In 2015, e-commerce sales in the U.S. accounted for $341.7 billion, with 14.6% growth rate over the previous year, and there are no signs of this growth slowing down in the future. Still, while the revenues of online retailers are soaring, very few of those are actually profitable or have a decent chance of turning profitable in the near future.
The reason why it is so difficult to build a sustainable business in the e-commerce space is simple: the vast majority of online retailers look too much alike. Sure, there are some differences, but most of those are still selling the same products to the same customers, thus creating a fertile ground for perfect competition. As a result, the gross margins become depressed, the marketing and operating costs soar, and ultimately the profits are competed away. Even Amazon, famously known for its brutal efficiency, was never really been profitable until a couple years ago (and those profits now come from AWS services, not its online retail business).
But while e-commerce in general might be a tough space to succeed, it doesn’t mean that the opportunities to build successful companies making huge impact on the customers aren’t there. One just needs to know to look hard enough to uncover those.
Imagine going to the mall to buy some clothes. You look around and see all the usual brands: Gap, J.Crew, Banana Republic, H&M, Levi’s and many others, all of them there. But as you enter the first store and start checking the items, you notice a strange pattern. Everything costs $200. You check a few pairs of jeans, a jacket, several tees — everything costs the same. Bewildered, you move to the next store, but there the situation repeats itself. Same for the next one, and the one after that. It looks like the choice of brands and styles is there, but for some reason the pricing is now the same everywhere. And while deep down you know that there is no way that tee is worth more than $20, the tag is still there and it says $200.
The Art of Building Monopolies Nobody Sees
Nobody in their right mind would enjoy that kind of situation, right? But that’s exactly how the market for premium eyewear looked like for years. On the surface, the customers have many choices: Ray-Ban, Persol, Oakley, as well as designer brands like Chanel, Prada, Giorgio Armani, Burberry, Versace, Dolce and Gabbana, Miu Miu, Donna Karan, Stella McCartney, and Tory Burch, and many others. But in reality all of those are either owned or manufactured by one company, Milan-based Luxottica, which controls at least 60% of the global market for high-end eyewear.
Funny thing is that most eyewear customers have never heard about Luxottica, and it makes a lot of sense for the company to keep the things this way. Having a near-monopoly hold on the market allows Luxottica to quietly set the prices for eyewear, pocketing impressive profits. At the same time, with the opportunity to choose between the all those brands, customers are tricked into believing that there must be a reason why all those frames cost so much.
And Luxottica doesn’t just make frames. It also owns a number of retail chains, such as Lenscrafters, Sunglass Hut, Pearle Vision, Sears Optical, Target Optical, and Glasses.com. As a result, even though Luxottica doesn’t manufacture prescription lenses, it still controls most of the stages of manufacturing and then selling eyewear.
Obviously, Luxottica isn’t the only player on the eyewear market. Over the years, there were some very promising companies who dared challenging Luxottica dominance in the field. Some of them, like Oakley, grew to become quite big, but ultimately got bought by Luxottica. Others, like Safilo Group (the second largest player in the market), as well as Marchon Eyewear, De Rigo and Marcolin, succeeded to carve a niche for themselves, but never quite reached the scale of Luxottica. Same goes for luxury groups, like Prada or Kering, who tried to work on their own. Aside from manufacturing, the biggest issue in this market is usually distribution, and that’s exactly why even well-known brands have to partner with Luxottica and the likes of it, as otherwise they risk being blocked out of certain markets where they are not well-known or represented.
Warby Parker Phenomenon
Still, if the market opportunity is tempting enough, one day some company will always find a way to disrupt incumbents and carve a place for itself. For the eyewear market, the story started in February 2010, four Wharton students, Neil Blumenthal, Andrew Hunt, David Gilboa, and Jeffrey Raider, founded a startup called Warby Parker, with a goal to provide customers with eyeglasses that wouldn’t cost a fortune and still would look great. And that’s where the things got interesting.
