Executive Summary

For hundreds of years, the playbook for building consumer product companies has incrementally improved. There have been marginal advances, but the fundamental premise of selling goods locally never wavered.

Then the internet happened, promising to fundamentally reshape the brand-building playbook. Today, there are more brands vying for the spotlight than ever before.

But will the new playbook—and the brands that use it—be as big, successful and long lasting as those that came before it? This report seeks to answer this question by looking into 13 different case studies of brands that started during the 20th and 21st centuries.

We created three different cohorts of brands for this study: Heritage Brands, Digitally-Native Phase 1 Brands and Digitally-Native Phase 2 Brands.

The Heritage Brands we studied, which include Comme De Garçons, Nike, Patagonia, Ralph Lauren, and Victoria’s Secret, all existed before the internet. They were mainly product and marketing companies that focused on designing and manufacturing reputable products, which they would then market and distribute through wholesale or in their own retail stores. Heritage Brands still hold the largest amount of market share, with a combined revenue of $45.5 billion, and live in the hearts and minds of consumers. Longevity is difficult to come by — almost 80% of companies traded on the U.S. stock market from 1960-2009 were gone by 2009. The average Heritage Brand we studied has been in business for 47 years. These early days and milestones provide crucial insights as to why these brands are still in business today.

The Digitally-Native Phase 1 Brands we studied, which include, Bonobos, The Honest Company, Happy Socks, Nasty Gal, and Warby Parker, all started between 2008-2012 and were a product of the internet era. We will refer to them as Digitally-Native Phase 1 Brands. These brands mainly took existing products and ported them over to the internet. They started building the skillsets needed to thrive online and used a digital-first mindset to evolve the core shopping experience. Phase 1 Brands brands have revenues in the low hundreds of millions of dollars, but because of their often sky-high valuations, their viability as either independent companies or potential acquisition targets is still unclear.

The newest brands we studied, which include Allbirds, Casper, and Away, were all founded after 2012 and also started online. However, shopping habits and social media have changed the ecosystem since Digitally-Native Phase 1 Brands launched. Digitally-Native Phase 2 Brands, as we’ll call them, are increasingly focused on building communities around their products and creating lifestyle brands from the beginning. These brands are growing faster, raising more money, and opening more stores than their Phase 1 and Heritage Brand counterparts. They are also performing better than the Heritage Brands did in their early days. Even so the future of Phase 2 Brands as long-lasting companies is still up in the air.

What follows is a detailed analysis of Heritage Brands and Digitally-Native Brands across six different vectors:

  1. How did the brands fund themselves in the early days?
  2. How long did it take for the brands to open their first stores and how many stores did they have after ten years?
  3. How many years did it take the brands to reach $10 million in revenue?
  4. How long did it take the brands to become profitable?
  5. How long did it take the brands to reach $100 million in sales?
  6. How long did it take the brands to run into their first financial crisis?

The best way to understand the new brand building playbook is to look at how it has changed since the old one was written. Only then can one determine the longevity of brands in the new era.

Methodology

All data in this report comes from publicly reported information, books, and data sources such as Pitchbook. We calculated averages or estimated when numbers from multiple sources differed. Because some of the brands we studied are private companies, we confirmed information to the best of our abilities, which included reaching out to each company individually. Most refused to comment, although we gave each of them an opportunity to.

All of the revenue, profit and acquisition amounts shown below for Heritage Brands and Digitally-Native Phase 1 Brands are adjusted for inflation at 2016 rates.

How did the brands fund themselves in their first ten years?

Building consumer goods is a capital-intensive business. It takes time and money to develop products, a process which happens long before the first sale. When Heritage Brands were starting out in the 1960s and early 1970s, institutional capital was not nearly as sizeable or available as it is today. These brands had to rely on different and more limited sources of income to bootstrap their companies and prove their worth.

Today, Digitally-Native brands have specific avenues to secure early capital and start building. Low bond yields in the current decade have led investors to flood the equity markets with money, giving venture capitalists more capital to invest than they know what to do with. Investors hope this influx of cash will help companies expand rapidly and dominate for years to come. The difference between the amount of money raised for Heritage Brands and the amount of money raised for modern brands during the first ten years is staggering, with Heritage Brands raising hundreds of thousands in their first few years and Digitally-Native Phase 1 and 2 Brands raising tens of millions.

Heritage Brands

When Heritage Brands were making their names, there was not much potential to quickly scale a brand and capital was much more constrained. Instead, Heritage Brands had to rely on more limited sources of money like savings, bank loans, family money, and operating cash flow in order to start and grow their companies. The type of investment needed to quickly scale a good idea was counterintuitive to banks, who wanted to back riskless ventures and give loans to small businesses that would become profitable right away and consistently pay them back.

Brands didn’t have much money to spend in order to continue fueling growth. They had to be profitable and quickly prove they were building a viable business. Early on, few brands spent as heavily on marketing as many Digitally-Native brands do today making the growth history of Heritage Brands slower and more methodical.

Victoria’s Secret

Victoria’s Secret did not have access to large sums of money when it first started. The idea for the company came about when founder Roy Raymond had to deal with purchasing lingerie for his wife in an old-fashioned department store filled with prying eyes and boring options. He saw a white space in the market and came up with the idea of selling sexier lingerie to the mass consumer in its own separate storefront, which would provide a more exciting and comfortable experience. Previously, shoppers mostly visited high-end stores like Frederick’s of Hollywood for special occasions like wedding nights. However, Raymond believed that the lingerie market could be larger if it were more accessible and thought up the idea for Victoria’s Secret.

In 1977 — the year the company was founded — he and his wife used their savings, money from friends, and a bank loan to get the idea off the ground. With this $322,000, they leased a storefront inside a mall in Palo Alto, California and created a store in the style of a Victorian boudoir. The company made approximately $2 million in its first year and continued to moderately grow, making around $15 million five years later in 1982. At that point, it had four storefronts and a growing catalog business, which helped spur sales. Before the internet existed, catalogs were the primary tool for reaching a national audience without needing to continually open stores.

Through its self-funding, Victoria’s Secret soon caught the attention of executives at holding company The Limited, who had never seen anything like it before. The holding company felt it could make the brand a household name and offered to buy it. Since Raymond was already having growing pains and was in search of additional resources, he decided to sell the brand to The Limited in 1982 for around $2.5 million. (The fact that he sold the business for 16% of revenue is emblematic of the times.) The Limited then poured capital into the store, growing it into the mega-brand it is today.

Ralph Lauren

Ralph Lauren was working as a men’s clothing salesman during the 1960s when he convinced Beau Brummel, a manufacturer, to produce his own line. He started off selling his products at specialty stores and, soon after, at Bloomingdale’s. After testing out the concept, he decided to create his own company with a $366,000 loan from his brother and the clothing manufacturer Norman Hilton. He used this money to design, manufacture, and distribute his new menswear collection, which he sold primarily out of Bloomingdale’s.

