How to Grow Your Retail Brand, Lessons From Starbucks & Others
How do I scale my business is a question that has kept many CEOs up at night. A great idea, product or service is one thing, mass adoption is another. In the direct-to-consumer space many brands have bumped into the same challenge, it’s hard to grow online past a certain point. Most retail spending happens offline and acquiring customers digitally has its limits financially. What’s a company to do? Most successful direct to consumer brands end up changing their business model either by selling their merchandise via wholesale partnerships or they open stores.
For a retailer like Starbucks that has always operated in the bricks and mortar space, an aggressive store expansion leveraging corporate owned instead of franchised stores has fuelled its growth.
If you are curious about how several well-known brands managed to reach a much larger market then consider these growth stories.
1. Dirty Mellon
In the beginning beverage maker Dirty Lemon like many direct to consumer brands used Facebook and Instagram to market its products. It even designed product packaging specifically to fit on a 2 x 3-inch screen and focused on a minimal (a.k.a “bland”) aesthetic. But over time the brand found digital marketing to be cost prohibitive.
“Having advertised with Facebook and Instagram since very early on, we saw the cost to acquire customers rise significantly, and it's at a place now where it's just unsustainable. I think that's happening because brands that have historically relied on traditional advertising methods are now shifting their ad dollars to online and to Facebook and Instagram. When that marketplace gets flooded with demand, it raises the price to connect with and acquire customers. As the prices rise and more advertisers enter the marketplace, there was a point for us that it no longer made sense to spend millions and millions of dollars on Facebook and Instagram” said Zak Normandin.
“So as the pendulum swings from traditional brands going to digital and away from retail, we're doing the opposite, shifting to retail and away from digital. As a young brand, there's only so many levers we can pull to reach the broader mass market. Shifting to retail is a great way to connect with a local audience but also have an impact on the national scale,” says Normandin.
As with most direct to consumer brands an online only business can only take you so far. To reach a larger customer base brands have to broaden their distribution points. It is easier to discover new products in a physical environment when a consumer is already on a shopping trip and happens to notice an interesting new product. How man/y times have you discovered a new product simply by trying free samples at Trader Joe’s?
Seeing the writing on the wall, last year Dirty Lemon closed a deal that places its beverages at over 500 Walmart stores in the Unites States. While some argue this move may hurt the cachet of the brand, to reach high levels of growth you can’t stay niche forever.
Normandin has called selling its product at Walmart as “the only way forward.” “If you look at the majority of beverage sales, they are either coming from Walmart, Target or Kroger, so we see this as an opportunity to acquire customers profitably” said Normandin. “When you look at what’s happened with Casper and a lot of direct-to-consumer companies that are getting hammered in the public market, it is because they’ve focused so much on spending whatever it takes to acquire customers and drive-top line growth. They’re losing a lot of money.”
2. Bonobos
If you have ever been on the hunt for a nice fitting pair of pants either for yourself or for a loved one you may have shopped at menswear retailer Bonobos. Like many brands it started from humble beginnings by selling just pants, pants that fit better than most. The founders, Andy Dunn and Brian Spaly sold pants designed by Spaly out of the back of their car and at house parties in the beginning. “So here we were running around school having guys try on pants. Guys are like dropping their pants behind parked cars and trees, giving us checks and cash to buy the product. At some point we woke up and we had tens of thousands of dollars from selling pants and that's when you can kind of humbly say to yourself, 'Maybe we're on to something.'”
After selling thousands of dollars in merchandise in a haphazard fashion the co-founders launched Bonobos’ direct to consumer website in 2007. Within the first six months online the brand projected it would make a million dollars within the first year alone. After a year and a half of growth Bonobos started to think about expanding into new categories. One of those categories was men’s shirts.
While men’s shirts sounded like a logical next step Bonobos found it wasn’t having the success it expected in selling that product online. Bonobos realized it might be easier to move the product by having a physical presence. Bonobos then opened a small fitting room within the lobby of its headquarters where customers could try on shirts. Sales picked up after customers were able to touch, feel and try on merchandise.
Building on the success of selling out of its headquarters in 2011 Bonobos opened its first physical store location called a “guideshop”. Guideshops carry all sizes and colours offered within each style of merchandise sold by Bonobos. The store is essentially a clothing showroom where customers can look at and try on merchandise for size and fit. If a customer likes what they try on they can have their purchases shipped to their home. Customers shopping at a guideshop are also provided with the assistance of a stylist who helps the customer find the right item with the right fit.
Speaking about its guideshops, Dunn has said: “you don’t have anyone manning a stockroom or playing defense against changing rooms where customers are dumping inventory in a corner. You don’t have the same folding nightmare or visual presentations nightmare.” Bonobos now has more than 60 guideshops.
