Scaling the DTC Jungle: Walmart’s Amazon Envy and the Bonobos-sized Misadventure

Last week, Walmart announced their decision to divest from the fashionable men’s clothing label Bonobos, selling it to WHP Global and Express Inc. for $75 million. Walmart, which initially bought the brand in 2017 for $310 million, is suffering a significant loss from this sale.

In a statement, Express Inc.’s CEO Tim Baxter remarked, “Bonobos is achieving sales growth in the double digits, and we aim to maintain this momentum while simultaneously capitalizing on operational synergies and other cost-saving opportunities.”

So if Bonobos is still growing, why is Walmart selling it? 

Misaligned Strategy

We could offer a simple, superficial answer such as: Walmart’s experiment to become more relevant to higher paying, more educated consumers by buying a number of DTC (Direct to Consumer) clothes brands failed. 

Over the last few years, Walmart bought the following brands:

• Bonobos (2017) - A trendy menswear brand.

• ModCloth (2017) - A women’s fashion retailer known for its vintage-inspired clothing (Walmart later sold ModCloth to Go Global Retail in 2019).

• Eloquii (2018) - A plus-size women’s fashion brand, acquired to expand Walmart’s product range.

• Moosejaw (2017) - An outdoor recreation apparel and gear retailer, bought for $51M and recently sold to Dick’s Sporting Goods for undisclosed financial terms (which is never a good sign). 

The announcement following Moosejaw’s sale is eerily similar to the one following Bonobos: 

“‘Bonobos joined the Walmart family to expand our assortment and expertise in menswear,’ Walmart said in an emailed statement to Bloomberg. ‘Since acquiring Bonobos, Walmart.com has grown from 70 million to hundreds of millions of items. After nearly six years, we’ve decided it’s the right time to sell Bonobos.’”

The fact that most of these brands were sold after their initial acquisition is proof that this approach isn’t working, mainly because there’s low overlap between Walmart’s customer base and that of those brands. And while synergies are possible, they never materialized: 

“For example, more than two-thirds of customers who shop at five of the companies Walmart acquired in 2016 and 2017—Bonobos, Jet, Shoebuy, Moosejaw and ModCloth—had a college degree versus less than half for Walmart.com, and more than 57% live in households with annual income in excess of $75,000 versus 41.5% for Walmart.com shoppers, according to a Bizrate Insights analysis based on data from nearly 1,000 consumers who shopped online in April 2017 at Walmart.com and the other five companies’ websites.”

There’s no question that Walmart’s acquisition spree broadened the scope, but it didn’t yield the necessary profits to maintain these brands, prompting the company to reevaluate its e-commerce strategy and sell many of them. 

Experimenting is not bad, so we shouldn’t fault Walmart for these acquisitions. 

Some may say that this is similar to what Walmart did in 2010 when the firm announced that: 

“‘We are going back to basics in terms of the product,’ Castro-Wright said in a June presentation. ‘We do well when we sell everyday needs for customers, from socks and underwear to jeans and t-shirts -- that is where we excel.’”

So Walmart will continue to sell apparel, but the less fashionable and trendy ones. This may also be part of a broader strategy of focusing on charging stations, health care, and fin-tech rather than expensive retail. 

So one explanation is that the DTC model just doesn’t fit Walmart’s strategy. 

But I think there’s another explanation, a deeper one: the fact that the DTC model is just not scalable. While it’s a model that can easily grow with the right products and marketing strategies, the amount of capital it requires is quite significant so there’s a chance that the returns generated are not enough to justify the investment.

 Let’s delve deeper, and before we do, let’s talk about Bonobos. 

The Bonobos Retail Model

Many of you may already be familiar with Bonobos, but it’s worth understanding their innovative approach in more detail. Bonobos started as an online-only retailer, initially offering a limited product line focused on men's trousers. Their key feature was offering very few styles, available in numerous colors and sizes, enabling customers to potentially find a better fit.

Even when they later expanded to physical stores, the products were not carried in-store. The stores were called “Guide Shops” since customers could come, try, and get measured, but would receive any purchased items at a chosen address. 

While this may seem like standard practice, it’s quite innovative, especially at the time Bonobos started. 

So let’s look at their initial value proposition (primarily with pants): limited variety (at least in terms of fits), long waiting times (compared to just shopping retail at J.Crew, for example), better customer service (the Guide Shops aways had pleasant and knowledgeable staff), and reasonable prices. 

When it comes to supply chain, I always return to my mantra: “Tell me what you’re not good at, and how you use that to be great at something else.” 

The fact that the firm didn’t carry products in their stores allowed it to pool inventory and reduce inventory costs (since inventory was stored in a centralized warehouse without the need to be shipped to specific stores). It also reduced the need to discount products later. Retail is all about selling products at full price. The moment a retailer discounts products is also the moment they lose money. 

Their limited variety allowed production to be more efficient, to utilize economies of scale in fabric purchase, and to offer a wide variety of sizes. It also allowed the staff to be knowledgeable regarding the specific fits (which can’t be said about the store associates at Macy’s). Finally, the limited styles meant that once you found your style, you could just keep ordering more of the same in different colors or sizes (through their app or website), creating a strong alignment between their value proposition and their supply chain strategy. 

