The Future of Retail: Never Miss an In-Store Sale

Stefanie: 0:10

Welcome to the Funded Podcast, where we dive into the details of how businesses really start, grow and operate. We'll hear from experts that could guide us, as small business owners, to making smarter decisions in finance, marketing, managing people and everything in between. I'm your host, stephanie, the CEO of Funded, where we're on a mission to redefine how businesses understand and access capital, and today I'm chatting with Michelle, the CEO and founder of Shop, and Vim & Vigr, which we'll talk about, and we're going to talk about retail and how it's evolving. Let's dive in. Michelle to start. You've been in retail now for 10 years. You've seen it evolve, like what's going on in retail.

Michelle: 0:53

It's a crazy business. I've been in retail for 10 years And during that time you've seen a lot of changes, especially around e-commerce. E-commerce has been the big deal for about 20 years now, and so what you've seen over the past 20 years is really a shift from brick and mortar retailers to e-commerce And that was a big topic from, i would say, really 2011, 2012, 2013, all the way to around 2019. And you really saw that increase And what it forced a lot of businesses to do is brands that traditionally got their business selling to retailers. They also created a direct-to-consumer e-commerce site And you saw this increase, too when you saw platforms like Shopify, bitcommerce, woocommerce come into the picture. That made it a lot easier for any brand, any business, to really start and grow in e-commerce business. So obviously the demand for that evolved with the creations of those types of platforms, but also with an increase in the ability for you to reach an audience. So that's where you saw a huge increase, obviously with Facebook ads and Google ads, so they all kind of collided all together. That created this perfect storm that accelerated e-commerce over the past 15 years, with a lot of direct-to-consumer brands coming onto the market during that time. In addition to that. So what you were seeing was this steady clip of e-commerce of growing at around 1% year over year, and then COVID happened, and what did everyone do? Everyone source closed down, everyone went to e-commerce and bought everything from the groceries to their clothing. Everything was done via e-commerce, and so we saw this massive increase. So, pre-covid, e-commerce represented around 9% to 10% of all retail, and that went up all the way up to around 20% to 24% during COVID, and what we've seen now, though, it's dropped back down to around about 15%, about 12% to 15% of all commerce. All retail is done online. So what's really interesting is, though we talk so much about e-commerce as, like the main way that people shop, at the end of the day, e-commerce still only represents 15% of all retail. That happens And I think that's really an interesting thing when I was going through the fundraising process For Shop DOT, the platform that I just launched. My platform really focuses on the brick and mortar experience, and initially, the funny thing is, when I started to pitch early on, about a year ago or a year and a half ago, they're like brick and mortar stores. You know why are we even talking about that? And the interesting thing is, a lot of direct-to-consumer brands now are really struggling, and what are a lot of DTC brands doing? Going into brick and mortar selling to retailers, because it's almost impossible to only rely on that one channel of e-commerce. You really have to create an omni-channel shopping experience.

Stefanie: 3:59

That's so interesting. I want to shed light on some of your background here. That makes it so interesting And sometimes I forget that I started in retail too and it comes flooding back to me. But I think back to the days when we were starting our companies. You've been bigger. For you, your compression stock company, mile 22 bags for me. Back then we didn't call them direct consumer brands, right, and we didn't even think I don't know, did you have a website from day one, like I know you're in hospital gift shops?

Michelle: 4:29

We sold a lot of gift shops, pharmacies. So my first company is Vim and Vigor, which is a stylish compression stock company. I launched that around 2014. And we did have a website. We created a Shopify store, but predominantly our business came from wholesale, so we sold to stores that then sold to end customers, and the reason for that is there was a level of education. We relied on retailers to get customer acquisition And so we felt there was a best way for us to launch a company, and that was 2013, 2014. Obviously, you know, kind of since then, a lot of brands have gone 100% direct to consumer route as a way of customer acquisition, because your margins are better. So when you sell direct to consumer, you're selling at retail price, but when you sell to wholesalers or retailers, you sell at about 50% off of retail, because you have to kind of share the profits with the retailers that you sell with, and so from a gross margin standpoint, your gross margins are much higher in retail, in direct to consumer, than it is via wholesale. The really interesting thing is, over the past five years, customer acquisition costs has increased And the amount of platforms that you need to use to really run a direct to consumer business has also increased And so when you look at the net profit, so what we're seeing like in a lot of my friends who have brands what we're seeing is a lot of brands. if you actually look at the net profit margin by channel, it's actually sometimes higher than selling to a retailer, even though you're selling it at a discounted price because of customer acquisition costs. So, yes, gross margins better, but from a net profit margin it isn't always more profitable And that's the reason why a lot of direct to consumer brands are saying oh crap, we really need to diversify our channels and look into selling to brick and mortar stores.

