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The "Nasty" Effect: Exploring E-Comm's New Volatility

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After becoming a brand that so many fashion technology startups saw as an example to model, Sophia Amoruso’s edgy Ebay-cum-clothing business, Nasty Gal took an unexpected turn towards bankruptcy this past week.


The news, which was made public on 11/9, comes about a year after the announcement was made that Amoruso would step down from the helm of the company. She surrendered the top spot in 2015 to Lululemon alum, Sheree Waterson. In operation for 10 years, Nasty Gal had raised a total of $65 million to date. Index Ventures was the company’s primary backer, with a $49 million investment in 2012. In February of last year former Apple and JC Penney retail executive, Ron Johnson invested an additional $16 million, with the goal to grow the company’s retail footprint, comprised of two stand-alone outposts in LA and Santa Monica.

“Nasty Gal has been a company that I have looked up to for a long time now but the e-commerce world is changing. It’s not like other industries where it has been easier to create a long-term plan that will succeed. You have to constantly be recreating your plan and adapting to the ever-changing landscape that is the Internet. I think once a company grows larger, like Nasty Gal it can become more difficult to implement drastic change at the touch of a button when there are more key players and more corporate type of action that needs to take place.”

-Nicole Bandklayder, Co-Founder of Bijouxx Jewels

“The investment horizon, scale trajectory and realm of likely exit outcomes for tech- enabled brands differ significant from traditional tech companies and require a different capitalization and growth strategy ,” says Natalie Hwang, who manages Simon Venture Group, an early stage venture capital fund based in NYC that is exclusively focused on investing in next generation commerce and retail technology. “Brands that grow too quickly and expand too widely run the risk of trivialization of brand equity through overexposure. If you try to engineer a path to scale for a brand that resembles that of a Google or Facebook without placing some constraints on growth for the sake of maintaining brand desirability and cachet, you can very likely implode these companies.”

Another potential issue with these well-funded retail businesses, according to Hwang, is that they are actually very niche, which makes it hard for them to expand their customer pool.

“Brands can grow rapidly at first because they are able to reach customers with whom their message resonates really easily at first without constraints of geography," says Hwang. "But as the company scales, faces increasing competition and a diminishing pool of customers, the acquisition of each incremental customer becomes much more difficult and expensive to acquire. Brands will eventually reach a natural saturation point."

Hwang says that to continue stimulating growth, it is imperative not only to expand distribution, but to also build new geographic locations. Either way, warns Hwang, slope and velocity of growth will start to flatline. Additionally, most brands "disruptive" startups from the past decade are typically niche in size because a brand is the expression of a very particular opinion, other than those brands that are uniquely able to build a mass market culture around their point of view, like Apple.

One venture investor in the consumer space agrees and says, “I think Nasty Gal was unable to handle its meteoric rise, growth-wise, as it wasn’t sure how to keep consistently responding to their customers. [I believe] also that Sophia was having difficulty personally handling that fast rise and while she made the right hires. It’s just hard to manage the niche the company carved out, product portfolio wise.”

Courtesy of MAC

Exactly how well Nasty Gal has been doing has been challenging to deduce, according to WWD, which last reported a company revenue of about $130 million in 2014. Meanwhile, Forbes valued the business last year at over $300 million. The brand’s outposts have been equally hard to gauge as Nasty Gal executives reportedly told WWD that “they were still learning from the two stores before determining next steps for the brand” when asked for a sales performance update over the past year.

“It's important to avoid inferring long-term growth from short term growth,” said Hwang, adding that until you can develop a better view for a brand's potential market reach and size, they are often times better off pricing themselves conservatively and raising capital consistent with most likely exits. "If these businesses run the risk of becoming overly financed, they will fail to yield a return to investors despite having generated hundreds of millions in a year and having built a very successful business."

"Most businesses that can build online, should build online, but people are in the process of figuring out best means to expand through a number distribution channels.”

-Natalie Hwang

Despite the growth of e-tail sales in the US, which Marketer Inc. estimates is increasing at a compound annual growth rate of approximately 14% over the next four years, topping out at $434.2 billion in 2017, there is clearly difficulty in the landscape. The challenge seems to be affecting those e-tailers who have been around for about a decade.

“Many of these brands that originated online about 10 years plus ago were focused on leveraging online distribution to grow their companies very rapidly with the broad reach of the Internet and to build a modern brand with the use of digital tools,” says Hwang. “When they started they weren’t even thinking about distribution expansion. What we're seeing these days is that the online and offline consumer are one and the same and what he or share cares about is the quality and ubiquity of seamless commerce. It will become increasingly important for brands to serve their customers through multiple touchpoints, create a compelling brand experience for consumers to buy into, and allow them to funnel their purchase intent depending upon their shopping need state through various channels and devices.”

Experts say that despite the vast opportunity that continues to exist in the e-tail industry, more saturation means there are stiffer benchmarks to proving success, and investors can get cold feet if profits aren’t high within the first year of business. For fashion e-commerce companies that have been in existence for a few years, reinvention is another challenge, as consumers are always moving to the next platform, in this case those with proprietary technology assets.

According to Hwang, companies like Uber and Etsy, which may spend a lot, but are also focused on re-investing it have the staying power she looks for when seeking the next investable idea. “The cost structure for how you scale up in e-commerce has proven every expensive because moth of the growth has been bought rather than organically acquired,” she says. “I like to see companies growing early almost by accident.” However, in a statement made in WWD, Nasty Gal executives say the move into bankruptcy will ultimately strengthen the company.

