Surveying the retail world right now, it’s hard to see anything but Amazon.
The company offers a degree of convenience for buyers of stuff that’s never been equalled (which, while being hyperbolic may also be true), and it has made consuming new crap nearly effortless. In the process it’s become the boogeyman that haunts the dreams of small retailers and big box stores alike.
However, few businesses are completely unassailable, especially in consumer retail. And there have been a number of venture investments into startups that are challenging Amazon’s business in interesting ways — by challenging the notion of ownership itself.
What began as a movement among couture culturati with the success of Rent the Runway has moved into everything from cars (Porsche’s got a subscription service ) to construction equipment and furniture.
Well, the Los Angeles-based startup Joymode has just raised $14 million to be the subscription service for nearly everything else.
The company raised its cash from the international technology conglomerate, Naspers — an investment that signals the global opportunity that Joymode presents.
It’s not about experiences, it’s about expenses
Thinking about worldwide markets (or threatening Amazon) may seem premature for a company that’s still operating from a single location. But the warehouse in downtown Los Angeles that Joymode calls home — which operated as an underground nightclub before becoming Joymode HQ — isn’t as far removed from the other far flung locations where Naspers has invested as one might think. Nor is it impossible to envision it as a counterweight to Amazon’s mass.
Joe Fernandez, Joymode’s founder and chief executive, has a knack for finding the right model for a particular moment. Klout, his last company (which raised $40 million and sold for $200 million) was launched in the early days of social media as an attempt to wrestle with a problem companies still struggle with — gauging the importance and influence of an online presence.
With Joymode, Fernandez is riding a wave of consumer sentiment that’s become increasingly thrifty with their purchases as costs for things like healthcare, pensions and insurance climbs.
A fascinating study by Deloitte indicated that consumers are spending less on things, not because they’re more interested in experiences per se, but because the costs associated with the social safety net are going up.
The authors write:
A closer look at the data shows that it’s not a sharp rise in spending on experience, but costs related to health care and insurance and pensions (figure 5) that are likely driving consumers away from traditionally strong retail segments such as clothing and motor vehicles. The share of out-of-pocket health spending in average consumer expenditure, according to the SCE, went up to 7.8 percent in 2015 from 5.2 percent in 1990. And it is not only older cohorts that are spending more on health care, but young consumers as well. For example, the share of health care in average consumer expenditure went up to 5.3 percent from 3.5 percent between 1990 and 2015 for consumers in the age group of 25–34 years; for 35–44-year-olds, the corresponding share rose to 5.9 percent from 4.0 percent over this period.
And while older consumers are increasing their insurance and pension payments to recover from the financial crisis of a decade ago, younger consumers are constrained by the mountain of debt their higher educations cost them, which puts an additional cap on living a louche life of luxury.
The average Joymode spends $296 and gets $3189 worth of products in their first year. Fernandez tells me.
Of course, services like Joymode and Rent the Runway — and, yes, Amazon’s low cost virtual superstore — are driving down costs for goods and services, likely contributing to spending declines as well.
Here’s a Goldman Sachs report on what’s going on in the retail world right now.
Walking through the warehouse at Joymode is like walking through a department store designed to cater to the kid in all of us. Metal shelves are stacked with cotton candy makers, popcorn machines, projectors, folding chairs, board games, margarita mixers, and blankets… and that’s just for movie night.
The idea Fernandez came up with was to create a subscription business for people looking to rent those things that they don’t use every day.
Since its soft launch to a small list of subscribers one year ago, Joymode has grown considerably. The company now has 5,000 products leaving its warehouse every weekend in Joymode branded vans delivering anything from the movie night kit, to board games, to camping equipment for a weekend away in the woods.
The most common first experiences are things like the company’s Backyard Movie Night, but utility experiences like the Essential Cleaning Kit drive the highest engagement, Fernandez tells me. One of the company’s key stats for Joymode is “share of closet” — and over 40% of its reservations are for things that historically you would assume people own (vacuums, luggage, or cooking things like pots and pans).
Ultimately, Joymode is providing access to products that people don’t need to own so that they can have the life they want.
“You pay for a membership to access to this economy and then you pay for access to the goods,” Fernandez told me as we walked through the company’s modest warehouse. Think of it like a Costco, but instead of owning, members get access for even a fraction of what an item would cost at even one of those discount warehouse retailers.
On average, a Joymode customer spends $296 and gets $3189 worth of products their first year, Fernandez says.
“Our whole premise is people should own less. We’re trying to help you fight the consumption hangover of debt and clutter and clutter and environmental impact,” says Fernandez. “People are going to own stuff. My hope is that people own fewer things that they are truly passionate about,” he said.
The logistics company
Behind Joymode’s collection of popcorn poppers and cotton candy machines, its karaoke and smoke machines, and, yes, its vacuum cleaners and mops (the cleaning package is surprisingly popular and paired with a margarita mixer turns weekend duty into a party) is a hefty bit of logistics technology.
