Retail apocalypse? How about a disruptor meltdown?

Discussion
Photo: Wayfair
Nov 13, 2019
Steve Dennis

A version of this article originally appeared at Forbes.com, where Steve Dennis is a senior retail contributor.

Dozens of digitally-native vertical brands continue to attract vast amounts of venture capital with a growing number reaching unicorn status. They also garner significant consumer interest and generally wreak havoc with the sales and margins of industry incumbents.

As such, it’s hard to argue that they haven’t been disruptive.

Well, there’s one problem. As time goes on, a significant number of these businesses are looking likely to be the Pets.com of the approaching decade. 

Already evident from the crashes of flash-sales and meal kits, the difficulties inherent in scaling just about any pure-play online retail business have only recently started to gain attention and are pushing virtually all of these brands to open the physical stores they once decried.

I’m not suggesting that none of these disruptor brands will turn out to be significant sustainable businesses over time. Yet, it seems eminently reasonable to ask whether part of the reason consumers love many of these brands is because their prices are artificially low and/or the service and product benefits built into their business models are over-engineered relative to the prospect of ever earning a decent return at the scale at which these brands need to grow.

The few recent retail disruptors that have gone public such as Chewy and TheRealReal are gobbling up market share, but their losses are significant and growing. Wayfair, founded in 2002, just posted a staggering quarterly loss of $272 million, up more than 80 percent. 

Recent comments by Everlane’s CEO on the sparse profitability of pure-play online, news that Walmart’s digital businesses are losing $1 billion annually and Nordstrom’s nearly $200 million write-down of Trunk Club are also hammering home the profitability hurdles facing digital-first startups.

The disaster that is WeWork along with the less than stellar Uber IPO will likely cause investors to take a closer look at the underlying economic reality of fast-growing, cash-devouring businesses. Whether the digital natives can scale the steps into physical retail will also likely face heavy scrutiny.

It’s convenient to say that “these are still early days” and sizable investments are always needed to “build the brand” and put in the necessary infrastructure. Well, sometimes. 

DISCUSSION QUESTIONS: Do you see signs that many of retail’s digital-first start-ups are heading for a shakeout? How convinced are you that the investment community is losing patience with the path to profitability for many of these companies?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"If investors were less frenzied/school-of-fish-like about their decisions, I believe they’d see that many of these start-ups would be worth letting play out."
"The shine wore off those gee-whiz online companies because ultimately they didn’t work for customers."
"If investors want a big cash out from the retail sector’s upheaval there is money to be made but it’s in retail tech – not a physical product or brand."

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20 Comments on "Retail apocalypse? How about a disruptor meltdown?"


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Neil Saunders
BrainTrust

Steve is spot on with his analysis. Sure many legacy retailers have issues – but they are mainly the ones that have failed to adapt, invest and change to meet new patterns of demand. Outside of those, on an economic basis, the old model of retail works even if it is coming under more pressure. Many of the new entrants, such as Wayfair, have yet to prove themselves. Sure they’ve racked up massive revenue streams, but a lot of them do not make money. Any fool can sell a product and fulfillment service that costs $10 for $5 – and in doing so exert downward margin pressure on the whole market. But sooner or later the day of reckoning will come.

Casey Golden
BrainTrust
22 days 19 hours ago

Agree, this is a conversation that needs to be had!

Ken Cassar
BrainTrust

The disruption of retail that we’ve seen over the past quarter century has been a boon for consumers and a much needed wake-up call to a retail industry where the creative energy had been subsumed by the desire to maximize profit by replicating tired store formats again and again in mall after mall. While the past 25 years has been tough for retailers, it is making American retail better and stronger than it’s ever been. Kudos to the disruptors.

Lee Peterson
BrainTrust

I blame WeWork for this trend. Long term thinking is not exactly Wall Street/Private Equity’s cup of tea anyway, so it was only a matter of time until the trend (proved out by Amazon, by the way) ended and future fears – future meaning next year for Wall Street — set in. If investors were less frenzied/school-of-fish-like about their decisions, I believe they’d see that many of these start-ups would be worth letting play out.

