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How Shoes Became Venture Capital's Favourite Accessory

Online shoe brands like Allbirds, Rothy’s and Birdies are growing sales by developing one really popular style and pushing it hard. Is this business model sustainable?
Birdies, Allbirds, Rothy's, Greats | Source: Facebook, Courtesy
By
  • Chantal Fernandez
BoF PROFESSIONAL

NEW YORK, United States — You've probably seen the shoes of the moment on Facebook, or heard about them on your favourite podcast. Or saw a photo of Meghan Markle sporting them on her Australian tour last autumn.

Online shoe brands that sell a limited range of styles— sometimes just one popular silhouette — are everywhere these days. The most successful have a name so well-known it’s become synonymous with the shoe itself — you wear a pair of Allbirds, Rothy’s or Birdies, rather than sneakers, flats or loafers. Behind them are a crowd of start-ups hoping to achieve the same success with leather boots, strappy sandals and myriad other styles.

These brands may or may not turn out to be the Vans and Birkenstocks of the digital age. But for the momentat least, they are among the fastest-growing companies in the current "it" accessory category. Footwear sales are booming, particularly sneakers and other casual, comfortable styles men and women increasingly prefer to wear in the workplace and beyond. US footwear sales grew seven percent in the first half of 2018, according to NPD Group, with e-commerce accounting for 90 percent of growth last year. Euromonitor estimated the US market at $76 billion in 2018.

But unlike in other accessory categories where one direct-to-consumer brand dominates — Warby Parker in eyewear or Away in luggage, for example — footwear start-ups have split up the market into signature styles that they stake out with aggressive online marketing. Once they conquer their niche, these brands release new iterations on their hero product, but rarely chase the silhouette of the moment. The goal is to be easy to identify, online and off.

“The luck that we have is that [Rothy’s] a very visually distinctive looking shoe,” said the brand’s COO and president, Kerry Cooper. “In a world of social where you maybe have ten seconds of someone’s attention, we have a shoe that [becomes], ‘Oh, I’ve seen those before.’”

Sneaker brand Allbirds is the most prominent success story in the market. Known for its all natural materials (merino wool, eucalyptus tree fibre, among others) and status as Silicon Valley's go-to style, the brand made headlines for selling one million pairs of $95 shoes in its first two years. Now profitable, it reached a reported $150 million in sales in 2018, according to Axios, and has raised over $77 million.  Investors include T. Rowe Price, Fidelity, Tiger Global, Maveron and Lerer Hippeau.

Rothy’s has found an audience for its flats among women looking for an alternative to sneakers or ballet styles. The shoes are 3D-knit (as part of a machine and handmade manufacturing process) using recycled plastic bottles; they are also machine washable. The profitable company has raised $42 million and reached more $140 million in annual revenue in 2018, three years after launch. Investors include Goldman Sachs and Lightspeed Venture Partners.

Birdies, a slipper made for wearing both inside and outside the home, is the new brand to watch. In January, it announced an $8 million Series A funding round, and said sales grew 400 percent in 2018 thanks to its association with Markle, an early fan, and the success of its Starling smoking slipper silhouette. Investors include Forerunner Ventures, Norwest Venture Partners and Slow Ventures.

Greats shoes, which makes “classic” unadorned luxury sneakers, launched in 2014. It’s raised $13 million and is banking on the continued popularity of its Royale style ($179). Investors include JH Partners and Searchlight Capital's Eric Zinterhofer. Thursday Boots, which started in 2014, sells Chelsea boots and other leather styles and raised an undisclosed amount from Blue Scorpion Investments in 2017.

One reason so many single-product brands have sprung up is that their simple business model appeals to venture capital firms eager to crash the fast-growing direct-to-consumer market, said Sucharita Kodali, retail analyst at Forrester Research.

Scaling can be a challenge, with many brands struggling to maintain their rapid growth once they surpass $100 million in sales, she added. To keep growing, they typically need to release new products or expand into different categories to find new customers.

