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Web Smith On Selling The Right Way On Amazon, And The Future Of Ecommerce Returns

web-smith-on-selling-the-right-way-on-amazon,-and-the-future-of-ecommerce-returns

The big kahuna of direct-to-consumer (DTC) commentary is not coastal, presiding neither from Manhattan penthouse or Malibu beach house. Instead, in this way, Web Smith is a man of the people. Though his connections run to the highest levels of the retail world, the founder of 2PM, the media and investing company that exists most prominently as a very influential newsletter of the same name, runs his empire from smack dab in the middle of America.

For some time now, Smith has become the most prominent observer at the intersection of ecommerce and DTC, his voice found often in the inboxes of the business elite, who look to Smith to make sense of complex trends and thorny issues in the space.

From his home near Columbus, Ohio, Smith discusses how DTC brands should sell on Amazon the right way, why the future of ecommerce returns may not be so bleak, and why the person behind your brand can matter as much as the products you sell. “To have an advantage today, you have to have a distinct advantage over the big boys,” he says. “That’s why founder-product fit is so important. Because the one thing that these large organizations can’t fake is authenticity.”

(This interview has been edited and condensed for clarity.)

One of the earliest successful DTC brands was Harry’s, the men’s shaving and personal care brand founded in 2012. What aspects of Harry’s playbook still apply today, and what has changed?

Smith: I can’t name very many direct consumer brands that raised that much money that early. Even if you look at what Joanna [Griffith]’s done at Knix—she raised a lot of money in that last round. It was something like $53 million. But she had already proven the viability of the company. They were raking in over $100 million in sales as of the last news article. She had proven the concept. Whereas that particular class of direct-to-consumer brands—Warby Parker, Casper, Harry’s—tended to raise money a lot earlier because they could.

A lot of the high-performing companies today are taking the longer grind to at least approach profitability before raising a mega round. The companies that have launched in the second and third waves are judged a little bit differently. Figs, for instance—one of the most important things about their S1 was their profitability. You can find that attribute across a host of other [consumer packaged goods] and DTC brands that were launched after that initial wave of highly-funded direct-to-consumer brands.

Harry's razors

Corporate acquisitions are a critical and lucrative exit strategy, but Harry’s sale to a major corporation fell through due to Federal Trade Commission concerns over competition. Do you think that was a one-off decision or a new trend?

Smith: I think it was a one-off. After the initial shock, it became very clear that what set Harry’s apart was essentially their vertical nature. Harry’s owned one of the few factories that could produce these types of blades.

I’m not saying I agree with the FTC. I will never agree with them in this context, because I want positive outcomes for all direct-to-consumer brand founders. But if there was one brand that could get knocked down like this, it was probably them.

Away doesn’t own their factory. Casper doesn’t actually make mattresses. Harry’s is a manufacturer of blades. As it scales, as it becomes that 5-, 10-, 15-, $20-billion company someday, eventually it’s going to prove that in some ways the FTC was probably accurate in their assessment.

You’ve become something of an expert chronicler of successful retail founders. What are some of the common traits among iconic DTC founders?

Smith: It’s a wealth sport in a lot of ways. It takes accumulation of so many resources and connections and funding sources and PR strategies and knowing the right people to implement those strategies.

I would say that the commonality between all of them is that they could have probably done anything in the world, and they chose to launch brands. You have to decide that that’s what you want to do. I think anyone that does that and is successful in that could have probably done a host of things if they had wanted to.

Founder-product fit is a principle that you have been vocal about. Who in your mind are the founders that are most valuable to their brands in retail DTC today?

Smith: Jack [Carlson] wrote the book Rowing Blazers, so that’s one of them. Helena [Price Hambrecht] at Haus. Ben Witte at Recess. Sandro [Roco] at Sanzo. I love the spirit behind the founders at Figs. Joanna [Griffiths] is a great example of why founder-product fit matters in Knix.

Product-market fit has been the catalyst behind a lot of investment decisions. This question is equally important: Can the founder push and pull the product forward until the product can push or pull itself?

Haus cocktails

The commonality that they share is that it’s not contrived. Helena and Woody [Hambrecht, Haus co-founder] live on a farm. If you talked to Woody at any given day, all he’s going to talk about is how his substances positively impact the human mind. He will talk to you about it for seven hours at a time. That’s how much he’s involved in this process. The idea that DTC brand founders can do it just because they think it’s cool and come out of Wharton—I think that that’s a common misconception.