Stephen Rector
BrainTrust

There will absolutely be a shakeout within the DTC brands – there are too many trying to sell the same thing – there are at least nine brands trying to sell DTC mattresses, seven sock brands and several selling $300 Italian-made shoes – how many customers are really out there that a.) need these items and b.) are going to be returning to buy again? I don’t think there are enough for all of them to survive and with that comes the end of the huge amount of funding supporting them currently.

Casey Golden
BrainTrust
22 days 19 hours ago

There are plenty of consumers for $300 and even $800 dollar Italian shoes. I’d be more worried about brands selling $60-$100 dollar shoes. However, they are all fighting over the same customers and funnel, making the customer experience of “shopping” absolutely unbearable. With 100 D2C brands focused on D2C, what consumer is going to be able to manage 25 of those relationships and stay subscribed to terrible emails? And no one will be downloading individual apps for every brand.

There is a reason the catalog business never had primary marketshare. Ecommerce is just a digitized catalog business with a higher “postage” cost.

Jeff Sward
BrainTrust

This whole article is a hugely welcome reality check. “Investing” in customer acquisition in one thing. “Investing” in customer retention above and beyond the rate of ever being able to make a profit turns out to be unsustainable. That’s not exactly new news, but there are disruptors and entrepreneurs who continue to think they are the ones who can beat the odds. And actually I am thankful for their revolutionary behavior. They make it possible for the evolutionary players to learn from their execution and results. Nothing wrong with being a fast, and profitable, second place in this environment.

Casey Golden
BrainTrust
22 days 19 hours ago

Investors need to acknowledge CAC, but measure CRC and LTV as key business indicators. Not enough companies are measuring and managing their CRC (Customer Retention Cost) with intention.

Dave Bruno
BrainTrust

I honestly never expected all – or even many – of these DNVBs to thrive in the long run. The evidence is overwhelmingly clear that sustained success almost always requires an omnichannel approach (digital and physical touchpoints). Heck, even Amazon realized they needed physical locations. Rather, I look at most DNVBs for what they truly are: inspirational and aspirational executions that help shape retail strategies for the future.

Cathy Hotka
BrainTrust

Steve’s right on all counts. And it’s not about the channel, it’s about consumer convenience. The shine wore off those gee-whiz online companies because ultimately they didn’t work for customers. We’ll keep seeing this evolution over time — it’s refreshing to see retailers have to compete this hard to retain their status.

Patricia Vekich Waldron
Staff

New brands bring excitement and energy. The key to longevity is to ensure there is a sustainable business model, market opportunity and differentiation in offerings.

Bob Phibbs
BrainTrust

Timely discussion with today’s NYT article The SoftBank Effect: How $100 Billion Left Workers in a Hole talking about all the money flowing into disruptors with little to show for it. Anyone can attract new customers to low prices but somebody pays the cost. The fact that so many are unprofitable seems to indicate that the Amazon model to outlast your competitors only worked for them and for a few others.

Shawn Harris
BrainTrust

The idea of positive unit economics being fundamental is catching up to digitally-native vertical brands. Critical to the planned success of these brands is that they own the market, and that scale would provide cover. Last I recall, none of these brands have an enterprise services business to help mitigate the losses in their retail business. Also note, it took Amazon almost 25 years to get here, oh and they also have an enterprise services business, as well.

Andrew Blatherwick
BrainTrust
Having created mayhem and destruction at many traditional retailers, we are now faced with many online retailers collapsing under huge losses. Well, surprise surprise. Many people in retail have said for some time that the business models of many online stores are not sustainable,. Research some time ago showed that only a very small percentage of online retailers were making any money, yet the private equity companies poured huge sums into supporting them allowing them to survive, grow and inflict further damage on the traditional retailers without ever understanding whether it was a sustainable business model. Even well-established traditional retailers have struggled to make any money out of their online business, so why should we expect the many and varied online retailers with little or no retail knowledge would be able to perform a miracle? The topic has been covered many times on this site – online retailers offering shorter deliver windows, free delivery and low prices does not add up and now we are seeing the reality. Does anyone remember the dot-com boom of… Read more »
Doug Garnett
BrainTrust

These observations from Steve Dennis are pure gold. Investors have been selling us on the mythology of pureplay online for decades (I heard my first pitch in 1997 — for a startup which was a massive failure and took down a venture company).

