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VOICES

Transformative Retail vs. Convenience

January 29, 2015, 8:00 AM PST

• 
• By Ricky Joshi, Co-Founder, Saatva

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The past two decades have seen e-commerce companies turn the world of retail on its head. Numerous startups have become major outfitters, and there is more transparency than ever.

Today, for example, you can purchase a pair of Nike Air Max shoes in a brick-and-mortar store, or you can buy them more cheaply and conveniently online via Zappos. It may seem that this choice delivers the ultimate in value to consumers, however there are limits to this model. The core brand, Nike, is still extracting a strong margin for this pair of shoes; it’s only at the end of the value chain (Zappos versus store) where consumers benefit because of greater efficiency.

But now there is a second revolution in e-commerce — direct-to-consumer brands with their own products that manage the entire supply chain. Essentially, they are both Nike and Zappos in one.

E-commerce companies that are figuring out this vertically integrated solution — controlling brand makeup and presence, product construction and distribution — take out a much more massive section of the cost stack. These companies are doing more than bringing efficiency to retail, they are bringing efficiency to the entire manufacturing and supply chain process.

In other words, the real power of this new type of e-commerce is in its ability to fundamentally change industries from beginning to end, instead of just adding convenience. And the winner is the consumer.

The eyeglass market

Warby Parker is perhaps the most talked-about example of a vertically integrated e-commerce disruptor. When it first entered the market, the eyeglass and sunglass world was dominated by Luxottica, which controlled 80 percent of the market. Luxottica accomplished this by not only owning the major brands in the space, like Ray-Ban and Oakley, but also owning retailers like Sunglass Hut, LensCrafters and Pearle Vision. With the market cornered and with industry-wide collusion, the worst kinds of business practices developed — deteriorating product quality, exorbitant prices and purposeful obfuscation.

The entrance of Warby Parker did a lot more than make buying a pair of glasses more convenient — it changed how the market fundamentally operated. Instead of simply re-selling Ray-Bans and Oakleys, Warby Parker created its own brand, and managed its own product development and supply chain. By wiping out overhead costs and needless brand markups, glasses became cheaper. The company operated with transparency in its manufacturing, brand and pricing, inciting customer loyalty and, in turn, inspiring customers to spread the word at a remarkable pace.

In overall market share, Warby Parker still remains a small player in the eyewear space, but its effect on the market has been very significant.

The mattress market

The broken market I’m most familiar with is the mattress market. Here, shoppers are left waiting for deceptive sales, dealing with confusing products, and finally dealing (or not dealing) with customer service and warranty issues. Price comparison? Forget about it. Identical mattresses are mislabeled and priced differently among retailers, most often leaving the savvy researcher in a quandary.

But until recently — much like the eyeglass market — there weren’t many other options. The customer had to go to a store and deal with products built by a small set of manufacturers in collusion with a small set of retailers — a system entirely designed to pad both groups’ profits.

This has changed now that e-commerce mattress brands have started to sell direct to consumers online.

Nearly every niche of the mattress market now has a vertically integrated player. Need an expanding mattress that can be delivered in a box to your apartment? Casper and Tuft & Needle offer great solutions. Interested in a more luxurious, innerspring mattress that can be professionally set up in your home? Look to Saatva (full disclosure: I am a co-founder).

The point isn’t that buying a mattress online is just more convenient or cheaper than walking into a store. Of course it’s both of those things. What really matters is that it’s correcting a badly broken market where consumers were seen as bank accounts instead of as people. The introduction of an honest and transparent approach within the e-commerce world by brands that value the customers’ satisfaction, product quality and loyalty (since the success of their brand directly depends on it) makes the entire industry better off.

The next market

Mattresses and eyeglasses are far from the only markets desperately in need of fixing — oligopolies and manufacturer/retailer collusion exist in markets ranging from furniture to home goods. All are industries with structural inefficiencies that extract value from consumers instead of delivering value to consumers. And it is vertically integrated e-commerce that is the best poised to disrupt these industries.

We’re entering the era of e-commerce in which no incumbents are safe; companies can no longer rely on monopolies or confusing business practices, and consumers benefit in a greater way than ever before. Welcome to the golden age of e-commerce.