2017 was yet another transformative year for the consumer economy. There were a range of new developments and trends from the last few years that continued accelerating. What follows is a recap of 2017, along with some predictions and recommendations for 2018.

The highlights:

  • Traditional Sales Channels Regain Favor  
  • More Questions Around Brand Longevity and Durability
  • Digital Customer Acquisition Costs Skyrocket
  • Amazon Increases its Fashion and Private Label Ambitions
  • Media Supercharges its Focus on Commerce
  • Old Retail Continues to Struggle
  • Holding Companies Modernize
  • Underserved Markets Are Waiting

Loose Threads Members get access to the full year in review, which outlines the implications of each section for brands, retailers, investors and real estate developers. Learn more about Membership or start a free trial.  

Traditional Sales Channels Regain Favor  

One of the biggest developments of 2017 was the ongoing game of musical chairs that brands played with their sales channels. Many digitally-native brands spent the year doing things they said they would not, such as opening retail stores or selling through wholesale. These brands collectively opened hundreds of stores and entered into wholesale relationships with retailers such as Nordstrom, Bloomingdales and a range of independent boutiques. The reason behind these developments is quite simple: brands will naturally flock to the most cost-effective avenues to acquire customers, and as digital advertising costs continue to rise, retail and wholesale is increasingly attractive.

Map of digitally-native brands opening stores in 2016 vs 2017. Via Foundry Commercial.

[wcm_restrict]

This has important implications for players across the ecosystem:

  • Brands need to aggressively pursue alternative, capital-efficient acquisition methods beyond Facebook and Google. They also need to acquire more retail expertise and understand that service and discovery are more important than ever, which necessitates better sales associates, personal shoppers and stylists.
  • Retailers need to actively court digitally-native brands that are eager to grow and reach new audiencesthey can do this by showing digital brands the number of eyeballs their stores attract and how brands can turn these shoppers into customers. On the back end, retailers need to update their payment terms to pay brands more quickly, make quicker buying decisions and work on keeping products at full price, relying less on discounting.
  • Investors need to forge relationships with retailers across the board and help secure sales distribution for their portfolio companies. They also need to prepare for changing distribution economics as brands explore different channels, and understand how these adjustments will affect the underlying economics of the business, especially around customer acquisition.
  • Real estate developers need to understand how the brand and retailer relationship is changing, and create incentives and services that help both parties succeed. This might include offering additional space for brand/retailer collaborations, creating advertising campaigns across properties or helping to drive foot traffic. Developers also need to work on increasing efficiency, since digitally-native brands will not wait months to close a deal. With an abundance of retail space available, the deals will naturally flow to the most agile and efficient players, which will force everyone else to catch up.

[/wcm_restrict]

More Reading

The Retail Revolution Report

The Wholesale Evolution Report

The Customer Acquisition Report

Brands think wholesale is the problem. Is it actually the solution?

The internet was supposed to eliminate sales associates. Then it revitalized them.

More Questions About Brand Longevity and Durability

This year the inverse correlation between money-raised and exit opportunities intensified, further proof that expectations affect everything. We dove into these topics in two massive reports: Building Bulletproof Brands, which looks at how the internet destroyed traditional moats for physical goods brands and created new ones, and Fast or Frivolous, which detailed how building consumer brands is evolving, accelerating and evaporating. To do this, we examined how the brand building playbook is changing by looking at the growth of both heritage and digitally-native brands.

The takeaways from these two series are somewhat paradoxical: while the playbook for building brands has evolved more incrementally than many expect—growing profitability and sustainability matter more than ever—the internet has changed the playing field for both the potential scale and the defensibility of a brand. Having a good product is no longer enough. Having a good brand is no longer enough. Having a website or a store is no longer enough. With more competition than ever before on all of these fronts, standing out is increasingly a challenge.

This makes growing a brand harder, but also more interesting. It’s forcing companies to really push the boundaries of marketing and growth, looking at old ideas in new ways and using technology as a backbone to scale these ideas more effectively than in the past. Think about Glossier’s influencer program, Peloton’s competitive community, and Supreme’s thriving secondary market.