My supply chain mantra also has a marketing counterpart: “Target customers that love you for who you are and are willing to overlook what you’re not good at.” And while this could very well be the ultimate marriage advice, it’s not. 

So who are these customers who are willing to overlook both the long waiting time and limited variety? 

We call them Men. 

Men (and I know I’m oversimplifying) don’t particularly like variety, and derive little utility from carrying a store-branded bag. So the things that Bonobos was not good at were, in fact, features that their customers liked. 

More specifically, customers (men) who were buying their first pair of pants without the assistance of a family member since they were now out of college and had a real job at a firm where the dress code didn’t allow jeans, but didn’t require a suit either. 

The Showroom Effect

As mentioned, Bonobos initially started by selling exclusively online, but quickly realized that it may be necessary to have physical locations where customers can come and try on clothes. So they came up with the idea of the Guide Shop.

In my opinion, this was the most innovative part of their model. 

In their research paper Offline Showrooms in Omni-Channel Retail: Demand and Operational Benefits, my colleague Santiago Gallino and former colleague Tony Moreno, study this exact system (i.e., where the store is merely a showroom, and order fulfillment is done via the online channel).

Using quasi-experimental data on showroom openings by Warby Parker (possibly the most successful DTC eyewear retailer), they find that showrooms: 

“(1) increase demand overall and in the online channel as well, 

(2) generate operational spillovers to the other channels by attracting customers who, on average, have a higher cost-to-serve, 

(3) improve overall operational efficiency by increasing conversion in a sampling channel and by decreasing returns, and 

(4) amplify these demand and operational benefits in dealing with customers who have the most acute need for the firm’s products.” 

So this model seems to have huge benefits —well beyond the supply chain benefits we discussed above. 

Scaling Pains

But there is a limit to how well it works. Over time, the firm added items to its product line (if customers are looking for pants, why not add matching shirts, or jackets, or even socks?). 

In time, it became evident that the physical store needed to carry some inventory since some customers will want to pick up a shirt right away (imagine you’re at lunch and you spill pasta sauce on your shirt!). 

So the firm launched a new model: 

“Bonobos has been quietly piloting a ‘try before you buy’ service in three of its Boston-area guideshops and is looking at expanding the service to the West Coast. Tests in the pilot have been successful as a way for the company to get existing customers to continue coming to stores…Now, under new CEO Micky Onvural, Bonobos is looking at how it can cater its guideshop model to shoppers with different habits, specifically by letting some customers now walk out of the store with product in-hand.”

In an effort to better meet the preferences of new Bonobos customers, the firm discovered that a majority of urban customers preferred ordering clothing items to be delivered directly to the brand's Guide Shops, rather than simply trying on the available in-store options. For instance, if a customer specifically wanted a pair of navy Chino pants, they were dissatisfied with trying on a different color (e.g., red Chinos) in the store. Instead, they preferred to try on the exact size and style of the item they desired.

While not exactly considered “carrying inventory,” the idea is still simple, albeit not as simple as their initial model (trying on in-store and delivering online). 

The complications are easily detected. Each decision strays from their initial model, adding complexity, cost, and difficulty in forecasting, and making overall scaling difficult. 

Not Only Bonobos

Allbirds, another DTC success story that’s been suffering over the last few months, also started deviating from the DTC model last year and began working with wholesale partners. During an earnings call last year, Allbirds’ CEO, Joey Zwillinger, revealed Zalando and Public Lands in Europe and the US respectively as the brand’s first wholesale partners. This followed Allbirds’ declaration in February of that year to venture into the wholesale channel.

And it’s easy to see why everyone is deviating from the original model. For starters, it requires a lot of working capital in order to grow. I don’t have Bonobos’ financial statements, but looking at Allbirds, it’s clear that their inventory turns approximately 1.5 times per year (Walmart is at 8.2). With 1.5 turns per year, you need a very high margin to justify operations. 

At the same time, the Customer Acquisition Cost is high, given the need to continue and acquire customers. Most DTC brands were built on Facebook ads targeting customers directly. Given the recent changes in Apple’s privacy policy, the effectiveness of this strategy has decreased while its cost has increased. 

And the financial returns over the last few months show this. Amazon and Walmart are not doing too well, albeit much better than the DTC brands:

With high CAC and operational challenges to scale (rather than just grow), the valuations of these DTC firms are hard to justify. 

This is probably what Walmart figured out. 

In many ways, while Bonobos is proof that retail can evolve by fine-tuning the online-offline retail world, it's also an example of the limitation of “focus.” It's easy to start by focusing on a narrow value proposition, but it's difficult to grow a focused model, and the result will be reduced scalability over time. 

It also shows the difficulty of building a retail brand, and specifically fashion apparel. 

Even the most successful clothing fashion conglomerates, Zara and H&M, have experienced many ebbs and flows in their performance. 

So maybe the conclusion should not be that grim. Some firms will continue to push the boundaries of the retail envelope, just as Bonobos did, by focusing on improving an important aspect of the experience and the operations. Bigger retailers will either buy them or adopt their methods, realizing, at times, that the model used is not very scalable, but parts of it may be. 

And while these firms may not be sustainable in the long run, their impact will outlast them.