Ralph Lauren secured funding, partners and materials through his retail industry connections. Using Bloomingdale’s as a strategic partner and Beau Brummel as a manufacturing partner gave him an initial audience, in addition to expertise and capital. All of this put Ralph Lauren in a good position to sell profitably and grow sustainably in its early days. His unique aesthetic quickly got the attention of the fashion community as his clothes invoked a sense of upper-class American style that was highly regarded. He used this same approach to create a women’s line and other adjacent labels.

Digitally-Native Phase 1 Brands

The brands we studied that were founded between 2008-2012 almost exclusively went for professional and institutional money to launch and grow. They rarely used their own savings or took on debt. Instead, they billed themselves as tech companies — first-movers and fast-growers — in order to grab venture money early on, using terms like “direct to consumer” to play into the investor appetite for “disruption” at every turn. Many of these brands sought to redefine industries they felt were stale, much like Victoria’s Secret did for lingerie in the 1980s. Starting as digital-first companies and wielding the web as a crucial tool was attractive to investors looking to capitalize on the internet revolution.

Nasty Gal

Nasty Gal was founded in 2006 as an eBay store and grew quickly into a coveted brand among young girls in California. Early on, the brand made money by finding clothes from Salvation Army stores and then selling them online for a profit. This worked well since its founder, Sophia Amoruso, had a knack for branding products in a way that drew attention. She would style the clothes, take pictures, add captions and then post the products online to sell to the general public.

In 2008, Nasty Gal had around $215,000 in revenue, growing to $28 million only three years later in 2011. It raised $9 million in venture money in March of 2012, $40 million in August 2012, and then $16 million in February 2015. These consecutive infusions of capital forced a nicely growing business to hyper-scale since investors needed a big return in their expected fund lifecycle of seven to ten years. This transformed the company from one focused on profitability to one focused on rapid growth at all costs. This would prove ineffective and lead the company into turbulent waters, which is further discussed in the Financial Crisis section of this report.

Digitally-Native Phase 2

Brands founded after 2012 view themselves as companies that can scale even more quickly than their Phase 1 counterparts. They raised more capital more quickly to realize this supposed advantage.

Casper

Casper raised money right in the middle of the Digitally-Native boom, calling itself the Warby Parker of mattresses by delivering a superior product at a cheaper price. It raised institutional capital from the beginning, starting with $1.6 million in January 2014 and then another $15 million a few months later. Its valuation ballooned from $7 million to $59 million and its revenue reached $30 million by the end of the year. This money,strategic prowess and never-ending subway advertising resulted in the company becoming the top-of-mind choice in the easy-delivery mattress space, even though similar competitors already existed in the marketplace.

Away

The founders of Away also came of age right in the middle of the Digitally-Native boom. Steph Korey and Jen Rubio worked at Warby Parker in 2011 and helped the company grow from 20 to 300 employees. They felt that the future of retail was direct to consumer, so they looked for another category in which to cut out the middleman.

With their hope of growing fast and disrupting the travel industry, venture money was a no-brainer. This additional capital would help them leapfrog into a bigger business with the potential of owning a piece of the overall market. Away raised $2.5 million at a $7.2 million valuation in 2015 before it sold any product. It followed with $8.5 million at a $40 million valuation one year later and then $20 million at a $120 million valuation in 2017, with $28 million of revenue.

The founders have admitted that they raised more money than they were looking for, evidence that there is an abundance of capital available to brands in the current landscape.

Questions:

  • How do phased funding rounds change the strategy of the company? What are the risks associated with raising excess capital for growth in early stages? What are the necessary steps that an early brand should focus on to build brand awareness and sales?
  • What would it take for young brand founders today to build up the business acumen to create billion-dollar businesses from scratch with less invested capital? What affect would this have on the brand, the founders’ equity and the employees stock options?
  • What does a high valuation predict in terms of long-term investment potential? Can investors expect returns based on valuation? If not, what are the leading metrics for financial return?
  • Are Digitally-Native Brands spending more money than they need to by selling only direct to consumer and ignoring wholesale? Is it possible to acquire customers sustainably without wholesale?
  • Is the idea of cutting out the middleman overplayed or is it actually something that can help grow these businesses into successful competitors?

How long did it take brands to open their first store and how many stores do they have after ten years?

Heritage Brands and Digitally-Native Phase 2 Brands both took an average of three years to open their first stores, much shorter than the average of seven years it took for Digitally-Native Phase 1 Brands. Heritage Brands expanded into retail shortly after proving their product in wholesale and mail-order catalogs, giving them the ability to control the whole brand experience. This is similar to Digitally-Native Phase 2 Brands that are e-commerce first and are creating retail spaces where they can build “communities,” support the brand experience and give people a chance to physically try on their products. With conversion rates in retail spaces around 30% higher than online rates, retail has and always will be a smart strategy that can lead to higher sales and increased longevity.

What the Digitally-Native Phase 1 Brands lacked in initial speed, they made up for in quantity. These brands have opened up stores quickly, averaging 26 stores after ten years. This is a stark contrast to Heritage Brands, which had an average of two stores open after the first ten years. An exception is Victoria’s Secret, which was bought by L Brands and quickly grew to 100 stores.

Heritage Brands

Heritage Brands took anywhere from one to five years to create their first physical stores, which were used to establish a presence in different parts of the country. Patagonia and Victoria’s Secret both started as storefronts (or trunk-fronts in the case of Patagonia) and opened stores within their first year in business. Victoria’s Secret’s business model not only depended on its products, but also on creating new environments in which consumers could purchase lingerie. Other brands such as Ralph Lauren and Nike took five years to open their first storefronts, which gave them time to first become wholesale experts. This also allowed them to focus on the design, imagery, and aesthetics of their product before taking on the skillset needed to succeed in retail.

After ten years, Heritage Brands had two stores on average and relied heavily on catalogs and wholesale. Without an influx of cash, they had to use other methods to grow before deploying retail.

Comme de Garçons

Comme de Garçons started in Tokyo in 1969 and quickly found success in Japan, opening its first retail store in its third year of business. Focusing on design and aesthetics, founder Rei Kawakubo first built up her women’s line and then followed it with a men’s line in 1978, five years after the brand’s founding. In 1982, almost ten years after Comme’s founding, she started to present her line in Paris and opened up a boutique in the city. After ten years, Comme de Garçons only had a few retail spaces, as Kawakubo wasn’t keen on establishing her brand as a quick winner. Instead, she focused her time on the quality of the goods themselves, which has led to brand longevity and continual relevance.

