DEATH OF PUREPLAY RETAIL

DEATH OF PUREPLAY RETAIL January 12, 2016

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL INTRODUCTION

REVENGE OF THE BRICK Echoing the death knell of the 2012 “showrooming” media frenzy, the popular press eulogized brick-and-mortar retail after Black Friday 2015 online sales were up 21 percent year-on-year. 1 Stalwarts like Macy’s have added fuel to the fire, with disappointing earnings calls that flew in the face of aggressive omnichannel investments. 2 The perception that online channel growth will signal renewed relevance to the street has driven many retailers into a downward spiral of e-commerce promotionality. Chasing Unicorns This silver bullet mentality is further reinforced by astronomical valuations awarded to buzzy e-commerce startups. The venture capital community signaled renewed willingness to go all-in on the pureplay business model—even as former “unicorns,” like Fab and Gilt Groupe, mirror the trajectories of their dot-com era predecessors. The same challenges that plagued Pets.com and others persist two decades later: unsustainable customer acquisition and shipping costs, and a discount-driven environment that erodes already razor-thin margins. Hitting “scale” requires cheap capital to fund growth, in the absence of profitability. Rhetoric The major cities where national media outlets are headquartered have also experienced a flood of last-mile providers. Markets including New York City have been home to pilots for Prime Now, Postmates, Instacart and others, creating top- of-mind awareness around innovators in the e-commerce space. The resultant, disproportionate press coverage belies the rampant pace of investment in less- sexy, brick-and-mortar retail—including major mall openings in the same markets (Brookfield Place, Hudson Yards and The Mall at the World Trade Center, in the case of NYC). Defying rhetoric, high-end malls continue to experience growth in sales per square foot. 3

Death of Pureplay Retail: Cities in Which Last Mile Services Have Deployed July 2015

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

Death of Pureplay Retail: Top Markets for Retail Development Based on Retail Square Feet Under Construction Q4 2014 ■ Cities in Which Last Mile Services Have Deployed

Boston

New York

Chicago

D.C.

Dallas

Los Angeles

Houston

Miami-Dade County

1. “ U.S. Retail Black Friday Report 2015 ,” IBM Watson, 2015. 2. “ Macy’s shares slump as revenue falls short of estimates ,” CNBC, November 11, 2015. 3. “ Against all odds, malls are thriving again ,” Fortune, March 30, 2015.

Source: “Doubling Down on the Rebirth of the American Shopping Mall,” CNBC, June 7, 2015.

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January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL INTRODUCTION

Category vs. Channel While the latest crop of retail “winners”—digital darlings like Warby Parker and Casper—may have originated online, success is not a channel effect. These disruptors saw the Internet as a way to establish proof of concept and access cheap capital before making a capital outlay to build stores, in niche categories with broken supply chains and inferior consumer experiences. The rapid growth of subscription-service Dollar Shave Club is not attributable to the online- only model, but to Gillette’s inflated margins in a consolidated industry 4 with desirable ship-to-weight ratios. Opening store locations has further reinforced the viability of these new business models, for retailers who have made the leap. The New Path to Growth Among the thirteen VC-backed “evolved pureplay” retailers tracked in the study (e-tailers who have experimented with brick-and-mortar retail), two-thirds raised capital with the explicit purpose of building stores. In addition to four-wall profitability, these investments are a marketing expense—generating always-on brand awareness that can (theoretically) self-fund. The ripple effect permeates digital channels: e-tailers with a terrestrial presence enjoy greater organic site traffic and lower customer acquisition costs via paid search and email. Since opening “guideshops” in major cities including New York, San Francisco and Boston, men’s retailer Bonobos cut digital marketing spend from 25 to 4 percent of net sales—while leading the industry in organic site traffic, and maintaining online conversion rates of 5 percent. 5 4. “Is P&G’s Gillette scared of Dollar Shave Club?” The Motley Fool, June 27, 2015. 5. “ After 8 years and $128 million raised, the clock is ticking for men’s retailer

Death of Pureplay Retail: Companies With Fastest E-Commerce Sales Growth Select Pureplay Retailers 2015

E-Commerce Sales (2014)

E-Commerce Sales Growth (2014)

Profitability

“It’s not clear if the company is profitable.” Re/code, May 2015

$65,020,000

550.2%

“...Dollar Shave Club is not yet profitable.” The Wall Street Journal, June 2015

$65,000,000

242.1%

“At this time, the e-retailer is running about break even.” Internet Retailer, October 2015

$30,030,000

200.3%

“Honest has dipped in and out of profitability; it is not yet consistently profitable.” Re/code, March 2015 “The company, which launched three years ago had been profitable since its third month.” Fortune, October 2014

$149,200,000

198.4%

$27,000,000

170.0%

Source: Internet Retailer | L2 Intelligence Report: Death of Pureplay Retail, January 2016.

Death of Pureplay Retail: Stated Purpose for Most Recent Funding Round For Venture Capital-Backed Evolved Pureplay Retailers 2015, n=13

31% Used

69% Used for Store Expansion

for Other Expenses

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

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January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL INTRODUCTION

What About...? Amazon casts a shadow across any conversation regarding retail. Amazon’s value proposition is sales volume, not brand equity. To that end, one of the Seattle behemoth’s core competencies is a singular ability to raise capital without the expectation of profits. Moreover, the majority of the company’s operating income comes from revenue streams outside of retail, specifically Amazon Web Services, while the e-commerce business incurs shipping costs that are double shipping revenues. In sum, the company plays by a different set of rules in the public markets, creating the (fallacious) perception that pureplay e-tailing is viable. This report analyzes disruptive retail models that have emerged over the past decade, in an attempt to identify winning business strategies and the underlying consumer behaviors that have enabled them. By contrasting digital and retail KPIs for pureplay, evolved pureplay and omnichannel retailers, L2 attempts to illustrate how organizations can benefit by operating across multiple channels. Like the medium we are assessing, our approach is dynamic. Please reach out with comments that improve our methodology and findings.

