior. “

These experiences have made retailers of this “new generation” smarter to open stores and avoid overbuilding, Greene said. Rapid expansion has caused problems for businesses in the past and has pushed many businesses to bankruptcy court to withdraw from leases.

“It used to be around the mall,” Green said. “You can define a mall strategy and create 200,400 stores. … Now I think we’re flipping that equation, and the initial engine is to build an online presence.

For Warby Parker and Allbirds, the benefits of opening more stores come with higher fixed costs and rental liability.

But many companies have found ways to manage these costs. For example, Target has taken the lead in using its major locations as mini-distribution centers to get the most out of its real estate.

It encourages shoppers to take online orders in their parking lots. Target takes advantage of its stores, in turn, to reduce costs associated with shipping and transportation.

“You can start a business of a certain size online,” Green said. “But the reality is, if you really have the scale in mind, you have to think about meeting the client where the client is. And they’re in a lot of different places.

Warby Parker and Allbirds decided they needed to expand their offerings to move towards profitability. According to Publix Goldberg, the success of their public debut will have implications for other companies that have followed their model first online.

“It is a positive confirmation for the model that it is a [of DTC brands] The exit is starting to happen, because there have been some good acquisitions so far … but the market was not very ripe for these IPOs.

“Now that the market starts to carry some of these ideas – and especially if they are successful with these entity economies – it’s going to join a whole second wave of digitally native companies, which are trying to follow in these footsteps. ” he said. .



Please enter your comment!
Please enter your name here