Nike

Nike did not focus on retail early on. It had only one store in its first ten years and then looked to open a few more in high-potential areas, mostly to broaden its presence around the country. Interestingly, its first store in Santa Monica was rather experimental, created as a “mecca” for runners. The store was outfitted with tables and chairs where customers could talk with each other, read books about running, collect free Onitsuka Tiger shirts—the brand Nike sold before it made its own shoes—and build community. It made sense to create a retail store as an experience rather than focusing it in on quick sales and pushy salespeople — mail-in catalogs and running clubs across the country already served that purpose.

Digitally-Native Phase 1 Brands

Paradoxically, even though modern brands have never had so many options in terms of where to sell their products, Digitally-Native brands are opening more stores more quickly than Heritage Brands did. This is partly due to the shortcomings of selling strictly online, which is forcing brands to grow their retail footprints to mitigate their increasingly expensive digital customer acquisition efforts. These brands are also learning from the playbook of successful retail stores while the influx of venture capital is allowing them to grow at a quicker pace.

Warby Parker

Warby Parker was one of the first Digitally-Native brands and is often used as the crown prince of the model. The company was online-only when it started, solving the issue of physicality by sending glasses to people’s homes to try on. This strategy worked. By its fourth year, Warby Parker grew to $35 million in revenue and opened its first storefront inside its offices in Soho, New York. Before this, it had experimented with store-within-a-store concepts throughout the country and used these learnings to launch its permanent stores.

After eight years in business, Warby Parker now boasts 61 retail stores across the United States. This aggressive retail expansion seemingly contradicts its initial online-only value proposition but has ended up complimenting it and expanding its sales. The brand has noticed that once it opens a store, online sales in the area accelerate faster than ever after an initial dip.

Bonobos

Bonobos started with funding from founder Andy Dunn’s business school classmates. Although the brand started by only selling online, it soon moved into wholesale and grew its retail footprint substantially. In 2011, it signed a wholesale deal with Nordstrom and expanded to sell its products inside 118 Nordstrom stores across America. In 2013, it also started to mail catalogs to shoppers around the country. Bonobos doesn’t carry inventory in its stores, but instead uses them as “guideshops” where consumers can try apparel on and then order their choices online. The company expanded its retail footprint to 41 stores after 10 years. This is significantly more than its Heritage Brand counterparts, which usually had substantially less stores at this point, often only one to three.

Happy Socks

Unlike other Digitally-Native Phase 1 Brands, Happy Socks used wholesale to earn quick and stable sales. This worked well because the brand’s colorful socks functioned as a cheap product that could provide easy value and a pop of fun for consumers. With this strategy, the brand attained physical distribution in around 90 countries and 10,000 wholesale stockists, leading to an annual growth rate of 70%.

This wholesale strategy has made the brand ubiquitous without having to spend too much money on customer acquisition and it has also helped the company increase its sales, boasting $50 million of revenue in 2017. Happy Socks sells online as well and has expanded into its own retail stores after being in business for four years. It has recently opened up more stores—it now has 27—as it looks to take advantage of its consumer loyalty and brand recognition.

Digitally-Native Phase 2 Brands

Phase 2 Brands have realized the value of physical retail sooner than their Phase 1 counterparts and are opening up stores very early on, more in line with the Heritage Brands. Although Phase 2 Brands tended to make their first mark online, they quickly started experimenting with pop-up shops. This was a great way to cheaply prove out retail models and start collecting information before a full-fledged retail launch. These pop-ups were either standalone or inside other retailers. With companies like Urban Outfitters facilitating this process, this strategy promised increased foot traffic and relevance for the smaller brands.

Allbirds and Away took only three years to open permanent retail spaces. Even though more than 8,600 stores are expected to close around the United States and 147 million square feet of retail space is expected to be lost in 2017, 90% of sales still occur in retail spaces. Phase 2 Brands are able to open up new stores, leading the charge and freshening up the dull shopping experience of which consumers are growing weary.

Away

Before opening its first retail space, Away used the store-within-a-store concept in New York to help it “navigate the technicalities of the retail space,” according to co-founder Jen Rubio. It soon graduated from this experimentation and now has two permanent retail locations, one in Soho and the other in Los Angeles, with plans to open two more by the end of 2017. The locations offer experiential features like yoga classes and concerts, which it uses to better understand shoppers and provide a more seamless shopping experience. Additionally, shoppers can purchase books and other travel accessories in-store.

The company hopes this physical manifestation of the brand and its community initiatives will create a moat around the company and make it an essential destination and product for travelers.

Casper

Casper has experimented with pop-ups in New York, Los Angeles, and London where shoppers can test-drive the mattresses for themselves. The brand is also planning on opening 15 more popups across the United States in the fall of 2017 as a way to introduce its new Casper Wave mattress. These pop-ups are a way for Casper to control the whole consumer experience. After a deal with Target, the brand has started wholesaling its mattresses in 1,200 of 1,800 Target stores as well as on Target’s website. The company also has hotel partnerships, which it uses to introduce new people to its products. Casper also has one permanent location in San Francisco called the “Casper Wake Up,” which is an appointment-based space that looks like a birdhouse where shoppers can sign up to take a “nap” on one of the beds.

Questions

  • Can you create a strong brand by focusing on physical direct-to-consumer retail spaces? Does real estate ownership still establish dominance?
  • How does retail store relevance differ depending on the product category? Are some industries more reliant on retail or ecommerce for a viable reason? If so, how can they be disrupted to cross sales channels?
  • How does having a retail experience boost e-commerce traffic? Do retail and e-commerce create double exposures that excite or limit the customer?
  • What makes mail-order catalogs different from the internet when it comes to acquiring customers?

How many years did it take brands to reach $10 million in revenue?

A company increasing its revenue by ten times is often an important milestone. Hitting $100,000 in revenue means an entrepreneur has turned a hobby into a job. Hitting $1 million in revenue means a job is now a small business. Hitting $10 million in revenue, however, means there might be a real and long-lasting company to build. It is a good sign that there are a significant amount of early adopters who are eager for a company’s product.

While old companies relied on wholesale, catalogs and a storefront or two to get them to $10 million in sales, Digitally-Native Brands rely mostly on e-commerce purchases to prove out their businesses. They work to put their brand in front of shoppers by focusing on press and customer acquisition tactics that usually involve large marketing budgets and require lots of capital. Reaching the $10 million figure took the longest for Heritage Brands, at an average of six years, while Digitally-Native Phase 1 Brands took less time, at an average of four years. The latest Digitally-Native Phase 2 Brands, however, were the quickest to reach this figure, earning $10 million in sales by their second year.

Heritage Brands

Although it took Heritage Brands an average of six years to hit $10 million of sales, it only took Ralph Lauren and Victoria’s Secret two and three years respectively. Both brands were early successes and found audiences relatively quickly. Ralph Lauren did it through its wholesale partnerships with Bloomingdale’s. Victoria’s Secret made its first $10 million via a handful of storefronts and catalogs. Both got their footing early on—Ralph Lauren was an insurgent in the world of Americana-wear and Victoria’s Secret launched a new wave of lingerie. Each company brought a fundamentally different perspective to the table.

