How personalization shapes the retail industry

Stitch Fix to stylists: 'Take ownership of the disappointment, no matter the role the data played'

Is the apparel e-retailer a tech company? Or not?

By: Daphne Howland • Published May 9, 2022

Stitch Fix, which 10 years ago launched as a data-enabled styling service selling clothes by the box, touts its AI to investors, but doesn't seem eager to speak of it to customers.

A few weeks ago in April, the apparel e-retailer told its stylists to refrain from invoking its technology when dealing with customers who say their preferences are being ignored, according to internal communications obtained by Retail Dive.

“Now, not only do they not want us to mention an algorithm, they want us to own the choices it makes,” one stylist, speaking on condition of anonymity, said by email.

In an internal message sent to stylists in mid-April, the company said in part: “Data science and Stylists have always worked hand-in-hand… When that partnership doesn’t result in the best client experience, Stylists should take ownership of the disappointment, no matter the role the data played.”

Additionally, stylists were instructed not to use internal terms “unknown to clients such as ‘AGP’ or ‘algorithm’ or explain our algorithmic technology in their notes to a client.”

“Data science and Stylists have always worked hand-in-hand… When that partnership doesn’t result in the best client experience, Stylists should take ownership of the disappointment, no matter the role the data played.”

Stitch Fix

Internal memo to stylists

According to Stitch Fix stylists interviewed for this story, the company previously did instruct them to let displeased customers know that its algorithm is always learning, and doesn’t always get it right.

As with the text on its customer-facing retail site — where it says it employs "real people who really get your style," referring to the nearly 4,000 stylists who curate its boxes — the new directive stands in contrast to how the company emphasizes data science in investor materials like its annual report, comments to analysts during earnings calls and communications with business reporters.

In an emailed statement for this story, Stitch Fix said that its “combination of human touch and data science is unique in the industry; we were the first retailer to hire a team of world-class data scientists to enable personal styling at scale and today we are still the only retailer that employs 1000s of style experts to build and maintain trusted, one to one relationships with clients and help us deliver a completely differentiated, entirely personalized shopping experience.”

Wall Street vs Main Street

Given Wall Street’s affection for tech stocks, it stands to reason that Stitch Fix would promote itself to investors as a data-rich disruptor of retail.

“Wall Street looks favorably on firms with a technology play, and tends to cut them more slack than it does traditional retailers,” GlobalData Managing Director Neil Saunders said by email. “In some cases part of the rationale is that technology gives companies a strategic advantage, and also that it could be resold or licensed to other firms creating an additional stream of revenue. For some, like Ocado or Amazon, this plays out and it is quite legitimate to see those players as technology-first retailers.”

The apparel box business, practiced by Stitch Fix and a few other companies, is predicated on a marriage between data and the human touch. The company gathers information like preferences, size and budget via style quizzes, and bolsters that with clues from purchases and returns, but enlists people to ultimately fill the boxes.

Speaking at the Milken Institute Global Conference, Stitch Fix CEO Elizabeth Spaulding described the setup much the same way that founder and former chief executive Katrina Lake always did.

“From the very beginning, I think one of the differentiators of our model has been really, really embracing human-in-the-loop machine learning,” she said during a panel on Retail’s New Reality: Technology, Innovation, and Consumer Behavior. “If you think about why the whole styling model works — and every quarter on record, we’ve improved our keep rate, which is how many items people keep in this box of products sight unseen — is where we’re leveraging the power of data science, feedback from our stylists, feedback from our client community."

"I think one of the differentiators of our model has been really, really embracing human-in-the-loop machine learning."

Elizabeth Spaulding

CEO, Stitch Fix

But the model’s track record has been bumpy, leading Stitch Fix to introduce the ability to shop directly from its site, and forgo the boxes, in order to stoke sales. In the months since that move, the box business has suffered more than executives had anticipated.

Stitch Fix’s tech advantage is “less convincing” than at other retailers, according to Saunders.

“While it is creative with technology, it isn’t a pioneer and what it has done with algorithms and AI still has a lot to prove,” he said. “This is likely one of the reasons Stitch Fix is keen to downplay any issues with their technology even though there are clearly some problems.”

Stitch Fix appears to have fallen from grace on Wall Street. At press time, its share price is hovering around $10, down from nearly $100 just about a year ago in 2021.

A preview of the problem

The company didn’t address Retail Dive's questions about its new directive to stylists, which is centered around “Fix Preview.”

That option, introduced in 2021 is an email sent before a “Fix” is shipped that allows subscribers — those who participate in its decade-old box business, as opposed to its much newer e-commerce site — to choose or reject suggestions for items that could go into their box. The added step has contributed to higher retention rates, Spaulding told analysts in March, according to an earnings call transcript from Seeking Alpha.

The preview can be a win for customers as well because there’s a greater chance they’ll keep something from their box. If they do, they can use the $20 styling fee toward the purchase; if they keep all five items they also get 25% off the entire cost.

Fix Preview has also introduced new potential pain points, however, according to stylists who spoke on condition of anonymity to protect their jobs. Stitch Fix’s pitch to customers is curating apparel that fits them well, and meets their preferences. When clients are miffed by the preview suggestions, they tend to assume that their stylists are ignoring their communications and disregarding their preferences or needs, the stylists said. It can be especially irritating when all 10 potential options are accessories like bags or ties, or the same garment in various colors, they said.

It’s the company’s tech that is usually responsible for poor selections like that, according to stylists. Successful tech-generated suggestions also raise other questions, they said.

“The algorithm is often (usually) selecting all of the items for the Preview — this is what stylists aren’t allowed to talk about or blame,” one stylist said by email. “We’re still charging clients a $20 styling fee, but leading them to believe a human stylist is always involved in the process even when that’s not the case. So what’s the styling fee for? Seems really unethical.”

A Stitch Fix spokesperson said that the Fix Preview is generated using various combinations of technology and stylist expertise, depending on the individual client. The company didn’t elaborate on how often the preview is surfaced entirely by the company’s algorithm, entirely by the stylist or some combination.

More than the algorithm

Being more transparent around its AI, rather than less, may actually be more helpful to Stitch Fix, experts say.

Technology in general, at least for now, isn’t great at handling the many mercurial factors around apparel and style, according to Piyush Patel, chief strategic business development officer at AI platform Algolia, which specializes in search and discovery.

“In fashion, I think there’s such a subjective element of what is right,” he said by video conference. “It’s going to take the input and give you the output, that’s all. It doesn’t have a preference, humans have a preference. If I didn’t have my cup of coffee this morning, I might think differently about stripes versus not stripes. Or something I saw, where stripes didn’t look good on somebody else. Maybe I just don’t like stripes, who knows? So many subjective elements go into fashion that I don’t know that you can trust either humans or data.”

Companies like Stitch Fix that present themselves as tech-forward often face elevated expectations from investors and consumers alike, according to Patel. Yet when it comes to making choices in areas like clothing, tech is less nimble than humans, who are aware of the subtle shifts in trends and understand the emotional response to style, he said. One way to manage customer expectations is to pair recommendations with the reasons why they surfaced.

“Put tags under it that say, ‘This was based on the colors you’ve chosen. This is based on the size you’ve chosen,’” he said. “Let the consumer drive the data that’s being used to make recommendations, and show them why. Then it’s not creepy. And then it can be wrong, and humans can accept it.”

“Let the consumer drive the data that’s being used to make recommendations, and show them why. Then it’s not creepy. And then it can be wrong, and humans can accept it.”

Piyush Patel

Chief Strategic Business Development Officer, Algolia

Steve Zisk, senior product marketing manager at customer data platform Redpoint Global, said it’s understandable that the company doesn't want stylists to point to the algorithm when a customer complains.

“Both customers and brands themselves find it easy to blame the tech,” Zisk said by video conference. “But blaming the tech doesn’t help because the tech is a reflection of somebody’s idea of what was supposed to make things better. The difficulty with that message is, I as a customer don’t really care. What the customer wants to hear is ‘I’m sorry.’”

Still, having stylists “take ownership of the disappointment, no matter the role the data played” is irresponsible, unfair and ultimately will hurt workforce morale, according to Colorado State Business School Professor Jonathan Zhang.

Rather than admonishing stylists to minimize tech’s role, companies may get further with customers by being more up front about it, he and others said.

“The algorithms are not perfect. Algorithms have certain skill sets, like humans have certain skill sets, and both make mistakes,” Zhang said by phone. “I think it’s important to avoid this illusion of technological superiority.”

Even if Stitch Fix could perfect its algorithm, however, it has bigger issues that would remain, including longstanding challenges that all retailers face, Saunders said.

“There are concerns around demand for their service, consumer appetite for apparel in general now that inflation is taking hold, and the underlying economics of their business model,” he said. “Having the best technology in the world doesn’t necessarily resolve those things – it just acts as a fig leaf to hide problems elsewhere.”

Article top image credit: Courtesy of Stitch Fix

Forever 21's metaverse venture lets Roblox players customize virtual fashion stores

Should more retailers be on Roblox?

The platform is used by millions of tweens daily. And ignoring it may cost brands loyalty, revenue and a future audience.

By: Kaarin Vembar • Published Feb. 17, 2022

If you haven't heard of Roblox, ask your 10-year-old to explain it.

Because while most of the adult population may still be struggling with the concept of the metaverse, chances are the tween in your life is already in it.

Launched in 2004, founders David Baszucki and Erik Cassel wanted Roblox to usher in "a new category of human interaction."

The company built out three major arms: Roblox Client, the application that allows users to explore 3D worlds, Roblox Studio, which allows developers and creators to build, publish and operate those 3D experiences, and Roblox Cloud, which includes the services and infrastructure that powers the platform. Users create a unique avatar that is able to go across experiences, like games and events.

The result is a digital space where people can play, learn and communicate in a world that is user-generated.

And it is gaining steam.

In 2018, there were 12 million daily active users on the platform. By the time the company filed paperwork with the securities and exchange commission in the fall of 2020 to go public, 31.1 million people were on the platform every day — and 54% of those users were under the age of 13. In mid-February, when the company reported earnings, that number hit a record of 45.5 million average daily users for fiscal 2021, an increase of 40% year over year.

That's a lot of young people in one space, and a number of brands like Gucci, Nike and Forever 21 are on it, creating experiences for a plugged-in audience.

But, should other retailers follow suit and be on the platform? And is it a meaningful way to build brand loyalty?

The case for Roblox as a marketing tool

Take Forever 21, which joined the platform in December. The retailer, which is owned by Authentic Brands Group, created "Forever 21 Shop City," where users can manage a digital store and compete to become the top shop. Participants customize the look of their store and complete tasks like stocking inventory, operating the cash register, hiring employees and assisting customers.

The fast fashion retailer's objective is to gamify fashion and encourage players to express their individuality by running, and customizing, their digital spaces. Products can be purchased for users' avatars with monthly "metamerch" drops — namely, apparel, makeup and accessories.

But some products can be purchased in real life. A page on the retailer's website dedicated to the partnership currently includes a quilted zip-up puffer vest, a colorblock shoulder bag, a cable knit sweater dress, and high-rise jeans, among other items.

The ability to purchase both digital and physical clothing creates different touchpoints for customers, and has the potential to be an additional revenue stream as well as a means to build brand recognition.

Retailers joining Roblox is a "sound strategy" to increase brand awareness and sales, according to Jenn Szekely, managing partner at Coley Porter Bell. "As a person with two children under the age of 13, I can tell you firsthand the amount of requests I get from them to purchase things from their visibility to brands and products in their online entertainment usage."

Szekely said that brands entering into the world of Roblox is a great long-term strategy that should be considered. "By getting to these younger audiences early, they are building affinity to brands they most likely would not be aware of yet," she said in emailed comments, adding that a presence on the platform demonstrates to existing audiences that a brand is "on the pulse of immersive technologies."

Retail is evolving, and as the metaverse moves forward, omnichannel is not only about physical retail and e-commerce.

"This is the ultimate omnichannel, because we're not just talking about stores and DTC and web 2.0," Keith Niedermeier, clinical professor of marketing at the Kelley School of Business at Indiana University, said in an interview. "Now we are talking about web 3.0, and a persistent digital world where millions upon millions of customers are spending significant time. So if that's where they're spending their time, and their engagement, that's where brands and retailers have to be."