“Our decision to initiate a court-supervised restructuring will enable us to address our immediate liquidity issues, restructure our balance sheet and correct structural issues including reducing our high occupancy costs and restoring compliance with our debt covenants,” Nasty Gal chief executive officer Sheree Waterson told WWD. “We expect to maintain our high level of customer service and emerge stronger and even better able to deliver the product and experience that our customers expect and that we take pride in bringing to market.”

“The cost structure for scaling e-commerce can become prohibitively expensive if growth is bought. Paid acquisition is a necessary expense but can't be the only thing that a company is good at."

-Natalie Hwang

Additionally, the “Amazon effect” as it is known is also a factor in the new volatile e-commerce climate. According to recent industry figures, Amazon is the leading e-retailer in the United States with more than 107 billion U.S. dollars in 2015 net sales. While fashion is still not a main focus, it is reported, as of the fourth quarter of 2015, that the e-retailer claimed more than 304 million active customer accounts worldwide. "Due to Amazon’s global scope and reach, it is also considered one of the most valuable brands worldwide," according to Statista. Clearly e-tailers looking for staying power are challenged more than ever to deliver a unique product at a competitive price.

Either way, it seems one thing for sure, selling via the Internet is not going anywhere. Brands can no longer rest on their laurels of large audiences as a key to success and now must think multi-dimensionally in order to mimic the way consumers are actually shopping; which is everywhere.

“Five years ago, the online and offline worlds were seen as separate and distinct, but truth of it is that the line between the two is a very hard one to draw. We live in a connected world,” says Hwang. “What has shifted is that the concept of shopping has shifted from owning things to buying into new ideas or values. A product or service is powerful because of its ability to impactfully connect people to those ideas or values and represent something about ourselves."

3 min read
Culture

Please Don't Forget to Say Thank You

"More grapes, please," my daughter asked, as she continued to color her Peppa Pig drawing at the kitchen table.

"What do you say?" I asked her, as I was about to hand her the bowl.

"More grapes?"

I shook my head.

"Please?"

I stood there.

"I want green grapes instead of red grapes?"

I shook my head again. I handed her the bowl of green grapes. "Thank you. Please don't forget to say thank you."

"Thank you, Momma!"

Here's the question at hand: Do we have to retrain our leaders to say thank you like I am training my children?

Many of us are busy training our young children on manners on the other side of the Zoom camera during this pandemic. Reminding them to say please, excuse me, I tried it and it's not my favorite, I am sorry, and thank you. And yet somehow simple manners continue to be undervalued and underappreciated in our workplaces. Because who has time to say thank you?

"Call me. This needs to be completed in the next hour."

"They didn't like the deck. Needs to be redone."

"When are you planning on sending the proposal?"

"Did you see the questions he asked? Where are the responses?"

"Needs to be done by Monday."

Let me take a look. I didn't see a please. No please. Let me re-read it again. Nope, no thank you either. Sure, I'll get to that right away. Oh yes, you're welcome.

Organizations are under enormous pressure in this pandemic. Therefore, leaders are under enormous pressure. Business models collapsing, budget cuts, layoffs, or scrapping plans… Companies are trying to pivot as quickly as possible—afraid of extinction. With employees and leaders everywhere teaching and parenting at home, taking care of elderly parents, or maybe even living alone with little social interaction, more and more of us are dealing with all forms of grief, including losing loved ones to COVID-19.

So we could argue we just don't have time to say thank you; we don't have time to express gratitude. There's too much happening in the world to be grateful for anything. We are all living day to day, the pendulum for us swinging between surviving and thriving. But if we don't have the time to be grateful now, to show gratitude and thanks as we live through one of the most cataclysmic events in recent human history, when will we ever be thankful?

If you don't think you have to say thank you; if you don't think they deserve a thank you (it's their job, it's what they get paid to do); or if you think, "Why should I say thank you, no one ever thanks me for anything?" It's time to remember that while we might be living through one of the worst recessions of our lifetimes, the market will turn again. Jobs will open up, and those who don't feel recognized or valued will be the first to go. Those who don't feel appreciated and respected will make the easy decision to work for leaders who show gratitude.

But if we don't have the time to be grateful now, to show gratitude and thanks as we live through one of the most cataclysmic events in recent human history, when will we ever be thankful?

Here's the question at hand: Do we have to retrain our leaders to say thank you like I am training my children? Remind them with flashcards? Bribe them with a cookie? Tell them how I proud I am of them when they say those two magical words?

Showing gratitude isn't that difficult. You can send a thoughtful email or a text, send a handwritten card, send something small as a gesture of thank you, or just tell them. Call them and tell them how thankful you are for them and for their contributions. Just say thank you.

A coworker recently mailed me a thank you card, saying how much she appreciated me. It was one of the nicest things anyone from work has sent me during this pandemic. It was another reminder for me of how much we underestimate the power of a thank you card.

Apparently, quarantine gratitude journals are all the rage right now. So it's great if you have a beautiful, leather-bound gratitude journal. You can write down all of the people and the things that you are thankful for in your life. Apparently, it helps you sleep better, helps you stay grounded, and makes you in general happier. Just don't forget to take a moment to stop writing in that journal, and to show thanks and gratitude to those you are working with every single day.