Public retailers are currently doing 1 thing right and 1 thing very wrong.

Larger Retail companies have made a big step forward in admitting that their future growth will come through acquisitions. Whether it be L’Oreal, Estee Lauder, Coach or Kors, in recent months each have admitted that they need to look at the innovation of other companies and make acquisitions.

However, they are making one big mistake, akin to the mistake Blockbuster made in 2008, when the CEO said:

“Neither RedBox nor Netflix are even on the radar screen in terms of competition — It’s more Wal-Mart and Apple.”

Instead of looking at the Kate Spade’s and Jimmy Choo’s of the world, they should be looking at the Netflix of retail, the disruptive players, which are the Digitally Native Vertical Brands.

They know retail rule 101 better than anyone — KYC (know your customer).

The failure of retailers to fully know their customer inside and out causes significant problems. The in-store experience provides limited data on customers, gaining no insight into who their customer was, whether they were coming back and what their purchase behavior was.

Digitally Native Vertical Brands (DNVBs) and innovative eCommerce businesses, on the other hand, hold the relationship with their customer core to what they do and know everything about them:

Rothy’s*

Rothy’s know exactly which groups are loving their comfortable shoes as they are liking and sharing the love with friends over Facebook. We can see the true word-of-mouth effect where sales can be seen in small pockets where a few are bought and then it explodes and tilts to many in the neighborhood. Complimenting organic growth with social media has been a strategy that has worked well for Rothy’s as we all see them on Facebook. At the moment, Facebook is an increasingly expensive channel for everyone but if customers are targeted efficiently it can be a key driver of your growth.

Zola*

Zola know exactly who their customer is and how to find them, as their customers self identify themselves when they announce they are getting married on Facebook (often they announce it that very same day). The recent launch of Zola’s wedding website is an excellent tool for customers to show their changing needs and style preferences that can be consistent throughout their own website, registry and whole wedding.

Glossier

Glossier used their popular blog, Into The Gloss, as their moat where they became a trusted voice and authority in beauty, earning them the right to then sell beauty. They used this captive audience to find their early customers who became the brand’s evangelists. They understood the customers changing needs by staying curious and asking their customers what they value in their products. This knowledge was used to introduce products, such as the serum, after their customers were asking them for it and telling Glossier what was most important to them in a serum and why.

The Honest Company*

Honest made the decision early on to focus on their own channel before diversifying into wholesale. This allowed them to know everything about their customer and how they shop and then to really own the relationship and build a true brand. Having a celebrity founder who is 100% committed also gives the brand a lower CAC (Customer Acquisition Cost) and strong growth trajectory in the early brand building days.

Dollar Shave Club

DSC found their customers through a viral marketing campaign on YouTube, with perhaps the cheapest CAC of any marketing campaign in history. They stayed focused on the hero product, the razor, in the early days and were always known for the razor before then using this knowhow to move into other products and really own the bathroom for their core customer. The razor was the Trojan horse into the bathroom.

Bonobos*

Bonobos saw their hero product, men’s pants, as a distinguished product design which helped grow word of mouth and they were then able to leverage the pant and move into other products for their core customer. They were able to know their customer’s shopping behavior by speaking to them online and also offline with the more personal touch in their own brand stores, post the initial sole focus online.

They each had a different strategy but knowing everything about their customer is core to what they do. KYC allows a brand to target the right people, own the relationship, give the customer what they want, innovate and be truly unique.

“In order to be irreplaceable, one must always be different.” Coco Chanel

As public Retail companies continue to acquire brands that fail to innovate, fail to delight the customer and fail to gain market share in the long run they will go the way of Blockbuster. One example is Liz Claiborne with its acquisition of lackluster brands, Juicy Couture and Lucky Brand. Or PVH with its ownership of names such as Tommy Hilfiger. Another is Deckers with brands including Sanuk and Uggs, where the Deckers stock still remains at it’s 2007 levels.

I covered retail and eCommerce back in 2006 at Morgan Stanley when the only acquisitions were older, non innovative companies but this was until Richemont and Yoox both acquired Net-a-Porter. Amazon and WalMart have also made high growth acquisitions over the years in companies such as Zappos, Quidsi, Bonobos and Jet. This is just the start. If a retailer in tomorrow’s world is to be successful, Kors, Coach and many others will soon be looking to the fast growth DNVBs.

My partners and I at Lightspeed are very excited about DNVBs and eCommerce as we see strong founders with a unique insight into their core customer here. It is this insight and belief that will give these brands rapid growth for years to come and will have the retailers of the future knocking at their doors.

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