And when it comes to interacting with the larger metaverse, the level of engagement is expected to grow. A recent report by Gartner forecast that 25% of people will spend at least one hour a day in the metaverse by 2026.

Companies are taking note. In December, Walmart filed multiple trademark applications regarding virtual products. Meta, owner of Facebook, is investing $50 million to create a "responsible" metaverse where users can communicate in a virtual environment. Microsoft announced it will acquire Activision Blizzard to grow gaming operations and build infrastructure for the metaverse.

"Thirteen-year-olds aren't cruising the mall everyday after school ... Kids are spending their time online, and increasingly, in this digital space."

Keith Niedermeier

Clinical professor of marketing, Indiana University

"Vendors are already building ways for users to replicate their lives in digital worlds," Marty Resnick, research vice president at Gartner, said in a statement regarding the research firm's report. "From attending virtual classrooms to buying digital land and constructing virtual homes, these activities are currently being conducted in separate environments. Eventually, they will take place in a single environment — the metaverse — with multiple destinations across technologies and experiences."

Roblox in particular is a means for companies to engage with the metaverse and get their brand identities in front of a younger audience. Because, as Niedermeier points out, tweens for the most part are not hanging around malls to discover products.

"Thirteen-year-olds aren't cruising the mall everyday after school," he said. "Stores in malls were the major brand builder where you could interact with the brands, the designs, the offerings, the employees. That's not where kids are spending their time now. Kids are spending their time online, and increasingly, in this digital space."

Instead, retailers need to go to where their audiences are gathering, according to experts.

"If you are targeting that age group, you absolutely should consider that as a major opportunity for you," Hana Ben-Shabat, founder of Gen Z Planet and author of the book "Gen Z 360," said. "Because it is marketing 101. You have got to be where your customers are. And here millions of them are hanging out on Roblox. Why would you not go there?"

Avatars and spending

An advantage of being on the platform is the ability to create virtual items that can be worn or used by an avatar. Each user creates a digital identity, and has the ability to keep the same avatar across Roblox. When users sign up, they personalize their avatars by selecting a body type, clothing and "gear" which may include weapons, musical instruments or skateboards.

While signing up for Roblox is free, along with most of the platform's experiences, users can also use real-world currency to purchase Robux, the platform's digital currency. Robux is the way people within the universe can purchase experiences and items for their avatar.

That means if a retailer sells a digital hat with a logo, let's say, the user will be able to wear the hat while visiting different experiences on the platform, and thereby show off the brand. Just like in real life where people can sport labels and perhaps be influencers, avatars can show up wearing items that are valuable within the digital world.

"You're becoming an ambassador for a brand," Ben-Shabat said. "Your avatar can go between different games, and show up as a representative of Gucci, for example," she said, noting that, "right now everyone wants to be an influencer."

Avatars wearing brands from space to space has big potential, according to Niedermeier. Because, if the metaverse evolves in ways that are being forecast, avatars don't have to stay within one world — they can potentially jump from platform to platform. "That's one of the huge values to brands," he said.

Additionally, virtual items can translate to real-world money. Last May, Gucci offered a limited-time, digital version of its Dionysus Bag with Bee through its Gucci Garden exhibition. The bag sold for around $6, but when people started flipping the product its price went up. One user paid around $4,115 for the digital purse, while the actual, real-life version of the bag sold for $3,400, according to reports.

Which would you rather have?

A real-life $3,400 Gucci Dionysus Bag with Bee

OR

A virtual $4,100 Gucci Dionysus Bag with Bee in Roblox pic.twitter.com/Xz4T4QVLoj
— Morning Brew ☕️ (@MorningBrew) May 25, 2021

So while brands are creating hype and brand awareness on the platform they could potentially be accelerating sales. And those digital purchases come with high margins because, as Niedermeier states, there's "no holding costs. There's no manufacturing costs. There's no distribution costs."

Creating and consuming, simultaneously

While companies with name recognition are building out Roblox as a channel, everyday users are also generating income from selling digital items. The developer community earned $538.3 million in 2021, exceeding the company's goal of $500 million.

Roblox was launched as a way for people of all ages to generate their own worlds, as a "co-experience platform."

There are reports as to how some young creators have experienced wild financial success through Roblox, and others on how it eludes them.

The thing to note, though, is that users are both creating and consuming content through Roblox. Brands should understand that co-creation is foundational to how a generation of young people are approaching a digital experience. And that may set the tone for future marketing.

"This is tapping into something that is so fundamental for Generation Z, which is their creativity," said Ben-Shabat. "This is a very creative generation. They grew up with access to digital tools that no generation has before them."

Having an audience co-create digitally may give retailers a deeper understanding to how products may operate in reality, and inform real-world product design, according to Niedermeier. "They can crowdsource products without having to actually produce them. It just exists in this virtual world, which then could translate into — at some point — into real-world products."

The potential challenges

While creating an experience that is tailored to a young audience may appeal to brands, it does come with some potential drawbacks. Namely, what's the best way to navigate a space that is primarily used by kids?

Roblox is aware of the potential complications, and enclosed language in its S-1 filing to address it. Namely that the Children's Online Privacy Protection Act applies to its operations, as it imposes requirements on operators of websites that are directed to children under the age of 13.

Retailers need to keep in mind that, while Roblox is predominantly a platform for kids, it also is a multi-generational social community, according to Mark Geden, head of strategic planning at Tribal Worldwide London. It "contains all the peer pressures, low levels of moderation and risks of predatory activity that can be found elsewhere," he said in emailed comments, noting that it presents a degree of inherent brand safety risks.

Other experts agree about moving forward, but with care.

"I think retailers should be moving with some caution, and largely because the platform is dominated by minors and children," Niedermeier said. But, he says, those brands that are "at the cutting edge and want to stay at the cutting edge are not coincidentally the first ones getting into this space."

Roblox addressed some of those concerns in a letter to shareholders released Tuesday. "[W]e must maintain the community's trust. And to do that, our platform must be safe and civil. Since our founding, safety and civility have been at the foundation of everything we do and we will continue to invest substantial resources to improve on this key priority."

The company is also making moves to expand its engagement with older users. It named attracting users in older age demographics as one of its "key objectives." CEO Baszucki in the company's recent earnings call noted that in January its 17- through 24-year-old segment grew 51% year over year, stating that it was "a wonderful validation of our vision to bring people of all ages together on our platform."

While co-creation is fundamental to the platform, it does mean that retailers have to give up some brand control as users expect for interactions to be collaborative.

But, that may be part of the larger future of how brands decide to market to their future customers anyway. Especially with a generation that holds community, creation and competition in high regard, according to Ben-Shabat.

Roblox "shows a very strong understanding of who this generation is, because it plays on all these elements," she said. "This is going to the heart of the psychology of this generation."

Finally, there is always the risk that users simply decide to abandon the platform because one that is more compelling arrives on the scene. Roblox understands that risk, stating that because a majority of users are under the age of 13, the demographic "may be less brand loyal and more likely to follow trends, including viral trends, than other demographics." Young people are ripe to change means of entertainment rapidly.

Yet, tens of millions of active, daily users on the platform means Roblox currently has a significant place in many users' lives.

"It's the Wild West," Niedermeier said. "And these things are going to continue to be moving targets. This is for the edgy marketers who have the stomach to roll with these changes."

Article top image credit: Courtesy of Virtual Brand Group

An employee and shopper getting food out of a bin in a store

Retailers, use data to personalize your customer experience

Grocers chase the promise of e-commerce personalization

Customization tools like shoppable recipes and product recommendations are helping consumers cut through the clutter of center store. But retailers are only scratching the surface of what's possible.

By: Sam Silverstein • Published Nov. 18, 2021

Grocery stores and hotels might at first glance seem to have little in common. But for Ryan Draude, the similarities are crystal clear.

Just as hotels offer rewards to people who regularly stay with them and take steps to recognize guests when they walk in, Draude, head of loyalty and digital for Giant Food, thinks one of the most effective ways food retailers can build ties with their customers is by turning grocery shopping into a personalized experience built around their needs and preferences.

To accomplish this for the Ahold Delhaize-owned grocery chain, Draude is looking for inspiration to his former role overseeing the frequent-guest program operated by lodging chain Choice Hotels International. Among his key takeaways from that job is that customers want to feel that a merchant appreciates them and is committed to helping them get what they want — and won't hesitate to leave if they spot a better option, Draude said.

For now, Draude is focused on using Giant Food's e-commerce program, Giant Flexible Rewards, to deliver personalized pricing, product recommendations and rewards to customers that also relate to their experience in the chain's stores. Later, the company may add technology to its locations that gives customers the ability to signal their presence in stores using a smartphone and then receive location-based promotions, he said.

"My biggest fear is if a grocery store opened up half a mile closer to my member's home than a Giant was, what are we doing [that is] so differentiated that would continue to make them drive that extra half a mile to go to our store?" Draude said

Personalizing the center store

Giant Food is focusing on personalizing the shopping experience at a time when grocers are looking for strategies to maintain the momentum they have made connecting consumers with essential goods during the pandemic.

Findings from a poll of 1,000 consumers Grocery Dive, Retail Dive's sister publication, recently conducted with market research firm Inmar Intelligence suggest that the grocery industry faces obstacles as it looks to convert customer relationships built in stores to online — especially where the center store sales that are key to grocers' bottom lines are concerned.

Three-quarters of participants in the survey said the center store is "absolutely" or "mostly" relevant to their shopping habits. But just 9% of respondents said they use their local grocery store's e-commerce service to shop this department, while more than nearly 70% indicated they turn to Amazon, Walmart, Sam's Club or Costco for their favorite center store staples.

Customization strategies built atop loyalty programs like the one Giant Food operates may hold at least part of the answer for grocers as they look to hold onto customers smitten by e-commerce, experts said. Grocers now have access to a variety of personalization tools, including customized coupons and promotions, shoppable recipes based on a customer's nutritional preferences and spending-related discounts. But retailers need to carefully test options and prioritize those that make it easy for shoppers to find their preferred products and also discover new items amid what can be an overwhelming center store assortment, sources noted.

Serving shoppers a selection of center store goods that they are likely to be interested in is critical to retaining their allegiance online and alleviating the "click and scroll fatigue" shoppers run into while online shopping, said Spencer Price, co-founder and CEO of Halla, a startup that specializes in grocery personalization technology.

"A process of elimination to some extent is one of the most important parts of personalization because you don't want to be inundated with tons and tons of products that you know you're never going to try or buy," said Price.

Using analytics to offer smart substitutions when items are out of stock is also essential to building relationships with consumers, said Sean Turner, co-founder and chief technology officer of Swiftly, a startup focused on digital loyalty technology. Earlier in 2021, Walmart introduced online shopping substitutions powered by artificial intelligence, boosting customer acceptance of those items above 95% as a result.

"It used to be personalization was just about 'how can I get shoppers products that they're interested in at a good price?'" but that has changed as retailers look to build deeper relationships with customers, said Turner. Now, he said, grocers face the tougher challenge of convincing people they understand their needs and are ready to meet them — without making them feel like just another customer.

Another factor behind the growing interest among grocers in developing personalized customer relationships is that shoppers themselves have an unprecedented ability to track prices, putting pressure on retailers to closely follow their competitors to ensure their customization strategies remain relevant, experts said.

"Whatever response you're going to take — whether it's a price change, whether it's an assortment shift, whether it's a new promotional cadence or approach — it all demands tracking your competition with much more granularity because that's what ultimately the shopper is able to do now," said Ben Reich, founder and CEO of Datasembly, a California-based company that gathers information from e-commerce sites for clients, including grocers, through a process known as web scraping.

Building a grocery store for every customer

While brick-and-mortar grocers have added shortcuts that help shoppers find relevant products in center stores and other departments, they're only beginning to scratch the surface of what a truly personalized shopping experience can be, according to online grocers that specialize in this approach.

Because they don't have storied brands and physical locations to build awareness, e-grocers are focused on offering new customized shopping platforms built around advanced technology like machine learning.

