Why the Walmart-Bonobos deal shows the way to retail's showroom future
The big-box retailer’s e-commerce acquisitions are about more than assets, they’re about taking on new mindsets, writes Lee Peterson of WD Partners.
Editor's note: The following is a guest post from Lee Peterson, executive vice president of brand, strategy and design at WD Partners, a global retail design firm.
In early June, Walmart surprised the retail and fashion industries by making an unexpected $310 million cash bid for Bonobos, the wildly successful "digital-first" menswear site launched a decade ago. No brand has more enthusiastically embraced the innovative, if tragically underutilized, merchandising strategy known as showroom stores better than Bonobos.
The acquisition was a radical departure from the industry’s typical deal because Walmart didn’t buy the category-defying brand for its assets, or even its sales, but for a far less profit-driven reason: to learn.
Considering Walmart is the largest retailer in the world, it was a humbling admission.
That’s one reason why WD Partners recently surveyed 3,000 consumers. We wanted to better understand the growing importance of showroom stores. We asked respondents to rank key retail innovations, including showroom store, endless aisle, buy online pickup in store, retail mobile apps, food service on site, experiential retail, artificial intelligence and pop-up stores. We wanted to know what retail innovations most influenced purchase decisions today. The results were unequivocal: Showroom stores were viewed as the single most influential innovation driving purchase today.
These definitive results motivated us to take an even closer look at the logic behind the Walmart Bonobos deal. We wanted to make sense of the outsized influence of this brand’s showroom strategy. After all, Bonobos led the way for a bevy of digital-first brands, such as Warby Parker, Everlane, Dollar Shave Club and Casper. Each company has upended a staid product category, from eyewear to mattresses, with a digital-first model.
Why Walmart bought Bonobos' showroom success
Over a decade ago, startup entrepreneur Andy Dunn launched the company with another Stanford MBA classmate in New York. The pair went to market with a deceptively simple business model: Sell a better pair of chino pants over the internet. (The Gap, the undisputed khaki king for decades in the physical store, didn’t exactly have that market cornered, in other words.) Bonobos instead created something entirely antithetical to the merchandising model of traditional retail, and none more so than Walmart.
It has now been three months since the Bonobos deal. But you won’t find a Bonobos Riviera shirt (the black, short-sleeve one with the brightly-colored peacocks all over it) in any of Walmart’s 4,692 locations. With a price tag of $88, that’s not much of a surprise. Walmart’s utilitarian menswear inventory rarely sells much above $25. But three months later, you still can’t take home the peacock shirt at a Bonobos store either. Bonobos and Walmart represent entirely antithetical models of retail today, even if both are effectively one and the same, at least when it comes to Walmart’s bottom line.
But at the brand’s 41 "guideshops" found in the upscale districts of cities like Austin and Brooklyn, the get-it-now instant gratification of Walmart isn’t on offer yet. At a Bonobos, you can try on any number of shirts and pants offered in an impressive display of different sizes and fits, but once you decide to buy, the peacock shirt gets shipped to you by mail. (A throwback process, if you stop to think about it, considering that’s basically how a catalog works.)
"[Walmart is] an uninspiring box surrounded by a sea of asphalt. It isn’t, in other words, the place you go to figure out who you are."
A Bonobo “guideshop” is small, only about 1,500-square-feet. But it’s much more than a traditional store, but more of a magazine fashion spread come to life. Except it is not two-dimensional. It is the aspirational scene come to life inside a store. A place to go shopping without the hassle and drawbacks of traditional shopping.
No wonder these inviting buy-free boutique zones are usually nestled in restive commercial districts — tucked among coffee shops, scented-candle stores and craft breweries. These are the hang-out zones of urban life. In other words, these are spaces where identity-formation and aspirational thinking dominates. Consumption happens, but it’s secondary. This is the essence of a showroom strategy — creating a space where desire rises above need and necessity.
In other words, these aren’t the kind of spaces one might naturally equate with a Walmart Supercenter, where you go to stock the cabinet or knock out the gift list come holiday time. It’s an uninspiring box surrounded by a sea of asphalt. It isn’t, in other words, the place you go to figure out who you are.
A Walmart promises something else: Find everything you need right now, but probably not what you never knew you wanted. A Bonobo’s on the other hand, creates a space to discover you do indeed want a black shirt with peacocks all over it. A showroom store drives purchase via desire first, but never need alone. This is what makes a showroom a showroom — delayed gratification, but gratification nonetheless.
