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Retail this week (wk 47.2020)
Direct-to-consumer (DTC) business models have generated tons of buzz in recent years. This started with a wave of from paupers to princes success stories in the 2010-2015 period. Most often cited is the ‘Dollar Shave Club’ phenomenon which allegedly took Gillette down from its very lofty position as a company that could ride every wave of opportunity/challenge and remain on top.
Michael Dubin, a co-founder of Dollar Shave Club is said to be worth around $200 million today. That’s not Jeff Bezos-sized rags to riches glory, but it’s enough to get entrepreneurs stuffing delivery boxes from their garages.
Another example highlighted frequently is Birchbox. Katia Beauchamp’s net worth was reported at near $1 billion in 2016. Wow. Now we’re talking.
However, let me remind you that the world changes quickly in this regard. In 2020, names such as Blue Apron, Home Chef, Stitch Box, Hello Fresh, Loot Crate, Graze, Sunbasket, Glossybox and more were being tossed around as often as Dollar Shave (now Unilever) or Birchbox (still independent).
In the most recent definitive ranking that actually matters to consumers, Elle magazine listed their “26 best makeup” subscription boxes. Elle’s tagline states that “you need them in your life right now” and “all of them give you bang for your buck”. Birchbox was #22 in the carousel of 26 if anyone is interested. I’m not sure if that means much except that if you’re like me you don’t get to #22 before your eyes start twitching from bluelight fatigue.
So, let me explore this as an analyst if you will permit me with a focus on an investor choosing between funding Birchbox compared to one investing in a 7-Eleven franchise. If you’re asking the question right now on whether to DTC or not to DTC during Covid-lockdown 2.0, maybe this will help you.
Birchbox has undoubtedly been successful
In 2015, Forbes magazine wrote a success story on how Birchbox achieved 1 million subscribers on just $70 million in funding. This is massive. There is no question that this is success.
There are three elements to this success which cannot be replicated easily in other parts of retail.
First, all of the final mile logistics is managed by third parties. Birchbox does not have delivery agents, trucks, vans, drones. However, in 2018 they started hiring 3,000 part-time staff to go around and give samples to consumers. Hmm. Advantage over.
Second, most of the product development/assortment is replaceable. If Birchbox has a product that is not a good fit for subscribers, they can easily swap it out for something more exciting next month.
Third, location is only important when it comes to assembly of boxes. Birchbox does not need to worry about geography like other retailers.
However, for fun and games, if we assume that the average Birchbox subscriber spends about $150 annually and retained operating profit from each subscriber is in the 10-20% range, then Birchbox appears to generate about the same ROI as a 7-Eleven franchise store in the period from 2012-2017, at least on a percentage basis. That’s good right? Yes and no.
7-Eleven’s scale
Seven Eleven Japan (SEJ) grew their Japanese footprint from about 15,000 locations in 2013 to 21,000 today. Let’s assume that each store reaches about 15,000 consumers. That means SEJ grew their audience by about 900,000 consumers. If you argue that Birchbox started with 100,000 consumers and grew to 1 million by 2015, you would have the same gain, approximately.
In this period, SEJ grew sales from 3 trillion yen to 5 trillion yen – a net gain of 2 trillion or USD$19 billion. From that gain, they have about about 7% EBIT which results in USD$133 million in recurring operating profit. Birchbox, by comparison, would have something like USD$20 million, most of which would be owed to investors.
Net-net comparison
The DTC model relies uniquely on three advantages over other types of retail:
a) Marketing buzz. If Elle magazine is saying you’re “hot” then DTC works pretty well. Things work differently when they are not saying that any longer.
b) Funding. Once again, if investors think you’re “hot” then the model works pretty well. The challenge is when investors don’t know which company is hot in a group of 26 to choose from.
c) Risk. The biggest risk for most retailers is physical location investments. If 7-Eleven invests in more franchises in Tokyo this is a big risk if nobody goes to office buildings in Tokyo any longer. Birchbox takes on no such risk until they need to hire 3,000 samplers to roam the real world and get subscribers.
In conclusion, if you’re looking to go with a DTC model during this 2nd wave of Covid-lockdowns, take some time to consider your economics. You will need to look at marketing buzz, funding, and risk. If you have geography at the core of your business, think carefully about the wild swings we will see in Big Cities around the world during lockdown and then ‘new normal’.
A reminder that when Paris announced a 2nd wave lockdown that millions of Parisians fled to the country. They might want a DTC subscription while hiding in the countryside. They may also cancel that subscription when they return to Paris and get back to the salons and spas that a big city has to offer.
Finally, when looking at the success of DTC remember the two big stories from 2010-2015: Dollar Shave Club and Birchbox. Birchbox’s investors might not feel so confident if they tried to find where Birchbox is located in Elle magazine’s list of the 26 makeup box companies that you must have in your life.
Where do you want to be in 5 years? If you think Big City retail is going to come back to life, you should keep this in mind during lockdown 2.0 when you discuss marketing buzz, funding, and risk.
Good luck this week – please stay in touch.
Regards – Ray Gaul (@RayGaul on Twitter, linkedin/raygaul)
Taken from Linkedin
To learn more about Ray, go here
