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

Getty Images Retail darlings Warby Parker and Allbirds launched on the internet and paved the way for other brands to follow their playbooks and hope for similar success.| Getty Images

Retail darlings Warby Parker and Allbirds launched on the internet and paved the way for other brands to follow their playbooks and hope for similar success.

Now, they’re betting big on real estate — not the web — to fuel future growth, filings with the Securities and Exchange Commission show. The path for online-first companies could depend on whether or not they are able to reap the advantages of physical stores.

Both businesses are synonymous with the phrase “direct to consumer” in retail. This strategy involves forging stronger relationships with customers by avoiding wholesale channels like department stores. DTC companies don’t have any brick-and-mortar stores.

Dozens — if not hundreds — of brands have debuted and labeled themselves in the DTC category in recent years. The products range from toothpastes and makeup to deodorants and toothbrushes.

Allbirds and Warby Parker are preparing to launch their respective products on the public markets. They’ve also entered an expansion phase, with ambitious goals. They will be held accountable by analysts and investors.

Brands following their lead will be affected by their success, which includes the rollout of additional physical stores.

Both businesses are losing money for one. It’s unclear when — if ever — will become profitable. Allbirds net loss was $14.5million in 2019, and it grew to $25.9million in 2020.

Warby Parker was able to break even last year, with a net loss of $55.9million.

However, opening new stores has its fixed costs. Brick-and-mortar retailers remain the best way to reach new customers. As they get ready to open their stores, Warby Parker is betting on the shops.

Allbirds is going public through an initial public offering, while Warby Parker is using a direct listing. Underwriters do not make shares public in the second case.

Experts say that an online-only model can only be sustainable for so many years. Experts say that the success of these companies’ public debuts can fuel more IPOs, or allow retail companies who have used a DTC model for exit strategy options.

“There was this early euphoria that there was a new model where you didn’t need stores anymore,” said Jason Goldberg, chief commerce strategy officer at advertising firm Publicis. The traditional model of business was outdated, with stores being the only option. But the new approach was to go directly to consumers, putting up websites and creating cool products.

According to Goldberg, companies are trying to figure out whether the current model can be sustained.

Goldberg said, “There is an area of infant growth in which you can succeed without stores. And it can be easy to gain customers.” A store is essential for any digitally-native brand to achieve a billion dollar in annual sales. They are an effective channel to attract customers and provide a low-cost way for them to do business.

Allbirds New York City retail location is in Manhattan’s fashionable SoHo district.

Source: Allbirds

Emory University assistant marketing professor Dan McCarthy keeps tabs on companies such as Casper Sleep, Figs, Revolve and Peloton as he monitors Warby Parker and Allbirds. Each relied on the internet to make sales.

They have not been able to generate a profit which may give investors cause for concern.

McCarthy explained that if you don’t have any revenue, it’s unlikely you will be a stock worth much in the long term.

Mattress maker Casper pivoted from its DTC strategy when it started selling in other retailers like Target. Since then, it has opened over 70 stores. This is yet another sign that a business initially driven by online sales has realized the value of real estate.

Allbirds, a sustainable footwear brand, was founded in Silicon Valley. The company said that it only has a small amount of potential stores to open, especially in the United States.

The company counted 27 retail locations globally as of June 30, according to an SEC filing.

Allbirds explained that the company expects to grow faster as its store inventory expands. We believe that our stores will be profitable and have attractive payback times. They also serve as capital investments. Our new locations are well-positioned to capitalize on physical retail’s recovery after the pandemic.

E-commerce made up 89% of the total company sales, while stores made up the remaining 91%. The Covid crisis forced the closure of its brick and mortar stores for several weeks. Allbirds stated that shoppers who went to both the physical store and online shop spent 1.5 times more than those who only visited a single location.

It cited its Boston Back Bay store as an example of the many benefits associated with opening a shop. The area saw a 15% increase in web traffic within three months of the opening of the shop in March 2019. In the same area, 83% of new customers were attracted by the company.

Companies don’t necessarily need to be in high-end markets such as Los Angeles or New York City, but they can still reap the rewards of store openings. Web Smith, founder of 2PM, recently wrote in a memo to subscribers that direct-to-consumer brands should look more closely at opening stores in second- or third-tier cities, such as Columbus, Ohio, for locations.

Smith stated that the DTC industry was a club with rules to be broken. There are many opportunities for breakthroughs that exist outside the traditional cities and strategies, provided retailers have the courage to step outside their comfort zones.

Warby Parker, a glasses manufacturer, said that it has more than 145 locations as of June 30, 2010. It plans to open between 30 and 35 new locations in the coming year, with an annual goal of expanding at this rate.

“Our retail stores are highly productive,” the company said in an SEC filing, adding that its average sales per square foot clocks in at $2,900. Apple is, by comparison, the most successful retailer according to this measure, with more than $5,000. per square foot. 

Warby Parker explained that the retail store serves as a marketing vehicle for new customers, driving repeat purchase and positively impacting our sales retention rate.

It offers eye care in person in 91 locations. Some people find the service more compelling than driving.

Warby Parker reported that 60% of its net revenue was generated by e-commerce last year. The remaining 40% was made up by stores.

Goldberg stated that almost all of the first-generation retail businesses have reached a plateau. They’re looking at different store models to keep their growth going.

‘It used to be all about malls’

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

Forerunner Ventures founder Kirsten Green says she does not use the term direct-to-consumer or DTC to describe businesses such as Warby Parker, Allbirds, Bonobos and Birchbox today.

These are businesses that were all founded online for efficiency, she explained. You could set up a website, start attracting customers and then you would be able to start learning, as you already had the data you needed to monitor customers’ behaviour.

These experiences made it easier for retailers to open stores and avoid overbuilding. Companies have been in financial trouble due to rapid expansion, and many businesses are now in bankruptcy.

Green explained that it used to all be about the malls. You could create a strategy for a mall and then put up 400 to 200 stores. It’s a complicated equation. I believe we need to flip it. The initial driving force is growing the website presence.

Warby Parker and Allbirds understand that the advantages of having more stores can come at higher fixed costs, as well the potential liability associated with a lease.

However, many companies have discovered ways to control these costs. Target is an example of a business that has used its large-box stores as mini-fulfillment centres to maximize its real estate.

Target encourages customers to place orders online from its lots. Target uses its stores to reduce shipping and transport costs.

Green stated that it is possible to build an online business up to a certain scale. But the truth is that if scale is your goal, it is important to meet the customer at their place of business. They are located in many different locations.

Warby Parker, Allbirds and Allbirds decided to increase their product offerings in order to achieve profitability. Publicis Goldberg says that other companies following their online-first strategy will benefit from their success in public appearances.

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

“Now that the market is starting to seemingly tolerate some of these ideas — and especially if they’re successful with these unit economics — that’s going to involve into a whole second wave of digitally native companies trying to follow in those footsteps,” he said.

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