I loved the store. Every time I was in NYC, I'd faithfully visit their store in the Hudson Yards. It was so cool. I never bought the cool bone conduction headphones. But something didn't sit right with me about the model. I wrote about it. Here is a reproduction of the essay, edited for today's reality.
B8ta tried to push forward to 'New Retail'. The pandemic wreaked havoc. But the model had cracks even before.
Here's the reproduction of the essay I had written in September 2020, with some parts struck out and updated in italics.
TLDR: There are only two channels in retail – ones that drive footfalls/traffic and another that drives distribution. If you are a marketing channel, the traffic you drive has to be substantial that the bottom of the funnel generates enough revenue to justify the channel. If you are a sales channel, you need to deliver $ (even if in an opaque way). The Retail-as-a-service model does not deliver on both these counts. The pandemic just made that clear faster.
I love Bill Gurley.
He says something that goes like this - "You can sell a dollar worth of an item for 95 cents and people will love it. You would even sell a billion dollars worth of it. But it’s not a business because it doesn't make economic sense."
New business models, however, are hard to pass judgment on. I am no Bill Gurley. But I have a daughter and I learn from watching her make tradeoffs that are untenable even for someone as street-smart as her. She doesn't like learning Tamil (ironically, our mother tongue) but knows that she won’t get the best student award if she doesn’t perform well in this subject. She kicks and screams. She takes refuge in her Harry Potter book collection until she can no longer postpone studying Tamil for her exams.
'Retail as a service' companies behave in a similar fashion. They kick and scream that wholesale channels are not conducive for DTC brands. DTC brands have embraced wholesale – Amazon, own stores, wholesales channels – the whole nine yards that go beyond the Hudson Yards showroom experience.
Here was my bear case:
Brands apparently don't like wholesale channels. They cannot 'control' the experience or get the data about their consumers. That is the central thesis of 'New Retail'.
(This is still true. But all channels don't have to be all things for brands. Some channels deliver data and revenue. Some deliver revenue at a huge scale.)
Retail-as-a-service promises that sales would eventually happen online or through 'Scan and go'. But life outside SoHo and Palo Alto works differently. Middle America and well, all of America except SoHo and Palo Alto need retail and go to shops to buy things they need. Heck, even in SoHo 'Scan and Go' doesn't work well yet.
(This is true even today notwithstanding Super Bowl ads.)
The sobering reality is that eCommerce in the US is only 15% of retail if you ignore Amazon. I don't support abusive relationships but that elephant in the room got there before the brands came into being. You can't go to its living room and complain that there isn't space. Anyway, for D2C brands there are two and a half options to address 'Brick & Mortar' retail - doing own B&M stores, going to wholesale channels or the warm and fuzzy pop-ups.
(This is what brands got right but 'Retail as a service' got wrong. Brands embraced all channels in spite of the power imbalance. Reach trumps control or experience.)
To see how weak the proposition always was, read this slightly exaggerated manifesto I had put out back then for this model.
Consumers use the big brand names as a proxy for trust. Now brands can build trust with YouTube videos. Trust-building is democratized. But you could only build a brand based on trust if you are open to slow cooking. Or you could toss it in the oven and what comes out is brandless :P!
Exposure is not brand-building.
As single SKU brands (once upon a time called "Digital Natives") launch, they need consumer feedback and the more real-time the feedback is the better it is. If you can track the consumer feedback through sensors and other cues right at the moment of truth, it would be awesome. Previously you'd set up a shop at a mall. Feedback was a side benefit. But not all could afford their own shops. Now you go to B8ta or NeighborhoodGoods to get feedback.
There is something uncomfortable about this value proposition. It really looks like a lot of lipstick on a cheerful pig.
While 'New Retail' claims to give customer data, the scale is nearly not as compelling as traditional retail. Product feedback is good but there is a selection bias. The SoHo crowd cannot make a brand succeed. They may give the start. Middle America is where DTC brands have to go to grow (that is if they want to be big). 'New Retail' does not want to be in Middle America.
So for brands, 'New Retail' was real-life A/B testing, session recording, and heat mapping platform for testing one segment that lives in urban centers. The 'Tech company' tag also isn't very appropriate. In the A/B testing software space, the software could potentially plug into every eCommerce website and stay there forever (well, almost). But in the case of 'New Retail', there is a limit to how many brands they can sign. Churn is a part of the design. There isn't a bigger physical space to upsell to the brands.
One of the top mall owners privately told me that the cute newsstand model ('New Retail') is an antithesis to how they make money. They need big brands with big shops or DTC brands with a need for big fulfilment space. The math doesn't work for them otherwise. It's not a stretch to assume that the 'New Retail' has even lesser ability to monetize space.
That brings us to the next revenue stream – Analytics.
The software on top of the tracking infrastructure, which is often enabled by a real tech company, is just a visualization layer. I would argue that there are a lot of 'small data' problems under the hood that needs to be solved before real analytics can happen. Is 'New Retail' a modern-day alternative to the likes of Nielsen? I don't think that is the case either. Neither their scale/medium nor their reluctance to be a 'sales' channel allows them to be a reliable source of consumer data. As in-store tech becomes more and more ubiquitous, large department stores could give the same anonymized data about shopper behavior to brands like the 'New Retail' players do today and maybe even some consumer data. If not anything else, wholesale gives a whole lot of sales.
'Pretty UI + a sub-let space + maybe some benchmarking' might make sense for brands in their early days, but what's the economic incentive for embracing 'New Retail'?
I like the thesis that there would be more brands striking out as independents and there is no compelling need for retail to be the only 'point of sale' or 'point of discovery' destination in the offline world. Tardy as it may be, 'scan and go' will succeed in the future. 5G will enable better analytics and personalization without the need for a human assistant to be there to deliver the 'wow' moment. But, how far is that future, and will the V1.0 of 'New Retail' survive and morph?
I am rooting for the experience it brings and the visibility it enables. But it's not nearly as exclusive and as compelling given the current scale. What's your bull case?
It turns out that DTC brands embraced wholesale and marketplaces with fervour. The digital acquisition isn't easy as it used to be. Wholesale and marketplaces bring scale benefits for sales and distribution. Own stores and showrooms do permanently what 'Retail as a service' promised to offer temporarily. It was not compelling enough.
We wrote a detailed essay about DTC brands setting up physical stores, deeper study on the state of the DTC market. Our research team has been on it for months now, and the findings are truly fascinating. Here is Werner Geyser from Influencer Marketing Hub with his insights of DTC industry based on our research data.
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