This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.
At Modern Retail, we’ve written a lot about how startups have pivoted over the past year and a half after unexpectedly doubling or tripling their e-commerce sales over the past year. Typically it means they’ve moved up plans to open new stores or raised a new round of capital amid the recent VC frenzy. But one Texas-based maker of fire pits called Solo Stove did a complete 180 after its sales grew 234.8% from 2019 to 2020.
Solo Stove changed its name to Solo Brands, and in September of this year, acquired three other brands in the so-called “outdoor lifestyle space” — that included apparel brand Chubbies, Isle Paddle Boards and Oru Kayak. Then, last week, the company filed to go public, describing itself in its S-1 as a “rapidly growing DTC platform,” that aims to acquire more brands in the outdoors space.
Solo Brands’ pivot is one that likely won’t be emulated by other brands — or at the very least, the speed of it would be hard for most other companies to match — but it’s indicative of a few trends that are worth keeping an eye on in the e-commerce startup space. Solo Brands’ pivot is yet another example of holding companies increasingly gaining traction in e-commerce circles — meaning the competition to acquire the best startups will only intensify.
There have already been a record number of IPOs this year and Daniel McCarthy, assistant professor of marketing at Emory University’s school of business thinks that Warby Parker’s public markets debut in particular will encourage more e-commerce brands to go public.
“I think [the Warby Parker direct listing] sent a signal to a number of these other businesses… that if you go public now, you will get your money’s worth,” he said.
Warby Parker’s stock price rose 36% on its first day on the public markets, closing at $54.49 per share. giving the company a valuation of more than $6 billion — more than what it was valued at in the private markets.
The company’s stock price has held steady since then, closing at $51.47 per share yesterday. For many startup founders, it was a welcome sign that Wall Street is increasingly seeing larger valuation potential in e-commerce brands.
Solo Brands CEO John Merriss has said in interviews that the plan to reorganize into a holding company has been in the works since the beginning of this year. And the company’s financial metrics reveal why Solo Stove was so eager to rush to the public markets this year.
Solo Stove, founded in 2011 experienced exponential growth last year, even relative to other e-commerce companies as fire pits were hot items. Solo Stove’s sales grew from $39.9 million in 2019 to $133.4 million in 2020. Its growth came at a cost, however — Solo Stove lost $24.2 million in 2020.
Then, in partnership with one of its backers Summit Partners, Solo Stove raised a combination of debt and growth equity to acquire new brands. According to its S-1, Solo Stove paid $129.5 million for Chubbies, $25.4 million for Oru Kayak, and $24.8 million for ISLE.
These brands did $44 million, $12 million, and $21 million in sales respectively in 2020, meaning Solo Stove is the largest brand in the portfolio by far. Solo Brands also broke out the expenses of Chubbies, revealing that the apparel brand netted $5.7 million in income in its last full fiscal year, ending January 30.
Other interesting tidbits from Solo Brands’ S-1: the company says that 82% of sales come directly from its owned websites. It also claims that 45% of Solo Stove’s new customers came from word-of-mouth in March 2021 — a sign that customers acquired during the pandemic subsequently recommended the product to their friends.
The company says it manages “fulfillment, research and development, sales and marketing, and customer service in-house,” but gives few details on how it plans to market products from one brand to customers of another.
McCarthy is skeptical that Solo Brands’ approach will result in significantly lower customer acquisition costs or even operational costs. “I think given the fact that the companies are fairly different from each other, I don’t know how much operational efficiency they will be able to drive.”
He also added that he thinks brands are able to drive more cost savings in cases where the brands operate off the same technology platform — as is the case with Amazon rollup companies.
The holding company approach has become more popular over the past year, as evidenced by startups like Pattern Brands, Win Brands Group, and OpenStore raising significant new amounts of funding to snap up Shopify brands. Meanwhile, Amazon rollup companies have also been raising money at eye-popping valuations for the past couple of years.
But it’s a big undertaking to go from managing one brand to four within the course of just a few months. Solo Brands will either be an example of a DTC brand that significantly benefitted from the pandemic, enough to parlay it into a successful IPO — or a brand that took the wrong lessons from a year of outsized growth.
In other IPO news
Rent the Runway also filed to go public last week, hoping to convince Wall Street that rental is back and better than ever.
However, the company incurred significant losses during the pandemic — and hasn’t dug itself out of the financial hole just yet. The company’s active subscribers number dropped from 133,572 in 2019 to 54,797 active subscribers last year. That number has since rebounded to 97,614 active subscribers in the first six months ending July 31 — still well below pre-pandemic levels.
The company’s revenue declined from $256.9 million in 2019 to $157.5 million in 2020. Rent the Runway lost $171.1 million last year.
The biggest challenges facing Rent the Runway right now are one, recouping its active subscriber base, and two, cutting down on fulfillment costs, which along with rental product depreciation, are its biggest expenses. Fulfillment costs for Rent the Runway ballooned from $53 million in 2019 to $118 million in 2021. Much of that was likely due to Covid — but everything from shipping to warehousing costs remained heightened last year.
Rent the Runway’s S-1 is a reminder that high customer acquisition costs aren’t the only roadblock to profitability e-commerce brands face — especially in an area like rental, which requires a lot of logistical investments to pull off.
What I’m reading
- Imperfect Foods has struggled to hold onto its pandemic-induced sales bump, Business Insider reports, and has burned through half of its executive team — including two CEOs — over the past year.
- More fashion companies are going public this year — but their S-1s reveal they are struggling to turn a profit and scale fast enough at the same time. Fast Company looks at what this means for fashion startups’ fundraising abilities
- Amsterdam-based fashion brand Scotch & Soda is undertaking a large physical retail expansion, with plans to open 22 stores before the end of the year, according to Retail Dive.
What we’ve covered
- Two-year-old sneaker reseller the Edit LDN is getting its own boutique in Harrods, as the famed London department store seeks to court younger, male shoppers.
- In the wake of USPS slowdowns, e-commerce startups are rethinking how much business to give to various carriers, particularly with the holiday season fast approaching.
- Vehicle service companies are starting to go digital, following the high profile IPOs of used car marketplaces like Carvana and Vroom.