These products were revolutionary and found quick audiences in a similar way that companies like Warby Parker and Casper found engaged shoppers today, as both took two years to reach $10 million as well. This quick initial sales growth did not ensure success down the line, as we will see later in the Financial Crisis section of this report. Ralph Lauren and Victoria’s Secret both ran into trouble relatively early on.

Ralph Lauren

Ralph Lauren reached $10 million in sales in its second year, boasting a 10% profit one year later in 1969—twice the industry average at that time. Lauren achieved this by perfecting his aesthetics and focusing on creating products he knew consumers wanted. Shoppers were drawn to the apparel Ralph Lauren offered since it was different from what they were used to seeing in stores. His Americana aesthetic gave off upper-class connotations and made for intriguing workwear. Ralph Lauren was poised to continue growing at this point—he needed only to create a sustainable business model around his initial popularity.

Nike

Nike reached $10 million in sales in its ninth year after spending seven years nearly doubling its revenues. The brand gradually grew and found its initial audience by trying to be at the right place at the right time. Founder Phil Knight drove around to running teams across the Pacific Northwest and sent his very few early employees to other outposts around the country to sell its products. By the time the company reached $10 million in revenue, the employees had done all of their marketing using a lean team, connections, a minimal retail presence and word of mouth. The first $10 million was especially important to achieve, as traditional sports retailers had unceremoniously rejected Nike and refused to sell its shoes.

Around this time, the brand didn’t have the cash to continue growing and had to borrow money from friends in order to stay afloat. This was a product of the way Nike was funding itself. It had relied on bank loans up until this point and as banks were becoming increasingly weary of supporting such a large and potentially risky endeavor. This lack of capital forced the company to run a lean business and restrict its spending to new inventory.

Digitally-Native Phase 1 Brands

Phase 1 Brands took an average of four years to reach $10 million in sales, which was considerably quicker than Heritage Brands. The brand that took the longest in this cohort was Happy Socks, which relied on organic growth before taking on growth capital. Phase 1 Brands reached this milestone years before Heritage Brands because of more sophisticated marketing techniques, the need to quickly prove their business models, and the endless venture money that was floating around.

Bonobos

Founder Andy Dunn started growing Bonobos’ sales by selling his pants in person. In its initial years, 90% of men who tried on Bonobos pants purchased them, and 25% of purchasers bought three or more pairs, according to the company. This led to $1.6 million in revenue during its first year, proving that a brand can successfully launch online by focusing on a singular product in different color options. By the third year, Bonobos had amassed a customer base of around 15,000 and a repurchase rate of 50% by focusing on high-touch customer service, high-quality products, and customer satisfaction. The company reached $10 million in sales by its fourth year after raising around $4 million dollars in institutional money.

Digitally-Native Phase 2 Brands

It took Phase 2 Brands an average of two to three years to reach $10 million in revenue—they hit this milestone significantly faster than brands in other cohorts. Phase 2 Brands were born with the digitally-native boom well underway and venture capitalists were eager to invest. Founders started these brands in the afterglow of the internet, where there was presumably a herd of willing shoppers ready to purchase the next fresh idea.

Bonobos and Warby Parker inspired many Phase 2 Brands, who would start off with just one product and use it as an early indicator of the brand’s potential. Once these brands found a captive audience, they tried to maximize revenues by launching new products in hopes of rapid topline growth. Paradoxically, even though the brands are starting with one SKU, they all proclaim lofty goals of reinventing the industries in which they compete. Allbirds and Away plan on becoming larger lifestyle brands and Casper touts the goal of reinventing sleep. It remains to be seen whether or not these companies will become mega-brands like the Heritage Brands in this study, or if their early self-confidence will catch up to them.

Away

Away launched to much fanfare—the founders knew the Warby Parker playbook quite well. Armed with this information, the company decided to launch its first pieces of luggage with a USB port, which tackled a consumer pain point and provided shoppers with a superior product at a price cheaper than a traditional luxury bag. The company reached $10 million in sales during its second year. After initial success, it continues to increase its assortment in 2017, offering kids-sized luggage, carry-on versions of its bags, and new stickers that customers could use to decorate and personalize their products.

Questions

  • How can brands use different sales channels, such as e-commerce and wholesale, to prove that a product can sell profitability?
  • How did Heritage Brands continue growing after initially disrupting an industry?
  • Is quickly reaching $10 million in revenue a sign of success? Or is it just a signal that the brand has started growing in a niche but possibly viable market?
  • For Heritage Brands like Ralph Lauren, wholesale and licensing were key to its growth. Are there lessons digitally-native brands can learn from this multi-pronged approach?
  • Is using digital media to advertise and track consumers more effective than the mass media that Heritage Brands used? How can you prove this and attribute ROI in a meaningful way?
  • Is starting out with limited SKUs a competitive advantage for modern brands or an aesthetic choice? How is this low SKU count helping out new brands when their goal is to become ubiquitous and necessary?
  • How do you evaluate other growth metrics such as new customer acquisition to predict sustained success?

How long did it take the brands to become profitable?

There are three main ways to measure a company’s profitability. First, is the overall bottom line profitable? Second, is the company making more money on each order and customer than it is spending to acquire the customer and her order? This is called order or customer profitability. And third, is the company making more money on each product than it costs to make each product? This is called unit profitability or a product’s unit economics. Great, long-lasting companies are profitable on all three of these vectors.

When Heritage Brands launched, profitability was not a choice. It was often the only way they could sustain themselves and continue growing. Cash flow was king. The Heritage Brands we studied were profitable almost immediately, while many Digitally-Native Brands have yet to be profitable even after an average of six years. Bonobos and Happy Socks, two Digitally-Native Phase 1 Brands, are exceptions. Happy Socks grew outside of the venture capital bubble and Walmart acquired Bonobos in 2017.

While overall profitability is sometimes a choice—a company can choose to show a profit or reinvest the cash flow into operations—per-unit and per-order profit is more fundamental to the characteristics of the business. Some products and customer acquisition methods will often or always be unprofitable because it costs more to find certain customers and make certain products than the potential revenue there is to capture. For example, when Bonobos first started to grow, it knew its average order value was $200. The brand did the math and discovered that acquiring a customer for up to $100 was enough for to make each order profitable. The brand then measured its marketing spending off of this to establish the health of the company.

However, as venture-backed companies need to continue growing, they must look outside their initial niches for new customers. The attractive economics of a niche start to fall apart as a brand moves outside of it and acquisition costs rise, often substantially. This can lead to companies shipping orders that are unprofitable to fleeting customers. Companies like Fab, Blue Apron, and Nasty Gal fell prey to these problems—losing money on every customer and order at scale is a recipe for failure.