Death of Pureplay Retail: Amazon Operating Income Millions of Dollars 2015 ■ Amazon Retail ■ Amazon Web Services

$1,705M

36%

64%

$993M

48%

52%

$706M

38%

62%

Q1 2015

Q2 2015

Q3 2015

Source: SEC Filings.

Regards, L2 & Simon Property Group

Bonobos ,” Business Insider, October 6, 2015.

2,000

1,000

Death of Pureplay Retail: Amazon Shipping Expenses Millions of Dollars Q1 2014—Q3 2015 ■ Shipping Revenue ■ Shipping Costs ■ Net Shipping Costs

$1,701 -$3,049

$849 -$1,829

$889

$1,048

$1,299 -$2,039

$1,399 -$2,340

$1,494 -$2,720

0

-$1,812

-$2,020

-1,000

-2,000

-3,000

-$980

-$923

-$972

-$1,348

-$740

-$941

-$1,226

Source: SEC Filings.

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

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January 12, 2016

TABLE OF CONTENTS

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL

Click logo to return here.

6 METHODOLOGY

39 Financial Returns 4 0 FLASH OF GENIUS A Shift in Strategy: Blank Label 41 Stores in the Black 4 3 The New Path to Growth

25 FLASH OF GENIUS Offline Partnerships: BaubleBar 26 More Stores = More Sophisticated

Click to jump to:

7

BRAND LIST

CONSUMER EXPERIENCE 27 Stores Provide An Elevated Experience 28 FLASH OF GENIUS Addressing Concerns About Fit: Rent the Runway 29 Next-Gen Service 30 FLASH OF GENIUS Unique Selling Environment: Trunk Club 31 FLASH OF GENIUS Differentiation Through Store Locations: Casper, Harry’s 32 Taking Back “Showrooming” 33 Digital Enhances Stores 34 FLASH OF GENIUS Organizing for Omnichannel Success: Birchbox, Warby Parker, Bonobos

CUSTOMER ACQUISITION 8 Traffic Must Be Bought 10 Casting a Wide Net Via Search 12 Further Down the Funnel 13 “Walk in Traffic” Doesn’t Exist Online 14 Compensating With Email 15 Stores Can Drive Organic Traffic 16 Store Expansion Builds Brand Equity 17 FLASH OF GENIUS Popup Shop Contest Drives Online Traffic: Frank & Oak 18 New Players Have Caught On Quickly

45

CONCLUSIONS

46

THE TEAM

ABOUT L2

47

LAST MILE 19 Free Shipping Pressures 20 Speed vs. Convenience

RETURN ON INVESTMENT 35 Reaching Scale 36 Pureplays: Losers in a Winner-Take-All E-Commerce Economy

21 Inventory Capabilities Still Lag 22 Unlocking Omnichannel Potential

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL METHODOLOGY

FULFILLMENT / INTEGRATED INVENTORY Online Purchase/Pickup In-Store Online Reservation/Pickup In-Store Online Purchase/Return In-Store Ship from Store Curbside Delivery SHIPPING Free Shipping Free Shipping Thresholds Expedited Shipping Expedited Shipping Costs & Thresholds

Search Engine Traffic Organic and Paid Keyword Volume Estimated Paid Search Budgets Unbranded Organic Search Visibility Branded Keyword Search Volume Email Frequency

Revenue Venture Capital Funding Valuation In-Store Sales Percentages Average Order Values Profitability

Promotion of In-Store Services and Events Online Booking of Appointments and Events Email Promotion of Stores

In-Store Amenities In-Store Technology

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL BRAND LIST

PUREPLAY RETAILERS n=24

EVOLVED PUREPLAY RETAILERS n=19

OMNICHANNEL LEADERS n=20

Brand Selection Methodology

Brand Selection Methodology

Brand Selection Methodology

Online-only retailers that may have experimented with a popup shop, but have not opened a permanent retail location

Companies that began as online-only, but have opened a permanent retail location in the last five years

Retailers that have effectively linked their in-store and online businesses to leverage their status as omnichannel retailers

Athleta AYR BaubleBar Birchbox Blank Label

Ashford Jewelry ASOS Bare Necessities Beyond the Rack

Indochino J. Hilburn Nasty Gal Proper Cloth Rent the Runway Trunk Club Warby Parker Yogibo YogaSmoga

Karmaloop ModCloth Net-A-Porter OnlineShoes.com Overstock.com The Real Real Revolve Clothing Rue La La Shoebuy.com The Clymb

American Eagle Apple Best Buy Bloomingdale’s Coach Free People GAP Gucci Home Depot IKEA

JCPenney Kate Spade Macy’s Nordstrom Ralph Lauren Sears Sephora Target Tory Burch Walmart

Bluefly eBags Etsy Everlane Gilt Groupe Jack Threads James Allen Jomashop

Blue Nile Bonobos

Casper Harry’s Frank and Oak

YOOX Zulily

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Traffic Must Be Bought The war for Google.com first-page search real estate is fierce. In retail, omnichannel players are challenging Amazon’s dominance, creating a bidding war for high-value terms that requires organizations to continually increase their CPC marketing budgets. 6 In Q1 2015, Macy’s and Nordstrom spent an estimated $6.4M and $4.0M in paid search listings for the top 1,000 apparel- related keywords, outspending Amazon as well as sister site Zappos. 7 Given the nature of their business models, pureplay e-tailers are particularly reliant on paid search traffic. The average pureplay e-tailer receives 20 percent of its total search engine traffic via paid search listings, compared with 16 percent for the average omnichannel retailer and 14 percent for the average evolved retailer. This outsized reliance on SEM is precarious—not only must e-tailers bid head-to-head with well-capitalized omnichannel retail juggernauts, but the nature of Google search is inherently winner-take-all. Clicks disproportionately go to the highest-placed search ads, with little room for differentiation. As a result, pureplay e-tailers’ search strategy is significantly more expensive to execute. E-tailers bid on seven times the number of keywords versus evolved retailers, and spend an average of three times more on search engine marketing.

