Sole Society Trades Margins for Awareness with Nordstrom Partnership

By Michael Carney , written on October 5, 2012

From The News Desk

Building a large scale, sustainable fashion ecommerce business is hard. The safes of venture capital firms are littered with worthless shares in companies in spaces that at one time seemed like can’t miss propositions. One of the few entrepreneurs to navigate these waters to any type of successful exit is Brett Markinson, co-founder of flash sale site Hautelook, which sold to Nordstrom for $270 million in February 2011.

Now Markinson is back in the game with a new ecommerce startup called Sole Society, a venture originally launched within Hautelook, in partnership with renowned footwear designer and former Nine West founder Vince Camuto, and then spun out at the time of the Nordstrom acquisition.

The company is being rebuilt around a hybrid distribution strategy, building a direct-to-consumer, online brand, while also leveraging bricks-and-mortar retail showrooms to add awareness and deliver a tactile experience. The company announced today that it’s partnering with the founder’s old friends to launch its new collection at and in select Nordstrom retail locations.

“Consumer behavior is shifting and we’re in an environment where a sense of aspiration can be developed and spread quickly on the Web,” says Markinson. “In-store shopping is fun and exciting, and the Web will never replace that. We envision a hybrid world where our brand can live comfortably in both places.”

Ask the serial entrepreneur, and he’ll tell you that paying tens of millions of dollars each year to acquire customers online, a strategy employed by the likes of JustFab, ShoeDazzle, BeachMint, and others, is ludicrous and in no way part of his plan. Instead, the founder plans to rely, in part, on Nordstrom’s reach to engage customers for the first time.

The belief is that today’s inherently social and digital generation of female shoppers will then investigate the Sole Society brand elsewhere online and purchase directly in the future. This isn’t just a question of bricks-and-mortar versus online, it comes down to whether others, like Nordstrom, are selling on behalf of the company or whether consumers are buying from its site directly. The end goal is to eventually arrive at an 80/20 split between direct and retail sales.

“You have an age old supply chain where brands are built through linear messaging mediums, supported by retailers that bring that message to consumers,” says Markinson. “Brands essentially rent customers from retailers. Online we own that customer relationship, and create a cooler, more aspirational brand that evolves throughout the process.”

The Nordstrom partnership went live the second week of September, and the day the brand launched on, saw a 1,000 percent spike in traffic. As a test, the companies temporarily removed the promotion and found that a new baseline was set at 300 percent of the previous traffic volume. Markinson admits that it’s easy to have these big numbers as such a small, young business, but the results seem to suggest that the customer acquisition model may work.

Like style bloggers who introduce new trends before magazines and retailers catch on, Sole Society releases a new on-trend shoe daily to its members at hyper-affordable prices. Consumers can discover, curate, and share their own personal style, recommend shoes to friends, and follow the collections of top fashion insiders.

Sole Society’s website will offer a wider selection than the Nordstrom portals but both will sell them at the same direct-to-consumer pricing of $49 to $99 per pair. Were the shoes sold primarily via a traditional retail model, like that of Steve Madden or others, they’d be marked up 100% percent or more before reaching the consumer. Sole Society offers the same quality of materials, construction, and styling, but offers lower pricing based on its blended distribution model – a pitch we've heard before

The rub, however, is that shoes sold via Nordstrom will offer the startup little to no profit margin, while those sold direct will offer the type of healthy mid-double-digit direct-to-consumer margins that are typical of the space. Where ShoeDazzle, et al spend millions to acquire customers online, and Steve Madden spends millions on print and TV ads, Markinson views the thin retail margins as a customer acquisition expense. In spite of the lost margins on this minority portion of all sales, the partnership will allow the company to reach scale more quickly, thereby improving economies across the business.

The partnership benefits Nordstrom as well, allowing the retailer to target a  more value conscious category of shopper.

“What you can’t see over the horizon, is that the retailer is not going to go away, the woman isn’t going to stop shopping at retail,” the founder says. “But retailers are challenged because they have a problem with customers getting younger, smarter, and more focused on value. They need product at the same level of quality at a lower entry price point, and this presents a conundrum within the traditional model.”

My fiancee, a fashionista in every sense of the word, tells me that that Sole Society might have the highest quality and best styling of any online shoe brand, offering real competition to JustFab, ShoeDazzle, and ShoeMint. Should the success continue in the footwear vertical, the company aims span out into bags and accessories in the future.

There are other examples of successful direct-to-consumer brands that leverage offline retail to gain awareness and distribution. Warby Parker, Toms Shoes, and new industry darling Nasty Gal are all examples, with two of three based alongside Sole Society in Los Angeles.

Asked about whether traditional brands like Steve Madden could adopt Sole Society’s strategy, Markinson went on a bit of a rant, saying:

Incumbents and denial are best fucking friends. All incumbents need denial to get up in the morning in a highly volatile, fast changing environment. Case in point, the music industry. Even though they knew they were going to get abused by the Internet, they didn’t know how to use it. Because it’s not in their DNA. Steve Madden would need to turn off his brand at retail, lower his prices, and start building consumer-facing value proposition. Could he do this? Yes. Will he do this? No way. It’s not in his DNA.

The most likely competition, he says, would come from a brand stuck at $20 million to $40 million in revenue, that has nothing to lose, and is smart enough and brave enough to blow things up and try something new.

“That said, the number of Internet guys that can design shoes, you can count on one hand,” he argues. “The number of shoe guys that can spell Internet is zero.”

This partnership isn't just about Sole Society thinking differently. Nordstrom is well out of the box here too. Most brick and mortar fashion retailers are making the same mistake that traditional media companies did in the early days of the internet – they dumped all their offline assets online and called it a day. Poof! We did the internet! Then they got killed by digital newcomers like Huffington Post or Gawker who did it better and with less overhead.

Signs point to the same thing happen with ecommerce, if the retailers don't move quickly. Ecommerce startups are dancing circles around them in terms of engagement, product development, and new kinds of user experiences. Very few legacy brands are investing in innovation to keep up. Nordstrom has been one exception. The company has acquired its way into innovative lines of business through Hautelook, and has previously invested like a VC, in Bobonos. The Sole Society partnership is another example of this progressive thinking.

Sole Society relaunched in January following the Nordstrom spinout, with an unspecified amount of funding from investors including Nordstrom, Insight Venture Partners, Lagovent Ventures, and Markinson himself. Its founders say the site is currently at a $1 million per month run rate, and grew 125 percent month-over-month in both July and August.

Like any upstart, Sole Society has a perennially uphill climb ahead of it. That said, the company has positioned itself alongside strong partners and with a genuinely unique business model. Consumers love it for the high quality at affordable prices, while still offering a tactile experience from time to time. Nordstrom is one of the most progressive of the traditional retailers which has already demonstrated that it’s willing to spend money to expand into new platforms.

Many would be afraid to sell at retail with absolutely zero margin, but Markinson believes in the what he calls “the DNA of the Web” to develop direct rapport and long term brand loyalty. It's a risky proposition, but if it works the payoff could be huge.