Heritage Brands

Heritage Brands were profitable early on because they slowly started selling to people in their local neighborhoods or geographical regions. These brands grew in a linear and more controlled pre-internet manner by opening physical stores or wholesale accounts in key markets, giving their founders the ability to tightly control growth and profit.

Nike

Nike was profitable in its second year of business. Even so founder Phil Knight had to take out bank loans on his father’s reputation. This was the only way he could secure enough money to purchase the Japanese shoes he was importing that were flying off the shelves. Each time he sold through his inventory, he placed an even bigger order with his manufacturer, putting larger and larger sums of money at risk. He used most of the capital he made from selling the shoes to pay back his loans. He would then take out bigger loans at better interest rates.

Nike was profitable almost immediately and the company used these profits to keep investing in the business, sustainably growing the brand. Knight knew that runners around the country would be interested in his shoes—he just had to get the product in front of them. He traveled around the Pacific Northwest, going to track meets and convincing coaches, runners and fans of the merits of his shoes. This captive audience continued to buy the shoes in large numbers, and Phil saw doubled revenue each year he was in business. He also did some modest advertising, putting out flyers around the places he visited in order to attract even more attention. Eventually, the company wanted to secure more capital and started raising money ten years into the business, failing to go public but receiving additional loans. The company eventually went through a successful IPO in 1980—18 years into the business—after making $472 million in revenue the year prior.

Patagonia

Patagonia was always profitable because its founder, Yvon Chouinard, used the money that he made from the business to support his climbing pursuits. The profits in the beginning weren’t high and he lived a very austere life on as little as 50 cents a day. He was selling pitons at this time, which are spikes climbers hammer into rocks in order to continue ascending, while he traveled around the mountains. He then added rugby shirts to his assortment and eventually expanded into other products, always keeping profits and sustainability at the forefront.

With virtually no marketing budget, Patagonia focused on organic growth. Out of the Heritage Brands we studied, it took Patagonia the longest to reach $10 million in revenue (seven years) and then $100 million in revenue (17 years). This growth wasn’t planned and the company had to change the way it operated to adapt. Chouinard almost had to take out a loan four years into the business as he was on the brink of bankruptcy over a batch of defective shirts. Unlike other Heritage Brands, Patagonia didn’t turn to institutional money to continue growing. Instead, the brand relied on cash flow and the real demand for its products, a model that sustains it to this day.

Digitally-Native Phase 1 Brands

Profitability for Digitally-Native Phase 1 Brands has been much less important than it was for their Heritage Brand counterparts. The influx of institutional capital led many of these brands to believe they could ignore overall profitability and, sometimes, even order profitability. The traditional margins for consumer goods likely ensured each product was profitable, especially without wholesale.

Instead, as the logic went, these brands should strictly focus on topline growth, driving up valuations, even if the future of the company was highly uncertain. Venture capital usually only wants two possible outcomes for a company—an acquisition or an IPO—because investors need liquidity. Remaining an independent company is not at the top of the list, so profitability is often not a priority. However, given the uncertain acquisition landscape and the discipline public market investors instill on a company, the hyperscale playbook of many of these Phase 1 Brands has not proven they can produce valuable exits. Dollar Shave Club, which was a subscription business that Unilever purchased, is the rare exception.

The Honest Company

Honest Co. started off with $7 million from its two founders, Jessica Alba and Brian Lee. Both founders quickly learned they needed more money to realize the dreams they had for the business. Lee’s connections helped them secure $27 million in funding before the brand saw a dollar in revenue, what one investor called “a leap of faith we don’t normally take in the e-commerce business.” The company sold organic and safe baby and cleaning products, an industry that was ripe for disruption. It decided that a subscription model would allow the brand to acquire customers once and then increase their lifetime value as the annuities racked up. Honest Co. was unprofitable to begin with and remained so even as it moved away from the subscription model. It now focuses on pure direct sales (70% of revenue) and wholesale sales (30% of revenue). After a botched deal to sell the company to Unilever for $1 billion, the company is still unprofitable and its investors have yet to see their big return.

Happy Socks

Happy Socks started with a mentality quite different from other Phase 1 Brands. It was profitable immediately because of its global wholesale relationships. The company hit on—and helped expand—the colorful socks trend. Selling primarily through wholesale forced the company to focus on overall, order and unit profitability in order to stay in business. While luxury brands have traditionally kept socks out of the spotlight, Happy Socks and its contemporaries turned this idea on its head by attempting to own a category, one that is now collectively worth $25 billion.

This focus on initial profitability helped the company to pursue institutional capital later, likely ensuring a good payday for its founders and a safe future for the business. Palamon Capital bought a majority stake in the company in 2017 for an estimated $85 to $115 million.

Digitally-Native Phase 2 Brands

Phase 2 Brands haven’t turned a profit yet because they are still in their venture-funded growth stage. These companies are pitching themselves as hyperbolic movements and lifestyle brands that can rapidly scale, rather than positioning themselves as (or admitting that they are) consumer goods companies. As of now, none of the companies we analyzed in Phase 2 have turned an overall profit, and instead, they focus on unit and order profitability to measure their health.

Questions

  • Are modern brands too focused on pushing their products onto people via intense customer acquisition instead of finding product-market-fit? If consumers have more choices than ever, how is this changing the customer acquisition playbook?
  • How would modern founders be able to support themselves with their companies if institutional money was never in the equation? What tradeoffs would they have to make? Does this pressure to support oneself call for more profitable companies?
  • As consumers look for fewer products and more experiences, how should consumer product companies evolve? Is creating a “community” the best manifestation of this or is there something more to be desired?
  • If consumers are turning into niche shoppers, what does it mean for brand assortments and merchandising? How will modern brands become as ubiquitous as older brands if there are less products in play?
  • If the internet democratized shopping and the ability to create businesses, does this mean that no new monolith brand will rise?
  • How do profitable retail companies differ in terms of expenses across product categories? Does the potential for higher margin businesses increase with Digitally Native brands?
  • How do capital expenditures change over time and affect profitability?
  • How do companies know they have the ability to be profitable when they are choosing not to? Is it possible to grow slowly by reinvesting money the way Nike and Patagonia did?

How long did it take the brands to reach $100 million in sales?

Hitting the $100 million sales mark is a big milestone that shows a brand is resonating beyond its initial group of early adopters. Getting from $10 million to $100 million in sales requires a great deal of strategic planning, focus, and growth. All of the companies we looked at that reached $100 million in sales did so within 20 years of being in business. Patagonia (17 years) and Nike (14 years) took the longest to hit this figure, while Casper (3 years), Allbirds (4 years) and Honest Co. (4 years) took the shortest. Venture money helps companies reach the $100 million mark faster as endless capital injections allowed the company to scale faster. Heritage Brands took eleven years on average to reach $100 million in sales, Phase 1 Brands took seven years, and Phase 2 Brands took four years, with the milestone arriving much quicker in each subsequent era.