Death of Pureplay Retail: Desktop Paid Search Traffic as a Percentage of Overall Search By Operating Model August 2015, n=24 Pureplay Retailers, n=19 Evolved Pureplay Retailers, n=20 Omnichannel Leaders

20.0%

16.1%

13.7%

Pureplay Retailers

Omnichannel Leaders

Evolved Pureplay Retailers

Source: Similar Web.

Death of Pureplay Retail: Monthly Desktop Paid Search Metrics, by Business Model October 2015, n=19 Evolved Pureplay Retailers, n=24 Pureplay Retailers ■ Evolved Pureplay Retailers ■ Pureplay Retailers

3X

$80,898

7X

53,247

$30,580

7,820

Average Number of Paid Keywords

Average Cost of Paid Search Traffic

6. “ Marketing Budgets 2015 ,” Econsultancy, February 26, 2015. 7. “ Apparel and Paid Search—Q1 2015 ,” Ad Gooroo, June 29, 2015.

Source: SEMrush, L2 Intelligence Report: Death of Pureplay Retail, January 2016.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Traffic Must Be Bought (Cont’d)

Death of Pureplay Retail: Top 20 Apparel Advertisers by Paid Search Spend Based Activity on the Top 100 Apparel Keywords by Spend January 2015—March 2015, U.S. Google

Desktop PLA

Desktop Text Ad

Mobile PLA

Mobile Text

Total Spend $3,985,000 $6,368,000 $3,364,200 $3,326,000 $3,128,000 $2,843,500 $2,709,000 $2,429,000 $2,355,000 $2,077,000 $1,849,000 $1,799,000 $1,605,400 $1,537,000 $1,505,000 $1,473,000 $1,437,000 $1,387,000 $1,327,000 $1,321,000

Macys.com Nordstrom.com Zappos.com JCPenney.com AliExpress.com JJsHouse.com LightintheBox.com DylanQueen.com Amazon.com Venus.com Kohls.com Target.com Zulily.com MichaelKors.com Bloomingdales.com Dressale.com Fitbit.com JCrew.com DavidsBridal.com LLBean.com

$1,496,000 $2,427,000 $2,415,000 $2,527,000 $945,000 $4,000 $738,000 $350,000 $2,292,000 $827,000 $771,000 $678,000 $1,601,000

$598,000 $926,000 $239,000 $220,000 $269,000 $982,000 $189,000 $127,000 $0 $140,000 $138,000 $409,000 $0 $128,000 $277,000 $438,000 $0 $73,000 $35,000 $61,000

$1,881,000 $2,978,000

$10,000 $37,000 $200 $7,000 $59,000 $500 $6,000 $12,000 $63,000 $8,000 $26,000 $3,000 $400 $44,000 $3,000 $0 $2,000 $10,000 $83,000 $10,000

$710,000 $532,000

$1,855,000 $1,857,000 $1,776,000 $1,940,000 $0 $1,102,000

$914,000 $709,000 $4,000 $543,000 $841,000 $750,000 $795,000 $757,000 $366,000 $751,000

$822,000 $384,000 $285,000 $640,000 $547,000 $843,000 $499,000

Source: AdGooroo 2015.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Casting A Wide Net Via Search Pureplay e-tailers tracked in the study purchase an average of over 53,000 keywords per month. Paying on-average $1.14 per monthly visitor via the paid search channel, this strategy can be characterized as “spray and pray.” Pureplay giants Zulily, Overstock.com, Etsy, and ASOS exemplify the tactic, with each e-tailer bidding on more than 74,000 keywords. While these e-tailers maintain a relatively low cost per visitor, they also play at the top of the funnel, bidding on generic terms (e.g. “shopping,” “maternity clothes,” “jewelry,” “wedding dresses”) that are intended to drive traffic but not necessarily conversion. Furthermore, the pureplay e-tailer strategy mimics that of leading omnichannel retailers— including Target, Walmart, JCPenney, and Macy’s—but at a fraction of the scale of these deep-pocketed stalwarts. Omnichannel retailers bid on an average of 431,998 keywords each month and pay just $0.85 per monthly paid search visitor, suggestive of search budgets that are orders of magnitude larger than what the majority of pureplay e-tailers are able to allocate.

Death of Pureplay Retail: Monthly Paid Keywords vs. Cost Per Site Visitor Via Paid Search October 2015, n=23 Pureplay Retailers*

$5

$4

$3

Via Paid Search

Cost Per Webite Visitor

$2

Monthly Keywords Purchased

0K

200K

400K

Overstock

$1

Zulily

Etsy

Asos

$0

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016. * Excluding The Clymb (no paid keywords).

