Warby Parker’s disappointing earnings report today is just more evidence of what I call the profitless prosperity of disruptor brands. They join a growing list of retail innovators that are posting strongly growing revenues while their profits continue to worsen. Given that Warby is among the biggest and most mature DNVB’s (digitally native vertical brands) one would expect profit margins to be improving, rather than headed in the opposite direction.
Most interesting—and perhaps alarming—is that while Warby was among the first of the recent generation of disruptors to seize on the importance of a major brick-and-mortar presence, the strategy seems to be falling short of expectations.
The Store Opening Panacea
Anyone who has been following my work will know that for many years I have been aggressively challenging the retail apocalypse narrative, as well as the idea that substantial profitable, online-only retail brands can be readily built.
As the industry has come to accept this virtual impossibility (heh, heh) it is not surprising to see dozens of companies that once believed they didn’t need those pesky things called stores capitulate and begin investing in brick-and-mortar as the potential antidote to the largely terrible profitability of pure-play e-commerce.
Warby Parker is the furthest along in this strategy, having bet big on physical retail, with plans to get to over 200 stores by year end. The hope is that an “omni-channel” strategy expands brand reach, lowers the cost of customer acquisition, reduces expensive product returns and drives greater loyalty. Allbirds, Madison Reed, Vuori and many others are now aggressively following suit.
Yet despite having some 100 locations open for multiple years now (the majority of which are presumably situated in the highest potential trade areas) something doesn’t seem to be adding up for Warby. Either these comparatively mature stores aren’t generating the kind of EBITDA one would expect by now, or Warby is investing far too much in overhead against the potential scale of the business.
Turns Out, Physical Retail Ain’t So Easy
As I advised one of the (now) more high profile DNVB’s to move into physical retail over a decade ago—and have been banging the drum for a “harmonized” retail strategy here, in my keynotes, and in my book for quite some time—I’m not about to suggest that physical retail expansion (owned stores and/or wholesale) should not be a key consideration for these brands. Yet, while it may be strategically sound, successful execution at meaningful scale is far from a slam dunk.
Just because a brand has gained significant consumer transaction online doesn’t mean it will translate well to a brick-and-mortar expansion. It’s taken many of the old school direct-to-consumer brands (Lands’ End, LL Bean, Duluth Trading Co., et al) many years and iterations to get their omni-channel strategy right. And plenty of much larger and more experienced retail brands struggle to get (or keep) their store and overall customer portfolios sufficiently profitable.
The skills needed to run a large chain of stores are dramatically different from those needed to execute an online only business. Opening stores requires significant upfront investment. Initial success in a handful of prime locations cannot be automatically extrapolated to dozens or hundreds of stores. The list goes on.
The Emperor Has No Clothes?
In addition to having been a Warby Parker customer for many years, I have long considered the company to be on a very short list of remarkably innovative retailers. So I find it both perplexing and disturbing that they are not on a better glide path to profitability.
To be sure, given their major pivot to physical retail, Warby has faced some unanticipated headwinds from the pandemic. And they clearly have plenty of strengths to leverage to (hopefully) get back on track. At the same time, their failure to perform well during the so-called “great acceleration”—and during what was probably the best 18 month period for retail consumer spending in decades—is troubling.
As they, and many of their brethren, embark on an expensive (and largely unproven) brick-and-mortar expansion strategy in the face of increasing economic headwinds, it’s fair to ask whether the promise of digitally native brands is nearly as compelling as once thought. Sometimes the invitation is indeed better than the party. Time will tell.
In the meantime, it’s probably time to buckle up for a lot of turbulence ahead.