[wcm_restrict]

The implications:

  • Brands need to seriously consider how funding is impacting their growth options. Raising too much money will handcuff a company and likely force it to become something it does not need to, nor wants to be. Additionally, brands need to stay abreast of changing consumer preferences for loyalty, community and network-building. With the battle for attention currently underway, these are crucial frontiers that will help shape customer affinity for the years to come.
  • Investors need to make sure they are capitalizing companies reasonably, and that the intended outcomes for both founders, employees and investors are attainable. Overhyped expectations are harmful to everyone involved, and should be avoided at all costs. Instead, brands and investors should keep each other inline so they can work toward common goals like establishing independence, obtaining a healthy acquisition or going public.
  • Real estate developers need to understand how physical retail is still an advantage for companies looking to have a foothold in the next-generation consumer economy, and how expediting their processes and allowing companies to test and learn only furthers this goal. Retail will forever remain an important part of the shopping experience—what will change is which brands will be included and how developers will capitalize on these macro changes.

[/wcm_restrict]

More Reading

Building Bulletproof Brands

Digital Customer Acquisition Costs Skyrocket

For many of the digitally-native brands that raised money, the looming question is what is their end game. Many are not profitable, which makes it hard to maintain independence for long without needing to fundraise again and again to stay afloat. Further, private equity and the public markets are usually not interested in investing in these companies because there is not enough cash flow to make their model work or for the company to support itself.

Acquisitions are the other viable outcome, but the landscape is bifurcated. There are few acquirers—aside from Walmart—for most soft goods, such as fashion, apparel, footwear and accessories, particularly because Amazon buys platforms and not brands. Traditional companies like LVMH are not very acquisitive, as their interest in, and ability to help digitally-native brands remains unclear.

But for other industries, such as beauty and cosmetics, there are a number of large strategic companies actively looking for new energy, as the flurry of acquisition activity shows. We expect that the best exits will continue to be in markets that many investors—mostly white men that live in their own echo chambers—don’t understand or are customers in.

[wcm_restrict]

The implications:

  • Brands need to actively pay attention to their capitalization and the expectations around it, ensuring they can get where they need to go without excessively diluting their cap table. Likewise, they need to choose both investors and strategic partners who understand their desired path towards long-term or short-term profitability and are able to help them get there. Staying unprofitable for a long time without a clear path to profitability will not work in face of so much competition.
  • Investors need to invest in brands and categories that will make their business models work. If there are few acquirers in the fashion and apparel space, and most of their companies are unprofitable, exits won’t happen at the price investors want them to. Investors also need to hire people with more diverse backgrounds, upbringings and interests who understand new markets with significant opportunity, rather than continuing to rely on the coastal markets they know so well.
  • Real estate developers need to look for possible vertical integration opportunities and make investments in up-and-coming brands to learn from the inside. Developers with significant cash flow should be taking aggressive bets in this area to learn from and iterate on new models, rather than waiting to react to whatever change is coming.

[/wcm_restrict]

More Reading

The Customer Acquisition Report

Brands think wholesale is the problem. Is it actually the solution?

Amazon Increases its Fashion and Private Label Ambitions

Amazon’s fashion and apparel ambitions gained further clarity this year. Amazon Fashion forged partnerships with more brands, entering new territory with collaborations like Amazon Fashion x Calvin Klein, which included both online and offline shopping experiences, as well as new celebrity collaborations with Drew Barrymore, Nicopanda and others. Amazon continued harnessing its aesthetic as well. With photography efforts leading the way, Amazon continues to invest in more aesthetic and technical infrastructure to support these improvements.

On the private label front, the company is rapidly expanding its offering, with over 41 brands that have either launched or will do so imminently. Amazon is capturing the low-hanging fruit of apparel, accessories, electronics and CPG, where billions of dollars, spent mostly on commodity items, are up for the taking. There are no signs Amazon will be slowing down in this category, and it seems possible that by the end of 2018, it could operate close to 100 brands. The success on this front is further evidence that building and preserving an audience is harder and more valuable than simply having product expertise.

[wcm_restrict]

The implications:

  • Brands need to focus on products that they can uniquely produce, sell and build experiences around. There is no point for most companies to compete on price or scale since they will not win, and the deflationary nature of Amazon poses significant risks to brands that are trying to elevate traditional commodity products. Instead, brands need to seek out the holes Amazon is leaving as a commodity player. Even so, no one can predict what Amazon will do next, so the company’s possible moves should always be in the back of a brand’s strategy. If you can’t win at Amazon’s game, play a different one, or determine how to leverage Amazon’s platform to meet your goals.
  • Investors need to understand Amazon as both a crucial acquisition channel and also a massive threat to portfolio companies. Amazon’s possible moves need to factor into all investment decisions and diligence, which will help investors figure out if a potential investment is doing anything defensible or if they are simply going after low-hanging fruit that Amazon will capture. The Whole Foods acquisition is also a complication, as Amazon forges further ahead into retail and controls all sorts of shelf space both online and offline.
  • Real estate developers should be open-minded about Amazon’s efforts, as the company will forever need more distribution centers and will likely expand Whole Foods’ footprint in the years to come. Developers need to figure out how to best work with the company and anticipate its future needs, while also hedging and protecting existing tenants that feel Amazon is a threat.