"Based on what I know about you, based on what I know you'll buy [and] what you won't buy, I can build a specific grocery store" for every customer, said Abhi Ramesh, founder and CEO of e-grocer Misfits Market. "That power exists in the digital universe in a way that can never exist in person."

Ramesh's company, which started three years ago in 2018 selling cosmetically defective produce, has since raised hundreds of millions of dollars to feed its ambition of becoming a full-fledged grocer. Every customer who opens Misfits Market's app sees a personalized assortment of foods determined by the company's in-house machine learning technology, and Ramesh wants to take that personalization to an even higher level.

"You're taking an amount of time that this customer is willing to spend on your site and you are maximizing the relevance of the product shown to that customer to maximize the possible basket that they will shop with you."

Pradeep Elankumaran

Co-founder and CEO, Farmstead

The company's goal, Ramesh said, is to only show customers items that might interest them and cut out all the products they're not likely to purchase. In addition to providing a "less mentally fatiguing" grocery-shopping experience, such a high degree of personalization can also help prevent food waste by enabling Misfits Market to precisely determine what it needs to keep in stock and when to bring it to its facilities, he said.

"Every off-the-shelf piece of technology and software that exists today is all designed for kind of the old-school model of buy from distributors, bring the same standard product into your warehouse, send it from the warehouse to the grocery store," said Ramesh. "There's very little machine learning, very little predictive algorithms built on top."

Given that an online shopping trip can take just a few minutes, California-based e-grocer Farmstead places a premium on only showing customers products they are likely to be interested in, said Pradeep Elankumaran, the company's co-founder and CEO.

"You're taking an amount of time that this customer is willing to spend on your site and you are maximizing the relevance of the product shown to that customer to maximize the possible basket that they will shop with you," Elankumaran said.

Farmstead, which also offers technology and dark store services to grocers, accomplishes this in part by encouraging customers to subscribe to the staple goods they always buy so they can use their time spent on the company's website or app to discover new items, he said.

"You can't have a high basket just by showing people the same things over and over," said Elankumaran. "It becomes especially important that you're showing people the right things that really resonate with them while also surfacing the things that they probably won't [otherwise] get to see, but surfacing it to them in a more relevant way to capture the thrill of the hunt, which is a very real thing."

High-touch doesn't have to be high-tech

Gary Hawkins, CEO of the Center for Advancing Retail & Technology, pointed out that personalization strategies don't have to be high-tech.

For example, a retailer could invite their best customers to bring knives to the meat department to be sharpened, Hawkins said. Another option would be to offer a customer who signs up for a loyalty program a tour of the store with a manager, he said.

"I've worked with retailers all over the world … and one of the things I found no matter what country I was in, no matter what culture I was in, [is that] we as human beings like to be recognized," Hawkins said.

Bob LaBonne Jr., president and CEO of LaBonne's Markets, a chain of four supermarkets in Connecticut, said one of the most effective ways to build bonds with customers is to give them a selection of treats — complete with a personalized letter from a store director — as a tangible show of gratitude. LaBonne's runs a points-based loyalty program that automatically sends customers coupons when they reach spending thresholds, but has discovered that giving people something they might not have bought is especially effective, LaBonne said.

LaBonne said he has found that distributing holiday gift baskets filled with items like nuts, snacks, olive oil and balsamic vinegar to especially loyal shoppers can go a long way toward making them feel special.

"Customers felt like we gave them a trip to Hawaii," he said.

Article top image credit: Courtesy of Giant Food

How high is the ceiling for personalized beauty brands?

Function of Beauty, Proven and more have pinned their business models to customizing products. But can you scale a business that's unique to each customer?

By: Cara Salpini • Published Sept. 22, 2021

Beauty has been one of retail's hottest markets for years. As of Sept. 15, beauty and personal care startups raised over $2.9 billion in funding in 2021 according to CB Insights. Crunchbase data shows just $1.9 billion raised in the space in 2021, but that's significantly up from 10 years ago when the beauty space brought in $402 million.

As with fashion, beauty is cyclical. Makeup, for example, has been in a downcycle for years, and the pandemic hasn't helped that, with many shoppers continuing to invest in their skin care routines especially last year as they largely stayed home. Those macro trends impact what kind of products a customer buys and how many of them.

Shopper preferences for one product over another might also shift depending on any number of factors, from skin changes to the simple desire to try something new. Over the past few years, though, a whole host of companies (including Function of Beauty, Proven Skincare and Atolla, among others) have begun cropping up with the aim of creating beauty products so customized that shoppers will never need to change.

"I think that the definition of beauty and self-care is growing and evolving. I think before maybe different things told us, 'This is what you need. This is the best thing for you. This is the only thing that's working for you,'" Tari Kandemiri, founder and CEO of Hama Beauty, a personalized beauty platform that recommends products to shoppers, said. "And then now we're realizing you can kind of tailor certain aspects of the beauty process."

In part, Kandemiri blames the "plethora of options" in the beauty space that can make it harder for customers to find what they need. In addition to being overwhelming for customers, it also requires a lot of effort on the part of a shopper to understand the ingredients and the effects of certain products.

"It's like, 'Okay, there's actually too many things out there, and I just want to know what's good for me, so I can spend my money wisely, so I can do what feels right for me,'" Kandemiri said.

Effectively tailoring products may help answer some of the frustrations customers have, but it also takes a lot of work on the back-end, from analyzing data to asking customers the right questions and, in the case of some startups, reframing the entire manufacturing process around creating personalized products. What does that mean for its potential to scale?

The market for personalized beauty

At their core, customized beauty products are based on the proposition that data can either help a customer find a better product or can create a better product for them than they can find on their own. For Proven, which focuses on creating a personalized skin care routine for customers, it includes collecting around 47 factors about a shopper and running those through its skin genome database, co-founder and CEO Ming Zhao told Retail Dive.

The database itself consists of data from over 4,000 scientific studies and more than 28 million customer reviews encompassing over 100,000 products and 20,000 ingredients. The "Skin Genome Project," as Proven calls it, was inspired by similar databases for music at Pandora and film at Netflix.

"Basically the known universe of beauty and skin care knowledge has been ingested and analyzed by our database," Zhao said.

Layered on top of that is an online diagnostics questionnaire customers fill out, which replicates how a dermatologist would conduct an evaluation. The form generates different questions depending on how a customer answers the preceding ones and eventually separates them into one of more than 60,000 subgroups. Then, the customer's formula is made.

"You're asking me what the total addressable market is — it is as large as the overall skin care, beauty, wellness and personal care markets are. It's all going to be personalized, and it should have been already."

Ming Zhao

CEO and co-founder of Proven

According to Zhao, Proven is now the largest personalized skin care brand in the industry, with over 100,000 customers, 70% of whom are repeat shoppers. Zhao says that is 20 times the industry average for repeat beauty purchases.

"You're asking me what the total addressable market is — it is as large as the overall skin care, beauty, wellness and personal care markets are," Zhao said. "It's all going to be personalized, and it should have been already."

Proven is far from the only brand that's aiming to capitalize on the growing demand for customized products. Function of Beauty, another player in the space, made a name for itself by creating personalized hair care products and has since moved into the skin care and body care spaces as well. In fact, Function of Beauty just acquired another competitor in the custom skin care market, Atolla, to improve its offering.

The segment has seen "significant growth" for years, according to Manola Soler, director of the consumer and retail group at Alvarez & Marsal.

"As consumers continue to prioritize ingredients and product efficacy, there is reason to believe there is significant upside in personalization in the beauty space," Soler said via email. "The rate at which companies can scale will likely be constrained at this point by their ability to develop flexible and scalable manufacturing processes that can ramp up or down as demand naturally fluctuates."

Kandemiri's platform, Hama Beauty, is focused on a less complex answer to receiving personalized products. Rather than creating her own products to match customer's needs, Kandemiri pairs customers with products that already exist based on their answers to a series of questions, including age and skin tone. Customers also enter, in their own words, what kind of needs they're trying to address.

"It was like, 'Okay, you can have these six problems with your skin and then nothing else.'"

Tari Kandemiri

Founder and CEO of Hama Beauty

That last point was particularly important to Kandemiri, as many similar offerings give customers a range of choices but don't allow them to explain for themselves.

"They would have like three options or six options of skin problems or things that you could need help with, like acne, hyperpigmentation, sun protection, but it just felt like it was kind of limited," Kandemiri said. "It was like, 'Okay, you can have these six problems with your skin and then nothing else.'"

After a customer responds to the quiz, the platform isolates the number of products available based on the specific age, skin tone and other personal information a customer gives. Then it works to provide a list of possible products that address the unique needs they entered.

"They entered hyperpigmentation or they entered redness: What are people like them saying about products for redness or hyperpigmentation? Which products are most highly rated, which are kind of the best rated for that specific profile?" Kandemiri said of the process.

Customers can also filter by price and brand — Hama Beauty has more than 400 brands represented on the site and "thousands" of products, according to Kandemiri. It's meant to provide a solution to the "overwhelming" amount of beauty products customers have to choose from without making them do all the work themselves.

Both Kandemiri and Zhao said their businesses were founded based on personal experiences that made it difficult to find the right products. But the customized approach may be more broadly applicable. Kenya Watson, an intelligence analyst at CB Insights, expects a large subset of customers to be interested in personalized beauty products over the long term, as they take some of the friction out of the shopping process. (The firm also put the sophistication of customized beauty products as one of its top trends to watch for 2021.)

"I think personalization [up] to this point — most of it has been at the consumer quizzes level, and brands and retailers are trying to figure out how to get past that point," Watson said.

The path to scale

There is certainly interest in the market, and not just from consumers. According to data PitchBook sent to Retail Dive, investment in the personalized beauty market (by dollar amount) has grown eight out of the 11 years between 2010 and 2021. The number of deals in the space has also grown, for the most part, though that metric peaked in 2019.

In 2021 so far, the personalized beauty space has raised $1.04 billion, according to PitchBook. That's compared to a total of $1.7 billion the beauty industry as a whole has raised. Out of 146 total deals in the beauty space in 2021, 93 have been dedicated to the personalized beauty market in particular, according to PitchBook's data.

Personalized beauty makes up a significant portion of the total investment in the beauty space in 2021.

Cara Salpini for Retail Dive; Data source: PitchBook

That suggests the investor interest is there. And Zhao firmly believes that personalized beauty products are just getting started. In fact, Zhao thinks "everything that touches our body" needs to be personalized, from personal care to wellness. To that point, the company has plans to expand into hair care, baby care, body care, color cosmetics and supplements.

"I actually think personalization is late," Zhao said, adding that in medicine we take a personalized approach to treating our organs. "If you had an issue with your kidneys, you wouldn't say, 'Let me go to the drugstore and buy the most popular kidney medication' because personalized medicine is just the default way that medicine is practiced. And that is done for any organ in your body. That's just expected. So why then for our skin, which is the body's largest organ, why is that not already personalized?"

Even if beauty products should ideally be personalized for a customer, there are a lot of factors that go into running a profitable business when the products are unique for every shopper. Number one on that list is manufacturing at an affordable price.

"While there is an ongoing customer desire for personalized products, there is still significant investment required to enable efficient manufacturing of personalized goods. Whether through incremental manual labor or through automated facilities, the cost of creating personalized goods is still significant," Soler said. "Another challenge in continued growth is consumers' desire for immediate gratification – personalized goods typically have longer delivery lead-times which may limit their audience, especially around peak demand periods."

Watson agreed that companies that can "crack the code" on efficient manufacturing will gain the upper hand in the space, and also added that it gets harder to create custom products at scale versus for a smaller subset of customers. Atolla, Function of Beauty's new acquisition, is managing this relatively well, she said.

Proven had to "reinvent" manufacturing in order to achieve any kind of scale, Zhao said. Currently, the brand uses predictive analytics to plan for what products it will likely need in the coming months and adjust manufacturing according to that.

Similar challenges make entering physical retail tougher. Proven is working on some different ways to approach the physical retail experience, but it takes serious innovation since personalized beauty companies can't just package up their products and sell them like other brands.

Soler noted a couple of players that have tweaked their offerings to better suit physical retail and efficiency, including Clinique ID and Function of Beauty. Clinique ID gives customers a choice between six base moisturizers and nine concentrate cartridges to address specific concerns, while Function of Beauty tweaked its offering for Target to include four base formulas customers can choose from and 10 "hairgoal booster shots" they can add in, Soler said.