Death of Pureplay Retail: Monthly Paid Keywords vs. Cost Per Site Visitor Via Paid Search October 2015, n=23 Pureplay Retailers, n=20 Omnichannel Leaders ■ Pureplay Retailer ■ Omnichannel Leader

$5

$4

$3

Via Paid Search

Sears Cost Per Webite Visitor

$2

Monthly Keywords Purchased

0M

2M

3M

JCPenney

Walmart

Target

Macy’s

$0

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Casting A Wide Net Via Search (Cont’d)

Death of Pureplay Retail: Cost Per Click for Top Traffic-Driving Paid Keywords By Percentage of Traffic Driven to Select Pureplay Retailer Sites

Top Paid Keywords

Cost Per Click

$1.78

1. Maternity Clothes 2. Lingerie 3. Umbrella

$0.67

Asos Zulily Etsy Overstock

$0.91

$2.15

1. Jewelry 2. Bar Stools 3. Shopping

$2.41

$2.45

$0.87

1.Wedding Dresses 2. iPhone 6 Cases 3. Dog Collars

$1.45

$1.31

$0.67

1. Lingerie 2. Red Dresses 3. Dr. Martens

$1.29

$0.72

$0.00

$1.00

$2.00

$3.00

Source: SEMrush 2015.

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January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Further Down the Funnel Rather than emulate the volume-driven search strategies of competitors, evolved retailers have adopted a distinct approach. These retailers bid on substantially fewer keywords, and pay more for each visitor acquired through paid search ($1.79 per visitor, compared with $1.14 per visitor for e-tailers). Instead of casting a wide net from a keyword perspective, evolved retailers target consumers that are significantly further down the purchase funnel, via bids on specific, product- related terms.

Proper Cloth, Casper, Harry’s and Birchbox each pay over $2.00 per visitor acquired through paid search. Noticeably, the top traffic-driving keywords to these sites are both more expensive and more specific than the leading keywords for e-tailer sites. By prioritizing bids for a smaller set of core terms (e.g. “monthly subscription box” for Birchbox; “bed in a box” for Casper), evolved pureplay brands recognize more efficiency in search spend by only bidding on conversion- driving terms.

Death of Pureplay Retail: Monthly Paid Keywords vs. Cost Per Site Visitor Via Paid Search October 2015, n=23 Pureplay Retailers, n=19 Evolved Pureplay Retailers ■ Pureplay Retailer ■ Evolved Pureplay Retailer

Death of Pureplay Retail: Cost Per Click for Top Traffic-Driving Paid Keywords By Percentage of Traffic Driven to Select Evolved Pureplay Retailer Sites

Top Paid Keywords

Cost per Click

$6

Proper Cloth

1. Custom Dress Shirts 2. Sea Island Cotton 3. Thomas Mason

$4.84

$5

$1.42

$1.14

Via Paid Search

Casper

Proper Cloth

$4

Harry’s

$6.79

1. Mattresses 2. Mattress 3. Bed in a Box Casper

Cost Per Website Visitor

$6.28

$3.48

$3

$1.24

1. Dollar Shave Club 2. Razor

Birchbox

$2

$6.55

Monthly Keywords Purchased

$3.05

3. Blades Harry’s

0K

200K

400K

Overstock

$1

$2.45

1. Ipsy 2. Oribe 3. Monthly Subscription Box

Zulily

$4.23

Asos

Etsy

$0

$3.87

Birchbox

$0.00

$2.00

$4.00

$6.00

$8.00

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

Source: SEMrush 2015.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

“Walk In Traffic” Doesn’t Exist Online Despite significant budget allocation from retailers, paid search listings account for just 10 percent of consumer clicks from Google results. 8 The remaining 90 percent of clickshare goes to organic listings—suggesting natural search optimization is essential to maintaining online traffic and e-commerce market share for all retailers. Just 5 percent of consumers visit the second page of Google search results, and 1 percent visit the third page. 9 Thus, having a meaningful share of the digital shelf—and by extension, consumers’ consideration set—requires appearing organically on the first page of search results for priority keywords. L2 analyzed organic search visibility for pureplay and evolved retailers on Google.com, using 1,231 unbranded category-specific keywords (selected based on per-category search volume). On average, retailers playing in highly fragmented categories, including Baby and Men’s and Women’s Apparel, appeared on the first page of results for no more than 5 percent of unbranded searches. Moreover, in every category except Women’s Sportswear and Bags, pureplay e-tailers and evolved retailers fell to the second or third page of results in terms of average organic placement—translating to invisibility. These retailers face stiff competition from Amazon.com, which maintains a significantly higher share of first-page organic results for almost all categories. The analogy? “Walk in traffic” in an online capacity is non-existent for small and mid-sized retailers, as most lack the first-page visibility required to drive organic search traffic versus scaled competitors.

Death of Pureplay Retail: Average Retailer Visibility for Unbranded Category Keywords Percentage of Keywords for Which Retailer Appears on First Page of Organic Search Results October 2015, n=23 Pureplay Retailers, n=16 Evolved Pureplay Retailers,* n=1,231 Keywords ■ Pureplay/Evolved Pureplay Retailers ■ Amazon

Accessories n=71 keywords Baby n=62 keywords Bags n=31 keywords Furniture n=130 keywords Fine Jewelry n=43 keywords Luxury n=218 keywords

15% 30% 5% 44% 69% 47% 34% 35% 42% 5% 2% 15%

Men’s Apparel n=207 keywords Shoes n=138 keywords Watches n=51 keywords

1% 22% 20% 21% 14% 69%

Women’s Apparel n=187 keywords Women’s Sportwear n=87 keywords

4% 9%

15% 30%

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016. * Excluding categories with only one brand.

