Why digital Warby Parker, Allbirds bet 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 game plans 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 are taking advantage of the benefits of brick-and-mortar stores could shape 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 forge stronger relationships with customers. DTC companies have few or no physical locations.

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

As Warby Parker and Allbirds prepare to make 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 their next moves, including the planned rollout of more physical stores, will likely have implications for brands that follow in their footsteps.

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

Warby Parker broke even in 2019, and his net loss last year was $ 55.9 million.

Although opening stores comes with additional fixed costs, physical retail remains 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 a direct listing. In the latter case, 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 debuts could fuel additional IPOs or lead retail companies that have followed a DTC model to look to other exit strategies.

“There was that early euphoria that there was a new model where you didn’t need stores anymore,” said Jason Goldberg, director of business strategy for advertising firm Publicis. “Like the stores and the traditional business model, it was old school, and the new way of doing things was going straight to the consumer … building a website and inventing a cool product.”

Companies are looking at whether the model is not sustainable, Goldberg said.

“There is a certain phase in your infant’s growth where you can be successful without stores, and it can be very easy to acquire customers,” he said. “But no digital native brand has a billion dollars in annual revenue without a store. 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 assistant professor of marketing Dan McCarthy keeps an eye on companies like Casper Sleep, Figs, Revolve and Peloton as he watches over Warby Parker and Allbirds. They all relied primarily on the Internet for sales.

But they also struggled to make a profit, which might give potential investors pause.

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

Mattress maker Casper moved away from its DTC strategy when it started selling at other retailers like Target. It has also since opened more than 70 of its own stores. This is further proof that a business initially powered by web sales sees the benefits of real estate.

Allbirds, the sustainable footwear brand that debuted in Silicon Valley, said it “has just scratched the surface” of its potential to open stores, especially in the United States.

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

“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 paybacks, be good capital investments and be well positioned to take advantage of the recovery in 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. Until June 30, shoppers who visited both a physical location and the website spent 1.5 times more money than a customer who only went to a store or bought online alone. , Allbirds said.

The company highlighted its Boston Back Bay location to show the benefits of opening a store. In the three months since the store launched 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. Web Smith, founder of 2PM, recently wrote in a note to subscribers that direct-to-consumer brands should take a closer look at opening stores in second- or third-tier cities, such as Columbus, Ohio, for retailers. locations.

“The DTC industry is a club and clubs have rules made to be broken,” Smith said. “For retailers brave enough to think outside the box, breakthrough opportunities 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, adding that its average sales per square foot was $ 2,900. Apple, by comparison, would be 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 generate repeat purchases and, in turn, have a positive impact on our sales retention rate,” said Warby Parker.

The company offers in-person eye exams at 91 sites. The service gives some people an additional reason to make the trip.

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 shopping centers”

The online sales model can only be a starting point for Warby Parker, Allbirds and the businesses that follow their path.

Forerunner Ventures founder Kirsten Green says she doesn’t today use the term direct-to-consumer or DTC to describe companies like Warby Parker, Allbirds, Bonobos and Birchbox.

“These are just businesses that all started online because it was efficient,” she said. “You can build a site, you can start wooing customers, and you can start learning 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, Green 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 about malls,” Green said. “You could develop a mall strategy and create 200 to 400 stores.… Now I just think we’re flipping that equation, and the initial engine is to build a stronger online presence.”

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

But many companies have found ways to manage these costs. Target, for example, was the first to use its big box locations as mini-distribution centers to get the most out of its real estate.

It encourages shoppers to collect their orders online from its car parks. 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’ll have to think about meeting the client where they are. And they are in a lot of different places.”

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

“It is a positive affirmation for the model that this first class [of DTC brands] is starting to come out, because so far there have been some good acquisitions… but the market was not very ripe for these IPOs, ”he said.

“Now that the market is apparently starting to tolerate some of these ideas – and especially if they are successful with these business units – it’s going to involve a second wave of digitally native companies trying to follow in those footsteps,” he said. .

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