Midmarket Ecommerce Report Episode 3: How Online Retailers Should Approach Physical Stores with Richard Kestenbaum

Midmarket Ecommerce Report Episode 3: How Online Retailers Should Approach Physical Stores with Richard Kestenbaum

In Episode #3 of the Midmarket Ecommerce Report, we cover how direct-to-consumer online retailers should think about approaching physical stores, the associated customer acquisition costs, questions retailers should ask themselves (right now), and how to know if wholesale makes sense. We covered lots of ground with veteran retail investment banker Richard Kestenbaum, a co-founder at Triangle Capital and contributor to Forbes.com, who has worked with thousands of retailers for more than 35 years. Also joining us was B2B public relations professional, John Forberger of Forberger Communications.

Topics covered in episode 3:

  • The biggest question Richard hears from direct-to-consumer online retailers
  • How to know if your online consumer brand should open physical stores
  • Initial questions midmarket retailers should ask themselves if they’re considering opening stores
  • The purpose of a retailer’s first physical store
  • Hidden customer acquisition costs to online retailers with physical stores
  • Why customer acquisition costs are rising and what they are
  • 2 questions every retailer must ask themselves today
  • Macro trends midmarket retailers need to be aware of
  • And much more

Check out the full transcript of episode 3 below.

Midmarket Ecommerce: [00:00:05] Welcome to Joining us today, our guests are Richard Kestenbaum from Triangle Capital and John Forberger from Forberger Communications. Gentlemen, welcome to both of you.

Richard: [00:00:15] Thank you for having us.

John: [00:00:16] Thank you.

Midmarket Ecommerce: [00:00:17] So Richard is in New York, he’s at Triangle Capital and Triangle helps retailers and related companies to sell their companies for the highest possible price, so he’s got some unique insights into the midmarket ecommerce area. And of course John Forberger, master PR strategist. We have some great questions lined up. We’ve actually spent a lot of time in the green room with Richard because we wanted to have him help us shape the questions to make sure we made this a good investment of your time because Richard’s got a lot of high level information for us. So first question I have for Richard, which is the most important question to ask any expert is, what is the biggest question that you get from people in midmarket ecommerce?

Richard: [00:00:53] You know Sterling, it varies by the time and the questions change year by year month by month. Right now, what online retailers, direct consumer brands, are asking us about is physical stores, should I open physical stores. The answer depends on how you define your business. If you say to yourself I’m an online retailer and my skills are based on getting consumers to buy my products online. Well, then being a physical store retailer is against your fundamental mission. But if you say I sell stuff. I want to sell more stuff and I want to sell my stuff in whatever way the consumer can receive it. I started by being online for whatever reason. But now that I’ve grown I have the capability of moving in a number of different directions and what should I do. In our view, opening stores makes a lot of sense. I believe if you look at the online sales of a direct to consumer brand, in the physical area surrounding the stores that they open you will find that the heat map is much more red. There are many more orders online around stores. That happens because the store is a great way of promoting the brand in a particular geographic area. So we are seeing that opening online store, excuse me, opening physical stores is an important part of growth strategy for many online direct to consumer brands. Can talk more about it if you want but in general we have a very positive view about that. Love to hear John’s point of view and continue the discussion

Midmarket Ecommerce: [00:02:54]  I have a little follow up question if that’s okay with you Richard. What’s the criteria if you’re talking to a retailer? What would be some of the things that you’d want them to be considering to drill down a little bit deeper into your question. What are some of the things the factors that they should be judging when deciding maybe he’s got a point we haven’t thought about that. How would you help them along in that dilemma that discussion they might have internally.

Richard: [00:03:14] Well I’m not a merchant I’m a banker, and so I can’t answer all their questions but opening stores is hard. It’s not just hard. It’s a different business than being an online direct to consumer merchant. Opening stores involves a number of really challenging decisions that are particular for each company like how big should the store be. What products should I feature in the store. Where in the store should they be. How do I tell the story of my brand in a store. Those are really hard questions and there’s no one right answer and the answer is different for every other store, for every other brand. In addition to that, retail space is changing and whereas it used to just be about putting stuff in a store and having access to the stuff, now it’s about much more than that. It’s about telling a story. It’s about creating events, music, film, food, discussion, community, all those things. So, stores require a lot more planning than they used to and they will require a lot more investment than they used to not necessarily in fixtures and design, but in mental energy to figure out what do I want to accomplish in a store. How do I represent in the best possible way what I think my brand is and what our brand values are not just an economic financial value of what you get when you buy our product, but what do we believe. What is the good we are doing in the world and how do we communicate that with music and film and food and people that we have visiting the store. What events can we create that will reflect what we believe our brand is. Those are really hard questions and they’re only being begun to be answered now by retailers. So, there are very few role models to look at to figure out what’s the right way to open a store.