Stefanie: 6:29

That's so interesting and such a good point because the narrative has always been like you can make more if you're selling directly to your customers. And yeah, there was that window of time. I know for me I was never selling into retail or brick and mortar, I was buying expo booths, right. So I was starting to compare my ability to sell through a website versus a marathon expo and the cost of that expo booth. And maybe we overcomplicated direct to consumer when it became so big by used to just be like all of us with our product in our basement shipping it out, And now it's like we need 12 different softwares just to feel like that. our table stakes now and the cost of all that software and stuff. Thinking about retailers.

Michelle: 7:11

Yeah, i think part of that, too, is when you democratize the ability for anyone to create an online store or to reach direct to consumer. really any business can register as a business and then sell on Facebook and sell on Google and do Google ads and put money towards it. That's a good thing, right Democrat people aren't going to be like that's bad. But at the same time, it floods the market so it makes everything that much more competitive and that much more complicated, where you do need to figure out what your competitive advantage is. Then you're investing in email, and then you're investing in those Google ads and increasing those ads and then you're now doing there's SMS now, and so it constantly. those table stakes continue to rise and more competitive the spaces, and that's exactly what we've seen over the past 10 years.

Stefanie: 7:57

It's so interesting and such a good point. I want to talk a little bit about retailers in general. So not the like brick and mortar retailers where it's a direct to consumer brand that opened their own shop, which we're seeing a lot of right. Like, kodapaxi now has their own stores, viora does all these brands that we thought of as direct to consumer But the normal people, the me's of the world, the small business owners who generally they're opening retail shops in the cities they live in because they're passionate about wanting to be a small business owner and they have to do a collection of brands. So I know this is like a super naive question on my part, but when someone opens a retail shop, how do they like get the brands Like? are they going to the brands individually? Is it like? how does that work?

Michelle: 8:43

That's part of why business owners are retailers. We can't even refer to them as independent retailers or multi-brand retailer. That's the difference between Bonobos or Kodopaxi, where they have their own stores and they're vertically integrated. They only generally sell their own product. The majority of retailers out there they sell other people's brands. In the past, they would go to trade shows. They would. There's trade shows in Vegas, atlanta, san Francisco, la, depending on your industry. You have industry-specific trade shows where you would go and you would essentially curate. That's the fun part. That's why a lot of retailers do what they do is they love curating products for their community. That's what they're passionate about. That's a big part of what they do. What we've seen is that that's moved a lot online. There's online marketplaces or online trade shows that people are going to now to try to source and find product. It's harder, though, because you don't necessarily touch and feel and interact. That's one way. There are other ways. You have sales reps. A lot of brands have independent contractor sales reps that cover geography. They'll represent your brand and they'll go to your store and talk about the product to the retailer or the business owner. There's a couple of ways. There's the online way online marketplaces, online trade shows, and then they have the actual physical trade shows too.

Stefanie: 10:14

Oh my gosh, that sounds so fun. It's almost like worth having a retail shop for. Not that I should do that, but it actually sounds enjoyable to go to these things. I think you have enough jobs. Yeah, certainly I know the stories of when you've been on the other side of it where you're a booth at one of those expos selling into the retailers. I love seeing you on the other side So many. They want to stay on this theme though. Yeah, it's been fun, okay. So small business owner, retail shop owner. They open, they go to a trade show, they stock their store. How are they managing all their inventory today?

Michelle: 10:49

So that's really hard. Retailers are constantly balancing between stock outs meaning they don't have a product or overstock, and it's a very difficult balance because when most retailers are buying in January and February for product that they're going to receive for the fall, and so they're making bets on what they think their customers are going to want the colors, the size, composition. So it's really, really interesting. I was recently talking to a retailer who has been in business for about 20 plus years and she sells a lot of denim And she buys kind of a certain percentage of sizes And what she's noticed over the past two years I have no idea if this is related to COVID is that she is now left with a lot of the smaller sizes which she never had before, and now she has to kind of change her range of sizes. It's like the different things like that even kind of what you thought worked last year isn't necessarily going to work this upcoming year, for whatever reason. It's really hard when you have the physical product, because when you're a retailer and you buy inventory and you buy product from a brand, you own that inventory. That on your balance sheet is an asset, you own that at that point, and so your cash is tied up into products sitting on the floor, which is essentially you're waiting for a customer to come in and buy that product for you to actually realize that investment, and so it's a very, very difficult thing for retailers.

