The Supreme Evolution of Retail

Black Friday is coming, and a popular past trend looks like it’ll massively change this year’s landscape. For the first time, shoppers plan to spend more than 60% of their holiday budget online. That figure is also only “planned” spend, rather than actual spending. When we consider some of the macro trends for consumers (consumers have more savings, COVID is hitting exponential levels, logistics and supply chains have retooled to handle more delivery, etc.), online shopping will only accelerate.

The retail experience has been getting much worst as well. Not on purpose by any retailer, but more so due to the financial dynamics that exist for so many retail brands and the more significant macro trend that has prioritized low prices.

• Private equity groups have purchased dozens of retailers over the past decade
• Private equity groups prioritize buybacks, buyouts, and dividends (and continue to do so despite dwindling sales)
• Prioritizing those actions dwindles sales, meaning that retailers are taking funds away from improving the buying experience, which comes in the following forms:
• R&D to make better products
• Operational investment to improve POS
• Employing staff to enhance the purchase experience

The decline of retail, though, isn’t just tied to the rise of financial engineering by private equity, since 1975, when discount retailers through the repeal of the Miller-Tydings Act (manufacturers were required to charge the same price to all customers aka resale price maintenance), the creation of the first discount retail lobbying group, The Mass Retailing Institute (Founded in 1969 by Walmart, Kmart, and Target), the passing of the Consumer Goods Pricing Act (repeal of the Miller–Tydings Act and the McGuire Act), and the Regan administration’s failure to enforce the Robinson-Patman Act (price discrimination in the form of discounts by manufacturers or suppliers is illegal). The Regan Administration’s failure to punish companies engaging in price discrimination by enforcing the Robinson-Patman act set the tone. For comparison, in the 1960s, the DOJ brought over 500 cases against companies violating the Robinson-Patman act, while during the Regan administration, there were only five. The shift in antitrust enforcement to a consumer-centric focus meant one thing; the US government was going to emphasize that retail drive for low prices.

This shift allowed discounter retailers to thrive. Walmart, Sears, Kmart, Target thrived in this climate, as they were able to drive out many independent retailers, grow their revenue, which also started to cripple the American middle class (buts that another post for another time). These discount retailers thrived in shifting operations and logistics to having less inventory maintenance. They were able to buy products at lower prices, spend less money on retail by having fewer and bigger stores rather than having more and smaller stores serving many more communities. Retail operations and culture have now shifted and slowly paved the way to the current demise of retail.

As discount retailers thrived on finding ways to cut costs continually, this led to the creation of Amazon. The discount retailers Walmart, Sears, Kmart, Target, etc., continued to play games of checkers to drive down costs from a physical retail space. Amazon was busy playing chess while every other retailer was busy playing checkers with one another.

“Your margin is my opportunity” — Jeff Bezos

For perspective, look at the following.

While discount retailers were sitting on their retail EBIT, Amazon was reinvesting most of that retail margin to grow its valuation by taking every single cost and turning it into a revenue opportunity.

The ink is already dry, and Amazon is still just getting started as we consider the trajectory of online sales; due to COVID, we can see the acceleration of online sales and the starkness displayed from 10 years to 8 weeks.

So as discount retailers continue to die out thanks to Amazon’s operational excellence, and the retailers who died out due to discounters resetting the table and destroying so much of the early vibrancy of retail. In many ways, because discount retailers had killed retail by making it unsustainable to have many stores that employ many different individuals with a voice that could serve each member of its community uniquely and delightfully. The actions of the early discounters on traditional retailers and crumbs left on the table by Amazon paved the way for the rise and growth of DTC 1.0. They were using online to replicate the early world of retail before discount retailers took over and changed the landscape. But many of those fizzled first DTC brands fizzled, yet the tactics and core foundations are still relevant.

• Know your Audience — the same way earlier retailers knew everything about the community it served and who lived there.
• Remove the Middle man — Don’t let anyone get in between your audience and product; early retail owners worked almost every day of the year for a reason.
• Be flexible — Creating tight feedback loops is your most significant advantage as it allows you to see opportunity and move quickly enough to take advantage of it; early retailers were always adept at making sure they could tailor any clothing, pair the proper hat with any suit, and evolve from there, which is why it was no wonder that tailors, hat shops, and suit shops were always near one another (and often owned by one family)
• Prioritize the experience — Nothing showcases knowing your audience more than making an experience that they love and appreciate; early retailers knew every intimate detail about their customers.

These steps drastically go against the typical flow of typical large modern retailers.

These observations now lead to this week’s big story about VF buying Supreme for 2.1B.

This analysis won’t take a look at whether or not Supreme will be able to maintain it’s cult status or veblen reputation of “streetwear luxury” but rather look at the market dynamics of the deal.

Over 60% of Supreme’s sales come from online. It only has 12 physical retail stores, and its omnichannel playbook has set the standard. Supreme customers interact with the brand long before they enter a store. From email lists to virtual tickets to third-party websites, these shoppers invest their time into the Supreme brand and will wait in lines of any length to get inside. Supreme has an elementary eCommerce site, but make no mistake it is the DTC king.

So how is Supreme such best in class, and what are the components that make the brand so compelling:

• Superior audience knowledge — To get to a drop day, you have to sign up to the email list, enter a lottery, show up at a certain, and then have the ability to purchase, which is tied back to a CRM for them. Supreme knows your price point and brand love in ways that other brands have no idea how even to fathom.
• Robust product launch strategy — Supreme has two annual seasons with large drops that drive insane demand. In between then, they use that plethora of audience knowledge to partner with the right brands to drive more hype and demand for the Thursday drop days.
• Cult-like consumer experience — There are unwritten rules obeyed when waiting in line at a drop day. Consumers dutifully wait in line to get their chance to get in and buy in the store. There’s no conversing to strategize any resell with others in the queue.
• Comprehensive merchandise strategy — Product collaborations drive a lot of hype for Supreme. Still, brand loyalty and love for t-shirts with a red logo have proven the power of brand loyalty regardless of product quality. Supreme’s immense audience knowledge and data allow it to expand into product categories the same way retailers try to use private labels, except most private labels don’t have Supreme’s veblen status.

Supreme’s model represents what an evolved DTC can look like and what most likely will become the evolved DTC playbook.

• Intimate audience knowledge that allows the brand to drive its prestige, status, and demand, while also identifying the best low hanging private label opportunities
• Operationally flexibility, that is set up to track users across all touchpoints, allowing all experiments and tests to yield far greater results than the typical Salesforce CRM will hold
• Compound that audience knowledge with operational excellence to drive an exceptional buying experience that brings cult-like loyalty to your brand.