“If you can source a product, you can take some pretty pictures on Instagram and generate demand,” Kodali said. “The challenge is that these brands have set the bar high for their products and maybe not everything can even be made the same way.”

Some shoe brands may prove to be more than just a trend, said Kodali, adding that there is “a lot of headroom” in footwear to grow.

That female consumer who is not wearing a sneaker to the office: what is she going to wear and who is talking to her?

"That female consumer who is not wearing a sneaker to the office: what is she going to wear and who is talking to her?" said Nick Brown, partner at investment fund Imaginary Ventures, which does not back any footwear-focused online brands. He has personally invested in Allbirds.

What’s required for long-term survival? A pipeline of new products that keep customers coming back — and telling their friends about it — and a differentiator that can withstand the inevitable knockoffs, like fabrications or a compelling brand identity.

Birdies only just figured out its place in the market. Just last summer, it pivoted its design, adding thicker soles to its slippers ($120-$140) after realising that its customers were wearing them outside regardless.

“When we shifted our positioning every so slightly… our business hit this massive inflection point,” said chief executive and co-founder Bianca Gates, who previously led retail partnerships at Facebook and Instagram. “We did not even know what our core product was… until this last fall.”

The refurbished slipper style generated at 30,000 person waitlist — half for the plain black style — and the fresh capital will help meet the demand for those orders. The brand declined to share revenue.

Gates said further refining the brand identity is key to scaling.  For Birdies, the story is about the home and family, attracting fashion-minded customers with new fabrications while winning over consumers looking to wear a shoe that feels like a slipper outside the home.

“The product itself is not defensible, what is defensible is the brand,” she said.

The company plans to expand a partnership with Nordstrom that started in November to find more customers outside California and New York.

Rothy’s is not interested in partnering with a retailer like Nordstrom — for now. The brand “doesn’t want to get lost in a sea of shoes,” said Cooper, who joined founders Stephen Hawthornthwaite and Roth Martin last spring.

She wants to keep close tabs on customer data, and is looking at e-commerce expansion in China, having opened an office in Shanghai last year. Cooper said she wants to develop new colours and patterns that bring customers back for multiple purchases. Its pointed style ($145) is the most popular. As customer acquisition costs rise on Facebook and Google, the company is diversifying its marketing strategy with podcasts, television, Pinterest and radio

Rothy's has been profitable since it started and Cooper said the brand is resisting pressure to scale faster. She said the company’s biggest challenge is execution risk.

“We want to do a couple things really well instead of ten things mediocre," she said.

Meanwhile, Allbirds is scaling by opening stores, with plans to add at least eight US locations in 2019, including Chicago and DC.

The brand, best known for its sneaker, also plans to introduce new styles and fabrications, which now include wool and eucalyptus tree fibre.

“The look we make is less important than how we make it,”said co-founder Joey Zwillinger. “It’s not revolutionary on silhouette design …. we are inventing a whole pipeline of incredible materials that take a long time to develop. It's a different model.”

At Greats, co-founder Ryan Babenzien is focused on growing their core sneaker style, hoping a simple, classic look will outlast the trend of hyped-up limited editions. He says the brand is differentiated in the market by its low price point for Italian-made shoes, which he claims last longer than those of online competitors. The brand declined to share revenue.

In 2018, it became clear the Royale was the best-seller and so Babenzien is retiring most of the other styles.

“My entire philosophy upon launching Greats was to have a narrow and deep design philosophy,” he said. “Let’s pick a shoe that we think we can have for a ten-year cycle and the only thing that will change ... is colour and material, and that’s where the fashion component comes in.”

As for marketing, Babenzien said the brand is lowering its spend on digital marketing and diversifying through other mediums such as podcasts. It has sold through Nordstrom online and in some stores since October 2017.

“We’re not getting caught in the digital warfare,” he said. “At this point, it’s just about making sure we get more customers, we don’t have to prove out a bunch of things that you have to do in the very, very beginning. Digital is just one channel of many.”

Editor's note: This article was revised on 4 February 2018. A previous version of this article misstated that Rothy's shoes are 3D-printed. They are 3D-knit.

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