Stefanie: 12:19

Oh, that's so interesting. On that too, you do talk to a lot of retailers. What are some of the concerns you're seeing, or what are the things on retailers' minds right now that keep coming up?

Michelle: 12:30

Right now. What I am hearing is there is a concern for pullback from consumer shopping and consumer shopping behavior. So they're full blown Just by economics. Yeah, economics. Obviously. People were so pent up during COVID And then, once things started to relax a little bit, there was a lot of shopping happening, and so every retailer that I've spoken to has says 2021 was their best year they've ever had. Businesses that have been around for those 20, 30 years. 2021 was a they've never had a better year, and it makes sense. I was one of those people too. I definitely, if I look at my credit card in 2021 versus other years, a lot higher, and 2022 was a really strong year, and what they're already seeing is a little bit of a slowdown in 2023. And I think that those are just the cycles of retail that we're seeing right now, and so that is a concern. So, again, a lot of these retailers have already committed to product with the brands months ago. So when you're trying to forecast, you're weighing historical data with what you think is going to happen, and so some retailers that I've spoken to have said that they are telling their brands can you hold off another month before shipping that product again, before realizing that inventory, and so those are some of the challenges we're seeing right now in the concerns.

Stefanie: 13:49

Okay, yeah, which are real challenges, huge risks. I totally get that. Okay, i want to get onto the topic of when a retailer doesn't have a product, which will lead into what you are doing and trying to just understand that problem. So today I go shopping downtown wherever I find a pair of jeans and they don't have my size because I'm with everyone else and need two sizes up the same size as everyone else. What happens? Like, right now, i just don't buy those jeans. I would just want to understand this problem. Like, what are people doing right now? Why is this a problem?

Michelle: 14:26

You know, if you are a bigger store that has a lot of different store fronts and a lot of inventory in a distribution center let's say you use like Nordstrom, for example you go to Nordstrom and you see something they don't have your size or whatever it may be Someone working at the store will say, let me check the inventory. And they're able to pull from their existing inventory from another store, from their distribution center. So they're kind of all kind of connected in that way. That's only like those big guys. If you look at the small to medium size independent retailers, if you go into a store and they don't have it, they have two options. They can say I'm sorry, we don't have that product, we're out of stock on that product, whatever that may be, and you would leave most likely not making a purchase at all because that moment has passed for you. You're like I guess I didn't really need those pair of jeans, right? Happens all the time. That's option number one. Option number two is they're like oh, you know, we're going to be placing a reorder on that product in a few weeks and we can call you when it's in And the likelihood of that actually happening, of you saying sure and going in and actually buying that product. You pretty much have missed the moment, and so what's unfortunate is, right now, retailers and customers that's at the highest intent to buy retail customer comes in wanting to make a purchase of something, but a retailer is limited by what they physically have in stock and they're limited by their cash flow and their space constraints, and so they miss that opportunity if they happen to not have that product that that customer wants. And if you ask a retailer, that happens all day, every day, for a retailer where they don't have exactly what the customer is looking for.

Stefanie: 16:06

Interesting. Yeah, which is a huge problem. I've heard you tell this to me in the past, so I want to come back to it because I can't remember the numbers right now. Tell me again what are the industry numbers around brick and mortar versus e-commerce? I'm trying to think about the potential impact here.

Michelle: 16:23

Yeah, so right now, e-commerce is a trillion dollar industry, which is crazy, but it still only represents 15% of all retail. So 85% of all retail still happens in the brick and mortar store, and whenever I tell people that and this is like you can search online, that's the statistic People are very surprised by it. But still a lot of retail happens in the brick and mortar store And so there's a huge reliance on the physical component of things And we are seeing that. So what's been interesting over the past couple of years is how does that brick and mortar store evolve with the next generation of shoppers? What are the next generation of shoppers looking for? And you're seeing a lot of closures to old school, old format brick and mortar stores like, most recently, bed, bath and Beyond Macy's have been shutting down their stores, so kind of the older school model of like. Within malls. These big formats lots of product to go through. Those types of businesses have been struggling for a while and now they're starting to shut down. But we are seeing these tend to be smaller retailers that do a really nice job of curating product, do really really well, and I think that what we're seeing with consumers is they have what's called like endless aisle fatigue. When you're looking for something, even when you go on Amazon and you search something, your intent to buy on Amazon is pretty high. You want, you're looking for something in particular and you want to make a purchase, and there's so many different products out there from different brands that you may not have heard of. That's a lot of work. It's kind of like, well, what's what? are these? fake reviews or real reviews Like you don't even know? And what the retailer, the brick and mortar retailer does for you, and especially the independents, is they curate that for you, they pick. This is what I think is like the best pot for you to use or the best kettle for you to use, or whatever that may be. So they do a lot of that work and where that relationship between the end customer and the retailer is a very trusted relationship, and so that's why I think we're seeing a lot of the independent brick and mortar stores still doing really well, whereas that larger format, old school way like the Bed, bath and Beyond and the traditional department stores struggling a lot more.

