By Daniel Meurer WG’17, Founder of Laguna Beach Towel Company
Today, retail entrepreneurs have a major opportunity to build lean, profitable businesses and capture share from large retailers.
Changes in distribution, advertising and freelance outsourcing accessibility have created the opportunity for entrepreneurs to offer equivalent value at lower prices. Smaller, newer, and nimbler companies can organically build brands and narratives that resonate with consumers and can do this using low cost, but high impact, advertising channels. This has pressured margins across the industry, but has simultaneously offered creative entrepreneurs the opportunity to create successful retail businesses.
Legacy retail companies can ride this trend by aligning themselves through partnerships, investments, or acquisition with smaller, upstart consumer brands. Retailers can also gain through association with smaller, more narrative focused brands and leverage brick and mortar stores, and established brand equity to play a greater role in curation, aggregation and distribution.
There have been two waves of distribution democratization. The first was the internet itself, which allowed people to sell goods without needing a physical store and shelf space (yes, there were catalogs, but that wasn’t an easy process). The second wave is occurring now and is ongoing: the democratization of fulfillment.
In the past it would have required many in-house hours of box packing and shipping or using a large distributor at much higher costs with very high minimum volume requirements.
Amazon Fulfillment, Shipwire and other 3PLs have now made fulfillment available to anyone, with much lower costs and minimum order thresholds. It’s now possible to have products made abroad, shipped to the U.S. and sent directly to third-party warehouses where sales are fulfilled automatically.
In an era of personalization, awareness, and greater transparency, it goes without saying that advertising has evolved. It has moved away from Madison Avenue influencing uniform swaths of people to more of a conversation between companies and consumers.
Most of these conversations do not occur through 30-second, prime time cable spots, but online—whether through Youtube videos, social media, influencers, or scathing reviews. With smaller, more targeted businesses, entrepreneurs can resonate with consumers concerned with authenticity, transparency, and personalization.
On the other hand, larger retailers can struggle to demonstrate authenticity. Moreover, save a demonstrable shift over the last few years, marketing efforts by big box retailers have been less focused on creating scrappier content more suited for today’s customer
New advertising channels enabled by the internet include AdWords, AdSense, Facebook and Kickstarter; they are available to everyone and can fit the smallest of budgets. Amazon, Wayfair and other online retail platforms that carry third-party products offer another unique methods of advertising in the form of customer exposure. Amazon accounted for 31% of online sales over the holiday shopping season, giving its third-party retailers access to a massive consumer base without any direct marketing spend.[i]
Critical aspects of any retailer’s business, supply chain and outsourcing used to be reserved for large companies and outside the grasp of the small business operator. Now, with a little time and money, a discerning entrepreneur can acquire the outsourcing capabilities and access suppliers behind the world’s largest brands, over simple platforms that aid in business services.
Through outsourcing, the bulk of a lean retail entrepreneur’s work involves ably managing these different moving parts. As mentioned, there are plenty of competent third party services that aid in the process. Fulfillment can be outsourced to Amazon, branding to 99Designs, product to design to freelancers, business services to Upwork, and basic legal services to LegalZoom.
Small, digitally native e-commerce companies can offer high value at lower prices and in aggregate, larger variety. This, in addition to broader, secular trends and shifts in consumer behavior, have increased pressure on retailer margins.
In a stylized example below, assuming a constant gross profit of $10 per unit for a brand owner, a product would sell for $39 through a direct-to-consumer site, $46 on Amazon and $68 if sold through a brick and mortar store.[ii]
Large consumer brands are losing share to new companies and entrepreneurs are taking value for themselves. Gilette sold to P&G twelve years ago for $57bn with 28,700 employees at the time. With an estimated 15% of unit market share in the US, Dollar Shave Club was purchased for $1bn by Unilever and had 190 employees.[iii]
What It Means
These trends are only going to accelerate. E-Commerce only accounted for 8.3% of total retail sales in the U.S. at the end of 2016, but it’s growing at 15.1% compared to the 2.9% growth in total retail sales growth.[iv] E-Commerce growth is going to benefit smaller, leaner brands, but shrewd legacy retailers will also be able to adapt and thrive.
Now is an incredible time to start focused, digitally native consumer brands. It can be done for a very low initial investment that doesn’t require outside fundraising and because of their lean structure, these businesses can be profitable in year 1.
No place is it easier to start this easier than business school, where professors are more than willing to help and conduits exist between the school and large retailers, investors, and retail entrepreneur alums. The Baker Retailing Center counts the CEOs of LVMH, Macy’s, Under Armour, Tory Burch, and Williams-Sonoma as board members, among many others. Alums who founded companies such as Warby Parker and Jet are also still active on campus.
Brick and mortar footprints and brand recognition are assets that continue to be incredibly valuable, and should be exploited. In addition to embracing innovation in-house—whether it is through inventory management, product design, or store tech—big brands can also embrace smaller, nimbler brands when possible, and play a role as platforms and aggregators. Moves like these will pay dividends and help protect big box retailers in particular, even when these trends are here to stay.
[i] Source: Fortune
[iii] Sources: Gillette 2014 10K, Stratechery
[iv] Source: U.S. Department of Commerce
Bio: Danny Meurer is a second year MBA student. He is the Founder and President of Laguna Beach Towel Company. You can find his products at lagunabeachtowelco.com, Amazon, Wayfair, and Jet. He just started a blog DannyMeurer.com where he writes about e-commerce, books, and other random thoughts.