Death of Pureplay Retail: Average Organic Search Position on Google,* by Category October 2015, n=23 Pureplay Retailers, n=16 Evolved Pureplay Retailers, n=1,231 Keywords ■ First Page (100% Click Rate) ■ Second Page (5% Click Rate) ■ Third Page (1% Click Rate)

20

3rd Page

16

16

14

14

13

13

12

2nd Page

10

8

5

1st Page

Accessories n=71

Baby n=62

Bags n=31

Furniture n=130

Fine Jewelry n=43

Luxury n=218

Men’s Apparel n=207

Shoes n=138

Watches n=51

Women’s Apparel n=187

Women’s Sportwear n=87

Source: Web Ranker; L2 Intelligence Report: Death of Pureplay Retail, January 2016. * For keywords for which the brand is present in Google Search results.

8. “ The First Page of Google, by the Numbers ,” Protofuse, April 30, 2014. 9. Ibid.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Compensating With Email In light of limited organic search visibility,

Death of Pureplay Retail: Average Email Volume Per Week, by Business Model August 24, 2015—October 24, 2015, n=24 Pureplay Retailers, n=18 Evolved Pureplay Retailers

organizations have turned to email as a way to maintain consumer mind share. With few other marketing levers to pull, pureplay e-tailers are especially reliant on email marketing, arguably to the point of oversaturation. An analysis of pureplay e-tailer strategies revealed a negative correlation between organic search visibility and email activity—brands with lower organic search visibility sent consumers a higher volume of emails per week. In addition, pureplay e-tailers averaged almost triple the number of emails per week versus evolved pureplay retailers, indicating their elevated reliance on the channel. Fighting for visibility in crowded inboxes, e-tailers that average more than one email per day (including Bare Necessities, Beyond the Rack, Bluefly, Gilt, JackThreads, The RealReal, Revolve Clothing, and Rue La La) are often forced to turn to promotional tactics to capture the consumer’s attention. A slew of sales and free shipping offers may drive open rates, but with significant impact on margins.

Pureplay Retailers

Evolved Pureplay Retailers

2.3

6.7

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

1

2

1. ModCloth emails incite action with limited time offers and promote the brand’s free shipping and loyalty programs.

2. Rue La La averages 13 emails per week, and uses email to promote its unlimited shipping loyalty program.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Stores Can Drive Organic Traffic Pureplays face limited organic visibility for category keywords, unsustainable bidding wars for paid terms versus retail goliaths, and a crowded email landscape that rewards promotionality. In this challenging environment, organizations have been forced to look to alternative marketing options to acquire new, brand-loyal customers. One strategy for growing organic site traffic has proven to be opening offline stores. Even e-tailers that previously vowed never to establish a brick-and-mortar presence—including Bonobos 10 —have done just that, opening popup shops, flagship stores, and entire retail networks. These evolved retailers recognize the benefits of new, profitable points of distribution, but also increased consumer awareness and subsequent site traffic. In October 2013, Rent the Runway opened its first popup shop inside Henri Bendel’s, and saw a slight spike in traffic from organic search the following month. The impact was even more pronounced a year later, when the company opened its first permanent showroom in New York City. Warby Parker, Trunk Club and Proper Cloth have all seen equally impressive growth in organic search traffic following their first store openings.

Death of Pureplay Retail: Changes to Organic Search Traffic as Evolved Pureplay Retailers Open Stores ■ Date of First Popup ■ Date of First Store Opening

150K

40K

100K

20K

50K

750K Monthly Organic Search Traffic Monthly Organic Search Traffic 500K 250K 0 Jan. 2010 Jan. 2011

0 Monthly Organic Search Traffic Monthly Organic Search Traffic Jan. 2010 Jan. 2011 750K 500K 250K

Jan. 2012

Jan. 2013

Jan. 2014

Jan. 2015

Jan. 2012

Jan. 2013

Jan. 2014

Jan. 2015

0

0

Jan. 2010

Jan. 2011

Jan. 2012

Jan. 2013

Jan. 2014

Jan. 2015

Jan. 2010

Jan. 2011

Jan. 2012

Jan. 2013

Jan. 2014

Jan. 2015

Source: SEMrush 2015.

10. “ For Bonobos, a Good Fit in Stores as Well as Online ,” New York Times, July 2, 2014.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

Store Expansion Builds Brand Equity While an initial store opening often translates into PR buzz, search data suggests that the boost in awareness does not fade after the initial media attention surrounding an e-tailer’s first brick and mortar venture. On the contrary, online traffic tends to increase with the build-out of an offline retail footprint. For the 19 evolved pureplay retailers examined in L2’s analysis, retailers with more stores were searched by-name on Google more frequently per month, suggesting that stores drive increased brand equity. Scale is reached at the 15-store mark; retailers with more than 15 stores averaged roughly double the number of monthly searches than those with fewer than 15 stores (237K searches / month versus 101K searches / month). This relationship is also much stronger than the slight positive relationship (R=0.06) between the years since a retailer’s founding and monthly search volume, suggesting that stores can have even more of an impact than retailer longevity on brand awareness.

Death of Pureplay Retail: Number of Stores vs. Average Monthly Searches for Brand Name September 2015, n=19 Evolved Pureplay Retailers

500K

Birchbox

Athleta

400K

Warby Parker

Nasty Gal

R 2 =0.23751

300K

Rent the Runway

Monthly Keyword Searches

200K

Bonobos

100K

Yogibo

0

0

20

40

60

80

100 Number of Stores

Source: Google Keyword Planner | L2 Intelligence Report: Death of Pureplay Retail, January 2016.