Stefanie: 18:40

Oh, that's so interesting, and we're starting to see that as we go out and walk around. I don't notice these things I'm not in the space like you are But it's like, as you're calling them out, it's like, oh yeah, that sounds about right. Okay, so let's talk about shopa bit, though, and I want to come back to your background. So your background is that you were on the direct to consumer. You were selling into retailers, originally with your fashionable compression socks, which most people definitely in Montana, but all over the place know about, and then, through the pandemic, you saw this problem for brick and mortar stores and you started shop. So tell us about shop. How did you get into it And what are you doing with it?

Michelle: 19:19

Yeah, so with Vim and Vigor, my other company. Even before COVID and especially during COVID, when, again, they were limited based on what they physically had in their store in order to sell to their customers, retailers would always call us and say, hey, i'm at a stock on this size and a customer in front of me right now and they once is product, can you ship it to them? Or they saw this particular style on your Instagram and I never carry that style. You know, at the end of the day, the retailers want to please their customers. A customer made the effort to come into the store looking for something, only to turn them away because they didn't have it, and meanwhile that inventory is sitting in my warehouse. And so a light bulb went off where I was thinking wow, i have my inventory sitting in a warehouse. The retailer is doing the hard work of customer acquisition, engaging with the end customer. How do I help bridge that gap and change the way that retail is done? The way retail has been done in like a millennia is I'm a retailer, i buy product from a brand, i own that inventory and then I sell that inventory. It's my inventory And that's the way it's happened for a very, very long time. But what if there was a model in which the retailer can tap into my inventory and be able to sell that product directly to their customer without the inventory risks, and gives them the ability to sell more of my product, carry more of my product, without that risk that they have in terms of the overstocked situation? And that's where ShopDot came about. So ShopDot is a platform that helps brick and mortar retailers never lose a sale because they have access directly to the inventory from their favorite brands. So the situation we talked about they're at a stock on something. That's one use case of ShopDot. Another use case that a lot of brands and retailers are excited about is utilizing ShopDot to facilitate a showroom model. So utilize the retail, the physical retail store, or like a showroom where the brand can provide them or the retailer can buy one of every size where a customer can come in and try on for that product And then utilize ShopDot to get the product shipped to the end customer directly from the brand. And so there are several other use cases that a lot of brands and retailers are excited about. But we're have a big task of changing the way retail is done where the brand and the retailer can partner together to better serve the end customer.

Stefanie: 21:47

That's awesome, and so is it my understanding. So both brands, like direct to consumer brands and independently owned retail shops, can come to your website, sign up for your platform and start working together. Is that how it works, or something else?

Michelle: 22:02

Yeah, so obviously you have the traditional direct to consumer brands. Those brands tend to not have a lot of retailers right now, right, because their focus has been mainly online. So, yes, we've spoken to a lot of direct to consumer brands who are looking for ways to get to brick and mortar retailers, but our main focus since we only launched about a month ago has been brands that already sell to retailers. So a lot of the brands that we have been working with that are even on our waitlist and our beta brands currently sell and this includes Vib and Vigor sell to a thousand to 2000 retailers nationwide already, and so they're excited about ShopDot because they already get this question from their retailers. Retailers are already calling them up asking them to ship out product directly to the retailer's customers. This is already happening, and it allows them to open up their inventory and product options to their retailers in ways that they've never had before, and so that's right now. Our main focus is around brand suppliers that already sell to independent brick and mortar retailers.

Stefanie: 23:06

Awesome. That's so cool And congratulations. That's such an exciting time. All of us listening like as business owners understand what you're going through, so we're excited for you. Michelle, thank you so much for being here. We learned so much from you And, best of luck, thank you Appreciate that. Of course, everyone else thank you all for tuning into the funded podcast. We really appreciate it. I hope you found this episode informative and helpful to your business journey. Don't forget to subscribe and follow us on social media to get other great content. If you are a small business owner looking for funded, check out our website, getfundedcom for flexible and affordable financing options. Otherwise, we'll see y'all back here next week.