This is an exceedingly simple — yet enigmatic — idea. Bonobos was born online. But it isn’t an e-commerce company first. It makes great pants—and whimsical peacock shirts. But it doesn’t do any of this via a legacy model of retail.
Bonobos offers a different mindset and clientele
Bonobos, arguably one of the most successful clothing startups of the last decade or so, wasn’t acquired by Walmart because the chain wanted to neutralize a competitive threat.
For starters, Walmart, with sales of nearly $500 billion, undoubtedly already sells more menswear in a day than Bonobos could in a month, or possibly even a year. Bonobos has never confirmed its annual sales, but it must be far less, on an annual basis, than the $310 million Walmart paid to acquire the company. (Some estimates put the company at around $100 million in sales annually.) Scale aside, this wasn’t an acquisition of some superior logistics system, and not a massive store footprint, either. If you added up the square footage of all Bonobos locations, it would only be about 61,000 square feet of retail space — which doesn't even come close to one Walmart Supercenter, which averages about 180,000 square feet. In fact, you’d need about 79 more Bonobos to equal the size of one supercenter.
"Bonobos can’t compete with Walmart’s scale, but has long beaten the chain in one key metric: sales per square foot, which is likely three times more than Walmart’s."
Bonobos can’t compete with Walmart’s scale, but has long beaten the chain in one key metric: sales per square foot, which is likely three times more than Walmart’s. With total square footage of about 61,500, and an estimated $100 million in annual sales, Bonobos may log $1,626 on this important metric, and some estimates go as high as $2,000. That’s significantly higher than the typical menswear store in American malls, which range between $350 and $650.
Buying Bonobos wasn’t a defensive move by Walmart. Bonobos was never a threat to its business model. Amazon was, and remains, its chief nemesis. Considering 97% of the Walmart’s sales still come from its stores. A digital-first strategy was a competitive necessity nonetheless. Yes, Walmart has seen significant growth in its online business. Revenue from its U.S.-based e-commerce was estimated at $8 billion in 2016, up from $4.54 billion in 2012. But Amazon’s sales are all effectively online and now top $136 billion. With Bonobos, Walmart has gained every nuance and proprietary insight into how to successfully run a showroom store, and make the digital-first model of brand building Millennials find most appealing work at scale.
In other words, Walmart effectively bought a mindset, more specifically, co-founder Andy Dunn’s Silicon-Valley infused and Stanford-educated brain. Dunn naturally gets what’s often a confounding paradox to the career retail executive: The best way to build a brand is to create a superior physical product. Yet don’t try to sell that product in a traditional store first. Instead, sell your product with a digital-first experience first. That model applies to all products, not only menswear.
"These strategic acquisitions were about more than assets, but mindsets, a means to jumpstart Walmart’s focus on a digit-first model, a duty Walmart has long delegated to suppliers."
To understand the elemental logic behind this seemingly irrational acquisition, one must understand an even bigger one: Walmart’s $3.3 billion cash and stock takeover of Jet.com about a year ago. Jet.com’s founder Marc Lore didn’t take the money and run — he stuck around, and now oversees the Walmart’s entire U.S. e-commerce business in the U.S. Dunn now oversees Walmart’s digital brands.
These strategic acquisitions were about more than assets, but mindsets, a means to jumpstart Walmart’s focus on a digit-first model, a duty Walmart has long delegated to suppliers. Bonobos — and Dunn — excelled by upending a product category. The influence of the showroom model will undoubtedly spur more innovation at Walmart. Showroom thinking is not just about apparel. For example, after the Bonobos deal, Walmart started Store No. 8, an internal venture focused exclusively on hatching new online retail businesses.
Walmart’s, if-you-can’t-beat-them-buy-them strategy, is starting to pay off. It recently reported online sales had jumped 60%, as more people shopped at Walmart.com, Jet.com and its other websites. Granted, the world’s largest retailer still operates millions of square feet of retail space. But Walmart isn’t looking back. It’s embracing the showroom, digital-first model of Bonobos, and considering the Amazon threat, this can’t happen fast enough. It is, after all, the innovation consumers want now more than any other, according to our recent survey results.
Showroom stores aren’t just the merchandising strategy of the future, but the store of the future. This raises a critical question for any store brand still sitting on the showroom sidelines: If even Walmart is getting on board in a big way, what’s stopping your brand?