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INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL FLASH OF GENIUS

Popup Shop Contest Drives Online Traffic Frank & Oak After opening six stores throughout Canada in 2014, evolved retailer Frank and Oak expanded its brick-and- mortar presence to the United States. In March 2015, the retailer announced its Collective Impact campaign, which asked U.S. customers to vote for the location of six new Frank and Oak stores. Consumers voted by purchasing a Frank and Oak gift card, and the first six cities to reach a pre-set voting target were promised a 12-18 month-long popup, with the possibility of a permanent store. While the campaign lasted just two weeks, it generated significant brand buzz for the menswear retailer. More consumers visited the Frank and Oak site in March and April than any other period over the previous two years, and the retailer also saw a spike in organic search volume.

1

1. Frank and Oak asked customers to vote for the next location of its stores, promising long-term popup shops in six winning cities.

Death of Pureplay Retail: Frank & Oak Website Traffic Unique Monthly Visitors June 2014—September 2015

400K

300K

200K

Unique Monthly Visitors

100K

Frank & Oak Popup Contest

0

Jun. 2014

Aug. 2014

Oct. 2014

Dec. 2014

Feb. 2015

Apr. 2015

Jun. 2015

Aug. 2015

Oct. 2015

Source: Compete.

17

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL CUSTOMER ACQUISITION

New Players Have Caught On Quickly The most successful evolved retailers have been quick to recognize the value of a brick-and-mortar presence, opening stores soon after being founded and also expanding rapidly. Learning from these frontrunners, which include Warby Parker and Bonobos, even newer brands such as Frank and Oak and Yogibo have followed suit, opening stores at a rapid pace just a year after their founding. While a cautious, test-and-learn strategy is still the norm, with most brands opening just one to two stores per year, the benefits of retail scale may prompt e-tailers to consider more aggressive expansion plans moving forward.

Death of Pureplay Retail: Years Before First Store vs. Stores Opened Per Year October 2015, n=19 Evolved Pureplay Retailers

23

Slow Adoption, Rapid Expansion

Rapid Adoption, Rapid Expansion

Athleta

8

Warby Parker

6

Stores Opened Per Year

Bonobos

Yogibo

Indochino

4

Frank & Oak

Years Before First Store Opening

18

15

12

9

6

3

0

2

Blue Nile

Nasty Gal

0

J. Hilburn

Slow Adoption, Cautious Expansion

Rapid Adoption, Cautious Expansion

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

18

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Free Shipping Pressures Amazon’s aggressive investments in order fulfillment have shaped consumer expectations. Regardless of business model, virtually all retailers have been forced to follow suit in order to remain competitive, offering generous free shipping policies, low order thresholds, and expedited delivery options. Pureplay e-tailers are less likely than evolved retailers to list free shipping option as a standard policy; just 57 percent of pureplays promote free shipping within their shipping policies compared to 89 percent of evolved retailers. However, pureplay e-tailers are, in fact, offering free shipping at the same rate as their evolved counterparts—just positioned as a limited time offer, and intended to inspire urgency to convert. After accounting for the (nearly ubiquitous) free shipping offers that can be found within e-tailers’ promotional banners, social media properties and emails, 83 percent of e-tailers were observed offering free shipping at a given time. This strategy suggests that pureplay e-tailers have limited marketing levers at their disposal, and thus capitalize on free shipping as a way to drive promotional site traffic without marking down inventory. When offering free shipping above a threshold, pureplay e-tailers are also more aggressive than evolved peers. Pureplay e-tailers require an average order of $68.33 to unlock free shipping, while evolved retailers average an order value of $90.71.

Death of Pureplay Retail: Free Standard Shipping, by Business Model Percent of Brands Offering Permanent and Limited Time Free Shipping

October 2015, n=23 Pureplay Retailers, n=19 Evolved Pureplay Retailers ■ Permanent Free Shipping Option ■ Limited Time Free Shipping Offer

Pureplay Retailers

57%

26%

Evolved Pureplay Retailers

89%

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

Death of Pureplay Retail: Average Threshold for Free Shipping vs. Select Competitors October 2015, n=6 Pureplay Retailers, n=7 Evolved Pureplay Retailers

$99.00

$90.71

$68.33

1

$50.00

$35.00

$25.00

Nordstrom $0.00

1. Gilt, and other pureplay retailers, frequently offer limited time free shipping codes via email.

Target

Amazon

Walmart

Pureplay Retailers

Macy’s

Evolved Pureplay Retailers

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016. * Excluding retailers without free shipping threshold.

19

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Speed vs. Convenience In May 2015, Amazon launched free, same- day delivery for Prime members in 500 U.S.

Death of Pureplay Retail: Availability of Expedited Delivery Options, by Business Model Percent of Retailers October 2015, n=23 Pureplay Retailers, n=19 Evolved Pureplay Retailers ■ Pureplay Retailers ■ Evolved Pureplay Retailers

cities, further pushing consumer expectations to aggressive new levels. 11 As pureplay e-commerce becomes synonymous with near-instant gratification, e-tailers have rushed to offer consumers expedited delivery options, investing at a faster pace than evolved retailers. Eighty-seven percent of pureplay e-tailers offer two-day shipping, compared with just 63 percent of their evolved retailer counterparts. Pureplay e-tailers have also led the push to next-day shipping, with two-thirds offering a next-day shipping option, compared to just 53 percent of evolved retailers. An additional 9 percent of pureplay e-tailers have begun experimenting with same-day delivery, also outpacing evolved retailer adoption. However, to close the gap in terms of fulfillment immediacy, evolved retailers have a distinct, and inexpensive last mile option that pureplays cannot provide. Click-and-collect services, offered by 32 percent of evolved retailers, allow customers to order from the convenience of their homes, and pick up their purchases as soon as the same day in-store. This functionality, which has been implemented by 60 percent of omnichannel leaders, also facilitates incremental purchases and upsell opportunities when the consumer enters the retail environment.