Fixing the manufacturing problem is doubly important as it also impacts the price of a customized product. The more expensive it is to manufacture the goods, the more the brand has to charge a consumer in order to recoup those costs — and price is a key factor in determining which brand a consumer buys.

Zhao is unconcerned about the cost of Proven's products. The average skin care product is about $45, according to Zhao, and Proven offers a skin care routine of three products for $129 if you subscribe. She also says those three products do the work of "six to nine."

Kandemiri thinks price may still be a challenge for the space, both for new entrants and in order to entice customers away from the brands they already know. While it's tempting to think about launching Hama Beauty-branded products, thanks to all the data Kandemiri has, she's concerned she wouldn't be able to cater to all price points if she did so.

"People are still going to want to purchase products from brands or retailers that they're familiar with that are within certain price points that are easily accessible," Kandemiri said. For example, a consumer is likely more willing to spend $100 on a product they know than on an untested product that's been recommended to them. "So I'm really interested to see how those costs are mitigated moving forward."

One way to lower the costs of personalized beauty is to approach it without manufacturing unique products, the way Hama Beauty currently does it. Kandemiri is actively talking to brands about selling her technology to them for their own quizzes, so a customer can find a product within a brand's website that will suit their needs the best. She's also considering how to extend her experience into the store by showing customers where they can find the products they've been paired with — what store and what aisle, even.

Soler also pointed to online quizzes offered by the likes of Il Makiage, which offers a money-back guarantee if its shade recommendations don't work out. Or Sephora's Color iQ, which matches customers to brands based on their skin tone and other factors.

"These resources can dramatically improve the customer experience and create personalized moments without the inventory complexity," Soler said.

Article top image credit: Courtesy of Proven Skincare

How Nike is using DTC and data to expand its empire

Since 2011, the sportswear giant has grown direct-to-consumer sales from 16% of its namesake brand revenues to 35%, all while continuing to take share.

By: Cara Salpini • Published March 23, 2021

In 2011, nearly ten years before Nike would announce its Consumer Direct Acceleration strategy to speed up the prioritization of DTC, the company was already focused on growth in that channel. In its annual report that year, Nike wrote that while wholesale made up the largest share of Nike brand revenues, "we continue to see growth in revenue through our Direct to Consumer channels."

At the time, DTC sales made up 16% of Nike brand revenues, or $2.9 billion of the total $18.1 billion the sportswear giant's namesake brand brought in that year (total company revenues, including Converse and other businesses, hit $20.1 billion). By the end of Nike's fiscal 2020, which came May 31, that number had grown to 35%, or $12.4 billion. Of course, Nike's revenues have also grown over that 10-year period, to $35.6 billion (or $37.4 billion company-wide).

By comparison, Adidas made 19.8 billion euros ($23.8 billion) last year, and Under Armour made just $4.5 billion.

The dominance of Nike was not always a sure thing. The numbers used to look closer than they do now (and they still are in countries outside of the U.S.), but the brand's journey to $35.6 billion, and generating more in DTC sales alone than some of its competitors make annually, has been through a path of persistent growth.

"Back in the mid-'80s, Reebok actually took No. 1 market share in the U.S. for about 18 months," Matt Powell, senior industry adviser for sports with the NPD Group, said. He noted that Nike had neglected the women's business, allowing Reebok to break in. "And then this guy named Jordan came along and Nike took No. 1 position back again. It's really been a multi-year strategy of them continuing to take share: Most years in the United States, Nike has taken share."

Nike made almost $14 billion more than rival Adidas in 2020.

Cara Salpini/Retail Dive; Data source: Nike annual reports

It's been about having the right product, definitely. But it's also been about knowing how to make tough decisions. In the '90s, that meant opening outlet stores when trends shifted to khakis and away from sneakers, according to Powell, and in the past few years, it's meant doubling and tripling down on shifting spend to its DTC channels.

"There's few brands that I can think of that should be pursuing the amount of economic upside from this kind of transformation more than Nike should," Michael Binetti, managing director at CreditSuisse, said. "It's such a big brand, with so many advantages to doing this."

Chief among those is that DTC sales are more profitable. Hence, the number of startups that have cropped up as DTCs. Nike has a strong brand, so it's able to command a sizable business through its own channels, but the more sales Nike can get that way, the better. Another advantage to the method is that Nike has more control over how its brand is presented through DTC channels, something which analysts speculated was the reason it stepped away from Amazon.

A report from McKinsey and the World Federation Sporting Goods Industry estimated that the shift to DTC has been accelerated by two years because of the pandemic, and researchers recommend that in the medium- to long-term, brands that want to thrive will need to aim for a 20% DTC business, or higher. It's at that point that brands begin to see a virtuous cycle from DTC sales and higher margins, rather than the "vicious cycle" that comes with less scale of the channel.

Nike isn't the only one that's figured out the benefits of selling directly to consumers, though. Under Armour, too, is looking to exit thousands of wholesale doors, and Adidas is planning for DTC to make up 50% of its sales by 2025. Retailers in other sectors have also recognized the need to reemphasize DTC sales.

"They're all doing what Nike's doing," Joe Feldman, senior managing director and assistant director of research at Telsey Advisory Group, said. "They're all trying to segment more. They're all trying to clean up their vendor partners."

Of course, retailers' partners are the other half of this equation. Even though the Nike brand still does 65% of its business through wholesale, Nike's DTC rise has consequences for the wholesale opportunities it's leaving behind.

"I think, frankly, any retailer who loses Nike is going to be affected in a major way," Powell said. "Some of the mall-based retailers do as much as 70% to 75% of their business with Nike. And even the ones who don't have that kind of dominant space, it's in the 30s. So it would be a significant loss to any retailer, to lose that brand."

Nike's acceleration of selling directly to consumers doesn't mean overnight changes, necessarily. The retailer has been steadily shifting to more DTC sales over the past several years. But with the pandemic accelerating e-commerce growth by years, the next phase in Nike's strategy might turn out to be incredibly well-timed.

"I've covered these guys for 13 years and I've never seen them really embracing change and moving as fast as they are today," Binetti said. "And if you'd have asked me if I would have seen the biggest company in my coverage moving at this kind of pace… it's quite an impressive thing."

The Nike ecosystem

As Nike's been pushing toward a greater percentage of DTC sales, the retailer has also been carefully constructing an ecosystem to support that shift. In reality, it's just Nike delivering on what every retailer aims for when they talk about omnichannel, but where others have struggled, Nike seems to be succeeding.

As explained by CEO John Donahoe in June 2020, the company's DTC strategy starts with digital and Nike's owned stores. Most retailers have an e-commerce presence in addition to a fleet of stores — that's not unique, per se. But how Nike is using its stores is. After years of experimenting with digitally connected store concepts like Nike Live and House of Innovation, Nike is planning 200 small-format stores in the same model as Nike Live.

Growing DTC share has been a priority for many years.

Cara Salpini/Retail Dive; Data source: Nike annual reports

While most retailers understand the benefit of having physical stores, and how it increases online purchases in a given area as well, few retailers operate stores that are as digitally enabled as some of Nike's recent concepts. The retailer has managed to make its app so useful to the in-store experience that consumers without it are at a disadvantage. Customers can scan QR codes to pull up products on their phone, they can start dressing rooms through the app, and signs throughout the stores show customers what else they can do with their phones.

"It's this really smart acknowledgement that a purchase journey is sort of fragmented, and there are multiple touch points that go into a customer's consideration process," Sarah Marzano, a retail analyst at Gartner, said of the stores. "You might visit the Nike website while you're considering a shoe. You might then want to pop into your local Nike store to evaluate that product in person. They keep being really thoughtful about, 'How do we collect the first-party data that's necessary to knit that journey together and drive conversion?'"

In addition to creating an interconnected experience, Nike also has a strong sense of the purpose that each of its channels serve, Marzano said. For its stores, there are multiple objectives. Nike's new locations, notably off the mall and in more local communities, will not only help compensate for the closing of wholesale doors by providing a place for shoppers to see products, but they will also help build community with loyal customers, in the same way many DTC brands view their stores as marketing channels more than just revenue opportunities.

"They're in front of the curve, where they're saying, 'Look, we're making a bet that the consumer is going to either shop digitally or closer to home and the way that a lot of retail is built on high streets and in malls across the country, those are going to continue to diminish,'" Binetti said. "They're making the right bets. And we hear similar overtones of the neighborhood store strategy or the smaller store strategy all over the place."

Of course, e-commerce as a channel in and of itself has also accelerated over the years, and even more dramatically during the past few months. Nike has said before that it plans to become a 50% digital business (that includes both its own digital channels and those of retail partners like Foot Locker) and analysts believe that is a medium-term milestone rather than an end-goal.

NPD's Powell noted that the "targets are moving" on e-commerce as a whole thanks to the pandemic, with the firm originally projecting athletic footwear would be 50% e-commerce in five to 10 years, and instead it grew from 29% to 40% in 2020 alone. What that means for the future share e-commerce could make up is less certain.

"Is 50 a ceiling or does this go beyond that?" Powell said. "My gut tells me it goes beyond that."

Erinn Murphy, senior research analyst at Piper Sandler, said Nike's direct digital channels are on track to make up 21.5% of the total business by the end of fiscal 2021, up from 15.5% in the last fiscal year. That would amount to $9 billion. Reaching 50% with its retail partners, then, seems "very achievable," Murphy said. In fact, in an August 2019 report on Nike, Piper Sandler noted that over time it expected digital DTC "to become [Nike's] largest selling channel."

Nike execs added on a conference call in March 2021 that its digital business had grown over 70% year to date, and total digital (both owned and partnered) had grown to 35% of the company's business.

Fueling that digital growth are Nike's apps. The SNKRS app alone is now a $1 billion business, according to Murphy, and made up 18% of Nike's total online sales in fiscal year 2020, Piper Sandler wrote in an October 2020 report. The percentage of both male and female sneakerheads that use the SNKRS app has increased year over year, according to Piper Sandler, while the Nike app saw almost 200% growth in Q1 last year.

Piper Sandler says Nike's direct digital channels are on track to make up 21.5% of the total business by the end of fiscal 2021.

Cara Salpini/Retail Dive; Data source: Nike annual reports

"It becomes a sticky ecosystem because, say that you've downloaded the Nike app on your phone, and you have the Nike running app or the fitness app that they have or even just their shopping app — you'll get targeted emails and they start to know what you do athletically. Or they might know your style," Telsey's Feldman said. "They'll start to send you direct emails when there's either a new product that might be of interest to you or they'll give you a first crack sometimes at a new product that just came out."

The importance of digital to Nike — and all of retail, really — has also led to shifts in how companies think about manufacturing and shipping, something Nike will have to think through as well. According to a joint report between McKinsey and the World Federation Sporting Goods Industry, digital trends have forced athletics retailers to "become nimbler, and produce smaller, more frequent product runs. Perhaps because of this shift, lead times have shortened, with Asian suppliers of large sporting goods companies moving initially from 120 days to 90, then 60, and often eventually down to 30 days."

Nearshoring, the process of moving operations closer to where the products are sold, has also been explored by some, according to the report. With Nike, Binetti doesn't believe the majority of the retailer's manufacturing volume will move to North America, but the new small-format fleet will likely be built to hold a certain amount of high-conversion inventory, and could be used to ship local orders when it's more cost-effective to do so.

"In very simple terms, there's a boat ride across the ocean that can't be changed," Binetti said. "It's just far away. But this, however, has caused them to look at all the other parts of the business and say, 'Look, we need to get a lot better at the digital side of it.'"

And in 2020, they brought in a digital CEO to do just that. Donahoe came in as the former CEO of eBay and Nike praised him for his "expertise in digital commerce, technology, global strategy and leadership" when his appointment was announced.

"He's the right man for the job," Binetti said. "And you see him doing it very, very quickly."

Nike, but make it personalized

At its heart, Nike's strategy for its various channels emphasizes uniqueness. Its Nike Live stores are focused on housing a localized assortment to best suit those geographies, and its wholesale partners receive different product depending on what type of consumer they serve. Nordstrom, for example, is a different consumer than Dick's Sporting Goods or Foot Locker.