Not too long after moving offline, Bonobos struck a deal in 2012 to sell its merchandise at Nordstrom. Speaking about the need to have a physical presence Dunn said the brand's "most profitable business" is its partnership with Nordstrom where Bonobos clothing is sold in Nordstrom stores. In the past Dunn has said that Nordstrom and its guideshops fund the losses from Bonobos’ eCommerce business. Dunn has also said that e-commerce is a "tremendously challenging, frequently unprofitable business." Bonobos was purchased by Walmart for $310 million in 2017 and now Bonobos clothing can also be found at Walmart.
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3. Quip
Move over Oral-B, brushing your teeth has never been so stylish. When Quip launched its stylish toothbrushes in 2015 it didn’t take long for the product to be a hit with consumers. If you are one of the over one million people that are part of Quip’s subscription service then you know what a difference using an electric toothbrush can make.
After launching in November 2015 just a little over a year later Quip had sold 100,000 toothbrushes. Many people start direct to consumer businesses with an idea that physical retail is dead or if it’s not dead it’s on the way out. But it isn’t too long before a successful direct to consumer business owner starts to realize two things. The first is that the cost of acquiring customers online is higher than in-store. For example, in 2019 Wayfair spent more than $1 billion in advertising on $9 billion in sales. It also lost nearly $1 billion that year.
The second shock comes in the form of logistics costs. Last mile delivery costs are expensive often causing retailers to lose money on each order of a certain size especially if the customer is not subsidizing the cost.
With these issues in mind what should a fast growing direct to consumer brand like Quip do? It chose to go into wholesale with a deal with Target in 2018. What is old is new again. At the time of the deal it allowed Quip to place its products on the shelves of 1,800 Target stores. “Core to Quip’s mission is accessibility. The product is positioned to help improve behaviors and get people more interested in their oral health, and we want to make that as accessible as possible. For some people, they’re already in Target doing a certain amount of product discovery and making purchases, so giving the consumer that option is really beneficial,” says Shane Pittson, Quip’s vice president of growth.
Quip is not the only brand to go wholesale. Several brands including Harry’s, Casper and Native can now be found on the shelves at Target. If the pandemic showed retailers anything it was the strength of omni-channel retailers. Target and Walmart simply have more traffic in their stores and on their websites than Quip could ever hope to generate on its own. You have to meet you customers where they are.
While a CPG brand can scale on its own to a certain level it often needs the help of someone else’s platform to get to the next level of growth. Coke would not be as popular as it is today if you couldn’t pick up a can of Coke your local corner store. The vast majority of retail sales in the United States still come from stores with 85.7% of retail sales in the third quarter of 2020 in the United States coming from offline retail.
Like Bonobos Quip also chose to introduce new products in order to scale. Over time Quip has expanded to sell kids toothbrushes, a refillable floss dispenser and an American Dental Association friendly gum. It also became as many would describe as overzealous in its pursuit of growth and acquired Afora a company providing an insurance alternative that offers dental care plans. Part of the reason for this move was to tap into a larger market. The dental products market is in the range of $10 billion to $15 billion in sales while the dental industry is approximately $130 billion in size.
Afora was the stepping stone for Quip to launch Quipcare: “an all-in-one platform to access simple, affordable, (and dare we say) delightful dental care.” After a trial in New York of the service which did not produce the intended results Quip has deprioritized the initiative. Last February Quip laid off 10% of its staff, most of whom worked on growing Quipcare. This story illustrates some of the growing pains companies go through as they try to scale. Quip says that it is now focusing on its primary business of selling oral care products directly to consumers. A former Quip employee has said: "the issue was Quip was trying to do go down 10 different paths at once." “We were chasing other projects, and we're forgetting about the people who made the company."
4. Starbucks
From the start Starbucks has had a very aggressive expansion strategy. After former CEO Howard Schultz purchased Starbucks and its 17 locations in 1987 there were 165 locations by the time Starbucks had its IPO in 1992. Four years later Starbucks had 1,000 locations and two years after that it had 2,000 locations. Then between 1998 and 2008 Starbucks increased its number of locations from 1,886 stores to 16,680. That is a rate of expansion that is not for the faint of heart.
Schultz bet big on his business idea to provide a space where customers could have a coffee and stay a while and hasn’t looked back since. Starbucks opened its 30,000th store in 2019. This dizzying rate of expansion is regarded as one of the most ambitious expansions in retail in history. It also speaks to Schultz’s gargantuan level of belief in himself and an idea.
Many restaurants including McDonald’s, Subway and Wendy’s use a franchise model to spur growth. But most of Starbucks stores are corporate owned. Starbucks believes using a franchise model would dilute the quality of its products as well as the customer experience.
“We believed very early on that people's interaction with the Starbucks experience was going to determine the success of the brand ... And we thought the best way to have those kinds of universal values was to build around company-owned stores and then to provide stock options to every employee,” said Schultz. “It would have been hard to provide the level of sensitivity to customers and knowledge of the product needed to create those Starbucks values if we franchised.”
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