3-2-1nsight: Evolving Business Models
How market leaders pulled the rug from right under our feet
As most of Q4 has been reported upon, we’re starting to see two types of companies come forth. Those who continued to grow and have dramatically evolved their prior business model and those who are trying to catch up. As we look at the robustness of the leaders we can see that their business models have not just slightly evolved, but have done so dramatically while most of the public still considers them for what they were, rather than what they’ve become. It’s a good time as we enter the year with more uncertainty to try to better understand what we’re trying to accomplish this year as the new normal sets in. Likewise, it’s also good to see how those trying to chase the leader will do so in order to be competitive.
3 Stories
Target Profit Rises as Annual Revenue Crosses $100 Billion
Target isn't shy about its recent success. So many retailers barely scraped by Q4 because of omicron or supply chain problems, companies like Target and Walmart thrived. Target saw overall earnings rise nearly 12% from a year earlier to $1.54 billion, comps rise 8.9%, and digital sales increase by 9.2%. The company continued to grow even as the pandemic wound down, allowing Target to use the time to reinvest into the business and surpass prior performance. Yet, rather than sitting still, Target will invest an additional $5B investment in operations and open 30 new stores and look to pay employees a minimum wage of 24 dollars an hour.
Allbirds plans entry into wholesale to raise brand awareness
Allbirds saw an increase of 23% year or year in net sales and recorded its highest sales ever in Q4. The company continues to bleed money. Net loss grew to $10.4 million for Q4 and almost doubled for the year from $25.9 million to $45.4 million for 2021. It's not a good place to improve revenue at the cost of doubling your losses. Especially when you consider the rising customer acquisition costs, the litany of new shoe brands, and the recent focus on sustainability from scale players like Nike and Adidas. All that adds up to either Allbirds will need to find some organic growth (not likely at the scale they need) or find a new channel to distribute to customers. Copying straight out of Vuori's playbook, Allbirds is now trying to move into wholesale in the second quarter to help raise their brand awareness. Nike continues to move away from third-party retailers such as Foot Locker. So there may be room for Allbirds to sneak into some of these outlets to gain brand awareness. Still, it'll be hard to see how this can scale to the levels they're hoping to maintain their projected growth without solid marketing and cultural presence.
Recently the NYT's acquired Wordle for an undisclosed sum of seven figures and their purchase of sports subscription service, the Athletic, for $550M in cash to surpass the 10M subscribers goal. We're now seeing large legacy news organizations like Gannett try to drive digital subscription growth as well. First, they put up a paywall for USA Today, and now they're finding other subscriptions to sell to consumers. The only problem is that USA Today is about eight years too late, and interest in news across America has dropped 17%. And as we see most frequently on both Fox News and CNN, the lack of objective reporting but push for more sensational propaganda has turned Primetime news into entertainment riddled with pharma ads. Subscriptions will most likely continue to work, but will news subscriptions continue to display lasting power?
2 Takeaways
Chasing the leaders is a lost cause for many companies with ambitious growth goals.
DTC darlings that went public during the pandemic because of a pull forward on users by circumstance rather than choice try to maintain their pandemic growth rates now realize that it's impossible. It's easiest to pick on DTC companies because they built much of their primary business model on selling directly to consumers through digital channels. When pandemic shut down the world, more people shopped online than ever before, inflating or pulling forward sales. As we enter the post-pandemic world, we're seeing many permanent behaviors changes turn out to be temporary trends.
Your point of view and how it affects your long-term vision is critical, as it informs everything you do. DTC darlings now realize that the shift to online shopping wasn't permanent. When we isolate companies that may have started online but were never DTC (in the typical DTC sense), they did not rely on the bump in sales and misbelieved their success; instead, they saw it for what it was a bump. Recognizing that the bump was just a bump made it easier to reinvest those sales to execute against their long-term vision.
Companies with a more robust, resilient, and long-term vision will only widen their gap. Allbirds can try to build a new wholesale strategy to help them hit their growth rate and margin, but Vuori has already stolen so much of this new consumer's attention span. Developing a resilient game plan to expand your revenue potential and opportunity is complex, and rarely can this be a sprint. These new models often require different frameworks, points of view, skill sets, and an appetite to suffer the needed losses.
Companies with a resilient vision cannot rest on their laurels because they know how tough the fight will be. That means they won't willingly give up their hard-earned customer. Leading companies will continue to meet their customers where they're at, how they want it, and what they want. Companies catching up need to remember that the competition isn't giving up their head start but will continue pushing the envelope. And it's always super expensive and taxing to keep up.
Businesses that grew responsibly during the pandemic have changed the business model for their entire vertical, not just their stores.
