Retail 2.0. It's the latest buzzword that every e-commerce start-up claims to be. As I've mentioned in previous posts, young, innovative companies have introduced a plethora of new online retail business models over the last few years. What I recently noticed, however, is that more and more of these start-ups seem to be focusing on the issue of "discovery." Social shopping sites allow tastemakers to share their favorite purchases with friends; subscription services send customers a curated selection of goods -- from makeup to jewelry -- each month to help customers discover products they love. Discovery is certainly a pain point in today's cluttered shopping environment. But why are so many companies chasing Retail 2.0 problems, when there are still plenty of Retail 1.0 problems to solve?
Supply chain innovation -- an area that I would classify as Retail 1.0 -- is one of the most fundamental ways to disrupt a category and earn the loyalty and dollars of customers. There are a handful of start-ups that are tackling the supply chain in their respective categories. Launched last month, Dollar Shave Club is a subscription razor blade service for men. But this subscription service isn't about discovery. Instead, it's about producing razors cheaply, forgoing the enormous marketing costs that other razor brands incur, and selling direct to the consumer online, rather than selling to a middle man (i.e., your local drugstore). I won't argue that producing and distributing goods more efficiently is an easy task; but a company that succeeds in cutting out fat from the supply chain and sharing this new-found value with customers is creating a long-term competitive advantage.
Venture capitalists are paying attention as well. Some of the darlings of the e-commerce start-up world are disrupting archaic production processes and distribution networks. Warby Parker, for example, is able to sell fashionable prescription eyeglasses at $95 per pair because the company designs its own frames and thereby avoids paying hefty licensing fees (which are the norm in the eyewear industry). Everlane, a vertically integrated clothing brand, releases only four new fashion products each month, which are sold in limited batches. The company is transparent about its 2x markup (so a T-shirt that costs $6 to produce will retail on the site for $12). This is significantly lower than the fashion industry's 5 to 10x markup, which must support high marketing budgets and a wholesale-to-retail markup that Everlane avoids by selling direct-to-consumer. Bonobos, which just announced a strategic partnership with retail giant Nordstrom, has done the same with men's pants.
Another interesting facet of these businesses is the fact that they focus on a specific category -- whether eyeglasses, T-shirts, or pants -- presumably because depth, not breadth, leads to lower production costs. This focus has an additional benefit: specialized customer service. Early on, Warby Parker identified a significant barrier to purchasing prescription eyewear online: customers are often confused by their prescriptions and are worried about entering their information incorrectly. Because of its focus, the company was able to craft the perfect solution. Warby Parker now has a team of customer service agents who will call your eye doctor on your behalf to retrieve your prescription.
So maybe, then, behind all the buzz words and slick marketing, Retail 2.0 doesn't look too different from Retail 1.0. Good product, good service, good prices. Can it really be that simple?
Vivian Weng is the co-founder of FashionStake, a venture-backed online marketplace for independent fashion that was acquired by Fab.com in January 2012. She is a recent graduate of Harvard Business School.
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