[/wcm_restrict]

More Reading

The Private Label Report

What does private label even mean anymore?

Amazon and Absolutism

Media Supercharges its Focus on Commerce

One of the more under-the-radar evolutions in the past year was the emergence that digital media companies are playing a larger role in commerce, from the perspective of both  recommendations (i.e., gift guides) and product creation. Companies like The New York Times/Wirecutter and BuzzFeed Product Labs are making serious strides in integrating media audiences with products and services. BuzzFeed is the standout here, as the company has put out dozens of products that are performing incredibly well because of its massive audience and intimate understanding of market needs. Based on BuzzFeed, which is looking to commerce for a bigger percentage of its revenue, (traditional ad sales are not hitting targets) we expect major growth in this area, which raises major questions about how much power these companies have, given their tens of millions of online visitors each month.

There is a good chance digital media companies with massive audiences can start replacing department stores as crucial distribution points for consumer products, while using the data they gather on brands to create their own products that are somewhere between named brands and private labels. The intersection of media and commerce is not a new discussion, but the new crop of its manifestations are finding better results than ever before.

[wcm_restrict]

The implications:

  • Brands need to recognize how much power these digital media companies have and forge relationships with them. While these partnerships could be much cheaper than advertising on Facebook or Google, they also present risksbrands will have less control over the channel. Media companies that are making their own products also are creating more competition—both for individual products and customer attention—for named brands. It will be interesting to see if digital media companies will buy more product companies and if brands and retailers will buy more media companies.
  • Investors need to understand how digital media companies are changing the sales distribution landscape, both positively and negatively. Investors with strategic relationships with different sales channels, platforms and partners will be assets to their portfolio companies, helping them navigate the increasingly complex landscape. On the media side, investors should be talking to media companies about their commerce strategy and evaluating the extent to which it is logical and aligned with the team’s skillsets.
  • Real estate developers have a big opportunity to work with digital media companies on driving foot traffic, creating special pop-ups and even customized products and experiences. Developers should approach media companies as entities that have a unique lens of where attention—especially that of young shoppers—is headed and how retail can leverage it. Digital media companies are increasingly looking for offline experiences as well and can look to forward-thinking developers to help them navigate the offline world.

[/wcm_restrict]

More Reading

The Gifting and Holiday Shopping Report

Old Retail Continues to Struggle

2017 was probably the worst year for traditional retail yet, and there are no signs the agony is slowing. There are a number of reasons behind this downward trend: for decades, retailers have failed to evolve their business model and shopping experience; Amazon is now eating a massive chunk of online sales; digitally-native brands are soaking up endless attention; and people are more interested in buying experiences rather than things. Regardless, people are still spending money and companies are still making money, so plenty of opportunity remains.

Next year, more companies will go bankrupt, close stores, lay off workers and cut their financial outlooks. While this trend entails job loss and major upheaval for people’s livelihoods, the new constraints will force companies to come up with new, creative solutions for building sustainable businesses.  Even though online sales are surging, offline retail will forever be a crucial part of the shopping experience. Instead of denying vast changes in the consumer economy, those involved in traditional retail now have the opportunity to reassess and rechart their course.

[wcm_restrict]

The implications:

  • Brands will need to take a serious look at their sales channels, expenses and retail footprint and look for ways to diversify. Do you need that many stores? Do they need to be that big? Why should shoppers go to your stores if they are all identical? Are your sales associates providing the service and insights that customers expect? How can you evolve your e-commerce efforts to compete with digitally-native brands and marketplaces? These are a few of the many questions brand leaders need to ask in 2018, with the added understanding that everything is up for debate.
  • Investors need to critically evaluate their new and old retail opportunities and figure out what areas are at risk and what areas are untapped opportunities. They need to understand how online and offline retail will change the financial outlook for their portfolio companies and how they can leverage the vacancies and falling rental rates that are bound to continue. As these trends will only accelerate, it’s better to accept them now so that more time can be devoted to determining new strategies as soon as possible.  
  • Real estate developers need to evaluate their holdings with older brands and retailers honestly and critically and brace for more change, not all of which will be good. But at the same time, they need to build relationships with the new generation of brands that are operating and scaling differently and might be in a better financial position than their traditional counterparts. Retail will continue being essential to the consumer economy for the foreseeable future, but the list of companies and the exact outline of these needs is changing quickly.