The problem isn’t that there’s not opportunity — but the combination of investor expectations for unicorn level success and the power of investors to control the message has led to an incredibly dysfunctional perception of these efforts.

Will investors wear out? That’s far harder to say. There is an incredible amount of capital desperately searching for high returns right now — and that leads to very poor choices with investing those dollars. We can hope they learn, but I’m skeptical that they will. As long as there’s a company around to exaggerate expectations beyond any level of realism, there will likely be an investor ready to buy into the fantasy.

Casey Golden
BrainTrust
22 days 19 hours ago

The shakeout is in full swing. There’s a reason the digital transition has been slow with traditional brands; the pay to play business model of “e-commerce” is inefficient and does not build a sustainable business. In the next five years we’ll see significant changes in retail as more retail technology solutions enter the market to solve these problems specifically for non discount-driven brands. The investment community should be losing patience, the distribution and growth strategies just aren’t mature enough for the money they’re raising. If investors want a big cash out from the retail sector’s upheaval there is money to be made but it’s in retail tech – not a physical product or brand. These are the next unicorns.

Ken Morris
BrainTrust

I have always thought that a true brand needs to have a brick and mortar presence. Commodity items are one thing online, but specialty retail and furniture need the multi-sense experience.

Return rates are still astronomical at 30% plus and with free delivery as the base line expectation, this is a tough business model to sustain. There will be a shakeout because at some point you need to make money from somewhere. Maybe it’s advertising or membership and not the product.

Nikki Baird
BrainTrust

I’ll add one more angle that hasn’t been explored yet. Disruption comes from innovation. You can argue whether an innovation is sustainable, or has a strong enough barrier to entry that prevents others from copying the innovation, or whatever. Steve does a great job in pointing that out. But a lot of the challenges facing some of these traditional brands that have acquired these upstarts is the fact that it is really hard to take an acquired innovation and turn it into lasting business value. It is probably THE singular most difficult way to innovate — acquire another company and try to bring it in house.

Perhaps the WeWork implosion and Walmart’s write-downs will help people be more considered and a little less enamored of these bright shiny objects, and a little more critical not just of the disruption itself, but also how they could possibly take advantage of it themselves.

Ricardo Belmar
BrainTrust

Steve is completely correct. Let’s face facts, there could only be one Amazon. If everyone could “get big fast” and succeed, every brand would hit unicorn status. The truth is, even the mighty Amazon needed non-retail businesses to supplement their retail business model.

Walmart (and others) write-downs will likely serve as a model for other brands or at the very least a reality-check. WeWork serves to show the world what happens when everyone takes a crazy pill and decides that any brand that calls themselves a tech company suddenly is one — reality-check: they’re not!

Retailers and brands that take these lessons to heart will come out ahead in the long run so long as they don’t succumb to the allure of “free money” from investors itching to give it to them to help “cover costs” while creating skyrocketing growth. Reality always catches up!

Bill Hanifin
BrainTrust

I find it interesting that in some cases, some of the disruptors have been “disrupted” themselves by fast-followers.

I considered that Casper was the leader in launching the online mattress business, however they were quickly joined by Purple and Leesa. Suddenly there is choice in a market that was only recently an eye-opener as a new DTC brand.

The exclusivity of the business model and hurdle to competitors should be something given greater consideration in this expanding online retail market.

wpDiscuz
Braintrust
"If investors were less frenzied/school-of-fish-like about their decisions, I believe they’d see that many of these start-ups would be worth letting play out."
"The shine wore off those gee-whiz online companies because ultimately they didn’t work for customers."
"If investors want a big cash out from the retail sector’s upheaval there is money to be made but it’s in retail tech – not a physical product or brand."

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