"Nike probably does the best job of any of the sporting goods manufacturers in terms of segmenting the market," Feldman said, explaining how the retailer is careful to avoid too much overlap at its wholesale partners, even with flagship products like its Nike Pegasus running shoe. "There might be different colorways, there may be slight differences within them, so that will help segment the market. And then they may even offer some that you can only get that certain color on their own website. So for direct to consumer, it helps to drive business that way."

With the Nike Live stores, the retailer personalizes in a different way, changing its assortment to reflect consumer trends in the region, as well as local teams and cultural touchpoints in that area. Matching assortment to what's popular in a given geography also means the retailer can benefit from using those stores as potential shipping or pickup points for online orders by customers that live nearby.

Being able to personalize effectively, of course, comes back to data. Nike's "robust data ecosystem," as Marzano refers to it, is what's behind the retailer's efforts to create a completely seamless online and offline experience. It informs the retailer's merchandising strategy, and also how the retailer markets to specific consumers. The company's made acquisitions along the way (four in the data and analytics space over the past few years, Donahoe said in a recent earnings call) to help it achieve those goals, including Celect, a predictive analytics and demand sensing firm Nike acquired in August 2019, and Datalogue, which Nike acquired in February.

In Nike's third quarter earnings report, which came out in March 2021, Donahoe hit on both acquisitions, saying Celect has helped with "getting the right product in the right place at the right time" and Datalogue will help improve personalization on both search and product recommendations, including anticipating when customers might be due for new product. In terms of a personalized experience for consumers, Nike is "just scratching the surface," Donahoe said.

"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done."

Matt Powell

Senior Industry Adviser for Sports with the NPD Group

But the retailer doesn't want to lose sight of product in all that data.

"The science of what we're doing: It's been done, it's doable," Donahoe said, according to a Motley Fool transcript. "But the thing that makes this company remarkable is the art. It's the creativity of our apparel designers, of our footwear designers, it's the creativity of our brand teams and the storytelling they do. And so, data doesn't displace art, it's both."

The result of Nike's data-heavy focus is that not only is merchandise personalized to certain stores, but the online experience of individual consumers is unique as well.

"When you open up the Nike app on your phone, it's not just, 'Here's a bunch of Nike stuff that we're excited to sell today.' It's literally a vending machine of the product that is most likely to sell to you," Binetti said.

With such an emphasis on differentiation, Nike's DTC strategy is understandably focused on pulling out of partnerships that aren't as unique or useful to the Nike brand. When it comes to wholesale, retail partners have to add something to Nike: a different customer base, a geography Nike isn't as saturated in, or representation that is advantageous from a branding perspective. Wholesale partners that just want "the hot Air Force One of the day" won't be attractive to the brand, according to Binetti.

Execs reaffirmed that strategy on Nike's recent earnings call, saying consolidation would continue, and that the retailer has been prioritizing inventory for its "strategic partners" and its direct channel over undifferentiated retail.

Analysts pointed to strong partnerships the brand has with certain wholesale partners like Dick's and Foot Locker as examples of areas where Nike is getting it right.

"Wholesale gets painted as kind of a bad thing these days ... but Nike's really, really good at it. They're really good at it," Binetti said. "There are still some places where they really should be doing it and can make a really good amount of money, leveraging other people's real estate, other people's customer bases, things like that. But there's always going to be that temptation to try to encourage those sales to happen in your own channels, in your own distribution, either your own stores or digital."

Off-price, on the other hand, is one of the channels that could suffer as Nike, and its peers, move away from certain wholesale partners. Multiple analysts referred to the channel as an area athletics retailers are trying to step back from as they look to avoid cheapening their brand. Rather than using discounting to drive incremental sales, Nike has relied on newness and exclusive product drops, according to Marzano, which keeps the focus on full-price products.

Analysts also highlighted that the U.S. is an incredibly retailer-diverse country, which means brands are selling through a large variety of different players. That complicates how companies can control their brand messaging, which is a key tenet of the DTC playbook.

"If you're really trying to control how your brand is presented at retail, how it's priced, how it's merchandised and so forth, having thousands of wholesale partners is really antithetical to getting that done," Powell said.

Innovating when you make $40B in revenue

As with any ambitious strategy, investments must be made, risks must be taken and occasionally, unpopular decisions must be made. Nike's particularly good at that last one, which has helped it weather crises in the past, according to analysts.

This time, it's Nike's undifferentiated wholesale partners that will pay the price.

"It's much more aggressive than, you know, 'I know some of my retail partners are going to go away, so I'm going to ramp up my DTC to offset it,'" Powell said. "This is actually forcing some of your retail partners to close in order to ramp up your DTC."

There have been other casualties as well. After the retailer announced the acceleration of its DTC strategy in June 2020, layoffs were close behind, with execs noting that the new strategy would allow it to "significantly simplify" its organization. Layoff costs were estimated at between $200 million and $250 million, as the retailer shuffled its management to better align with the new plan. The company has made additional cuts since then.

"The leadership changes, combined with a strategic alignment of NIKE's operating model against the CDA, will create even greater focus and agility that will be enabled by a nimbler, flatter organization in service of consumers," a press release at the time read. "To drive this focus, NIKE will streamline its organization, including its Corporate Leadership Team (CLT)."

Nike's undaunted attitude is also matched by a willingness to make heavy investments, and a large amount of revenue to take the sting out of those investments. Since 2015, Nike has made upwards of $30 billion a year, peaking at $39.1 billion in fiscal 2019. Even during a pandemic, Nike made it out with $37.4 billion. That's $13.6 billion more than Adidas made last year.

Being a bigger company comes with both pros and cons, though.

"Nike has to transform $40 billion worth of revenues every year, so for them, they just have to invest bigger dollar amounts because they have a bigger business to transform," Binetti said, noting that during the pandemic they had problems just like everyone else, but with "10 times" the complexity because of their scale.

"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?'"

Michael Binetti

Managing Director at CreditSuisse

Researchers from McKinsey and the World Federation Sporting Goods Industry also highlighted that a shift to DTC could pose problems for larger companies because it may be difficult to move as quickly as a smaller company, but that mostly applies to brands that aren't pursuing change the way Nike is.

"We think there are two types of brands who are particularly at risk," Alexander Thiel, partner and leader of the Sporting Goods Practice EMEA for McKinsey, said in a briefing on the report at the beginning of the year. "They are smaller brands lacking the capital and liquidity to make the investments that are required to succeed in these plans. But the second group we think [that] will also have issues are bigger, lagging brands who lack a culture of agility and change, and who will therefore be slow to adapt."

For brands that are already aware of what shifts need to be made, scale is a benefit over smaller competitors.

"Middle-sized companies, they're always having to make a decision between, 'OK, are we a big enough business to make an investment in this technology and have it really generate a return for us?' And in a lot of those things, Nike's size — just being four or five, six times bigger than anybody — they don't have to think about that," Binetti said. "They know that if they make a bet, then it costs a couple dollars. Even if it's a little bit of an expensive acquisition, if they can use that across their $40 billion of revenues around the world, it's going to pay for itself."

Looking at Nike's small-format stores is a good example. The stores are practically built on effective uses of data, which has come through acquisitions. While the majority of retailers have known data is important for years, Nike is one of the few who's made big strides in using it well, according to Binetti, and part of that is that the company has the "biggest budget of anyone" to pursue it. The basis of the retailer's Nike Live stores, which rely on changing assortment frequently and using data to understand local preferences, wasn't possible a few years ago, Binetti said.

The retailer started small with the concept, testing Nike Live locations in a handful of places, but it rapidly accelerated to a fairly large-scale expansion of similar stores — around 150 to 200. Not only do analysts see no problem with Nike opening that number of stores, some think the rollout is actually conservative, and that even if they don't work, it won't be a real problem for Nike.

Nike's competitors aren't sitting still. Adidas is also investing boldly. The retailer rolled out a four-year strategy in March 2020 that emphasizes the same things that Nike is focused on: having a DTC-led business model, sticking with only strategic wholesale partners and investing heavily in digital. It includes funneling 1 billion euros ($1.2 billion) into a digital transformation between now and 2025.

Executives also said during an investor presentation on the strategy that Adidas had a plan for the basketball segment, an area where Nike is the "dominant brand" in the U.S., according to Feldman. The difference between Nike and its competitors, at least for the moment, might just be that it's moving faster.

"It is interesting to see that most of these guys have realized that data was the future and they knew they had to talk about their data initiatives, but they're still on the cusp of really getting smart," Binetti said of other players in the space. "I think it's interesting to see the biggest one of them, Nike — with the biggest mountain of a business to move — really moving, in my opinion, fastest on a lot of these things."

Article top image credit: Permission granted by Nike

Algorithms vs. humans: Who's better at predicting fashion trends?

These days data is plentiful, useful and fast. But some in the industry warn that old fashioned merchants are undervalued at a crucial time.

By: Daphne Howland • Published April 29, 2021

Apparel retail, an industry segment that has been in turmoil since well before the pandemic, is poised for a reset as the pandemic shows signs of easing in the U.S.

Already, there are signs of hope: In March, clothing sales soared 105% year over year. Market intelligence platform Edited recently found that prices at the luxury end are actually rising and not just in streetwear. But apparel brands and retailers are grappling with many unknowns. The pandemic has probably entrenched consumers' already-building preference for less dressy attire and willingness to buy clothing online, so it's hard to judge how dressier apparel and brick-and-mortar stores will bounce back. In general, what styles and colors will match consumers' post-pandemic mood are still being worked out.

In order to anticipate new trends, match supply to demand and manage e-commerce's more complex logistics — especially difficult in apparel — technology may seem more important than ever. But the need for more human involvement may be even greater, apparel industry experts say.

"I will always promote data analysis because I'm into the numbers," Shawn Grain Carter, a Fashion Institute of Technology professor of fashion business management with decades of experience as a buyer, said by phone. "But the human factor will always matter. When we talk about fashion trends, an algorithm can't give a gut reaction, an algorithm can't go to Paris, London and Milan and say, 'Oh my God, I know this is perfect for my customer.' Because algorithms only rely on historical data and oftentimes you need to be able to use that sixth sense that you have as a merchant, that tells you this is a risk that's worth taking and I can calculate this risk and I'm going to go into it full throttle, and let the customer know this is a must-have item that you have to own for the season. That's why you need smart buyers and visionary merchants in retailing."

The risk

Data is integral to any business these days — certainly for an industry as complex as apparel — and today's AI and machine learning capabilities have reached impressive levels of efficiency and speed.

"We've always used data, that's nothing new," Carter said. "Historical data initially was done by hand, we used to keep what we called checkerboards. Then we were excited when Excel came along, we were excited when computers could give us a vendor analysis, and our gross margin analysis, and our markdown, then we were more excited with QR codes that could model stock replenishment. And now we're talking data insights, predictive analytics, markdown algorithms and machine learning. I can give you the data now faster than you got it 10 or 30 years ago, but you still need a human to interpret it, because if you interpret it wrong, you've messed up your volume, and your gross margin tanks."

Eliminating risk sounds ideal, but there's a danger in smoothing things over too well, several experts note. Trends, tastes and lifestyles are always in flux, perhaps even more so in the internet age, and hitting the mark in fashion often means taking a chance.

"The people with great fashion sense and intuition have been weeded out of the industry for a long, long time — ever since data became more important than intuition."

Lee Peterson

Executive Vice President, Thought Leadership & Marketing, WD Partners

"The fashion business, other than haute couture, for a long time has been driven by data and by data people — and lead by data people," Lee Peterson, executive vice president of thought leadership and marketing at WD Partners and a veteran of specialty apparel merchandising, said by phone. "They're giving you what you want efficiently. Speed, efficiency, quickness. They're showing you things based on what their algorithms tell them, and what they should put with what. And that's why so much fashion is boring because the intuition, and it's actually the risk, is gone out of the equation. The people with great fashion sense and intuition have been weeded out of the industry for a long, long time — ever since data became more important than intuition."

Commodity or fashion?

Still, a retailer can sell a lot of clothing leaning on data alone, as Walmart and Amazon consistently prove.