[/wcm_restrict]

More Reading

The Retail Revolution Report

Mickey Drexler and the death of a supply-driven world

Malls give Apple special treatment. Is it paying off?

The Amorphous Evolution of Retail — with Rachel Shechtman of Story

Rethinking the Purpose of a Store — with Alana Branston of Bulletin

Holding Companies Modernize

This year was also important for the composition and outlook of holding companies. Traditional players like LVMH continued on their normal path, mostly working with expected brands. Yoox and Net-a-Porter merged, consolidating luxury ecommerce. Walmart is building its own holding company with acquisitions of Jet, Bonobos and Modcloth.

But we are also seeing new holding companies emerge that are much more rooted in technology and feature deeper integration across their brand portfolio. Resonance, for example, is incubating brands on a deep technology and manufacturing platform and seeks to give smaller brands the infrastructure to produce and scale incredibly quickly. As competition increases, holding companies that offer infrastructure, expertise and working capital for their portfolio will have massive advantages over traditional players who simply buy companies and let them operate without leveraging the assets of the portfolio.

[wcm_restrict]

The implications:

  • Brands need to seek out and work with strategic partners that give them advantages over competitors, allowing them to design, produce and distribute better and more cheaply than the rest. They should evaluate holding companies by what their strengths are in terms of customer, brand identity technology, and logistical expertise. The holding companies brands would turn to in the past are probably not the ones worth turning to today or in the future.
  • Investors need to connect their portfolio with these companies and even offer some of these services themselves. Investors that have strategic capabilities will have an advantagethere is plenty of money flowing around, but the focus now is on smart money.
  • Real estate developers should also look at both creating new holding companies with strategic power and helping existing ones scale. All players across the ecosystem need each other and as retail becomes more important, real estate has a lot to gain if developers keep an open mind.

[/wcm_restrict]

Underserved Markets Are Waiting

2017 was probably the most saturated year for companies working in traditional markets. With more custom [insert product] companies, athleisure companies, basics companies and cutting-out-the-middleman companies, it will be increasingly challenging to make a meaningful dent in any of these areas.

The most exciting opportunities are in less-discovered markets beyond the coastal elites and the eyesight of male financiers. There are still greenfield growth opportunities left where customers are begging for solutions, where there is little competition, and where the acquisition landscape is much more favorable as there are fewer companies bidding for the same customers.

For example, though there are more companies now serving the plus-size market, it still has a ways to go before it reaches saturation. Additionally, products that serve women, not just men, are new opportunities to build lasting companies, which will require funding more founders—both women and people of color—who bring their own experiences and needs to the table. Also, products that traditionally served women but might be appealing to men are also interesting, such as makeup and skincare for men.

[wcm_restrict]

The implications:

  • Brands need to focus on new markets and hire diverse people that truly understand new customer segments. If a team is not as diverse as the customer base it is serving, something is seriously wrong. They need to look for markets and products that are less inundated by competition and provide more room to experiment and build affinity.
  • Investors need to significantly diversify their teams and spend considerable time exploring new, non-obvious markets. Real opportunity lies outside of San Francisco, Los Angeles and New York, waiting to be accessed. Investors will also need to change the metrics they use to evaluate these companies, since there won’t be as many examples to point to of prior success since these are new markets that have been traditionally underserved. But instead of seeing this as a limitation, investors should view this as a chance to make real money.
  • Real estate developers should work with these new companies to fill less obvious real estate across the country in need of new, energizing tenants. Offline retail will be an important part of these companies, as the shopping experience in new markets is often a big opportunity for improvement. Developers need to get out of their own bubbles as well, take risks with younger and less-defined companies, and help them navigate a quickly changing offline world, which is becoming more important to brands and retailers as online acquisitions costs surge.

[/wcm_restrict]

More Reading

The Plus Size Opportunity

What is Stitch Fix? A platform, a retailer or something new?

The Cross Country Opportunity — with Kevin Lavelle of Mizzen + Main

Reinventing Plus Size from the Ground Up — with Nadia Boujarwah of Dia&Co

An Umbrella Obsession — with Dave Kahng of Davek

Democratizing the Swimsuit — with Moshe Laniado of Swimsuits For All

Thank you!

Thank you to all of our readers and members for making 2017 the most transformative year yet for Loose Threads. This year the company evolved from a hobby into a quickly-growing company, as we expanded our offering, team and ambitions. But we have an immense amount more to do, and we can’t wait to share what is coming next year.

Happy Holidays!

Richie Siegel
Founder and CEO
Loose Threads