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

Michael Buckner | Getty Images

Retail favorites Warby Parker and Allbirds launched on the Internet, paving the way for other brands to follow their playbooks and hope for similar success.

Now they’re betting heavily on real estate – not the internet – to fuel future growth, filings with the Securities and Exchange Commission show. Whether or not they reap the benefits of physical stores could pave the way for other online first businesses.

The two companies have become synonymous with the term “direct-to-consumer” in retail. The strategy is to avoid wholesale channels like department stores in order to build stronger customer relationships. DTC companies have few or no stationary locations.

Dozens – if not hundreds – of brands have made their debut in the DTC category over the past few years and labeled themselves. The product range extends from make-up and pajamas to toothbrushes and deodorants.

As Warby Parker and Allbirds prepare for their respective launches, they have entered a new phase of expansion with aggressive goals. Investors and analysts will hold them accountable.

The success of their next steps, including the planned rollouts of more physical stores, is likely to have an impact on the brands that follow in their footsteps.

For one thing, both companies are losing money. It is unclear when – if at all – it will become profitable. Allbirds’ net loss was $ 14.5 million in 2019 and increased to $ 25.9 million in 2020.

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

While store opening comes with additional fixed costs, brick and mortar retail remains the best channel for finding new customers. Warby Parker and Allbirds are betting on deals as they prepare to go public.

Allbirds goes public through an initial public offering, while Warby Parker uses a direct listing. In the latter case, the stocks will not be listed on the stock market by a team of underwriters.

A purely online model will only last for a limited time, experts say. The success or failure of these companies’ IPOs could spur further IPOs or prompt retailers that have followed a DTC model to look for other exit strategies.

“There was this early euphoria that there was a new model where you no longer needed stores,” said Jason Goldberg, chief commerce strategy officer for advertising firm Publicis. “Just as business and the traditional business model were very old-fashioned, and the new way of doing things directly would go straight to the consumer … gossiping a website and inventing a cool product.”

Companies are finding the model is unsustainable, Goldberg said.

“There is one stage in your baby’s growth that you can be successful without doing business and it can be very easy to get customers,” he said. “But no digital native brand has generated $ 1 billion in annual sales without a store. At some point you will need these stores as a cost-effective channel for customer acquisition. “

Allbirds’ New York City retail store is located in Manhattan’s trendy SoHo neighborhood.

Source: Allbirds

Dan McCarthy, Assistant Marketing Professor at Emory University, oversees companies like Casper Sleep, Figs, Revolve, and Peloton while overseeing Warby Parker and Allbirds. They have all relied on the internet for the most part to sell.

But they also struggle to make a profit, which potential investors might pause.

“If you can’t make a profit then I’m sorry, you won’t be a valuable stock in the long run,” said McCarthy.

Mattress maker Casper turned away from its DTC strategy when it started selling at other retailers like Target. In addition, it has opened more than 70 branches of its own since then. This is further evidence that a company originally powered by web sales saw the benefits of real estate.

Allbirds, the sustainable footwear brand that started in Silicon Valley, said it had “only just scratched the surface” of its store-opening potential, particularly in the US.

As of June 30, the company had 27 retail locations worldwide, according to an SEC filing.

“With the expansion of our store fleet, we expect that our growth will accelerate compared to 2020,” said Allbirds. “We believe our new businesses will also be highly profitable, have attractive payback times, serve as a good capital investment, and are well positioned to benefit from the brick and mortar retailer’s recovery from the pandemic.”

The company said e-commerce accounted for 89% of total sales last year, with stores accounting for the rest. His stationary shops were closed for weeks in 2020 due to the Covid crisis. As of June 30, shoppers who visited both a physical location and the website were spending 1.5 times more money than a customer who just walked into a store or made online purchases by themselves, according to Allbirds.

The company referred to its Boston Back Bay location to demonstrate the benefits of opening a store. In the three months after the store opened in March 2019, web traffic in the region increased 15%. The company saw 83% more new customers in the neighborhood.

To take advantage of doing business, businesses 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 take a closer look at opening stores in second- or third-tier cities like Columbus, Ohio.

“The DTC industry is a club and clubs have rules that must be broken,” said Smith. “For traders with the courage to think outside the box, there are opportunities for breakthroughs far outside the cities and strategies of the status quo.”

Meanwhile, eyewear maker Warby Parker announced that it had more than 145 stores as of June 30. The company plans to open 30 to 35 locations this year and plans to expand at this pace every year.

“Our retail stores are highly productive,” the company said in an SEC filing, adding that average revenue per square foot is $ 2,900. For comparison, Apple is the top-selling retailer on this metric, with sales exceeding $ 5,500 per square foot.

“Our retail stores serve as valuable marketing tools to bring new customers to our brand and encourage repeat purchases, and in turn have a positive impact on our retention rate,” said Warby Parker.

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

Warby Parker said his e-commerce business accounted for 60% of net sales last year. The remaining 40% made up the business.

“Almost every single one of these first-generation retailers has hit plateaus,” said Goldberg. “And they are exploring a taste of a store model to continue their growth.”

“It used to be all about shopping malls”

The online sales model may just be a starting point for Warby Parker, Allbirds, and the companies that are on their way.

Kirsten Green, founder of Forerunner Ventures, says she no longer uses the term direct-to-consumer or DTC to describe companies like Warby Parker, Allbirds, Bonobos and Birchbox.

“These are just companies that all started online because it was efficient,” she said. “You could set up a website, woo customers, and start learning because you have all of these touchpoints to track customer behavior.”

These experiences have made this “new generation” of retailers wiser at opening stores and avoiding overbuilding, Green said. The rapid expansion has caused problems for companies in the past and has pushed numerous companies to bankruptcy courts to get out of the leases.

“It used to be about shopping malls,” said Green. “You could come up with a strategy for a mall and set up 200, 400 stores … well, I think we’re going to flip that equation and the first driver is building the online presence.”

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

But many companies have found ways to manage these costs. Target, for example, has used its big box locations as mini fulfillment centers to get the most out of its properties.

It encourages shoppers to pick up online orders in its parking lots. Target, in turn, uses its stores to reduce shipping and transportation costs.

“You can build a business of a certain size online,” said Green. “But the reality is, if you really think about scaling, you have to think about meeting the customer where the customer is. And they’re in a lot of different places.”

Warby Parker and Allbirds have decided to expand their offerings to become profitable. The success of their public debuts will impact other companies that have followed their online-first model, according to Publicis’ Goldberg.

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

“Now that the market seems to start to tolerate some of these ideas – and especially if they are successful with this one-size-fits-all economy – a whole second wave of digitally native companies will emerge trying to follow in these footsteps,” he said .