"The first question really is — are you saying that you're a fashion brand, or are you a commodity brand?" Peterson said. "Walmart, for example, says they do fashion, right? They don't really do fashion, they're selling commodities, they're selling known entities. They have data on what works, what doesn't work and they get it from their vendors, who would be the ones that take the risks. But if you're a fashion brand, you can't just rely on data. You can't."

These days, well designed algorithms are sophisticated enough to anticipate to some extent what a customer is more likely than not to purchase, according to Thomai Serdari, professor of luxury marketing and branding at New York University's Stern School of Business. But that's not the same thing as anticipating trends, which come and go, and in apparel generally tend to last for six to 10 years. Data is unreliable when it comes to knowing when a fashion moment has passed because it's rooted in the past, Serdari said by phone.

"Talented merchants don't just look at other fashion companies or how people shop, but they look at other areas of taste," she said. "Fashion is just one aspect, but taste encompasses everything, from what you eat and drink and what you watch and how you do your hair. All of these relates to each other and it's a very, very complex thing that happens outside of the computer, even if we do leave traces on the computer. There are a lot of cultural elements that are missed because it's impossible for the machine to have that sort of proactive behavior."

The pandemic has scrambled that further, and it will take a balance of tech and humans to navigate a time when fashion is top of mind in a way it hasn't been for a while, according to Tom Ott, former chief merchant of Saks Off 5th and general merchandise manager for men's at Saks Fifth Avenue, and founder of retail consultancy Retail and Fashion Solutions.

"We're entering a very strong fashion cycle," he said by phone. "The business is really exploding right now, and as people begin to travel, as people begin to go back to the office, as people begin to socialize, they're very much interested in fashion. We've probably seen a pivot in the business that we may have never seen in our lifetimes, going from replacement clothing and very casual apparel to a really fashionable time period. There's a need for a merchant to be out there, not just on the receiving end of line sheets. People need to be out and about, they need to be touching fabric. They need to be understanding fits. And the big critical piece that I think that's really missing a lot today is a clear understanding of the customer by region."

A Stitch in time?

There may be no greater confidence in algorithms' ability to sell apparel than what's found at Stitch Fix. The online apparel seller sends out regular boxes (or "fixes") of clothing curated by human stylists, based on algorithms that incorporate a style quiz, return rates and purchase information, and customer feedback.

"Our goal has always been to deliver the most personalized shopping experience to every client, and what has enabled us to do this so well is the nearly 10-year advantage we have building an algorithmically driven engine for highly personalized, apparel-based shopping," Elizabeth Spaulding, a former business consultant and now president of the company who is set to take founder Katrina Lake's spot as CEO, told analysts.

Even Stitch Fix understands the value of the human touch, as executives often tout the contribution of real-life stylists in curating boxes and nurturing the customer relationship. The company currently boasts 3.9 million active customers and 5,800 stylists, or about 672 customers per stylist.

Ryen Anderson, the company's director of men's apparel design, says he finds "inspiration from street style, traveling and themes from global cities and runways" and keeps "up to date with what people are searching for online, what our clients are seeing on social media from influencers they follow, and even the fabrics our vendors are introducing."

In addition to completing a quiz at sign-up, which asks about size as well as fit and style preferences, customers let stylists know if they need items for a return to work or a vacation. "We also make it easy for clients to share useful, actionable feedback with us across fit, style, price and quality at checkout — and more than 85% do," Anderson said by email. "All of these data points help us understand whether we should buy more of an item or find similar items at a different price point, or adjust the hem on a pair of jeans."

There are some signs of trouble at the e-retailer, however, aside from the founder's departure as chief executive. Stitch Fix is moving beyond its inaugural model, where customers pay $20 per box, which arrives as often as every couple of weeks or as seldom as every three months. (That goes toward their order if they keep something, but is forfeited to Stitch Fix for "styling services" if they don't.) The company is now developing more open-ended ways for subscribers to shop on its site directly, closer to a traditional e-commerce site.

Rather than stylists, the company may have considered hiring influencers, according to Ilse Metchek, president of the California Fashion Association.

"They should have created their own influencers, and then stuffed the merchandise in the boxes based on what the influencers told their customers to buy," she said by phone. "They're behind the curve on that one because that train has left the station. There's too many influencers now. Now we're into micro-influencers."

Managing risk

In a fundamental way, a fashion brand serves as its own influencer or stylist. Fans return to it because their taste matches the aesthetic, and expectations have been set around quality and price.

"Risk is brand specific," Jeff Sward, founding partner and CEO at Merchandising Metrics, said by email. "Risk is also customer specific. What would be high risk at the Gap might be moderate risk at Urban Outfitters. What would be moderate risk at Lily Pulitzer would be outlandish at Donna Karan."

Merchants at such brands are more likely to gain traction with garments that be a surprise or departure, as long as they are true to the brand's story. But even a more daring brand often has a core commodity offer that is less daring, and whose development may be more informed by data.

"The ideal assortment, even for a fashion business, is in the shape of a triangle," said Peterson, who was a merchant at The Limited for years. The largest swath, at the bottom, sustains profitability. "In order to experiment with the top, you have to have the bottom on board. So that commodity business for women's was always sweaters, and then later on, bottoms and sweaters, because we had the data that told us what sold with what. If you don't solve that base, it's really difficult to just circle around and do nothing but test things to fail."

Sward similarly denotes four types of apparel merchandise by ascending level of risk: basics, key items, trends and forward fashion. A retailer seeing a lot of returns might "just skew to lower overall risk," he said. "That thinking is what got the Gap into so much trouble. They couldn't figure out how to break down and manage risk."

What you don't know

Data collection can be key to that management, according to Sward. But Stitch Fix and the many other (mostly DTC) retailers that employ style quizzes may not understand their limits, according to FIT's Carter.

"People don't understand that you need open-ended questions on a quiz to allow the consumer to tell you exactly what's on their mind," she said. "When you give them nothing but closed-ended questions, you're going to get enough information for your data insights, but they won't tell you more meaningful insights. You send out quizzes, and they tell you these are my favorite colors, this is my style ... that stuff is so meaningless now because what you find is that most consumers have split personalities. Of course there are those consumers who are pretty traditional. But what you can't predict is —Yes, I'm conservative by day because I'm a bank clerk, I'm a teacher, I work in the dental office. But at night, I'm a crazy woman."

Metchek agrees and notes that, at the same time, traditional demographic information has also lost its meaning.

"Merchants at Macy's or Saks or Neiman's could give you chapter and verse about their customer — where they live, what they eat, what restaurant they go to, what movies they see, that's all part of demographics — you can't do that anymore. You cannot pigeonhole a millennial," she said by phone. "You know them by knowing who they listen to on the internet. You do it by their influencer. You do it by the school they go to, perhaps, or maybe the neighborhood, or maybe some other thing, but you can't do it by age, you can't even do it by what job they have."

Taste is more niche today, is how Serdari puts it. "And actually this is exactly the problem for the algorithm," she said. "You follow different influencers and you see what they do. Or if you're very much into cartoons, then that really influences everything that you do."

One of the best ways to get to know a customer has stood the test of time however, and that's running a store, because that's where human interaction, conversation and observation are possible, Metchek said. That's also something that Stitch Fix has said it will never do. Matching each location to its customers is also key. "The Nordstrom in Manhattan has totally different merchandise than the Nordstrom in Los Angeles. And that's where Macy's failed and J.C. Penney failed and is still failing, and why Bloomingdale's just closed its store at the beach in Santa Monica — because they continued to put in Bloomingdale's merchandise from New York," Metchek said.

Store interactions provide unique fodder for ideas, according to Serdari. "The salesperson may have observed other customers doing certain things or doing things differently," she said. "And she would suggest to me something based on her experience with others, which the algorithm cannot do necessarily."

Above all, what the great (human) merchants seem to realize is what a customer once bought or once liked is old news. And that the one data point that can never be fed to any algorithm is what the customer might want in the future.

"I've heard [former Gap and J. Crew CEO] Mickey Drexler say this a thousand times — they don't know what they don't know," Peterson said. "It's the old Henry Ford thing. 'If I were to ask my customers what they wanted, they would have told me a faster horse.' This is a classic art and science question, and what we're talking about now is the over-reliance on science. If that's what you want, you're going to send boring clothes to people who also don't want to take a risk. If you just want your straight up Banana Republican generic look, then data is fine."

Article top image credit: Courtesy of Stitch Fix

Nike's expansion of small-format Nike Live stores pushes localization and digital

By: Cara Salpini • Published Jan. 22, 2021

Nike remains clear on its priorities of leading with digital and owned stores, including a focus on store concepts like Nike Live, first tested in 2018. The neighborhood stores emphasize localization and community, tailoring the assortment, design and community engagement elements to what customers in the area want most.

The latest of these stores opened in Eugene, Oregon in January, as the athletics retailer continues to emphasize its DTC strategy. Dubbed Nike by Eugene, the location joins three other Nike Live concepts in Los Angeles, Tokyo and New York, according to details emailed to Retail Dive at the time.

Located in Nike's birthplace, the store reflects the retailer's history in Eugene through its design. For example, the store has Eugene run maps customers can pick up that point out sites of importance to Nike and imagery of athletes with ties to Eugene.

The latest addition to the Nike Live fleet takes learnings from its predecessors, according to the company, and will feature several digital and convenience-focused services, including BOPIS and curbside pickup. The retailer said over the summer that it had plans for up to 200 small-format stores like Nike Live.

In Eugene, new assortments drop every three weeks, and the store also offers a selection of University of Oregon merchandise. The main welcome area will serve as a meeting place for running groups and other athletes to meet "when it's safe to do so," the company said. New arrivals and employee picks are featured at the front of the store, and the store will build relationships with local organizations that encourage kids to be active.

As with the other Nike Live stores, though, a large part of the focus is on offering digitally-enabled services that pair with the retailer's app to make membership more compelling. A digital vending machine dubbed the "Unlock Box," which lets members redeem free products and gifts, is a feature of the store, as it has been in others. Customers can also text store associates about product availability, recommendations and current offerings.

With the pandemic accelerating consumer reliance on digital, Nike took the past year to accelerate its digital-focused strategy as well. The key piece of its Consumer Direct strategy is to emphasize Nike's stand-alone retail stores, including Nike Live and House of Innovation, as well as the company's digital business, and a concurrent movement away from wholesale. In fact, a report a few months after the next phase of the strategy was announced suggested Nike had moved quickly to shutter certain wholesale accounts.

"The global pandemic has made it clear that consumer behavior is changing rapidly, providing the opportunity for us to accelerate the pace of our transformation," CEO John Donahoe said on a conference call in June about the strategy. "Over the past few years, we have shifted from a legacy, wholesale distribution model to investment in a model that gives our consumers a more premium shopping experience."

The shifts came with layoffs shortly after and a new store concept just a month following the announcement.

As the athletics retailer moves further into creating its ecosystem of digitally-enabled stores, it's also benefiting from ship-from-store capabilities at the new Nike Live store, the company said. Those kinds of online-to-offline capabilities are a focus for the retailer in continuing to expand its fleet. Chief Financial Officer Matt Friend said on a December earnings call that the retailer planned to open 30 stores in the next two quarters.

Article top image credit: Permission granted by Nike

Marketers play it safe as pandemic's effects linger

Industry leaders are pinning their hopes on a better year in 2021, but experts say marketing likely won't return to normal anytime soon.

By: Maria Monteros • Published Feb. 10, 2021

After a year marred by store closures and budget cuts, marketers enter a new chapter more optimistic and more cautious.

Retail marketers were up against a challenge unlike anything taught in business schools in 2020. The pandemic and its economic fallout caused a chain reaction across every retail category and, inevitably, marketing. When nonessential retailers closed stores, furloughed employees and switched growth strategies, marketing departments had to bear the brunt of significant budget reductions.

"It's been a really significant year of upheaval for marketers across all industries," said Ewan McIntyre, vice president, analyst at Gartner for Marketers. "I think from a retail perspective that is just as pronounced, if not more pronounced, than any industry."

The challenges ushered in last year are still present. In response, chief marketing officers are turning to low-risk strategies in 2021. Seventy three percent of CMOs said they intend to focus on current customers rather than develop strategies to enter new markets, according to Gartner's recent CMO Strategic Priorities Survey emailed to Retail Dive.