You’ve said you would rather see brands build slowly than chase rapid success. What are the common traps you observe DTC brands falling into in terms of moving too quickly?

Smith: One of the traps is growth for growth’s sake. Retail is an EBITDA industry. It’s always been judged by the profits that you can spin off, and how likely it is that you can spin those profits off in perpetuity. That’s how private equity firms in the public markets determine if a retail brand is worth its grain of salt.

It wasn’t until really the ease of the launch of brands that it became, “How do we arbitrage this brand to grow as quickly as possible?” And that’s just not how the public markets or private equity, who is typically the catalyst behind acquisition, ever judged the success of a company.

I’m a proponent of slow growth. In most cases, slow growth means that you’re actually focused on the right things. You’re not pumping huge sums of money into advertising sources that are not sustainable. You’re not using those unsustainable advertising sources to bandage over incompetencies within the walls. Because eventually those incompetencies come to the light.

What have you seen to be the truest drivers of conversion rate in retail ecommerce?

Smith: The idea of vanity metrics, likes or impressions and all of these things that we’ve judged the brand by over the last decades, is giving way to [conversion rates] being the ultimate measure of a brand’s success, or a creator’s success, or a media company’s ability to impact its audience.

Look at 2PM. If no one’s buying subscriptions, then I’m failing as a publication. If you’re a creator and selling merchandise and you have millions of YouTube subscribers but no one’s buying your merchandise, it’s probably an indication that your audience isn’t as loyal and passionate as they could be.

For retailers, if they’re paying for public relations in these publications that are featuring the brand and advertising that the brand got X, Y, Z impressions, or this many people noticed the brand, that notion is giving way to the simple fact that if a person’s looking at a product or a brand or a creator, that person will be driven to compensate that body, that organization, in some way, shape, or form. That’s the ultimate measure. We’re seeing that in the NFT space now. We’re seeing that in a number of forms of decentralized finance. It all began with ideas that stemmed from simple retail ecommerce.

Boxes

A serious side effect of increased online purchases is the corresponding increase in returns. What do new DTC brands need to know to not get caught flat-footed here?

Smith: There’s actually an organization that deals with this. Loop Returns is great about their branding of post-returns commerce. By that I mean: What happens to the refund or the return to prevent it from becoming a refund? I think what we’re going to see is there will be a way to prevent the loss of revenue by promoting post-return marketplaces.

Let’s say instead of pure ecommerce returns, [the product]’s going back to the 3PLs, and the 3PLs are doing [quality assurance]. And the brand that has that average order value on the hook for a potential lost sale is relieved when that product is then purchased by someone else. And that order is fulfilled and that product loss is now net zero, or even essentially what they expected before the loss, before the return sale. We’re going to see a lot more of that, given that the secondary market for returns will spur a lot of interest in larger companies and platforms building marketplaces of their own.

Selling on Amazon provides access to an amazing logistical network and customer base. But you have to “pay to participate,” as you’ve said, meaning that your brand representation may suffer in some ways. What relationship do you think a DTC company should have with Amazon?

Smith: For one, I think that agnostic packaging will be a lot more commonplace in the next five years. As it relates to Amazon, it is a gift and a curse.

With [Mizzen and Main], for a while our strategy involved selling our basic shirts on Amazon as a top funnel capture, and selling our more premium shirts and our more infrequent styles on our own Shopify-hosted site. I’m all for distribution. And Amazon is not in my top two or three of companies that I would want to distribute to. But I understand why brand founders do it.

This is still somewhat of a nascent industry, where a lot of this progress has been made over the last 14-15 years. Brand founders have a hard time understanding sometimes that it’s a contact sport, where people are going to knock you off and undercut you and do all these things. Just be aware that that’s the industry that you’re fighting in before you take part in Amazon’s practices. We are often protective in our own little direct-to-consumer bubble, because we have brands that won’t compete against one another and everyone plays fair. But in the greater system, the game’s not really that fair at all.

DTC is no longer a novelty, and traditional retailers have had to dip into DTC to stay relevant. What are the things that DTC brands have borrowed from traditional retailers, and vice versa?

Smith: Direct-to-consumer brands obviously borrowed the concept of thoughtful, expensive, well-engineered packaging and marketing. That’s only a 50-to-60-year-old notion in the industry. Before that, products were just products.