In order to keep costs down and be able to name the prices, Warby Parker chose to own all stages of manufacturing and distribution. Their eyeglasses are designed in-house and manufactured in China (Warby Parker doesn’t own the factories, but that’s the only stage the company doesn’t fully control). After that, the glasses are shipped to the U.S., where Warby Parker custom-cuts and installs prescription lenses and ships the glasses to the customers. All sales go either through Warby Parker website, or through a number of offline stores the company owns. The price for a frame with prescription lenses starts from $95 (Luxottica frames often cost you $200–300 and more, and that doesn’t include the lenses).
But while keeping prices low was crucial, several other aspects were comparably important. First of all, Warby Parker needed to design the frames that would be attractive enough to compete with the likes of Ray Ban and other top brands. Having good-looking frames wouldn’t be enough, though: the company needed to find a way to bring those to the potential customers and also to establish its brand in the field.
Warby Parker chose to approach this challenge from multiple directions. Early on, the founders recognized that while the ultimate goal was to sell most of the eyeglasses online, having an offline presence was crucial in order to build connection and trust with the customers. This understanding of the importance of having omni-channel strategy as opposed to being pure online retailer was crucial for Warby Parker’s subsequent success. Today, Warby Parker has 37 retail locations (36 in the U.S. and 1 in Canada), up from just 12 prior to the last round of financing. Having offline presence also allowed Warby Parker to provide its customers with after-sales service (e.g. adjusting the frame fit), and enabled it to partner with independent optometrists in a number of cities to provide on-site eye exams for its customers.
Next, in order to promote its brand, the company used a number of unconventional tactics, such as turning a school bus into a pop-up store and then sending it on a tour across the U.S. for the potential customers to get the chance to experience its products.
Another program Warby Parker launched early on that played a huge role in helping the company to build trust with the customers and establish its brand was so-called Home Try-on option. The idea behind it was very simple: Warby Parker would ship 5 different pairs of glasses free of charge for the customer to check them out and choose which ones she would like to keep. For an online retailer selling such a personal items as glasses, having this option proved to be really important, as it allowed the customers to experience Warby Parker’s products without ever leaving their homes. It also lowered pressure for the company to invest into building substantial offline presence in every city it wanted to work in. Having offline stores was still important, but with Home Try-on option the company could now focus on building just a few flagship stores in major cities, and using those to promote its brand, increase its visibility to the customers and offer after-sales services, instead of being forced to rely on brick and mortar stores as a main channel to sell its products.
Finally, Warby Parker committed to give away a pair of glasses to people in developing countries for each pair sold as part of its “Buy a pair, give a pair” program, run in partnership with a non-profit VisionSpring. Today, the company has already distributed over 2 million pairs of glasses to those in need, and continues to contribute to the program. Obviously, this is a great mission, that has immediate and profound impact on communities throughout the world. However, it is also interesting to look at having this program from pure business perspective. Presumably, taking on such a mission should have helped the company to attract new and keep existing customers, who feel sympathetic to the cause. And while the impact this program had on customers’ retention might be hard to measure directly, it attracted a lot of attention to the company from press, which for sure helped the company to establish a brand for itself, especially in its earlier days.
Today, Warby Parker is valued at around $1.2 billion, raising over $215 million in funding from such investors as American Express, General Catalyst Partners, Menlo Ventures, Tiger Global Management, T. Rowe Price, Wellington Management and others. Despite all that, in its core it is still a startup that is growing fast and redefining itself. Most likely, for now Warby Parker remains unprofitable. And while it still has to go a long way before it could compare to Luxottica (or any of top-5 eyewear manufacturers), it will get there in its time.
The reason for that to happen is very simple: the customers who tried Warby Parker once (me included), just wouldn’t ever want to go back to the market dominated by one company selling vastly overpriced products. And that’s exactly how you build a successful enterprise in e-commerce space (or in any other space, for that matter): by finding customers’ pain points nobody is willing to address and then working hard to remove those.