Retail marketers are treading a fine line between wanting to try innovative strategies and expand on the digital front while also minimizing risk, the report indicated. While a focus on the retention of existing customers is a safe bet, it might not be enough to thrive, especially in the current unpredictable conditions.

Marketing budgets are still in for a tight squeeze

It's no surprise that marketing budgets shrunk as a result of the pandemic, said McIntyre. The majority of CMOs, about 65%, had prepared for cuts because of the mandatory shutdown of some locations.

By the end of 2020, however, global ad spend dropped even lower than expected. The ad market declined by 10.2% — that's double the reduction seen from the 2009 recession, according to a recent report from WARC.

Companies like Tapestry, Best Buy, The RealReal, Capri Holdings and Chico's announced unquantified reductions to their marketing budgets. Kohl's, Kirkland's and At Home also slashed costs in that department.

Even Amazon, whose overall net sales rose 40% in the second quarter, announced cuts. CFO Brian Olsavsky said on a July call that the e-commerce giant cut marketing costs by about a third in the second quarter of 2020 to manage the demand triggered by the pandemic.

WARC's ad report projects that it could take at least two years for ad spend to recover from the downturn.

Contrary to reports, some marketers do expect budgets to bounce back by more than 15%, said McIntyre, citing a survey conducted by Gartner. He said the expectation might be unrealistic given the extent of time it would take to get residents in a large country like the U.S. vaccinated.

"2021 frankly is going to be more like 2020, than it was like 2019," he said. "Marketing may well be confident that they're going to see their budgets increase. But if I look at data from the office of the CFO, for example, or some data that we have from the Gartner Board of Directors there's a strong indication that marketing budgets will continue to be squeezed in 2021."

E-commerce has been rising all year long, and those that already had a strong digital presence are reaping the benefits. Black Friday illustrated this digital shift last year, with shopping apps hitting a record 2.8 million installs, according to estimates from Sensor Tower Store Intelligence. Smartphone shopping was up 25% from the previous year, according to Adobe Analytics data.

Though the pandemic has accelerated the push for digital retail platforms, that doesn't mean that every dollar spent on digital is money well spent, said McIntyre.

Marketers need to take "a long hard look, that is, into digital media spending, the efficiency that we're getting from it, and this idea that nobody ever got fired for spending on paid digital needs to go away," said McIntyre. "Frankly, this idea that 'offline bad, digital good' just doesn't hold any water."

The pandemic pivot might become the marketing norm

From responding to the pandemic to the Black Lives Matter protests and political division, the events of 2020 spurred the need for marketers to address inefficient industry practices. Marketers implemented years' worth of innovation within a few months to keep up with digital natives.

As a result, marketing has adapted a more agile way of planning, said Shar VanBoskirk, vice president and principal analyst for Forrester. Historically, marketers planned their strategies 12 to 18 months in advance, which in retrospect was not very timely, she said.

"All of a sudden then, the circumstances of last year showed that buying media 18 months in advance of a condition like what we all went through last year makes absolutely no sense. So, I am seeing CMOs really working to hasten the way that they do media planning," she said. "They're putting pressure on their media partners to allow them more flexible terms so that they can have guaranteed performance."

Having flexibility in their contracts allows marketers to make faster adjustments to their messaging or product placement if a major event happens.

CMOs were quick to reorganize their priorities. As the pandemic shifted the way retailers communicated to their customers, CMOs had to trim away traditional media and place a special focus on contactless digital mediums.

"We started watching marketing move into a more innovation role," said VanBoskirk. "I think marketing got very comfortable, historically, playing maybe a sales enablement or a communications function, but not really a thought leadership or a business strategy role."

Email marketing continually received investments due to their addressability, meaning marketers could use this channel to send marketing messages like health protocols or changes in store hours to their target audience, said VanBoskirk. The emergence of new platforms in mobile communications like Tiktok and Instagram Marketplace meant marketers needed to adapt to less comfortable mediums.

Social and performance-based media, such as cost-per-click or cost-per-action, were appealing to marketers in 2020 due to the cheap price tag, she said. However, she said traditional retailers can learn from direct-to-consumer brands' ability to provide an authentic and personalized experience to their consumers.

"I am actually telling marketers, not to go too far toward the performance-based approach. I get the appeal because economically, it's guaranteed," she said. "I actually think it's the goodwill in brands that will carry them out of such a difficult economic time."

Consumers have changed their expectations on brand experiences and personalization as they become more digitally engaged. In a recent Forrester survey, about 63% of consumers said they prefer brands that contribute to local communities, and 57% said they intend to purchase from companies that contribute to sustainability more often over the next two years.

The report also signals that consumers are increasingly becoming more tech-savvy and demanding more from brands.

Major retailers are catching up on that front — mostly out of necessity, said Ronald Goodstein, associate professor of marketing at Georgetown University.

"The expectation that all the customers are going to return to the stores is not reasonable. I think that they are training customers that you can shop and do everything you needed to do [online]," he said. He added that "the big danger for all these stores going online is, what are you doing to continue to build your brand?"

To elicit excitement from customers, marketers often use discounts to promote their products, Goodstein said. But in doing so, they risk losing equity and do little to build the brand. Without building their brand, companies risk becoming "a comparison set to what you can get on Amazon."

Instead, retailers need to make room for mission-driven messages where marketers produce content not just to sell a product but also to sell an idea. To do that, marketers have to explain what it means to build a brand that resonates with quality to their CFO, he said.

Some CMOs have started focusing on brand strategy over analytics, personalization and marketing technology for the first time, according to an announcement from Gartner last July. About 33% of CMO's surveyed ranked brand strategy as one of their top three priorities — a significant upshot from being in the bottom half of the list in 2019.

"You're going to have to teach your CFO what brand equity means. What does it mean to have a brand that resonates quality?" Goodstein said. "Because some of the marketing budgets now is going to have to go to building the brand, not announcing more sales."

The role of a CMO

An ineffective marketing team can no longer hide behind a booming economy or a good quarter, said VanBoskirk. If the CMO couldn't deliver on their goals or didn't contribute to the brand's strategy, it became more obvious, she said.

Several top brands had either named or fired their CMOs, even before the pandemic — in some cases, completely reinventing the title. The role itself has become far more complex as the pandemic pushed companies to look for a specific set of skills in their CMO in addition to having a broader umbrella of responsibilities.

The term "marketing" can be somewhat ambiguous, which is why other functions in the firm have taken on the marketing job, VanBoskirk said. In 2021, she expects marketers to realize that customer experience and marketing have the same goal: Demonstrating the brand promise.

"I believe the marketing function is responsible for those three things: customer understanding, brand strategy and brand experience. And what you call that person who is responsible for the function that runs those three things could be anything from a chief marketing officer to a chief growth officer to a chief experience officer, or to a chief customer officer," said VanBoskirk. "In most companies where it's not called the CMO, it's because the CMO somehow didn't take responsibility for those things."

With consumers spending more time online, digital and data competency are some of the skill sets that brands now expect when appointing a new CMO, according to Tim Derdenger, associate professor of marketing and strategy at Carnegie Mellon University.

Understanding these pandemic-driven trends and how consumer behavior will evolve are some of the top concerns of marketers. A survey from Dentsu last October indicates that a little over half of CMOs (52%) feel unprepared for the next six to 12 months.

CMOs need to recognize "that these trends aren't going away. They're just going to get more prominent," said Derdenger. Big firms have the workforce and the resources to implement quick changes to fully integrate online and physical shopping experiences, "but for small- and medium-sized businesses, they're going to have to make these transformations as well, to be competitive again."

In addition to keeping up with the trends, brands are pressuring CMOs to plan strategies on a shorter timeline — a struggle they've had for years, only exacerbated further by the pandemic.

"Over a significant period of time, marketing is just not as good at doing scenario planning as other functions within the enterprise," said McIntyre. The COVID-19 pandemic has seemed at times as if it "masks some of the other significant challenges — the geopolitical, cultural and political challenges — that brands have had to respond to in 2020. It's been such a year of change," he said.

Marketers should also beware of the hype around future-forward digital capabilities, he said. While there are benefits around investing in these innovations, CMOs must make sure that these technologies are appropriate for the company's needs.

Marketers have learned to switch gears from making near-term reactions to a crisis to making long-term cultural shifts within the marketing space, McIntyre said. Now that marketers have a better understanding of consumer trends, they ideally have the muscle to anticipate potential scenarios, he said.

"If good comes out of the challenging situation, it will be that marketing becomes more fiscally responsible, and we'll get better at being able to defend and prove the value of our budgets," said McIntyre. "Perhaps next time around, marketing won't be the first on the list for budget cuts because we've gotten better at this stuff.

Article top image credit: Fotolia

Saks Fifth Avenue relaunches its website

Saks Fifth Avenue relaunches website with emphasis on personalization

By: Tatiana Walk-Morris • Published Nov. 2, 2020

Saks Fifth Avenue has relaunched its website, with its first "comprehensive website replatforming and redesign" in the last five years, the retailer said. The new site emphasizes "fashion, ease and personalization" and will let users filter for certain fulfillment options, like BOPIS, same-day delivery, preorder and currently available.

The site will have segmented homepages and navigation for men's and women's, which the retailer hopes will help better serve its growing men's customer base. It will also include product recommendations and curated content.

Along with those features, Saks' "New Arrivals" section is more prominently placed on the new website, and the "Edit," which features shoppable editorial content like trends stories and influencer curations, has been "significantly expanded" and will now include a "Designer Spotlight" section.

Saks' website refresh is focused on creating a seamless shopping experience, with a few of the improvements aimed at easing the path to purchase. As part of that focus, customers can now add items directly to a wish list or their cart from the product array, and product pages will have a "Complete the Look" section that lets shoppers add items directly to their cart.

As is true for other apparel retailers, Saks Fifth Avenue has had to adjust to COVID-19 conditions. The retailer previously laid off employees, but a spokesperson for the luxury retailer declined to disclose how many. The layoffs were part of a strategy that emphasized personalization, a theme that has been carried through to the website refresh.

Saks joins a growing list of companies venturing into shoppable content, including LG, Macy's, Google, TikTok and Shopify. All of the new digital features are meant to make the luxury retailer the go-to place for high-end fashion, Emily Essner, chief marketing officer at Saks, said in a statement.

Article top image credit: Courtesy of Saks

The lack of marketing/PR firms working with DTC brands

Is the DTC brand aesthetic bad for business?

Sans serif font and bright colored backgrounds are hallmarks of digitally native brands, but it may not matter if they all look the same.

By: Cara Salpini • Published Nov. 16, 2020

Much has been made of the fact that direct-to-consumer brands, which claim to be challengers in their respective spaces, look visually similar. Articles have lamented the rise of the "bland" and the boringness associated with it as more direct-to-consumer companies launch.

It starts with a sans serif font and ends with a clean, bold color choice, but there's more to it than brands playing copycat. Emmett Shine, co-founder and creative director of Pattern, a multi-brand consumer goods company, noted that much of the DTC aesthetic retail has become familiar with is generation-based.

"DTC as it relates to typography, photography, colors, advertisements, Instagram — they're just forms of expression that essentially are representative of values and aesthetics of, really, millennials," Shine said.

Prior to closing the company to focus on Pattern, Shine was the co-founder and former executive creative director of Gin Lane, the branding and growth company that helped launch Harry's and Hims to market, and worked with Warby Parker, Bonobos and Everlane, among others. Shine noted that those early players in particular were inspired to create the DTC style of branding by what came before it: mainly brands that were either corporate juggernauts or had a hipster aesthetic.

"The hipster stuff was plaid and twirly mustaches and everything in the world was made in Brooklyn somehow, and it was bespoke," Shine said, noting Dollar Shave Club and other early entrants saw a white space there to do something different.

"They looked fundamentally at these markets and said ... There's a real opportunity here to lean into a kind of witty, almost snarky — but not too Gen X snarky — customer service, and a clean aesthetic that says, 'Hey, take a breath from all the loud noise and commercials and crazy ads, and just listen. We have a pretty good product at a pretty good price. We're pretty nice people. We'd love to get your business, just talk to us.' And so I think that as a framing created the next kind of 10 years."