Midmarket Ecommerce: [00:05:15] How does timing affect this issue? I’m sure it might be better or worse depending on where they are in their growth curve, but how would you address that question as far as timing of jumping out and taking that chance and actually opening a physical location

Richard: [00:05:40] When I think about the timing and the lifecycle of a company. What I’m thinking most about in terms of opening stores is do you have the time. Entrepreneurs are necessarily working 24/7 and once they get some traction in their business they have the resources, to the financial resources to get help and increase their staff. A store, a first store particularly is an experiment and you have to be able to iterate the store. It is never true that first store you open is gonna be completely right. It’s going to have mistakes. You have to be willing to invest the time, management time, to be in the store, to have senior people at the store, to discover what’s right about the store and understand what’s wrong and fix it until it’s right. There are so many variables in a physical store that it’s almost impossible to get right on the first try. So you have to be willing to invest the time, management time, to make it work. So in terms of the lifecycle there’s gotta be a commitment of time. You have to be capable of investing that time to make sure that the store really works.

Midmarket Ecommerce: [00:06:50] Sounds good. I’m gonna turn it over to John. I know he’s kind of burning question for you as well. So John why don’t you take it away from that second question.

John: [00:06:57] I do so. Richard, speaking about resources with these retailers and the investments they have to put in. I want to talk a little bit about what are the costs to them, which is their customer acquisition costs. Right. So my first question to you is what are the, as a direct to consumer brand online, what are you finding about the customer acquisition costs right now and what types of trends are you seeing around customer acquisition costs to these online retailers?

Richard: [00:07:33] When you think about a historical retailer who has a store they pay rent and they pay rent for the privilege of being in a location where there are enough footfalls in front of the store to attract enough customers to make the store work and be successful. Now, online stores don’t pay rent but they have to pay to acquire their customers. They have to get the customers to come to their site and that’s their customer acquisition cost. It’s the equivalent of rent. One of the advantages of having customer acquisition costs online as opposed to rent is that you can change your strategy. It’s very hard to get out of a lease, store lease, but it’s not that hard to change your customer acquisition strategy. What we’re seeing now is that customer acquisition costs are going up because Facebook is becoming more expensive, Instagram’s becoming more expensive and those are according to what people tell us, the two most important channels for customer acquisition right now. What we found even before there was online, is that the most successful companies are doing something that is different than what has come before them. Every now and then someone comes to my office and they say, I want to create the next fill in the blank, whatever company they think it’s great and I always want to save them, we don’t need another one of those we have one. What was great about what that company did that was so successful is that they were original. They created a way that cost them very little to generate interest in their brand and sell product. When you use dollars to generate interest in your brand the cost can only go up because with the first dollars you get the people who are most likely to be caught in your in your promotion, but then it gets more expensive because the easiest people, the people who are most likely waiting for the kind of product you’re offering, they’ve already been caught. You have to get people who are less and less susceptible and it gets more expensive over time. And Facebook and Instagram are raising the costs. The companies we find that are successful are the ones who have found a creative way, with content or other means, sometimes influencers these days, to get consumers to be interested in their brand. When you try and do it in ways that everybody else is doing it it only gets more expensive, competing for Google AdWords that only gets more expensive. So you have to find a creative way that makes your brand interesting and attractive to consumers that costs relatively little or nothing to get consumers interested. Customer acquisition cost is like paying rent and when you put a store in a high rent location that isn’t justified by the business the store can do it’s not going to work. Customer acquisition costs works the same way.

John: [00:10:37] I have a quick follow up question to that, Richard. If you were going to pass along two pieces of advice on identifying this customer acquisition costs, what one two takeaways should someone know right where right away right now from you that you would share sort of a behind the scenes secret if they were meeting with you.

Richard: [00:10:56] I would say two things. First, measure early. And if you’re not getting immediate traction, start worrying and make course corrections. And number two, am I doing, I think you have to ask yourself, am I doing what other people are doing. Am I doing this because other people are doing it and I’ve seen it work for them. Because if you’re doing what other people are doing it’s probably not going to work. So I think those two things would be really important to ask and I think if you’re doing something original and creative and you’re getting early traction, it’s probably going to work.

Midmarket Ecommerce: [00:11:37] Quick follow up to John’s followup, Richard, if that’s alright. Can you tell us a little bit more about, when you say if you’re doing when other people are doing it’s probably not going to work? I know that some ears might have gone up like mine did. I know that there’s truth in that and also somebody might take the counterargument of well that’s why it works so that’s why I should be doing it. Can you give us a little more because I know there’s a shading of detail and meaning there.

Richard: [00:12:10] Sometimes you walk into a modern art museum and you look at what’s on the wall and you say, why is that interesting i’s so simple a kindergartener could do it. And the reason it’s interesting the reason to attract attention and the reason it has value is because it was original. When the second person comes along and does it i’s not interesting anymore. Promotion and advertising and content works the same way. When you create content that copies someone else someone else’s content it’s not interesting, people have seen it. It’s doing something original that engages people and makes them say, hey I’ve never seen anything like that before, what is it.

