Why Digital Retail Darlings Warby Parker and Allbirds Are Betting Big on Stores to Grow Ahead of Public Debuts

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  • Retail darlings Warby Parker and Allbirds launched their businesses on the internet and paved the way for so-called direct-to-consumer brands to follow their playbooks.
  • Both businesses are unprofitable, and they're betting on opening more brick-and-mortar locations to bring future growth.
  • The success of these companies' public debuts will carry implications for other so-called DTC businesses.

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. Whether they reap the benefits of physical stores could shape the path ahead for other online-first companies.

The two businesses have become synonymous with the term "direct-to-consumer" in the retail industry. The strategy involves avoiding wholesale channels, such as department stores, to forge stronger relationships with customers. DTC companies have few or no brick-and-mortar 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've entered a fresh expansion phase with aggressive goals. Investors and analysts will hold them accountable.

The success of their next moves, including the planned rollout of more physical stores, will likely carry implications for the brands following in their footsteps.

For one, both businesses lose money. It's unclear when — if ever — they'll become profitable. Allbirds' net loss totaled $14.5 million in 2019 and grew to $25.9 million in 2020.

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

While opening up stores comes with added fixed costs, brick-and-mortar retail remains the best channel to find new customers. Warby Parker and Allbirds are betting on shops as they prepare to go public.

Allbirds is going public through an initial public offering, while Warby Parker is using a direct listing. In the latter, shares are not taken public by a team of underwriters.

An online-only model is only sustainable for so long, experts say. 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 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. "Like stores and the traditional business model was all old school, and the new way of doing things was going directly to the consumer ... slapping up a website and inventing a cool product."

Companies are figuring out the model is not sustainable, Goldberg said.

"There's a certain phase of your infant growth where you can achieve success without stores, and it can be really easy to acquire customers," he said. "But no digitally native brand has achieved a billion dollars in annual revenue without a store. You need those stores as a cost-effective customer acquisition channel at some point."

Allbirds' New York City retail store is located in Manhattan's trendy SoHo neighborhood.
Source: Allbirds
Allbirds' New York City retail store is located in Manhattan's trendy SoHo neighborhood.

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. They all have predominantly relied on the internet for sales.

But some of them, chiefly Casper and Peloton, have also struggled to make a profit, which could give potential investors pause.

"If you can't generate any profits, then I'm sorry, you're not going to be a valuable stock in the long run," McCarthy said.

Mattress maker Casper pivoted from its DTC strategy when it started selling in other retailers like Target. It has also since opened more than 70 of its own stores. It's further evidence of a company initially fueled by web sales seeing the benefits of real estate.

Allbirds, the sustainable shoe brand that got its start in Silicon Valley, said it has "just scratched the surface" of its potential to open stores, particularly in the United States.

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

"As our store fleet expands, we expect our growth to accelerate, as compared to 2020," Allbirds said. "We believe our new stores will also be highly profitable, have attractive payback periods, serve as good capital investments, and be positioned well to take advantage of physical retail's recovery from the pandemic."

The company said e-commerce accounted for 89% of total sales last year, and stores made up the rest. Its brick-and-mortar shops were shut for weeks in 2020 due to the Covid crisis. Through 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 shopped online alone, Allbirds said.

The company pointed to its Boston Back Bay location to show the benefits of opening a shop. In the three months after the store's debut in March 2019, web traffic in the area rose 15%. The company saw 83% more new customers in the neighborhood.

To leverage the benefits of stores, companies may not need to target expensive markets like New York City or Los Angeles. 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.

"The DTC industry is a club and clubs have rules made to be broken," Smith said. "For the retailers with the courage to think outside of the box, opportunities to breakthrough can be found far outside the cities and strategies of the status quo."

Meanwhile, glasses 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 expand at that pace annually.

"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, for comparison, has been reported to be the highest-grossing retailer in terms of this metric, bringing in more than $5,500 in revenue per square foot. 

"Our retail stores serve as valuable marketing vehicles for introducing new customers to our brand and driving repeat purchases and, in turn, positively impact our sales retention rate," Warby Parker said.

The company offers in-person eye exams in 91 locations. The service gives some people more of a reason to make the trip.

Warby Parker said its e-commerce business accounted for 60% of net revenue last year. Stores made up the remaining 40%.

"Almost every single one of these first-generation retail companies has hit a plateau," Goldberg said. "And they're exploring some flavor of a store model to continue their growth."

'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 just businesses that all started online because it was efficient," she said. "You could put a site up, you could start courting customers, and you could start learning because you had all of these touch points to track customers' behavior."

Those experiences have made retailers in this "new generation" smarter about opening up stores and avoiding overbuilding, Green explained. Rapid expansion has gotten companies in trouble in the past and pushed numerous businesses into bankruptcy court to get out of leases.

"It used to be all about malls," Green said. "You could figure out a mall strategy and put up 200, 400 stores. ... Now, I just think we flip that equation, and the initial driver is building the presence online."

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

But many businesses have found ways to manage those costs. Target, for example, has pioneered using its big-box locations as mini-fulfillment centers to get the most out of its real estate.

It encourages shoppers to pick up online orders in its parking lots. Target leverages its stores, in turn, to lower costs associated with shipping and transportation.

"You can build a business of a certain size online," Green said. "But the reality is, if you really have scale in mind, you are going to need to think about meeting the customer where the customer is. And they are in a lot of different places."

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

"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 evolve into a whole second wave of digitally native companies trying to follow in those footsteps," he said.

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