Heritage Brands

Heritage Brands reached $100 million in sales organically without having to spend an inordinate amount of money on paid customer acquisition. They found strategic partners such as wholesalers and licensors (Ralph Lauren) and running clubs (Nike) that cheaply and effectively gave them access to new audiences. The brand focused on making these niches happy before thinking about how to expand their product lines and sell their aesthetic to the mass market.

Victoria’s Secret

Even though the Limited bought and grew Victoria’s Secret in its fifth year, it took the company eight years to make it to $100 million in revenue. To get to this point, it continued perfecting its product-market fit and growing into new products, lines and personas, while also expanding its retail footprint. The brand kept its market share and reign for years as the only national chain focused on accessible lingerie. This gave it the ability to continue expanding and introducing its product to an increasingly larger group of people.

After this, the brand harnessed celebrity power to continue dominating. Popular supermodels make up its Victoria’s Secret angel team, coveted for its high status, which has launched the careers of Tyra Banks and Adriana Lima, among others. The company puts on yearly fashion shows that attract the interest of the media and fans, who tune in to see the million dollar bra, the fun themes the shows offer, beautiful supermodels, and celebrity performances that have included Taylor Swift, Selena Gomez, and The Weeknd in recent years. The company has also created new brands like Pink (for college students) and products like the Wonder Bra. It has made a splash in beauty and perfume as well—three of its perfumes reached the top 10 perfumes in the U.S. in terms of sales in 2016. In 2002, 25 years into the business, Victoria’s Secret had reached $5.7 billion in sales and has continued growing, hitting $7.8 billion in worldwide sales for 2017.

Comme de Garçons

While it took Comme de Garçons approximately four years to reach $10 million in sales, its rapid expansion into multiple adjacent brands and products fueled the company’s revenue to $100 million in sales by its tenth year of operation.

Although Comme’s high-end clothes aren’t for the average shopper, the brand resonates across the spectrum because of a strategy that touts the main line as the peak expression of the brand while its numerous diffusion lines capture more consumer attention and incremental revenue. “The only way to grow is horizontally, because Rei is very aware that the market is limited for the main line,” says Kawakubo’s husband and business partner Adrian Joffe. With this point of view, the line continues to increase revenue with its diffusion lines and Dover Street Market, its gallery-like retail experience founded in 2004. Kawakubo’s aesthetic and the way in which she goes against the grain of fashion has elicited fandom among elite shoppers and the broader fashion industry, while also making the business a substantial, ever-present force. In 2017, its revenues hit $250 million—its Dover Street Market department stores accounted for 35% of sales and its popular Play line accounted for 12%.

Digitally-Native Phase 1

Phase 1 Brands reached $100 million in sales in an average of seven years. These companies were still proving their business models when they first started out and took longer to figure out the formula for reaching $100 million in sales, especially compared to their their Phase 2 counterparts. Direct to consumer was still a newer term and the way in which they were potentially disrupting the industry wasn’t popularized until early movers like Warby Parker and Bonobos started to gain traction.

Bonobos

Investors didn’t initially rush to give Bonobos money. The company had to raise capital from over 100 angel investors in its fourth year at a $30 million valuation after the company reached around $10 million in sales. Hitting $100 million in sales took Bonobos around 10 years, as the company was one of the first to go direct to consumer and helped to define the benefits and shortcomings of the business strategy. Walmart bought the company in its 10th year for around $310 million, which didn’t provide its investors the returns they expected. Bonobos sold after expanding to multiple verticals and realizing it could scale more quickly using retailers, its customers, and supply chain to support its vision without having to fund everything itself. And, most importantly, because it had raised over $127 million in venture capital, its investors needed an exit.

Digitally-Native Phase 2 Brands

Since Bonobos didn’t give investors the return on investment they expected, and most other brands founded around the same time have not exited, all eyes are on Phase 2 Brands and their financial performance. These companies are focusing on becoming larger vertical companies with the goal of usurping the success of Phase 1 Brands and quickly overtaking incumbents like the billion dollar Heritage Brands. Because investors seek to make a return on their investments around the seven- to ten-year mark, these companies feel pressured to quickly grow and reach $100 million in revenue as quickly as possible, especially since their ideas take such a large amount of capital to scale.

Allbirds

Allbirds started as a Kickstarter campaign that focused on drumming up excitement for a new wool shoe that people could wear without socks, which was washable and good for the environment. The company took off in the tech world as people bought the shoes and spread the word. The company’s larger goal, like many of its Phase 2 Brand counterparts, is to become a vertical lifestyle brand. It’s important to find product-market fit before expanding into the broader market, which is one reason many of these Phase 2 Brands are focused on perfecting one or two products. As of fall 2017, the brand is rumored to be making enough each month to hit $100 million in sales annually. 2018 will likely be the first full year where sales top $100 million, its fourth year in business.

Casper

Casper garnered $1 million in sales during its first 28 days in business, $30 million in its second year, and $100 million in sales by the third year. By its fifth year, 2016, it doubled revenue to $200 million and is expected to hit $400 million in its 6th year (2017) as the company starts opening up stores and introducing new products like bedding, pillows, foundations, and the new and more expensive “Casper Wave” mattress.

The company attempted to sell itself to Target in 2017. However, the deal fell through with some speculation that investors didn’t get the valuation they expected after pouring over $70 million into the business. Instead, the company decided to create a partnership with Target and accepted a $170 million investment from the company and other investors at a valuation of $920 million. This partnership is beneficial to Casper because it gives it the ability to leverage Target’s retail footprint and its synergies to expand its sales and become a presence around the country.

At the same time, the company knows that competition is increasing and that retailers can start copying one of its main value propositions—a bed in a box. In turn, Casper is attempting to become more than just a mattress company: Its goal is to reimagine the future of sleep. The new money will help it research and develop new products around the future of connected sleep, which will give the company a larger chance of standing out. But it remains to be seen if this will sustain the company and give its investors the financial exit they hope for.

Questions

  • Why are modern brands using intensive venture capital to reinvent the wheel rather than partnering with brands who already have the infrastructure and expertise? How could doing this change the capital needs of modern brands?
  • What does it mean for brands when their goal is to reach $100 million in sales as quickly as possible? What is the reason for doing this? Will ubiquity will get them the revenue and profit they seek? Or does the speed that they reach this milestone have little to do with how long they will last?
  • Are Digitally-Native brands hitting $100 million in sales faster than Heritage Brands because of the amount of money they are investing into marketing? Or are they more viable businesses that scale more quickly?
  • How important is research and development for the continued success of modern companies? Is this method, which is heavily used by Casper, the key to succeeding in the new consumer economy?
  • How do experienced and capital-rich holding companies grow and acquire new brands?
  • Should modern brands be building their own infrastructure? If the end goal is to get acquired, would it be smarter to focus more on their aesthetic and brand message and rely on third-party infrastructure? Should they focus on licensing out their brand’s vision like Ralph Lauren did in the past?
  • When does a brand plateau in terms of double digit growth and how does the strategy pivot to include acquisition or other inorganic growth measures?
  • How do the financial expectations for the business change its sales expectations?

