The Problem With “Warby Parker for X”
Direct to consumer online-only retail is not disruptive because its online. Do not mistake good marketing for a new and innovative business model. Warby Parker was a special case driven by very interesting market dynamics that don’t apply to the other companies in the space. Let’s dive in and take a look.
Over the last few years there has been a surge in new direct-to-consumer online-only companies, particularly in the apparel space, companies like Everlane, Pickwick & Weller, Beckett Simonon, and Pistol Lake. These new models have been framed as disruptive innovations by investors, the media, and of course the startups themselves, but the fact is that they are not offering something that is fundamentally different from the market incumbents from a business model perspective. These verticalized retailers are mostly trying to replicate what Warby Parker has accomplished with eyewear, but unfortunately that category had very specific advantages that don’t apply to other vertical apparel segments in general. Warby Parker used online distribution to put the first chink in the armor of a huge monopoly, Luxottica.
The Lowdown on Luxottica (more info here):
- Luxottica is a $20 billion company.
- It makes glasses and sells them.
- 500 million people wear its products.
- 65 million pairs were sold last year.
- It owns Ray Bans and Oakley. It makes glasses for other brands it does not own, including Ralph Lauren, Chanel, Prada, Burbury, Prada, Tiffany, and many more.
- It owns glasses stores Lenscrafters, Pearle Vision, Oliver Peoples, Sunglass Hut and others.
- It owns Eyemed, the nation’s most popular vision insurance company.
Breaking this monopoly is the reason Warby Parker has been so successful. They were able to cut the cost of designer glasses in half while managing 60%+ operating margins and doing so while still donating a free pair for each one they sell.
Online Only Apparel Retailers
Unlike Warby Parker, who was offering something fundamentally new in designer quality glasses at half the price, the online only apparel retailers fundamentals are already very similar to the incumbents in terms of price, quality, and underlying costs.
These new online-only apparel brands claim to bring you designer retail without the middle-man. I bet you can’t name one direct to consumer designer retailer that sells glasses that existed before, but you probably have heard of some designer direct-to-consumer retailers that sell apparel or footwear: J. Crew, Banana Republic, American Apparel, Gap, Aldo, and many more.
These new brands often claim their advantage is eliminating the middleman and the markups that go with them, but these are straw-man middlemen. These brands compete with name-brand vertical retailers, not the designer brands they claim to compete with. Their economics are strikingly similar to incumbent retailers and their online only nature helps margins a lot less than they claim.
Looking at the numbers, J. Crew, Banana Republic, and Gap have COGS (Cost of Goods Sold) of around 60% of total revenues. Online-only retailer Everlane sells shirts they claim to make for $6.70 for $15. Their cost of goods is already at 45% of revenues before even factoring in merchandising, warehousing, and distribution costs. (which big brands are required to include in their COGS calculations). Beckett Simonon says they have similar COGS of 60%. This isn’t any different than the COGS of the big direct-to-consumer brands. The difference isn’t made up in selling, general and administrative expenses ￼either as data points indicate that online only brands have seen that those costs approximate the cost of retail stores themselves (as we will see in a minute).
Growing Up Offline
As these new online-only brands continue to seek growth it seems likely they will pursue distribution across all available avenues. If there is a positive tradeoff between lower margins and higher profits by increasing sales volume, it seems very likely that these brands will make those tradeoffs. The obvious application of this strategy is opening stores. We’re already starting to see this with formerly online-only brands launching forays into bricks and mortar retail.
Bonobos has launched a number of Guide Shops. Bonobos CEO, Andy Dunn, cited a couple reasons for this. First, they “found that about half of would-be customers would not order apparel online because they wanted to feel the merchandise.” and second, that “the cost of marketing a Web site and the cost of free shipping both ways was approximating a store expense.” We’re already seeing younger brands trend in this direction as well. Frank & Oak dipped their toes into the water of brick and mortar retail with a holiday pop up shop this year. In general, the trend is for these online-only stores to move offline as they grow.
So, if there isn’t really any underlying business model advantage why are we seeing so many of these new brands show up now? My theory is that there is now a critical mass of consumers that are now comfortable with shopping online has given brands two things they’ve never had access to before: low startup costs and broad early reach.
Until recently, starting a vertical retail brand meant opening a physical store and being limited in audience to customers in the nearby surrouding area. This meant paying for expensive retail space before having any idea if your concept would even work. Now brands can test their ideas and acquire audiences before they even launch. Flint and Tinder, a men’s underwear brand, raised almost $300k from over 5,500 backers before they even shipped their first product. Everlane had tens of thousands of signups before they even announced what they were building. Because of the proliferation of social media, new advertising technologies, and better analytics it is easier than ever to reach more consumers more often in ways that are more targeted for less money. It is easier than ever to build a brand from scratch.
These trends are enabling new brands to quickly discover where there are gaps in the single-brand retail marketplace and scale up quickly when they hit on something that works. Frank & Oak is filling the gap for J. Crew style men’s clothing at a sub-$50 price point. Bonobos filled the gap of a better fitting preppy brand, or maybe just an alternative to guys who are tired of Brooks Brothers. With some of these new brands its unclear what gaps they’re filling.
Who Will Win?
The brands that will do well are the one’s that understand that they are not going to win by leveraging better economics due to their "online only” nature, because these economics don’t exist. The brands that succeed will be the ones that are good at finding gaps left in the single-brand retail marketplace that previously have not been exploited due to the difficult pre-internet economics of starting a new single brand retailer, and agressively pursuing them.
Discussion on Hacker News here
Comments from Jesse, co-founder of Everlane here
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