#140. Every week on the podcast we’ll challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach. We discuss SmileDirectClub’s retail and product extension into Walmart and the reasons why it entered this partnership.

Check out the full transcript below. 

Richie: [00:00:03] Welcome to the fifth episode of Espresso, a podcast from Loose Threads where we challenge a recently-announced business strategy to understand the upside and downside of the brand’s approach.

Richie: [00:00:13] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com.

Richie: [00:00:27] Joining me for our discussion this week is Rebekah Kondrat, a partner at FaceLift by Loose Threads, and Caroline Tibbetts, who leads our research at Loose Threads.

Richie: [00:00:37] This week, we analyzed SmileDirectClub’s retail and product expansion into Walmart, which comes on top of a recent partnership with CVS. Both moves aim to get the company’s clear aligners in front of more customers, but the addition of a toothbrush and water flosser pushed the company further into orthodontia. Will the weight of the world’s largest retailer give Smile Direct Club the revenue and reach it needs as a newly public company? Here’s what we thought about the move.

Rebekah: [00:01:06] Given the fact that SmileDirectClub has been trading well below its opening IPO price for quite some time—I mean, since it IPO’d—and also the fire that it’s come under from the, call it traditional dental industry on its SmileShops, I think it needs to diversify into making different products. White-label products makes total sense. Walmart actually makes a lot of sense as a choice over Target because, in my opinion, at least, Target is so full of D2C noise at this point, it’ll at least be able to stand out. I think they have some endcap positioning. So this, I think, will work for what they’re trying to do, which is get their brand out there. Will it make their stock go up? It did surge a bit, but nowhere close to its IPO price.

Caroline: [00:01:55] They also thought that Walmart might be a better idea due to the direct-to-consumer volume in Target stores. However, is that really true? Is it just the nature of direct-to-consumer? Because Walmart has its fair amount as well, right?

Rebekah: [00:02:10] I mean, that’s true, I guess. All of the legacy players have some direct-to-consumer, at least in this kind of like, grocery/pharmacy space. They all seem to kind of have Birchbox and Glam Squad and all of these brands in there. I think that Walmart is going to reach more people, because what they’re trying to do is democratize orthodontia and make it more accessible from a pricing standpoint. And also just like, general dental health, which is what they’re doing with these products. So I feel like Walmart is more in the areas that may need that.

Richie: [00:02:45] I think it’s really more about the audience, right? Like Target is still a higher-brow department store. Walmart is the “every person store.” And Smile Direct has a few hundred million dollars in revenue. They’re clearly outside of like, the early adopter canon, and they’re trying to go big, they’re trying to grow their revenue, all those things. There’s probably no better place beyond Walmart, in assuming that they won’t do Amazon. Right? It’s the biggest store in the world.

Caroline: [00:03:07] So, isn’t the angle in being in Walmart because they’re just offering toothbrushes and whitening products? So is the idea that a Walmart customer purchases these items and then will go on to spend $1,800 to get teeth straighteners? But I feel like the shopper would need to investigate that, and I don’t know that people are that patient or interested in doing so. Walmart shoppers, specifically.

Richie: [00:03:34] It’s an interesting strategy, though, of like, take a commodity product—which they maybe make a little bit of money on, but very little—and just say, “Let’s get people to use our toothbrushes,” and like, all those things, that they’re just gonna put every day into their lives and become part of the daily ritual. And then say, if they start to care, maybe they’ll go invest in some of these higher-value things. Right? It’s the opposite of what Quip is doing. Quip started as a toothbrush, and then is backing into all of these other health care and, call it adjacent, upsells. Versus Smile Direct, [which] started on the high-ticket items and now is going back into the commodity products.

Rebekah: [00:04:06] The other thing that [having] commodity products does for Smile Direct Club is it gets it into dental offices. And so, if dentists are giving out their products or recommending their products, then when it does come time to spend money to straighten your teeth, traditional braces are still very expensive.

Caroline: [00:04:25] Six grand.

Rebekah: [00:04:26] Yes. And these invisible liners are a great option for someone who can’t spend six grand. $1,800 sounds amazing. So if you can get even the dental professionals to recommend it. Now, there’s a little bit of like, tension there, so I’m not sure if they would be willing to do that at this juncture. But at least if they can carry the products, it’s something to show that the brand is trusted by professionals.

