In the 5th part of the startup failure series, we look at the brand ‘Brandless’, an e-commerce startup that offered private-label alternatives to branded household, personal care, baby, and pet products at a fixed price of US$ 3.
Headquartered in California, U.S., Brandless announced a shutdown of operations in early February 2020, citing overcrowding and heavy competition in the direct-to-consumer e-commerce sector. But within a span of 6 months, Brandless re-opened with a trading name of Onward Partners, LLC, a joint partnership between marketing firm Ikonifi and Clarke Capital Partners. Currently being led by Ryan Treft, Brandless is back as a quieter company focused on slower growth.
About Brandless
Brandless manufactures and sells products under its own Brandless label. Founded by Ido Leffler and Tina Sharkey, it was launched in July 2017 with a selected range 115 items, many of them marketed as healthy and environmentally-conscious products. It provides groceries and essentials, minus the cost of marketing. It was known for its unique pricing model, where every item cost a uniform price of US$ 3, as well as its clean product packaging.
Brandless offers everything from beauty and hair products to grocery staples and toiletries, eliminating markup for distribution and marketing in its DTC (direct-to-consumer) model.
On 10 February 2020, Brandless and key investor SoftBank confirmed that Brandless was terminating its operations. The company later announced that it would relaunch in the summer of 2020.
Total Disclosed Funding: Brandless had reported total funding of US$ 292.5 million. However, for its US$ 240 million Series C financing round, which had valued the startup at over US$ 500 million, Brandless received only US$ 100 million upfront from SoftBank. The remaining pledged US$ 120 million, contingent on the achievement of certain milestones, that never came.
Investors: SoftBank Vision Fund, Google Ventures, Sherpa Capital, Redpoint Ventures, Cherry Tree Investments, among others
Does Brandless’s failure prove that brands matter? Brand does matter, but that is not the reason for Brandless’s failure. Brandless is itself a brand. The co-founder of Brandless Tina Sharkey said, “Sometimes people might mistake the name Brandless for the idea that we’re anti-brand. We’re unapologetically a brand, but the difference is that in 2017 we’re re-imagining what it means to be a brand.”
No Ups, All Downs
Many factors were at play that led to the shutting down of the company. Intense pressure from SoftBank to achieve profitability at breakneck speed, a faulty business model, high costs all of these factors led to the company shutting its operations in Feb 2020.
- Brandless was struggling with high shipping costs and quality problems. It had tried to increase the prices of certain products to US$ 9 in order to achieve SoftBank targets, which also didn’t work out. In 2018, its revenue was US$ 20.2 million, while it made losses of US$ 48.8 million.
- Facing a cash crunch, Brandless had to lay off 13% of its staff in March 2019. The startup’s co-founder and CEO Tina Sharkey was also forced to resign in the same month. But she remained on the company’s Board. SoftBank wanted someone with more retail experience to lead the startup.
- In May 2019, former Walmart COO John Rittenhouse assumed the CEO role and announced his plans to pivot Brandless to big-ticket items and to steer the company to an online-offline model by leveraging his experience in the sector, aiming to achieve profitability by 2021.
- Unfortunately, he became too ambitious and his promises and goals proved near-impossible to achieve. John Rittenhouse stepped down in December 2019, and Sharkey assumed the CEO role.
- In Feb 2020, the startup had laid off nearly 90% of its employees. The remaining staff was working to deliver pending customer orders and wind-up operations.
Brandless’ Business Model
Brandless has a distinct look. Brandless products are designed for the Instagram generation, in an array of pretty colors. ‘Brandless’ brand name is also trademarked. The company wanted to destabilize other established manufacturers and successful brands by being a retailer that only sold its own brand, by cutting out the middleman.
It could save its customers money. Money matters, but yet many people go to the supermarket to solely shop for their own-brand basics. So, was the Brandless business model an issue?
- Products are tailored to people’s needs, not price
Brandless gave people something that they did not want. It launched 110 products, all priced at US$ 3. Charging a flat price for all products can sound lucrative, but there’s a reason most retailers don’t do it. Pricing strategies are made considering various factors like prestige, discounting, sentiments etc. They serve a purpose in attracting different types of customers. Some may prefer the more expensive product while others may be attracted to a product on sale, than the one that is permanently low priced. This is called sensitivity testing that Brandless probably did not consider to do.
It believed that there is a segment of young consumers who care more about price than the brand. But does this target market exist? It seems Brandless did not research well before launching. People pick up items with intrinsic brand value. It could be their favorite coffee beans or trusted face cream. The product is tailored to people’s needs. But according to the strategy of Brandless, products are tailored to the price. The company’s Chief Merchant Rachael Vegas herself said, “Nobody wants $3 worth of diapers; it’s not practical.” Brandless did abandon its single price model in July 2019, but it was too late for the struggling brand.
- Trying to be all-in-one
Surviving in the retail industry is not that easy. In order to win, you can be either the cheapest, i.e. going for low margins and high volume, or you can be expensive but unique. Brandless tried to be an all-in-one. It went for low prices, while also attempting to portray itself as a high quality, sustainable brand supportive of good causes.
When you get goods at such low prices, it is needless to say that people will cherry-pick the ones that feel like good value and purchase other high-quality items from their trusted brands like Walmart or Amazon. Due to this reason, Brandless’ margins were so low and they could not reap the benefits of economies of scale.
Why did Brandless Shut down?
- Low-Quality Goods
Brandless wished to become a reliable brand itself, but it didn’t provide that level of quality to its customers. There were several complaints on the internet of broken items and kitchen goods that started to fall apart after a few washes. For a company looking to sell goods by the simple addition of a ‘Brandless’ logo, consistent product quality is imperative.
- Rising Expenses
Brandless spent a lot of money on marketing. They even hired a trendy New York design firm Red Antler to design their logo and packaging. It also spent huge amounts on advertising, putting many Brandless banner ads. It wanted to help customers save money by not spending on marketing itself. But it did and though its message tried to convey quality and price, it couldn’t deliver it either.
In short, Brandless went down due to: low margins, ruthless price competition, low-quality goods, disloyal customers, low economies of scale and high marketing expenses.
Major Takeaways
The most important lesson to be learned from Brandless’s failure is the importance of pre-launch market research. Before launching, a company must be sure that its target market is big enough to be profitable. If there are no businesses that serve this audience yet, then what is the reason behind it?
Brandless’ pricing model and audience segmentation were fundamentally flawed. If you try to sell too many different products, and none of them are good enough to attract a crowd, then there is no use in selling it.
The perfect formula to be successful in this industry is:
Success = High-quality goods + investments in customer experience and salaries (which leads to customer loyalty and word of mouth marketing) + low advertising costs + high volumes + low margins+ well-oiled operations + low costs.
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