NEW YORK, United States — For decades, the playbook for building consumer goods brands has only evolved incrementally. Then the internet happened, fundamentally reshaping the brand-building playbook with an emphasis on e-commerce, digital marketing and abundant capital. Today, there are more brands vying for the attention and dollars of shoppers than ever before.
But will any digitally native brands out scale and outlast the 20th century heritage brands that came before them? This is the most pressing question for fashion’s digital-native gold rush, which has led investors to pump over $1 billion dollars into up-and-coming brands across the consumer ecosystem.
To answer it, one has to evaluate both brand cohorts against a number of vectors: their funding, retail growth, sales milestones, profitability and financial troubles. This is exactly what we did. We selected 13 brands and split them up into three groups: Digitally Native Phase One Brands, which started between 2008 and 2012 and include Bonobos, The Honest Company, Happy Socks, Nasty Gal and Warby Parker; Digitally Native Phase Two Brands, which started after 2012 and include Allbirds, Away and Casper; and Heritage Brands, which were founded in the 20th century and include Comme des Garçons, Nike, Patagonia, Ralph Lauren and Victoria’s Secret.
Successful brands, no matter what era they come from, are able to raise capital, expand their sales channels, reach profitability and hit big sales milestones in a methodical and sustainable manner. What follows is a look into the dissonance between the dreams and realities of the digital-native boom — and whether building a lasting brand today is easier or harder than it used to be.
Access to Capital
A brand’s starting point has a big impact on where it will end up, especially when raising institutional capital. When Heritage Brands started in the 1960s and early 1970s, professional capital was not nearly as abundant as it is today. These brands had to rely on different and more limited sources of income to bootstrap their companies and prove their worth, such as personal savings and bank loans. For example, founder Roy Raymond started Victoria’s Secret in 1977 with $322,000 (after inflation) that he compiled from a range of sources.
Conversely, most Digitally Native Brands went exclusively for professional and institutional money to launch and grow. They hoped this money would give them an edge against existing players and other ambitious start-ups. These companies have raised money liberally: Casper has raised over $240 million; Warby Parker has raised $215 million. On average, a Heritage Brand’s fundraising in the first 10 years amounted to $5 million, while a Digitally Native Brand’s was $125 million, a staggering difference that has seriously impacted the expectations for digitally native businesses.
While the internet has created an explosion of avenues for brands to sell their products, Digitally Native Brands are opening more stores more quickly than Heritage Brands did. Almost a decade into its business, Warby Parker has 61 stores, Bonobos has 41 and Happy Socks has 27, while Nike had one and Patagonia and Ralph Lauren had three after 10 years.
Heritage Brands often didn’t open their first stores until they proved their products through wholesale and mail-order catalogues. For Digitally Native Brands, the shortcomings of selling strictly online are increasingly clear. With millions of dollars in investments at stake, these limitations are forcing them to grow their retail footprints quickly as a way to mitigate their increasingly expensive digital customer acquisition efforts.
Cash Flow and Profitability
Heritage Brands relied on cash flow and profitability to keep their businesses going and livelihoods afloat. These companies were profitable almost immediately while many Digitally Native Brands have yet to be profitable even after being in business for an average of six years.
For Digitally Native Brands, it’s more important to be seemingly ubiquitous and cutting edge than it is to remain profitable and independent. Bonobos and Happy Socks, two Digitally Native Phase One Brands, are exceptions: Happy Socks was grown outside of the venture-capital bubble and Bonobos was acquired by Walmart in 2017. Given the uncertain acquisition landscape and the discipline public-market investors instill on a company, the hyperscale playbook of many of Digitally Native Brands has not yet been proven to consistently produce valuable exits, or to be more capital efficient than the old, slow and steady funding approach.
$100 Million in Sales
Because of the substantial amount of money flowing into the ecosystem, brands are reaching $100 million in sales much quicker in each subsequent era. Heritage Brands took 10 years on average to reach this figure, phase one brands seven years, and phase two brands only four years. Patagonia took the longest to hit $100 million in sales, taking 17 years, while Casper took the shortest, at three years.
Heritage Brands proved out their business health by reaching $100 million in sales organically and finding sustainable customers along the way. Digitally Native Brands cannot follow Heritage Brands’ playbook for growth since their investors need a return on their investment in seven to 10 years. This puts pressure on Digitally Native Brands to reach $100 million in revenue as quickly as possible. Casper is a key example of a brand that launched in 2013 and took the least time out of all of the brands we studied to reach $100 million in sales. It’s expected to hit $400 million in sales this year, its fifth year in business, yet it took $240 million of venture capital to get there.
Although their goal is ubiquity, Digitally Native Brands are still far away from encroaching on Heritage Brands’ territory as multi-billion dollar, mostly independent companies. The old brand-building playbook, which relied on steady growth in both retail and wholesale channels, relatively modest capital raises and marketing budgets, has proved itself.
However, the new brand-building playbook, which relies on e-commerce, digital marketing and abundant capital to condense a process that normally takes decades into a handful of years, remains unproven. With endless amounts of money entering the digitally native space, the entire ecosystem needs to reconsider if it is building companies that will truly last or financial instruments that seek — but might fail — to make a quick return.
Maybe the fundamentals of building brands — consistent and repeatable growth, low-risk experimentation and a focus on profitability — have not changed that much after all, even with the internet reshaping almost every part of our lives.
Richie Siegel is the founder and lead analyst at Loose Threads. All data above comes from the report “Fast or Frivolous? How building consumer brands is evolving, accelerating and evaporating.” Dollar amounts are adjusted for 2016 inflation rates.
The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.