Now, a lot of the incumbent companies are becoming better at DTC strategies than the actual brands that began as digitally natives. These are large conglomerates like Procter & Gamble and Unilever, whether they’ve done so by acquisition or by bringing in talent to help them navigate a new ecosystem.

A lot of these major retailers are becoming really good about either private label or building brands of their own that resemble the same spirit of the DTC industry. For a lot of these new brands, you’re entering the space where the old guard can compete with you. The arbitrage opportunity of beginning on the internet is essentially over.

What are the ways in which partnerships between retail startups and traditional retail brands make the most sense to you?

Smith: Naturally, the way that the consumer mind works is we appreciate brands with heritage. The older a brand can make themselves feel, the more likely you are as consumers believe that this brand has a long-term outlook for their industry—[that] they’re going to be around for a long time.

Kith BMW car

When you see the Kith partnership with BMW or the Aimé Leon Dore partnership with Porsche, what they’re doing is they’re reaching back into legacy brands and saying, “Please co-sign us, because we want our consumers to know that we’re not going anywhere.” It’s really important for a lot of other brand founders to understand that these strategies are more than partnerships to sell goods. They are partnerships that can positively impact consumer psychology.

Do you think more established companies also benefit from being affiliated with newer companies?

Smith: It depends on the type of company. When Rowing Blazers did a deal with FILA, no one was talking about FILA online. So that provided some credence to them, while also doing a service for Rowing Blazers.

These are companies that aren’t often in the digital space or the digital media limelight. By working with these younger brands, you’re almost guaranteed to have write-ups in certain publications that you wouldn’t have achieved on your own, even if you paid for it. That’s certainly a benefit for these legacy companies that have been around for a long time.

You are friendly with many of the founders and brands you cover. How do you navigate your coverage of companies and people that you have developed personal ties to?

Smith: One thing I pride myself on is objectivity, even for the companies that are within the 2PM portfolio. I often will get asked by a founder why I’m highlighting other companies. 

I often have to have conversations about why my coverage or my opportunities presented to companies outside of my own personal interests is just as important as those personal interests themselves. The overarching strategy and mission of 2PM is to move the industry forward. And you cannot do that with your own personal interest as the soul of your focus.

Part of the reason why I think people are even attracted to 2PM and what I write is because they know that whatever I do publish, whether it’s a tweet or a database or an essay, it’s from the heart. I probably really, really believe that thing. I hear it from people that are very high up in this industry, that they love that about me. I can assume that if I don’t hear from people in the same industry, that they don’t love that about me at all. That’s just something that I have to deal with.

2pm logo

In addition to your newsletter, part of 2PM’s business model is investing. You hold stakes in many DTC companies yourself. What is the rough formula you use to evaluate the future success of a DTC brand?

Smith: We’ve already touched on how well I think the leadership is suited for the industry and the time that they’re in.

Clean cap tables—to me, that essentially means, “Have they raised efficiently?” I typically believe that if a company raises too much money, they are enabling themselves to mask over inefficiencies or weaknesses with capital, and so I look for the companies that don’t have that privilege.

I look for the companies that I believe are moving the industry forward. And by “believe,” that’s clearly a subjective analysis. It’s based on things that I can measure and things that I’m not sophisticated enough to measure. I know that they’re true, but I’m not sophisticated enough to put it on paper as a mathematical equation.

I take in information all day, every day. I’m in this space from the crack of dawn until two o’clock in the morning, almost daily. I feel like I can assess things in a way that maybe isn’t the best on earth, but is sufficient enough to make firm decisions that I know I won’t regret, whether they succeed or fail.

Who do you see as the next generation in DTC? Which brands do you put your money on to become the next major players in this space?

Smith: I’d have to say any brand that’s focused on others. The brands that are founded by minorities, women, immigrants, people that maybe didn’t have the Ivy [League] pedigree or the east coast credentials. As ecommerce continues to penetrate society and grow its influence on our habits, obviously that means that it’s going to trickle down to places that maybe didn’t have access to that same technology 5-, 10-, 15-years prior.

As the technology itself is democratizing, so are the people that are interested in the products that the internet has to offer. The beauty of the internet is that you get to see people that look like you, sell you things that you wish that you could have sold other people if you had the opportunity.

I think the future is going to go to a lot of those people. Because, frankly, it’s the “others” that are the majority of the world, and ecommerce is just now reaching them. It’s just now leaving the upper-middle class, the wealth class, coastal communities, and moving to the rural parts of the country. It’s opening channels that will get new products to people that have felt probably a little bit neglected over the years.

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