Walmart and Target's success has made it clear that the expectations for retail have transformed. Previously, analysts and individuals would often lump Nordstrom, Target, and Kohls together and leave Amazon aside because it was an eCommerce retailer. Now, Amazon, Target, and Walmart are heads and shoulders above their retail competitors because they have continued to evolve with the consumer's needs. Amazon is the company that started the shift that introduced consumers to a more convenient way to buy things. But Target and Walmart have taken that ball and run with it. They are leaving so many retailers floundering trying to navigate this new paradigm.
Retail is no longer just a byproduct of merchandising, in-store experience, and commercial strategy. It's now a blend that starts at omnichannel and finds the most effective way to provide value to consumers through the right mix of inventory management, merchandising, online experience, offline experience, resource planning, and fulfillment. Mastering those disciplines was always demanding but exceptionally challenging when you have to integrate it all with the right front and backend, the staff to execute, and direct marketing. Hence, consumers know what they're getting. Despite being in the lead, Target is still planning on investing $5B into operations, which includes launching 30 new stores, pushing minimum wage up to $24 an hour, and continuing to widen their gap. Target knows that any investment into their physical retail stores will also drive up their online sales.
Contrast that with Kohls trying to manage a supply chain issue, merchandise strategy problem, inflation competition, labor shortage, pandemic fears, and inability to leverage promotion or pricing as a stepping stone for something greater means they'll always be so far behind target. Companies like Kohl's have realized too late that the world has shifted its expectation of retail because of the robust success of Target, Walmart, and Amazon. Consumers' price elasticity currently appears strong; the moment that wanes, retailers like Kohl's will scramble running promotions and sales to be considered by consumers while also ratcheting up overhead costs to meet that demand. Contrast that with Target, where the leaders can compete on price if they choose to, and won't suffer those same operational losses due to present investment, and steal away customer share from the competition.
1nsight
Rather than chase what worked in the past, the pandemic established many new digital behaviors, making now the best time to challenge assumptions.
The pandemic and the rapid shift to digital has only further fragmented users, creating space to test tried and true assumptions. Old assumptions about the speed of delivery as the most crucial factor for consumers may morph into new beliefs about delivery control that may prove more critical. Pricing assumptions for specific cohorts could magically change as new "buy now, pay later" methods become more popularized. Product discovery assumptions rooted in page load speeds, algorithmic feeds, and the right aggregators might shift to live consumption or UGC endorsement.
Almost everyone believes the NYT is a news company, but we continue to look and see the company slowly becoming an entertainment/gaming company. The Times, in 2021, ended the year achieving its goal of reaching 10 million subscriptions by 2025, four years ahead of target, with 92% of those subscriptions (about 92%) being digital-only subscriptions. The Times' growth during this period is even more impressive because there wasn't infuriating daily news caused by a president that couldn't stay off social media. After the Trump era, Primetime news viewership has dropped 36% across the three major cable networks, and website visits to news companies have also decayed 8% during this period. Yet while facing all the slowdown in consumers demanding news, the NYT saw another path forward for their business, short-form-mobile entertainment.
Digital subscriptions at the Times in 2020 saw its standalone products, like games and cooking, increase 66% while subscriptions to its digital news product only rise by 48%. The growth of non-news subscriptions increased in 2021 by 38% in the third quarter (1.9 million subscriptions) compared with the news product, which grew 21% (5.6 million subscriptions). Non-news growth is now responsible for 10% of their revenue ($568M) in 2021. The New York Times' business expanded beyond just news, which is why we can easily understand the motivations behind their acquisition of Wordle.
Many current leaders who have either transitioned to digital or found the right blend of digital and physical will soon test their models and assumptions to ensure they remain valid. The pandemic pulled forward and introduced many new habits and behaviors to consumers. Most of the dramatic behavior changes caused by the pandemic won't persist, but there have likely been many new habits formed, and we haven't even discovered the best to monetize these new habits. Leaders in specific verticals and spaces have grown at a blistering pace over the past two years. It'd be fool's play to catch up, instead, rather than keeping up, instead invest your resources to stand out.
Walmart and Amazon had cornered the market in fast delivery, so Target invested in new kinds of fulfillment. Investing in innovative fulfillment solutions allowed Target to realize it could better serve the pick-up at store option. Target didn't just focus on gaining eCommerce proficiency; instead, blended and used digital to facilitate better discovery both on their app and in-store, allowing their comps to improve 12.7% YoY despite the pandemic shutdowns and supply chain woes.
It's always easy to make models or plans that follow the assumptions established by the market leaders, but you'll always be an imitation. Instead, focus on your assumptions rather than follow the leader because that's how you get to the end of the rainbow.