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                    A consumer play not yet served by Amazon. Photo courtesy of Christopher Michel.

“Warren Buffet just confirmed the death of retail as we know it,” – that’s the headline of an article published by Business Insider last week. If your startup is in the consumer retail space, you should take notice.

Warren Buffet is usually spot on when it comes to having long-term vision. To illuminate this long-term view and how it applies to the consumer retail outlook, here is an exchange he and Charlie Munger, vice chairman of Berkshire Hathaway, had at their most recent annual meeting earlier this month:

Warren Buffet: “The department store is online now, I have no illusion that 10 years from now will look the same as today, and there will be a few things along the way that surprise us, the world has evolved, and it’s going to keep evolving, but the speed is increasing.”

Charlie Munger: “It would certainly be unpleasant if we were in the department-store business.”

As strategic CFOs for consumer startups, we’ve learned 3 lessons we’d like to share in order to help you position your startup to attract the investment that will bring success in the evolving retail landscape that Mr. Buffett refers to.

  1. Don’t be in the crosshairs of Amazon

People love Amazon. Consumers are used to finding and ordering on their site or app in a painless and quick way. You do not want to be solving a problem they don’t have. You therefore will have a hard time raising money for an online business selling things that can be easily found and bought on Amazon, like regular books, toys, and small electronics. If you focus on these types of commodity items, investors will have a hard time believing you can source your products for less, or get them to the customer faster, or even get people to visit your site in the first place and transact there when they already have Amazon Prime.

Yet, there is hope for your startup. Although it may seem like they already sell everything, Amazon didn’t get to every category at once (for instance, they are just now getting to furniture and groceries). They didn’t do every category well on the first shot either (case in point: fashion). Your opportunity to play alongside this online giant is by focusing on a niche they are presently not choosing to focus on or have historically had execution challenges with because of obstacles related to merchandising, vendor relations, or other factors. A complex selling process also opens up a window of opportunity, for instance, a market where you need to customize the product online (like glasses), or a market where regulatory compliance makes Amazon’s standard checkout process insufficient (think pet RX), or areas where merchandising is key (like designer fashion).

  1. Don’t write off physical retail for dead

If all it took to imagine the future of retail was visualizing empty malls and a world where every purchase is made on a mobile app, a sharp guy like Buffet would not have said that “there will be a few things along the way that surprise us.”  Although news about the death of bricks-and-mortar retail and retailer Chapter 11 notices surrounds us, many local shops are doing quite well. Online brands are building and emerging faster than ever. One of their “secrets” seems to be to open physical retail along the way for brand support, and for retail “showroom-ing”. This term is used when an online brand (like Warby Parker or Bonobos) opens a bricks-and-mortar location that is open to the public in order to let the customer touch and feel the product. This allows the company to get closer to their end customer and acquire feedback that will be essential for future product development. Often these new retail showrooms carry very limited or even no inventory for purchase, and customers need to wait for their purchases to be mailed to them, as if they had purchased online, while they have had the benefit of a physical try on.

The destruction in legacy retail is a naturally occurring forest fire; it is creative-destruction that opens up space, and creates opportunities for new brands in the form of short- and long-term and pop up leases in premium, high street locations and malls. These opportunities would have been unthinkable just a few years ago. If you think bricks-and-mortar are dead, think of millennials; as connected as they are, they also like to stroll their local neighborhood on weekends and find stuff they can buy. Tourists from areas of the country less dense with early adopters, and international arrivals in particular, can also be introduced to new, emerging brands – in fashion, home, electronics, even food & beverage and health & wellness – through strategically placed physical outposts in high traffic locations. Physical space is here to stay for those startups that are creative and use it to augment their digitally-driven business models.

  1. Inventory-lite is favored by investors

The model invented by Zara and H&M has put many former titans of the mall on the brink of irrelevance – and they did not do it by shifting consumers online. Fast fashion companies like Zara, H&M, and Forever 21 know that consumers are fickle and what is hot now can become old news next month. Their entire model is designed to take new styles from the designer’s desk to the shelf in just a few weeks, without squeezing their suppliers. As a result, their initial buys are shallow and frequent, and stores only carry current stuff that will not need to be heavily discounted because it went out of fashion while sitting in a warehouse waiting to be shipped – which is a huge issue their competitors have.

Having a lite – or even zero inventory –  business model reduces the investment in working capital, which in consumer businesses, is often a risky asset. Getting to inventory-lite requires high inventory turns. High inventory turns are made possible by a kick-ass concept-to-shelf design process, aided by superior logistics. Even better than inventory-lite is inventory-zero. Inventory-zero is inherently less risky, requires the least working capital, results in the highest operating margins, and has a tendency to translate into a free cash flow machine. VCs know this. Think eBay, MercadoLibre, Grubhub, and Opentable, who don’t even own anything they sell. They are the toll-takers of the internet, taking a piece of other people’s transactions, but never actually taking the risk of owning anything or the expense of warehousing or shipping anything. These agency businesses are fantastic business models, but they tend to be winner-take-all because of the importance of scale and network effects, so when attempting to build a toll-taker business, be prepared to answer questions about how you will acquire your customers, how much it will cost to do so, and who your competitors are.

Use them to fine-tune your value proposition

These three things to have in mind when formulating the plan for your consumer startup are by no means exhaustive… the comprehensive list of potential ways to maximize the value of your consumer startup would be a very long one. These are however three key things you should keep in mind as you try to define your value proposition for VCs. They are also key items to keep in mind as you prepare your strategic plan and do your long-term modeling to ensure you have an attractive beachfront to compete supported by smarter finance.

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