87%

65%

63%

53%

32%

9%

5%

Reserve / Buy Online, Pickup In-Store 0%

2-Day Shipping

Next-Day Shipping

Same-Day Shipping

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

1

2

1. Athleta customers can select a store in which to reserve products based on real- time in-store inventory.

2. Rent the Runway allows customers to reserve their rentals online before picking them up in one of the retailer’s four stores.

11. “ Amazon launches free same-day delivery for Prime members in 500 U.S. cities, including Seattle ,” GeekWire, May 28, 2015.

20

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Inventory Capabilities Still Lag While evolved retailers have begun to leverage their stores as fulfillment centers, inventory management capabilities still lag behind traditional omnichannel leaders. Specifically, not all evolved retailers that offer in-store pickup fulfill these orders through in-store inventory. Instead, many offer a “ship-to-store” option, which curtails the immediacy of click-and-collect that attracts many consumers in the first place. 12 For example, Yogibo, an evolved home furniture company with 26 store locations, requires five days to fulfill in- store pick-up orders, owing to shipping speeds from fulfillment center to store. Stores can also act as a point of return for online purchases, giving retailers the ability to recapture sales, via exchanges and upselling, from customers unsatisfied with their original orders. While buy online, return in-store services are ubiquitous across the 20 leading omnichannel brands analyzed, just 32 percent of evolved retailers promote the service online. Some evolved retailers, including Birchbox, explicitly state their inability to accept online returns at their store locations, suggesting POS systems limitations. As evolved retailers continue to expand their store networks, they must capitalize on their lack of legacy POS investments and implement order management systems that allow them to take advantage of omnichannel experiences.

Omnichannel Leaders

100%

Death of Pureplay Retail: Availability of Buy Online, Return In-Store, by Business Model Percent of Retailers October 2015, n=20 Omnichannel Leaders, n=19 Evolved Pureplay Retailers

Evolved Pureplay Retailers

32%

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

2

1

3

1. Customers who choose to pick up their purchases at one of Yogibo’s 26 stores must wait 5 days after placing an online order.

2. Although Birchbox allows customers to return online product purchases via delivery, the brand does not allow customers to return products bought online at their flagship store.

3. Frank and Oak allows customers to pick up their online purchases at one of its 12 stores, but the brand does not fulfill these orders with in-store inventory.

12. “ Customer Pulse Report 2015 ,” JDA and Centiro, June 2015.

21

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Unlocking Omnichannel Potential Evolved retailers have been slow to implement omnichannel investments, including in-store pick-up, in-store returns, and real-time in-store inventory—even as these tactics become increasingly commonplace among traditional U.S. retailers. 29 percent of index brands tracked in L2’s Intelligence Report: Omnichannel Retail 2015 offer the ability to pick up inventory in-store. Additionally, 75 percent of Index brands allow customers to return online purchases in-store, and 48 percent of index brands offer real-time in- store inventory on product pages. As evolved pureplay brands catch up to this degree of sophistication, they stand to benefit financially. While pureplay e-tailer orders typically net 77 cents on the dollar (due to costly returns that average 23 percent of order value), retailers that offer both in-store pick-up and returns enjoy an accretive effect—whereby shoppers walk out of the store with 107 percent of their original basket size
after exchanging merchandise and making incremental purchases (behaviors rarely seen in a digital world). 13

2

1

1. Sears and Kmart promise curbside delivery in 5 minutes or less, and track delivery times via an in-app stopwatch. Consumers receive coupons for longer waits.

2. Consumers call or text when approaching one of 20 Nordstrom pilot stores offering curbside pickup, launched in May 2015.

Death of Pureplay Retail: Net Sales Given Omnichannel Capabilities

Initial Purchase Value

Return/ Exchange Loss

Pick-Up Recoup

Returns Recoup

Net Sales

Pureplay E-Commerce

100%

-23%

N/A

N/A

77%

Buy Online, Return In-Store

100%

-23%

+18%

95%

N/A

Buy Online, Pickup + Return In-Store

100%

-23%

+12%

+18%

107%

13. “ Shopping Centers: America’s First and Foremost Marketplace ,” ICSC, October 2014.

Source: L2 Inc., “Omnichannel Retail 2015,” July 2015.

22

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Unlocking Omnichannel Potential (Cont’d)

Death of Pureplay Retail: Number of U.S. Fulfillment Centers Pureplay Retailers 2015

Death of Pureplay Retail: Number of U.S. Potential Points of Distribution Evolved Pureplay Retailers 2015* ■ Evolved Pureplay Retailer Fulfillment Centers ■ Evolved Pureplay Retailer Stores ■ Pureplay Retailer Fulfillment Centers

As evolved retailers continue to expand their retail footprints, they also have the potential to increase shipping speeds while decreasing costs, via ship-from- store capabilities. While 11 percent of brands in the Omnichannel 2015 index have implemented ship-from-store— including big box retailers (Walmart, Lowes), department stores (Neiman Marcus, Macy’s) and specialty retailers (Urban Outfitters, Ralph Lauren)—none of the evolved retailers tracked by L2 have made corresponding investments. Evolved retailers would have a significantly more robust warehousing network if they instituted ship-from- store capabilities, even compared to the most mature e-tailers, most of which have no more than three U.S. fulfillment centers.