How long did it take the brands to run into their first financial crisis?

Heritage Brands and Digitally-Native Brands went through financial crises for opposite reasons. While Heritage Brands hit rough patches because they grew too quickly, Digitally-Native Brands are struggling financially because they aren’t growing quickly or profitably enough to meet their investor’s expectations.

Digitally-Native Brands, who procured sky-high valuations on the premise that consumer goods could be as scalable and defensible as technology companies, are starting to realize the absurdity of this comparison.

Tech companies can create defensible ecosystems where as more users engage and interact with each other, the less likely they are to decamp to a competitor. This is often referred to as a network effect, which is a competitive advantage companies like Facebook and LinkedIn have that keeps users coming back. Because people use these platforms every day, it’s increasingly challenging to try to dislodge them. The switching costs are so high that no one wants to (or really could) create their Facebook or LinkedIn network all over again.

Consumer goods companies, however, possess none of these advantages. If someone buys a shoe from Nike today, there is nothing stopping them from buying an Adidas shoe tomorrow. Sure, he or she has to go try it on and make sure the sizing system works, but this is nothing compared to trying to switch from Facebook to a competing social network.

Phase 1 Brands tried to become impenetrable by creatively playing with their business models, experimenting with things like subscription and discover boxes, monthly fees and slow rollouts of products. Community building was not common, likely because they had so much work to do laying the foundation for digital commerce—these companies often had to build their own infrastructure, including websites and payment systems. But with much of this infrastructure in place, Phase 2 Brands are able to focus more on community building. Even so, community—a word thrown around as much as the phrase direct to consumer— does not possess nearly the same advantages as a network.

Heritage Brands got into their first financial crises either in the fifth, tenth or 20th year. Almost all of them experienced turbulence as they tried to keep up with their growth. Phase 1 Brands, such as Nasty Gal and Honest Company, hit financial crises in their tenth and seventh years respectively, while Phase 2 Brands haven’t hit any financial crises yet, as most have only been around for a few years.

Heritage

Heritage Brands experienced growing pains and ultimately had to rebuild their business models to keep up with consumer demand. Without access to abundant capital, these brands couldn’t reconcile their growth and had to reset financially in order to stay alive.

Patagonia

Patagonia hit its financial crisis during its 20th year in business—one year after the company grew its sales by 40%—only to completely reorganize just before the 1990 financial crisis. When the company saw such strong sales growth, it focused its operations on its four sales channels—retail, wholesale, international and mail order—hiring a number of people and upgrading its business operations. When the company’s primary lender reduced its credit line after fears of the recession, it didn’t have enough money to pay its employees and had to let go of 150 people, which was 20% of its workforce. The CEO and CFO resigned.

After this, Patagonia focused on smart spending and didn’t take growth for granted. It then promised to use its money prudently and created a statement of values that included giving back to the community, focusing on the environment and ensuring that employees had a high quality of life, which included a good work environment. This has fared well for the company, which continues to grow every year. It hit $750 million in sales in 2016 and tripled its profits from 2008 to 2014. The company is still independent and prides itself on it.

Ralph Lauren

Ralph Lauren started creating clothes for women three years into its business, which brought it to $60 million in sales. As Lauren was a designer and salesperson at heart, the rapid expansion was too much for him to handle. Orders started shipping late, which caused trouble with his retailers. He had a strong brand identity and a style that people wanted, but he wasn’t sure how to market his business and sell it to them correctly. The brand hit a financial crisis in its fifth year because of poor financial management and the growing pains associated with such quick expansion. Ralph Lauren grew depressed. He had to invest $600,000 of his own money in the business to keep it afloat and gave away 10% of his company to businessman Peter Storm, who then ran the company’s financials.

The brand also decided to focus more on designing clothes—its strength—and started doing licensing deals with companies it felt could uphold the brand’s reputation. It received five to eight percent of sales and split the advertising costs. This proved to be a great move at the time. Ralph Lauren saw decades of success after this, licensing his name to all types of consumer products and apparel including furniture, accessories and towels. This strategy allowed the brand to become one of the most successful lifestyle brands ever, even though this would come back to haunt it in more recent times as its products became too widely available.

In 1994, Ralph Lauren sold 28% of the business to an investment fund managed by Goldman Sachs for $222 million, valuing it at $796 million. The low selling price surprised people, but also served as a testament to how far the company took itself before needing additional capital. Some said this deal was evidence of the brand’s slower growth after Nautica and Tommy Hilfiger started selling similar styles at cheaper prices. Regardless, Ralph Lauren went public three years later.

More recently, the company is struggling to figure out its future—its legacy business, distribution and existing technology is holding the company back. The brand is also moving away from Lauren’s signature preppy style. Even so, it had $7.4 billion in sales in 2016, evidence of the conundrum many Heritage Brands find themselves in today. It is still bringing in cash, but on a business model and with a cost structure that is increasingly a relic of the past.

Digitally-Native Phase 1 Brands

Honest Co. and Casper, two Phase 1 Brands, tried to sell themselves to bigger brands but failed to close their deals. Both Honest Co. and Nasty Gal hit trouble three years after reaching $100 million in sales as they had to balance investors’ high expectations and their own business challenges, which often have conflicting solutions.

Additionally, Warby Parker and Bonobos have stagnated as their growth has decreased after promising beginnings. Each has responded by opening a multitude of stores all over the country. Warby Parker has 61 and Bonobos has 41. One hypothesis is that their online businesses have slowed, which has forced them to open physical spaces to attract new customers.

Nasty Gal

Nasty Gal’s initial business strategy didn’t call for mega-growth, as it built its company around the relatively laborious and tailored process of finding vintage clothes and convincing people to buy them at a higher price. When the company raised money, it had to change its business model and rely solely on the brand name and trend-based products to drive growth. It became clear after a few years that this niche brand did not need or know how to use so much capital—it hadn’t built itself strategically as a mass-market or venture-backed company. Spending heavily on sales and marketing helped the company grow its sales in the beginning, but it didn’t turn its shoppers into loyal customers. But when the company stopped paying for marketing, sales significantly slowed down, making the business unsustainable. The clothes the company manufactured seemed like an afterthought, which customers complained about, as the company primarily focused on marketing.

Nasty Gal went bankrupt in its tenth year after getting a $15 million last-ditch loan the year before. Its revenues fell from $100 million in 2012 to $77 million in 2015. U.K.-based ecommerce company Boohoo bought the business for just $20 million in 2017, after it had been previously valued at over $200 million—a total wash for investors.

