What Changes At ModCloth And Nasty Gal Mean For E-Commerce

Editor’s Note: Boris Wertz is the founder of version one ventures, and has invested in over 50 early-stage consumer and enterprise companies, including Chloe & Isabel, Frank & Oak, Julep, and Indochino. Follow him on his blog and on Twitter @bwertz.

Recent weeks have brought some major shakeups to the e-commerce world as Sophia Amoruso stepped down as CEO of Nasty Gal and Eric Koger stepped down as CEO of ModCloth.

While some may wonder if such personnel changes signal the fall of vertically integrated retail, I believe the industry is entering a new phase where successful players will look and behave more like retailers and less like tech startups.

Two years ago, I wrote that vertically integrated retailers represented the next wave of e-commerce, citing examples like Warby Parker, Bonobos, Frank & Oak, Julep, and yes, Nasty Gal and ModCloth.

These web-only brands vertically integrate the retail value chain, taking ownership of the design, curation, manufacturing, and sales. By going straight to the consumer and typically foregoing the high costs associated with brick and mortar, vertically integrated (or v-commerce) retailers can offer high-quality products, such as eyeglasses or clothing, at significantly lower prices.

Perhaps even more importantly, these start-ups are able to carve out a niche with unique offerings that stand out among mass-market goods. As the saying goes, “If it has a UPC code, Amazon will beat you” (via Chris Dixon). By owning the design and manufacturing, v-commerce retailers don’t have to compete head-to-head with Amazon. In addition, they can offer their customers a more rewarding experience based on small-batch, artisanal philosophies.

 Is There A Scaling Problem With V-commerce?

For all the promise that vertically integrated commerce offers, these retailers have struggled to scale beyond $100 million in revenue. TechCrunch reported that ModCloth saw little to no growth in 2014, and reduced its engineering team to just over a half-dozen.

It is unfair to generalize what is happening with a diverse group of retailers by assuming that scaling problems with one company apply across the board. However, it is true that with any niche or long tail marketing, you can connect with your target customer segment quickly and efficiently, but it is much harder to break into the mass market. To put it another way: it’s easier to scale with a blockbuster film than a collection of low-volume art films.

For this reason, we’ve seen many examples of impressive early growth followed by relative stagnation among v-commerce start-ups.

Additionally, since these companies haven’t gotten to scale yet, they aren’t enjoying the deepest price breaks in the supply chain and the best gross margins. As a result, more v-commerce start-ups are forced to change their initial business model and focus on profitability over revenue growth. Breaking even is the new goal for many of these start-ups.

The Next Stage For Vertically Integrated Companies

In a company announcement about his departure as ModCloth CEO, Koger wrote:

“We always knew the time would come when ModCloth would need the leadership of an experienced retail executive to take our well-loved brand into the future, expand our distribution, and lead the continued evolution of the customer experience.”

One important lesson we have learned over the past years is that vertically integrated retailers are a lot closer to traditional retailers than we once thought. While these companies are often portrayed and positioned as tech start-ups disrupting retail, they still need to follow the retail playbook and sweat the small stuff in order to succeed.

We should expect more v-commerce companies to change up their teams in the near future in order to bring in seasoned executives with deep retail experience.

Moving Online To Offline

A growing number of v-commerce companies are refocusing their acquisition and growth strategies on offline versus online. Warby Parker, Birchbox, Bonobos, Frank & Oak, Indochino, and Harry’s have all recently opened some kind of physical space.

Warby Parker’s co-Chief Executive Neil Blumenthal told the Los Angeles Times, “We can create really special experiences online, but there’s nothing quite like walking into a physical space, a world we’ve created. … To some extent these stores can be considered a form of marketing and customer acquisition.”

Offline channels let shoppers try things on, see the quality first-hand, and interact with a brand on a deeper level. Pop ups and stores tend to generate more word-of-mouth than online since shoppers are immersed in a fuller experience.

By 2016, men’s retailer Bonobos will have approximately 40 “Guideshops” nationally. As a great example of showrooming trends moving offline to online, Bonobos’ physical locations will bolster its online business: customers can go to a location, try on clothes first-hand, and then order them to be shipped a few days later.

 What’s Next?

The takeaway message should not be that e-commerce is moving offline. Vertically integrated companies will continue to rely on online as the most cost-effective channel for reaching their markets. However, we are learning that v-commerce is harder to scale and execute than we once thought.

As v-commerce matures, the lines between tech start-up and retailer will blur. These entrepreneurs will innovate across multiple channels, while borrowing from the traditional retail playbook, to improve the customer experience.