Warby Parker

Ashford

3

21

4

Gilt

3

Bonobos

1

20

Net-A-Porter

3 3

Rent the Runway

1

4

Overstock.com

Zulily

2 2 2 2 2

4

Ashford

Bare Necessities

2

1

Nasty Gal

Beyond the Rack

2 1

Harry’s

Jomashop

OnlineShoes.com

2 1

Blue Nile

ASOS

1 1 1 1 1 1 1 1 1 1

3

Overstock.com

Blueflly

3

Net-A-Porter

eBags

Everlane

3

Gilt

JackThreads

1 1

Birchbox

Karmaloop

1

1

ModCloth

Baublebar

Rue La La

1 1

AYR

Shoebuy.com

YOOX

Source: Internet Retailer, Press Reports. *Fulfillment Center numbers were reported in 2012 for Warby Parker, 2013 for Nasty Gal and 2014 for Birchbox, BaubleBar, and Harry’s.

Source: Internet Retailer, Press Reports.

23

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

Unlocking Omnichannel Potential (Cont’d) Ship-from-store has allowed leading omnichannel brands to compete with, and in some cases surpass, Amazon’s vast last mile capabilities. In June 2013, Best Buy launched ship-from-store, transforming its stores into mini-warehousing facilities. At the time of launch, Best Buy’s average delivery time was almost double that of Amazon, but by October 2013, the retailer had leveraged its new fulfillment locations to cut shipping times in half and was consistently outperforming Amazon shipping speeds. 14 In 2012, Macy’s also launched ship-from- store and has continued to expand the program throughout its store network. As of May 2015, Macy’s can ship online orders from 886 US store locations, 15 making its fulfillment network 13 times the size of Amazon’s. 16 With a more comprehensive fulfillment network, Macy’s packages often have less distance to travel than Amazon purchases, enabling faster delivery at lower costs.

Death of Pureplay Retail: Store Warehousing vs. Centralized Fulfillment Centers Amazon.com and BestBuy.com Average Parcel Delivery Speeds June 2013—December 2013 ■ BestBuy.com ■ Amazon.com

8

Ship From Store Launch

6

4

2

Average Delivery Window (Days)

0

Jul. 2013

Jun. 2013

Aug. 2013

Sep. 2013

Oct. 2013

Nov. 2013

Dec. 2013

Source: StellaService.

Death of Pureplay Retail: Macy’s Ship-from-Store Locations vs. Amazon U.S. Fulfillment Centers ■ 2012 ■ 2013 ■ 2014 ■ 2015

886

775

500

292

70

Amazon Fulfillment Centers

Macy’s Ship-from-Store Locations

14. StellaService. 15. “ Macy’s battle for the ‘last mile’ leads to Amazon ,” NY Post, July 2015. 16. “ Amazon Global Fulfillment Center Network ,” MWPVL, November 2015.

Source: “Macy’s battle for the ‘last mile’ leads to Amazon,” NYPost.com, July 2015; “Amazon Global Fulfillment Center Network,” MWPVL, November 2015.

24

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL FLASH OF GENIUS

Offline Partnerships BaubleBar After opening three popup shops in 2013, BaubleBar began expanding into the permanent brick-and-mortar space via partnerships with omnichannel retailers. In January 2014, the brand announced a deal that would place BaubleBar products in Anthropologie’s 174 U.S. locations, 17 and in March of the same year, BaubleBar products became available at 35 Nordstrom locations. 18 In July 2014, the jewelry retailer’s products became available at all Nordstrom locations, and BaubleBar reported that offline sales were now accounting for 20 percent of the company’s revenue. 19 Having already proven out the value proposition of offline retail, BaubleBar opened its first permanent store in July 2015. The 1,200 square- foot space, located at Roosevelt Field Mall in Garden City, NY, was finalized after the brand used sales data to identify the area as a strong customer base. 20

Death of Pureplay Retail: Locations Selling BaubleBar Products 2015 ■ BaubleBar ■ Anthropologie ■ Nordstrom

Source: BaubleBar.com, 2015.

17. “ BaubleBar now designing monthly collections for Anthropologie ,” Fashionista, January 28, 2014. 18. “ Nordstrom Hopes to Shine Up Sales with BaubleBar’s Affordable Bling ,” Forbes, March 31, 2014. 19. “ With $10 million, BaubleBar continues its foray into brick-and-mortar retail ,” Fortune, July 29, 2014. 20. “ Online jewelry startup BaubleBar to open retail stores ,” Forbes, June 24, 2015.

25

January 12, 2016

INTELLIGENCE REPORT DEATH OF PUREPLAY RETAIL LAST MILE

More Stores = More Sophisticated L2 collects data on omnichannel retailers’ propensity to push consumers from site to store. As evolved retailers expand their physical footprint, their in-store and omnichannel execution becomes more sophisticated. Based on the criteria used to evaluate site-to-store incentives, a significant positive relationship emerges between an evolved retailer’s number of stores and its integrated fulfillment score. The transition to stores is difficult; retailers must learn to balance in-store and online inventory, train sales associates and staff, implement backend website changes, and create a seamless multi-channel experience. Yet as evolved retailers scale, implementation becomes easier and relatively cheaper, with a more gradual learning curve at each new store.

Death of Pureplay Retail: Integrated Fulfillment Score vs. Number of Stores October 2015, n=19 Evolved Pureplay Retailers

12

R 2 = 0.30542

Yogibo

10

Rent the Runway

8

Frank and Oak

Athleta

6

Integrated Fulfillment Score Data Points Online Purchase / In-Store Pickup Online Reservation / In-Store Pickup Online Purchase / In-Store Return Real-Time Store Inventory on PDP Real Time Store Inventory during Checkout Curbside Pickup Displays Online Stock Availability Uses Zip Code to Estimate Delivery Date on PDP Ship-From-Store

Bonobos Fulfillment/Integrated Inventory Score 4

2

Warby Parker

0

0

20

40

60

80

100

120

Number of Stores

Source: L2 Intelligence Report: Death of Pureplay Retail, January 2016.

26

January 12, 2016

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