Honest Co.

The Honest Company ran into financial issues in its seventh year of business. Most recently, it is rumored to be raising money at a valuation that is 40% lower than its previous round, known as a down round. Not only has the company been going through multiple lawsuits as consumers and regulators find deficiencies in its products’ ingredient assertions; it also went through a failed acquisition with Unilever for a rumored $1 billion. Instead, Unilever bought Honest Co.’s competitor Seventh Generation in 2017. The company then replaced founder Brian Lee as CEO and brought in someone from Clorox to restore Honest Co. to its former glory. The company is restructuring and starting layoffs, a troubling sign for its investors. Although Honest Company still has a $1 billion valuation and had $300 million in revenue in 2015, it has yet to go public or successfully exit.

Digitally-Native Phase 2 Brands

It’s still unclear whether or not Phase 2 Brands will last longer than their Heritage Brand counterparts or run into trouble and stagnate like Phase 1 Brands did. Aggressive valuations and an uncertain acquisition environment make their prospects questionable. What is clear, however, is that few of these brands will be independent and profitable. That hope went out the window the second they took on significant venture capital, since investors expect returns much more significant than any cashflow could provide.

Questions

  • Is necessity the key to innovation? Are Digitally-Native brands paying enough attention to market forces by ignoring profit, even after several years in business? How can they more prudently build their businesses with the infusion of capital they’re receiving?
  • How does a brand evolve its product portfolio curation to remain on-brand and profitable?
  • How did Seventh Generation’s brand strategy compare to that of Honest Co.’s? Is Honest Co. failing because it’s thrown the CPG company playbook away?
  • How will Away and Allbirds become the next big lifestyle and travel brands when they’re attempting to prove themselves with limited SKUs? What lifestyle components are they hoping to bring in to develop a community?
  • Why did so many Phase 1 Brands go through trouble three years after they hit $100 million in revenue? What should brands do immediately after hitting this figure so that they don’t go through similar problems?

Conclusion and forward-looking questions

The Digitally-Native brands we studied are quickly reaching the $10 million and $100 million sales mark. They have 2017 revenue rates of $48 million to $350 million. But it is unclear whether these brands are creating actual, long-lasting value or if they are waiting for an exit opportunity that may or may not arise. Although their goal is ubiquity, Digitally-Native brands are still far away from encroaching on Heritage Brands’ territory as multi-billion dollar, mostly independent companies.

There are a number of questions to ponder that will determine the viability of the core brand-building playbook for future consumer product brand.

Growth

Modern brands are reaching $10 million and $100 million in sales faster than ever and are opening a large number of stores quicker than brands did in the past.

  • Why are modern brands growing so fast?
  • Is it because they aren’t doing anything defensible and need to become ubiquitous in order to remain afloat?
  • Or is it because they are building brands that will last for a long time and resonate with a wide range of consumers?

When investors and venture capitalists pour money into new businesses, they expect to get a return on investment in around seven to ten years. Profitability is generally not of interest. However, Digitally-Native Brands have not yet delivered on this promise. Most of them have not hit profitability or reached a successful IPO or sale at an intended valuation.

  • How will investors get their liquidity after investing in these modern brands? Who will buy these modern companies? Will they remain independent? Is it possible for these new brands to go public?
  • How will the answers to the above questions affect the funding environment for consumer brands?

The internet has made it easier to start new companies. But it has also made it harder than ever to scale and sustain companies that want to be more than small businesses.

  • Has this ease of entry raised the barrier for success?
  • Why are new companies spending so much money on marketing, especially early on, whereas Heritage Brands grew more organically?
  • Is the old playbook for success just a pipe dream or are there still lessons that apply today?
  • Are new brands spending frivolously to superficially grow?

Business Models

Honest Co., Nasty Gal and Bonobos built themselves on the premise that brands can sustainably grow using the internet and new methods beyond physical retail.

  • Why are Phase 1 brands like Honest Co., Nasty Gal, and Bonobos going through trouble after so much talk of their potential?
  • Were these companies operating with fundamentally flawed logic? Was the market smaller than they expected, or reaching scale much more expensive than expected?
  • How is having the ability to purchase on the internet different than the mail-order catalogs that Heritage Brands heavily utilized? How does this affect capital needs?
  • What is the difference in customer acquisition costs for Heritage and Digitally-Native Brands?

Tech companies such as LinkedIn and eBay are successful because of their network effects. Companies like Outdoor Voices and Glossier are trying to create communities, which are somewhat related but structurally different than network effects.

  • Why are modern brands trying to build their business models around the network effects that made Facebook and Google so successful when they fundamentally do not exist for physical-product companies?
  • Is it possible to create network effects around consumer goods? Is creating a community of shoppers around these brands enough to catapult them to the top and remain there for decades to come?

Digitally-Native Brands are using a completely different playbook than their Heritage Brand counterparts did, focusing on a small number of SKUs, simpler product messaging, less traditional marketing, and less wholesale.

  • Is focusing on one SKU at a time a recipe for success? Why are modern brands using this method? Are they more careful to prove each product out because of the high overhead costs?
  • Are Digitally-Native brands overlooking marketing channels that can help their businesses? Which marketing channels are missing and how can they put these to use?

Marketing

All of the excitement around Digitally-Native Brands has turned them into celebrities and press darlings. In the past, however, awareness of brands came from seeing products in stores and via more traditional channels.

  • Do Digitally-Native Brands have high awareness and low sales, while Heritage companies are high awareness and high sales?
  • How is word of mouth changing? It is as reliable as it used to be, even with the promises of social media? Or is cutting through the noise harder than ever?
  • How is the gap between awareness and sales playing out for Heritage Brands and modern companies?
  • How do startups move the needle in their favor, so that their awareness and sales are more aligned, resulting in increased sales?

Digitally-Native Brands like Everlane, Brandless and Warby Parker have all focused their business models on giving the shopper a cheaper product by cutting out the middleman. The tactic is good for margins and a marketing story but actually cutting them out and simultaneously growing a business is more difficult to achieve, as middlemen provide crucial services.

Without the stamp of approval from wholesale, Digitally-Native Brands have to centralize all of their marketing and do it on their own, creating more costs and complexity for the brand, and removing a layer of trust that shoppers are used to.

  • Is cutting out the middleman still a smart move? Are there more downsides than anticipated?
  • Does largely cutting out wholesale spell trouble for modern brands that they will need to renege on?
  • How did diffusing the message through wholesale and licensing tactics help Heritage Brands grow sustainably?
  • If wholesale is not an option, how else can companies ensure that shoppers trust them with partnerships and other tactics?

These are a few of many questions that need to be answered about the future of consumer brands. There is still an immense amount of change ahead, but not everything from the past is worth discarding. There’s always something to learn from.