It's not a phenomenon unique to DTC brands, either. Shine referred to ads and branding styles as "time capsules" of the society and pop culture of the day, and Victoria Sakal, managing director of brand intelligence at Morning Consult, noted that there are branding trends for every time period.

"Every generation or so you see some of these trends around design or experience come through," Sakal said, "and if they work, there's probably a reason that people are flocking to them."

Retail just happens to be in the DTC generation at the moment.

The DTC promise

The direct-to-consumer promise is well documented: a simpler shopping experience based on cutting out the middleman and offering fewer, but higher quality, products than traditional players. With that goal comes a similar shopping experience, which means that not only do the basic logos of DTC brands match, but so do their digital experiences.

"Designing a digital experience that can work for the consumer — that's the piece that is very, very consistent across many of the DTCs," said Zach Weinberg, director of advisory at Gartner, noting that once a category has been established is when brands start to look the same. "If you look at, let's say, the furniture category: You compare Burrow against some of the other DTC companies and you see that also the branding and the design is similar. But the reason for that is because that's the experience and that is the mechanic that they are trying to create — and that's something that I think has proven successful over time."

On the branding side, in particular, Weinberg said many DTC brands have been focused on creating companies with a personality and values that consumers can align with themselves, a position that "speaks to a universal truth of a consumer base." It might be sustainability or another element of corporate behavior that consumers have come to care more about over the years, but the niche focus of DTCs allows them to develop distinct personalities, Weinberg said, and "find like-minded friends, let's call them, instead of consumers, that you want to talk to. And those people want to talk back."

What makes DTCs appear so similar is that many of them are trying to talk to the same customer base, Shine said, namely millennials. Adopting the now-familiar branding themes of other DTCs can signal to consumers that the company they're looking at is part of the set of brands they already trust to understand their needs.

"I'll see an ad for God-knows-what brand and it'll have some hip serif font with some clean minimal background and I go 'Here we go again,'" Shine said. "But at the same time, I'm going to go, 'They probably get it.'"

"I'll see an ad for God-knows-what brand and it'll have some hip serif font with some clean minimal background and I go 'Here we go again.' ... But at the same time, I'm going to go, 'They probably get it.'"

Emmett Shine

Co-founder and Creative Director of Pattern

Shine added, though, that while there is a DTC aesthetic, the cohort is not as similar as it looks from the outside. In reality, creating differentiated DTC branding is a dance between building something that is familiar and will appeal to the millennial audience, and also adding distinctive features to help tell a certain brand's story. He likened the differences in DTC branding to the small things private school students do to stand out from others while they're all still wearing the same uniform.

"When you're trying to design any brand, you figure out the denominator: OK, this is the core, we're trying to talk to you. This is the vibe they like," Shine said. "And then the numerator is, how can you freak it a little bit to be kind of custom per the aesthetic or the values that the founders have and that they're trying to give their interpretation on? If someone just says, 'Yo, copy this and make it the same. I just want to fit in,' you never want to do that job because there's no pink streak in the hair or no fingernail polish or no unique shoelaces."

That streak of individuality can impact brand choice, according to Sakal. But there's nothing inherently wrong with DTC brands pursuing an aesthetic and a digital experience that look and feel similar, so long as a business can offer something unique to consumers. And part of the reason for the similarity is out of the DTCs' hands.

"It's also really easy for me to just engage the Red Antlers, the Gin Lanes, all the branding businesses that built the initial winners," Alex Song, founder and CEO of the Innovation Department, said, noting the influence of venture capital firms on the process. "The VCs are like, 'Hey, I know the contact — they're dependable, they're good. They're the ones that did these other guys so they got the winning formula.'"

So what if they're all the same?

Rather than turning off customers, the similarities in DTC brands can actually work in their favor, by putting consumers in a place where they feel comfortable. Branding is tied to human psychology and a longing for feelings of safety and familiarity, according to Song.

"Consumers are creatures that like familiarity," Song said. "We like to go buy things and use things and be around things that feel familiar, feel comfortable and feel cozy to us. So when you see that you had these styles, these palettes of colors, these font types, across your Instagram for so long, you gravitate towards things that also feel fun and familiar, versus something that's way off base and it just doesn't resonate with you the same way because it just isn't what you're used to seeing."

So, too, with the similarities in the shopping experiences DTCs create, Weinberg said. He noted that many DTCs have a "how it works" section on the site to explain value points like month-long return windows or a subscription function or how the product itself works. As a result, consumers have come to look for the same experience, perhaps subconsciously, because they're used to it. Those that fall outside of that experience may have to work harder for consumer attention as a result, rather than consumers growing tired of shopping similar brands.

"The ones who do it really well will be recognized and will be familiar to new consumers, but the ones who are different, consumers will say, 'Hey, this is not the same experience that I've seen on some of these other companies and they'll actually need to make a decision at that zero moment of truth when they first enter a site," Weinberg said. "'Do I like the way that this is even browsing? And do I find it familiar?' And if I don't, that's when they may drop off, as opposed to the other way around."

Outside of the possibility of consumer fatigue, one of the biggest risks DTCs could face from sticking to the same aesthetic year after year is the loss of their leading-edge status, Shine noted. DTCs with "massive revenue targets and goals" would likely suffer from not maturing their brand over time, but it's not necessarily a death knell.

"I think there are brands that were from the '50s, '60s, '70s, '80s and '90s, that still market as if it's that time, and they do fine," Shine said. "I think they're just not changing the cultural narrative."

"There's a real authenticity that comes to a brand from a founding team that you really can't recreate in a lab, so to speak."

Andrea Hippeau

Principal at Lerer Hippeau

For the moment, at least, DTCs are hitting on trends that consumers appreciate, including purposeful branding and a dose of authenticity that wasn't always true of businesses. Sakal noted that some may "get a bad rap" for their execution of those things, but at their core, they're acting on consumer behavior trends.

It isn't turning away venture capital firms, either. Andrea Hippeau, a principal at Lerer Hippeau, which focuses on early-stage funding, noted that there are plenty of "me too" brands created by the DTC formula, but she looks to the founding team to discern how deep the brand message goes.

"There's a real authenticity that comes to a brand from a founding team that you really can't recreate in a lab, so to speak," Hippeau said, noting her firm looks for mission-driven companies when investing. "That's something that you can sniff out pretty quickly is if a brand is truly authentic. What's their mission and are they true to it? Is it a real mission or are they just donating one pair of whatever it might be just to kind of say that they do?"

Branding is cyclical and DTC's cycle is not over yet. But as DTC brands continue to enter the space, or grow their businesses, there's a new cycle emerging for Gen Zs that is anti to the millennial appeal that DTCs hold, according to Shine. He said DTC branding has become a "dominant visual language of communication," and may stay so for the next five to ten years, but added that younger generations are more focused on a rebellious "frumpy on purpose" vibe.

"You've got the next generation going, 'OK, we've had 10 years of sans serif, millennial pink, different bright colors, everything is clean, there's hands in all the photographs, everything is bright and blown out — we're just going to funk this up,'" Shine said.

Maturing the aesthetic

Shine may have stepped out of the DTC branding world, but he didn't give up on DTCs, or on the ability of the original pioneers to transform their marketing to fit a new generation of shoppers that's "a bit more loose and a bit more messy."

He cited Recess and Ghia as in-between brands of the millennial "premium mediocre" aesthetic and the Gen Z "domestic cozy" aesthetic (terms coined by Venkatesh Rao of Ribbonfarm). His own company, Pattern, is also trying to bridge the gap between those two with its brands.

"We are still using notions of premium mediocre in terms of some of our advertising and some of our site's design," Shine said. "But we are fusing it I think with notions of domestic cozy, in the sense of, we're not trying to be too slick and too manufactured. We're trying to espouse values around, you know, 'Don't try to be a superstar at work. Don't try to be a superstar on the internet. Spend more time at home, do things that are cozy and intrinsically motivated.'"

Shine added that he was impressed with a Harry's TV ad recently that was a departure from their previous marketing, and "a really nice maturation." For others in the space, it's possible to mature their marketing as well while not departing too heavily from the millennial aesthetic that made them so successful in the first place.

"You kind of expect a business to stay at its core," Shine said. "Like Chanel or something — they can do reinterpretation and reinvention, but it's still, 'Yo, I'm a French, luxury, atelier-based business.'"

Outside of the classic DTC brands, Song cited Liquid Death and Magic Spoon as examples of very different branding that has worked as well. But even those brands will have followers, and they're likely to show up on consumers' Instagram feeds, Song noted, reinforcing the feeling of sameness through an echo chamber effect.

Indeed, one of the defining features of DTC marketing is social media. Companies including Chewy, Wayfair and Casper have shelled out millions on advertising while running up ever higher net losses. The branding similarity may not be a problem, but "creating thumb-stopping power" is, Weinberg said.

"It's not good enough anymore to just have really strong lifestyle branding with a strong message," Weinberg said. "DTC brands need to do more to differentiate and create that thumb-stopping power within those social engagement platforms that actually communicates a differentiated message, not just a pretty brand."

So maybe, in the long run, the biggest problem for DTC brands is not their branding. It's how they differentiate on social platforms or through ad campaigns, how they mature their brand over the years, and how they tackle the real threat: profitability.

"I think we are experiencing fatigue right now. I think that's fundamentally what you're hearing and that's what people are writing about," Song said. "But the truth is, things change when they stop working."

Article top image credit: Photo illustration by Danielle Ternes/Retail Dive; photograph by fizkes, Nicola Katie and Urfinguss via Getty Images

Stitch Fix to stylists: 'Take ownership of the disappointment, no matter the role the data played'

Wall Street vs Main Street

A preview of the problem

More than the algorithm

Should more retailers be on Roblox?

The case for Roblox as a marketing tool

Avatars and spending

Creating and consuming, simultaneously

The potential challenges

Retailers, use data to personalize your customer experience

Grocers chase the promise of e-commerce personalization

Personalizing the center store

Building a grocery store for every customer

High-touch doesn't have to be high-tech

How high is the ceiling for personalized beauty brands?

The market for personalized beauty

The path to scale

How Nike is using DTC and data to expand its empire

The Nike ecosystem

Nike, but make it personalized

Innovating when you make $40B in revenue

Algorithms vs. humans: Who's better at predicting fashion trends?

The risk

Commodity or fashion?

A Stitch in time?

Managing risk

What you don't know

Nike's expansion of small-format Nike Live stores pushes localization and digital

Marketers play it safe as pandemic's effects linger

Marketing budgets are still in for a tight squeeze

The pandemic pivot might become the marketing norm

The role of a CMO

Saks Fifth Avenue relaunches website with emphasis on personalization

Is the DTC brand aesthetic bad for business?

The DTC promise

So what if they're all the same?

Maturing the aesthetic

The era of personalization in retail

included in this trendline

How personalization shapes the retail industry

Note from the editor

Stitch Fix to stylists: 'Take ownership of the disappointment, no matter the role the data played'

Wall Street vs Main Street

A preview of the problem

More than the algorithm

Should more retailers be on Roblox?

The case for Roblox as a marketing tool

Avatars and spending

Creating and consuming, simultaneously

The potential challenges

Retailers, use data to personalize your customer experience

Grocers chase the promise of e-commerce personalization

Personalizing the center store

Building a grocery store for every customer

High-touch doesn't have to be high-tech

How high is the ceiling for personalized beauty brands?

The market for personalized beauty

The path to scale

How Nike is using DTC and data to expand its empire

The Nike ecosystem

Nike, but make it personalized

Innovating when you make $40B in revenue

Algorithms vs. humans: Who's better at predicting fashion trends?

The risk

Commodity or fashion?

A Stitch in time?

Managing risk

What you don't know

Nike's expansion of small-format Nike Live stores pushes localization and digital

Marketers play it safe as pandemic's effects linger

Marketing budgets are still in for a tight squeeze

The pandemic pivot might become the marketing norm

The role of a CMO

Saks Fifth Avenue relaunches website with emphasis on personalization

Is the DTC brand aesthetic bad for business?

The DTC promise

So what if they're all the same?

Maturing the aesthetic

The era of personalization in retail

included in this trendline