Richie: [00:04:49] What do we think of the difference between going to Walmart or going into CVS? They’re in a thousand CVS locations, they’re going into over 2,500 Walmart doors. Do you need CVS if you now have Walmart? Do you want to just be everywhere?

Caroline: [00:05:02] Well, the product offering is different. At CVS, it’s only in CVS pharmacy locations. And to your point, there’s someone on staff who can help you. And it’s about the aligner. Whereas Walmart is purely about secondary products, adjacent products.

Rebekah: [00:05:19] I see CVS as a bit of a replacement. They have 300 SmileShops. I don’t know that they’ll close them, but they have—especially in California, which is highly regulated—come under some fire. And if they end up having to close some SmileShops, CVS is kind of a replacement for those. And then Walmart is more about building brand recognition and brand affinity, in my mind.

Richie: [00:05:41] It reminds me of a lot of Theranos, ’cause they tried that with Walgreens.

Rebekah: [00:05:44] You’re right.

Richie: [00:05:45] And it totally imploded.

Rebekah: [00:05:47] Well, it imploded because the technology was completely false.

Richie: [00:05:51] Yeah. But it brought Walgreens kind of down with them, in a sense, at least from a reputational perspective. And it’s, I guess, interesting given the existing controversy just around these businesses generally, of what does it mean to see these major players get on board? CVS and Walmart are also trying to get very deep into health care right now. I think Walmart made a number of announcements about giving healthcare to its own employees and trying to become almost like health care supercenters. And then CVS is also doing the same, as there’s tons of competition in that channel. So it’s interesting that both a Smile Direct Club is competing with these dentists and so forth—so are the players they’re going into, trying to become more general kind of health care hubs.

Rebekah: [00:06:29] It’s smart because it’s largely a recession-proof business to move into health. But for Smile Direct, I think it’s a good play. It’s a win, especially given their current stock price.

Richie: [00:06:40] What do you think, though, about the wholesale part of it? So, SmileDirectClub usually sell[s] stuff direct. The SmileShops are still a direct way to do that. CVS started to change that, although I would guess that they have to have some sort of financial arrangement that would pay CVS for some sort of lead generation, right? Because they’re not actually fulfilling the order. You don’t walk out with them, I think they’re just helping place the order and there’s some sort of kiosk. Walmart, now, you’re going into, basically, I assume, a traditional wholesale deal. Do they just account for that under the guise of marketing and just assume they’re gonna make not that much money, but it’s really just kind of a scale entry point game?

Rebekah: [00:07:13] I feel like that makes the most sense. Because in the CVS example, you are still receiving the aligners directly from the company.

Richie: [00:07:21] Right, it’s like lead-gen.

Rebekah: [00:07:21] Right. So, sure, while it’s not as overt as CVS, being in Walmart—I think it’s still an important place for them to be.

Caroline: [00:07:32] I can’t help but think about the Casper story, and how Casper started with this high ticket item. And then, after the fact, ventures into pillows and bedding and bed frames. But they haven’t developed that credibility or the audience to feel like, “Oh, I bought my mattress from Casper. I should also buy my bed, and my dog bed and my nightlight from them, too.” And this is kind of the same thing, because they start with this $1,800 item that’s still expensive for an average person, and now they’re just offering toothpaste and teeth whitening solutions. And if you’ve never heard of the brand, I just highly doubt that you’re going to buy the toothpaste and be like, “Oh, maybe I should try the braces out. Maybe I should research this brand online.” Unless there’s a specific marketing strategy within Walmart stores.

Richie: [00:08:22] I think the strategy of having a really technical product and then moving from high to low is actually a really good one. And you look at it with like, a Tesla, or Uber starting an Uber Black and going into the Uber X because they have the luxury thing to hold up at the top and then it can trickle down. The difference, though, is all the other things—such as night lights, pillows, whatever—are all effectively lifestyle products, and a water pick or a toothbrush is like, kind of a commodity technical product. So I actually would still trust them more than I would Casper to understand, like, the lifestyle.

