The showroom at the New York headquarters of Warby Parker, one of a wave of e-commerce companies trying to build premium brands at discount prices by going straight to manufacturers.

Michael Falco • New York Times ,

Warby Park co-founders David Gilboa, left, and Neil Blumenthal. Their eyeglasses sell for $95 a pair.

Michael Falco • New York Times ,

Karin Shieh and Christopher Sun, co-founders of Crane & Canopy, release new duvet covers and sheet sets every other week based on the latest trends.

JIM WILSON , New York Times

E-commerce companies build brands by cutting out middlemen

  • New York Times
  • April 2, 2013 - 6:32 PM

When the founders of a start-up that sells eyeglasses online, Warby Parker, began investigating why designer glasses cost several hundred dollars, they discovered that everyone in the process was taking a cut: designers, manufacturers, brands, wholesalers and retailers.

But what if they left out most of those people? “I had been to the factories and knew what it costs to manufacture glasses and knew the cost didn’t warrant a $700 price tag,” said Neil Blumenthal, a founder of the company. Inspired by glasses they found in their grandparents’ attics, the founders sketched a few frames, hired the same Chinese factories that make designer glasses and started selling directly to consumers online. By doing so, they eliminated enough of the cost to charge customers just $95 a pair.

Warby Parker is part of a wave of e-commerce companies trying to build premium brands at discount prices by cutting out middlemen and going straight to manufacturers. They make everything from bedding (Crane & Canopy) to office supplies (Poppin), nail polish (Julep), tech accessories (Monoprice), men’s shoes (Beckett Simonon) and shaving supplies (Harry’s). The result is generally cheaper products for consumers and higher profit margins for the companies.

Big retailers discovered long ago that controlling the supply chain benefited their bottom lines, which is why companies like Wal-Mart and Whole Foods sell many products under their own brands. At Macy’s and Kohl’s, such private label brands make up almost half of their sales.

Start-ups have traditionally struggled to match those efforts. They do not have as much brand recognition as big retailers, and persuading consumers to take a chance on, say, Warby Parker eyeglasses instead of Prada’s can be difficult.

“The challenge is, if you’ve never heard of the brand, you wonder, ‘Should I buy it when it’s 20 percent cheaper?’ ” said Raj Kumar, a supply chain consultant at AT Kearney. “Or should I buy a brand I trust?”

What is empowering the upstarts now is the Web’s ability to reach lots of consumers without the costs of operating physical stores as well as a change in manufacturers’ willingness to work with small brands.

The founders of Deal Décor, whose model was to sell furniture directly to customers, worked at Target and Home Depot Direct before starting their company. They said they saw an opening after the recession hit.

As home sales in the United States declined, and furniture sales went with them, Chinese furniture factories had excess capacity, said Craig Sakuma, co-founder of the company. The factories were now eager for business — but they were concerned about getting paid, as they were already chasing down payments from errant retailers.

So Deal Décor approached manufacturers with an appealing proposal: It would pay them as the products were shipped, rather than a month or more later.

Unlike traditional furniture retailers, Deal Décor’s model was to sell couches or bookshelves on its website before they were in production. It timed the deals for when a factory was producing similar items for other clients and could easily add Deal Décor’s order. Deal Décor ordered the exact quantity it had sold and had the items shipped straight from the factory to customers eight to 16 weeks later.

Because they are not dependent on third parties, these e-commerce companies can also introduce products much more quickly.

Crane & Canopy, for example, releases new duvet covers and sheet sets every other week and designs textiles based on trends on Pinterest and elsewhere, instead of planning collections seasons ahead of time like most brands, said Karin Shieh, its co-founder. “We want consumers to get those products immediately, so we connect our customers directly with the factories that are currently making bedding for Bloomingdale’s, Neiman Marcus and high-end brands,” Shieh said.

But Crane & Canopy sells the bedding without all the extra costs. A queen-size white pintuck duvet cover on its site, for instance, is $119, while a similar one by DKNY is $400 at Bloomingdale’s.

These direct-to-consumer companies are raising large sums from investors, who see great potential in the idea. In February, Julep raised $10.3 million from Andreessen Horowitz and Maveron.

This year, Warby Parker raised $42 million from investors including American Express.

Still, managing a product’s entire supply chain has challenges. One, said Kumar, the supply chain analyst, is controlling quality at factories abroad. Another is marketing costs to find customers.

Deal Décor learned this firsthand recently. After 10 months in business, it was on track to have $2 million in revenue this year, and its margins were 20 to 30 percent, said Gregory Lok, a co-founder. However, marketing costs to attract customers to an unknown brand were too expensive. Deal Décor is shutting down operations, and Lok is working on a new business.



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