Midmarket Ecommerce: [00:12:53] Fair enough. So final question for me, and John you might want to add to this as well, but should online brands consider wholesale? If so, which ones and why?

Richard: [00:13:14] The thing about wholesale is the margins in wholesale are much lower than the margins in direct to consumer because there is a retailer at the table who has to make a profit. So if you’re going to sell to the consumer at the same, if the retailer was going to sell to the consumer at the same price as you’re selling online they have to make a profit, they have costs and you have to charge them less than you’re selling to the consumer directly. Why would you do that. You do that because wholesalers often have a lot of reach and it can be a good way to promote your brand. Also, sometimes direct to consumer retailers have high costs themselves in their customer acquisition costs and the cost of shipping and handling products on a one by one basis the way you sell them to consumers. So if you can make the margins attractive in the wholesale business, net net, well that’s great. It is a good way of expanding your sales to reach people who could then convert to direct to consumer customers, but if it’s a way of shifting from a low response online attempt at reaching your customers to reaching more people, that’s probably not a good strategy because what you’re doing is shifting from a high margin business to a lower margin business and you are allowing someone else, the retailer, to tell the story of your brand and that gives them the power to come back to you for even yet lower prices, and that’s the problem with selling to multi-brand retailers. So wholesale can be an opportunity but when you depend on it too much it becomes more of a problem.

Midmarket Ecommerce: [00:15:02] Final question for you guys both. It’s a little bit of a surprise question, I told you guys before we might throw a little curveball but there’s no wrong answer to this. As we come to the close of 2018 and you see 2019 on the horizon. Is there any particular trends or anything exciting to you that you see coming especially that might impact midmarket retailers and I’ll leave that open to either one you guys to take a shot at first.

John: [00:15:28] Sure I’ll jump in. I think that the association between brands and partnerships coming out of 2018-2019 is something that a lot of different brands are very excited about. This is not a year to sit back and watch your competitors sort of blow by you without maybe even trying to reach out in some interesting way that as a consumer you would think, I never saw those brands lining up but this is something that makes sense. And you know we’ve seen this fusion as Richard pointed out earlier between brands in entertainment and music and culture and events, I think we’re gonna see a little bit more of that 2019 but I’m really intrigued to see where the partnerships go with film studios and also more importantly some of their competitors or people that are a little lower market than them where an association makes sense. It could be bundles, it could be deals, it could be something strictly online or something in store where you have an audio experience or a consumer electronics brand brought in to an apparel location. So I think sort of the unseen partnerships that we didn’t see in the past, they’re coming about now and I’d like to see more of those personally being in the industry and also as a shopper myself.

Midmarket Ecommerce: [00:16:47] A deeper and deeper more creative and possibly even more surprising partnerships maybe things you didn’t think of before.

John: [00:16:54] Yeah absolutely, and far outside of the norm. Yeah absolutely. So I’m going to pass this back to Richard knowing the fact that he’s spoken to that tens of thousands of retailers over the years, I’m curious what he thinks.

Richard: [00:17:07] Well I think you’re right, John. I think we are in a golden age of content and content is becoming more important. It’s more important to drive consumers and to make them stick. But I also think there’s a macro trend that retailers need to be aware of and focus on. 2018 has been a great environment for retail. The economy is rarely, if ever in our lifetimes, in the condition it’s in now. Very few people are worried about losing their jobs. There is a lot of capital spending. There’s a lot of consumer spending. Interest rates are low. Equity values are high. All those things rarely happen at the same time. And here we are. 2018 is the high watermark or is potentially a high watermark for the performance of our economy. Maybe it will continue into 2019, I hope so. It’s hard to believe it continues into 2020, but what that means is if you’re doing great in retail in 2018, well of course you are because everything around you is pushing the stream so rapidly that the flow is really strong. The question isn’t can you succeed in 2018. The question is can you succeed when it’s not 2018. So when I think about what that means for a trend is get ready and buckle in because things are going to become harder and are you ready for that. Do you have the capital resources to do it? Is your organization structured to become more effective in your marketing when it’s not as easy? Those are hard things to know in advance, you don’t find out until it’s over and it’s going to get tougher.

Midmarket Ecommerce: [00:19:03] Good answer. Thank you. I’d add a quick one just that I look forward to seeing more conversations happening around the problem space that your products or solutions solve. I think we can never overdose on communication and conversation and insight that we get from other people, hence why we do the midmarket ecommerce report. So I leave you both to your business. Thank you very much, Richard Kestenbaum from Triangle Capital in New York, and John Forberger from Forberger Communications. Thank you both for joining us here at the midmarket ecommerce report. And I look forward to speaking with you really soon. Thank you.

Richard: [00:19:34] Thank you and thanks for having me.

Midmarket Ecommerce: [00:19:35] Our pleasure.

You can see episode #2 of the Midmarket Ecommerce Report here that covers NRF’s 2018 holiday forecasts, retail tech trends, how brands are surviving, and more. Our guest was Ana Serafin Smith, Senior Director of Media Relations at NRF.

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