Richie: [00:08:54] We wrote, I guess, a year ago when Parachute introduced their mattress, right? ‘Cause you had Casper that started a mattress, has moved into all these other products, you had Parachute Home, who started in all these other products, moving into mattresses, and basically concluded that I actually would buy the Parachute mattress over the Casper mattress, ’cause I trust that they’ve built that lifestyle out and have kind of figured it out. So I think they’re actually okay here.

Richie: [00:09:19] The opposite, though, is Quip. Which I think, again, if you start as just a toothbrush company, I don’t really trust you in health care. I would trust you as a toothbrush company, but I don’t if I trust you with my health, or my insurance or like, any of those things. I think it depends like, where the starting point and the ending point is and, I guess, the nature of those products. ‘Cause I still think Smile Direct Club is just a great name for any sort of oral care brand.

Rebekah: [00:09:40] I mean, yeah, just sheer branding alone. If you’re walking down the aisle and something has literally a smile on it, and you want a nice smile, aren’t you gonna buy it? Or be more apt to buy it, I suppose.

Caroline: [00:09:50] I mean, I agree from the technical standpoint. The water pick, perhaps the toothbrush, I guess. But how many toothpaste options and whitening options does one have? And, I think Crest remains the ruler of that domain.

Richie: [00:10:03] For a certain generation, though, no? ‘Cause brand preferences, I guess, are handed down or established independently, right? Like, you know Crest because your parents or someone close to you who you grew up with used that thing. For younger people, I don’t know if Crest holds any affinity for them, beyond what is in their home. So if their parents are younger post-millennial, I guess, Gen X parents are starting to use some of these more modern brands, like, their kids are gonna grow up using those brands. Like, I actually don’t know that much about Crest. I know that people use it and I know that dentists recommend it, or Colgate, or whatever it is. But beyond that, they’re kind of just a toothpaste company. Versus Smile Direct, if they’re like, helping people fix their teeth, that seems like a higher-level brand pillar to trust them on, than just like, toothpaste.

Rebekah: [00:10:48] I think being a legacy player makes them even more susceptible to be swapped out by the younger generation.

Caroline: [00:10:55] And especially the problem that they’re solving is such a delicate issue. I’m sure you all know people who are adults and wish that they had gotten braces when they were younger, and now’s their chance, and they can actually afford it.

Richie: [00:11:08] It’s a very social-media-driven thing as well, of like, people are only going to be photographed more and only care about their images more. And so, it’s kind of like this genius, mostly cosmetic, somewhat technical fix that doesn’t actually fix everything, but fixes like, just enough to make a difference. Versus like, a braces or a retainer or whatever is like, really doing work. This is a little bit more of a like, “Yeah, it looks better.” From what I know. It’s not fundamentally changing the structure of your teeth or jaw or—it’s much slower, isn’t it?

Rebekah: [00:11:39] It is. It’s much slower, and the people that have, like, real medical issues that could affect their health, like a cross-bite, and you could eventually get lockjaw, and like, very, very serious issues, need much more robust, call it hardware in their mouth. So this is, to your point, not fixing that. It is largely cosmetic or, like, whitening, entirely cosmetic and playing vanity. But I think from a new generation social media standpoint, it’s a really good move.

Richie: [00:12:07] I think they can keep going, too. I assume there are a lot of other adjacent products that they can move into, whether it is like, white strips or stuff like that. It’s making me think of the Filter we just wrote about owning a product category, of like, a Smile Direct Club, where they’re sitting around a table being like, “We’re gonna own the mouth.” And it just sounds terrible. But like, how far could that actually go?

Rebekah: [00:12:25] Right.

Caroline: [00:12:25] So, is their presence in Walmart—what’s going to set them apart and help them to win this category, versus the competitors that you mentioned?

Richie: [00:12:34] They’re already ahead of everybody. And if you want to stay ahead, you go to the biggest store in the world.

Rebekah: [00:12:39] Yeah. It just keeps them ahead.

Richie: [00:12:41] And I assume they’ll just want to keep rolling down to more and more stores. And then I think, you know, they’ve got to be careful of like, the product mix and make sure not too much revenue comes from wholesale. But if these things are really just a marketing activity to get you to convert to the aligners at some point, it’s a pretty good strategy.

Richie: [00:12:59] Thanks for listening to Espresso, a Loose Threads Podcast, you can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes, we always appreciate it, and thanks to George Drake, Jr. for editing this episode. We’ll be back in a few weeks with more.