Because Joymode delivers on weekends and most subscribers book in advance, the company runs a pretty tight ship. “We’re able to create density,” says Fernandez. “When a truck leaves a warehouse it’s full, and that route is well-planned so our unit economics are actually amazing,” he said.
The company is profitable on a per-reservation basis (at 40% to 50% margins), but operations and expanding inventory have kept the company from flipping the switch to becoming a cash cow.
Keeping customers constrained to a weekend delivery has helped control expenses on the delivery side, and increased the density. In addition, a number of Joymode customers like the experience of going to the warehouse to pick up their own stuff, Fernandez said.
There’s an average of eight days between when someone books a reservation and Joymode delivers the package, but on any given weekend the company has 5,000 products leave its warehouse.
With a rental business, there’s a lot that can go wrong once a product leaves the storage facility, so Joymode’s staff is incredibly vigilant about quality control as well, says Fernandez.
“We think of what we call unforced errors,” says Fernandez. “What I can live with is if the projector goes to you and a fuse blows that’s out of our control. If we deliver the projector to you and we forget the plug that’s on us.”
Every Wednesday the company goes through a careful review of went wrong with the orders, so that management can build out process to ensure that mistakes don’t happen in the future.
“You can’t have 20 people at your house for karaoke night and something goes wrong and you’re out of luck,” says Fernandez.
Managing and maintaining the store of goods in the Joymode warehouse is one challenge, but there’s also an incredible amount of data science and software that’s gone into establishing the business.
At Klout Fernandez and his co-founder Keith Walker, processed a ton of data — about 15 billion pieces every day. Joining the founding Joymode team is Waynn Lue, someone Fernandez tried to recruit from Google to the Klout team for over five years.
Joymode takes the same data centric approach in building what the company calls the “JoyEngine”.
That software tool lets Joymode know what products to add to its inventory, how many of each product it needs, and then add additional items to its deliveries that the company can upsell en route through its app.
“We had to build our own inventory system, driver app and cleaning team app as inputs into the JoyEngine because we couldn’t find any tools that could properly handle 100% of the products that are “shipped” coming back and being re-used,” Fernandez told me.
The local and global market
Fernandez, came up with the idea in New York, refined it in the years after the sale of Klout in San Francisco, but wanted to develop it outside of those two regions, in part to prove that it could work anywhere.
Los Angeles, with its sprawling reach both geographically and socio-economically, seemed like it would be an ideal testbed for Fernandez to get the service off the ground (and the weather’s better).
And while downtown Los Angeles is a huge center of activity for Joymode customers, residential neighborhoods in LA — like the predominantly upper middle class Beverlywood neighborhood — also has a high penetration of Joymode users.
Founded as a media company in South Africa in 1915, Naspers has grown to become one of the most successful technology investors in the world — largely on the back of an incredibly prescient investment in the Chinese gaming and social networking company, Tencent, which is now one of the largest technology companies in the world (with a market cap over $500 billion).
Unlike other companies (including Omnia, which just raised $25 million from Ripple) that are trying to create marketplaces of used goods which are basically networks of consumers sharing household unused things, Joymode’s chief executive stressed the importance of having Joymode act as the hub.
“The only way this would work is if we owned everything. Trust and consistency and brand were critical,” says Fernandez. It makes sense. With other people’s things, a user never can be assured that the toaster will work without shorting, or even that a board game will arrive as a complete set. Joymode’s ownership guarantees a level of quality.
With the $14.3 million that the company just raised it’s hoping to expand its footprint in Los Angeles before taking the concept nationwide.
“We are negotiating for a 50,000 square foot warehouse,” says Fernandez, up from the 5,000 foot space that the company currently occupies.
For Naspers, the thinking is that Joymode’s strategy is today LA, tomorrow the world. The company has already invested hundreds of millions of dollars in companies that solve problems for the global consumer (and problems attendant with global consumption).
“First, we were attracted to several emerging consumer trends that Joymode supports, including increasing urbanization causing smaller living spaces, a shift towards experience-spending versus ownership, and a breakaway from excessive ownership. By introducing a rental, experience-based model, the company offers an alternative to consumers who, in the aggregate spend $1.2 trillion on low-utility products per year in the U.S. (estimated $4.5 trillion globally),” wrote Mike Katz, head of U.S. Investments for Naspers Ventures, in an email.
“We really are seeing a generational shift, particularly in space-starved urban areas around the globe — people are renting not buying. However, no-one is effectively enabling that shift across the trillion-dollar recreation space, so the potential for Joymode is vast in the U.S. and abroad,” Katz said.
Other retail investments in the Naspers portfolio include OLX and letgo, which have both received hundreds of millions in capital from Napsers investment team.
“I honestly believe we can change the way people think about ownership, especially in emerging markets and these mega cities around the world with these young populations that want a certain lifestyle,” says Fernandez. “In Los Angeles we are props for your Instagram life but in Jakarta we can fundamentally change the life of someone. And that, to me, is compelling.”