How retail can succeed in a fast-evolving market

Over the past decade, our shopping experience has transformed from window shopping to one-click online checkouts, from fitting rooms to at-home try-on’s, and from branded shopping bags to cardboard shipping boxes on our front porch. Retail has been disrupted by the ascendance of Amazon and e-commerce, the rise of data and new technologies, the new expectations of GenZ customers, and much more. With many new trends, it is not surprising that retail has grown increasingly competitive.  And needless to say, COVID-19 has only accelerated retail’s advancements and level of competition.

In such a dynamic and competitive market, it is often challenging to make straightforward predictions as a venture capital firm. However, we’ve found the Kahn Retailing Success Matrix to help guide our investment decisions in retail companies, highly recommending it to venture capitalists and entrepreneurs.

About the Kahn Retailing Success Matrix

In her book, The Shopping Revolution, Wharton School Patty and Jay Baker Professor of Marketing Barbara Kahn effectively explains her guiding framework to understand how a company can emerge as a market leader in today’s ever-changing world of retail, also showing why many retailers are slowly disappearing. With her Retailing Success matrix, Kahn advocates the 2 fundamental principles:

1. Retail Proposition: customers are willing to buy something they want from a company they trust
2. Superior Competitive Advantage: to win over customers, retailers must provide products and services that are better than their competitors’

Kahn suggests that to be a market leader, retailers must provide superior value in at least 1 dimension of value, and to excel in competitive markets, it is necessary to be present in two and challenging to be in three or more.

• Lead on Product Brand: retailers offer greater brand superiority, leading to customer confidence
• Lead on Experiential: retailers offer enhanced customer experience, leading to a sense of increased pleasure
• Lead on Low Price: retailers offer operational excellence, lowest costs, efficiencies, leading to greater savings
• Lead on Frictionless: retailers create an easy/seamless customer experience, leading to greater customer convenience

Applying Kahn’s Matrix

Red & Blue Ventures has invested in a variety of innovative direct-to-consumer retail brands from the University of Pennsylvania ecosystem including Harper Wilde, Primary, rmdy, Burrow, and Colugo, in addition to Warby Parker from our prior fund. While our portfolio companies in the retail space range from bras to sofas, the common thread that connects them is not only that they are digitally native brands (DNVBs)—brands that are in control of the entire consumer experience handling logistics from the factory to when they reach their consumer—but they also they follow Kahn’s principles.

Customers are willing to buy from them because of their high trust. This trust is built through DNVB’s hyper-customer-centric focus. DNVB’s must be very attentive to their customers’ needs and design meaningful solutions that they’ll use.

For instance, one of our earlier investments under our previously branded fund, Mentortech Ventures, is Warby Parker, a modern eyeglasses company founded in 2010 in Philly, by Neil Blumenthal and Dave Gilboa from Wharton. Kahn refers to Warby Parker as “prototypical DNVB” for its innovative implementation, having strengths in all dimensions of the Kahn Retailing Success Matrix. 

Red & Blue Ventures’ Portfolio Companies

Warby Parker

Being one of the first investors of Warby Parker. which went public in September, we were particularly proud to see that Kahn examined the company in both her first and second editions of her book. Kahn discusses Warby Parker’s strategy in rivaling its competitive giant, Luxottica, in the eyewear business. She goes into depth about Warby Parker’s competitive advantage in the company’s especially strong Lead on Product Brand and she describes the company as having a “maniacal” focus on users’ needs. 

Warby Parker was able to convince customers to purchase glasses online without trying them on in the traditional sense. While this may seem like a contradiction, the company was able to succeed through their innovative “Home Try-On Program.” Home try-on’s bring the shopping experience online, allowing for customers to request free glasses frames to be shipped to them and try on for free before purchasing, thus eliminating the “middleman” who provides glasses try on in stores. In the long term, this also helps on costs, selling trendy glasses at a more affordable price, further catering to consumers.

Warby started out offering fairly basic glasses at a low price with styles that appealed to younger "hipster" millennials and Gen Z's. The brand was reinforced by articles in publications such as GQ. They have since expanded upon this through collaborations with celebrities and design leaders. After a few years, they opened physical retail stores, for a more frictionless experience, which also reinforced the brand and are fun to be in to cover the experiential quadrant. They are now in all four quadrants and now trade in the market capitalization of $7.5 billion.

Burrow

Having a greater focus on consumers’ needs places DNVBs in a prime position to eliminate pain points. An example to demonstrate this is Burrow, one of Red & Blue Ventures portfolio companies, founded by Stephen Kuhl and Kabeer Chopra which specializes in selling furniture online. As you might imagine, one of the biggest pain points of buying a sofa is going through the very arduous process of moving it into your home. Burrow eliminates this issue through their modular design of sofas—sofas conveniently arrive at your door in cardboard boxes and require a feasible assembly process. Based on Kahn’s matrix, Burrow ultimately Leads on Frictionless, while also developing a strong brand at an accessible price. Burrow did move prematurely into experiential stores while the product design and manufacturing were still in transition.

Retail has been a dynamic space over the past years and it has only been further accelerated by the COVID-19. In a more remote and sedentary world of the pandemic, it is no surprise that Warby Parker’s and Burrow’s sales have increased. Our other companies which also follow Kahn’s philosophy for DNVBs have also performed well. Harper Wilde creates more comfortable and personalized bras, Primary provides basic essentials for kids’ clothing, Colugo makes compact strollers for on-the-go urban parents, rmdy creates enjoyable-to-eat, science-backed daily digestives. 

Their growing success in a great time of uncertainty shows the significance of Kahn's framework in making good investments and building great companies—it is important to be attentive to users’ needs through enhancing product and customer experience.