This post originally appeared on Entrepreneur.com - #Growing Your Business
15+ min read
This year did not start well for brick-and-mortar chains.
In January, Pier 1 Imports announced it was closing up to 450 stores. Later that month, two other prominent retail brands — the high-end audio manufacturer Bose and the paper-goods chain Papyrus — reported their own significant closures. And yet, on the same day that Macy’s announced it was laying off 2,000 workers and closing 125 stores, I was arriving at the San Francisco offices of a startup called Le Tote…where a very different kind of thinking was going on.
Le Tote is not a brick-and-mortar business. It’s a fashion-rental company. Users subscribe by the month and can rent and return (or buy) entire wardrobes. But last November, seemingly out of nowhere, this eight-year-old startup purchased the 194-year-old department store chain Lord & Taylor for $100 million. The move raised many serious questions, most of which boiled down to: What?!? In 2018 alone, Lord & Taylor lost more than $100 million. Why in the world would a digital firm want anything to do with a floundering mall cornerstone?
That’s why, when I sit down with Le Tote’s founders, Rakesh Tondon and Brett Northart, there seems to be only one question worth asking: “Are you crazy?”
“You’ve got to be contrarian,” Northart says jokingly. Tondon smiles and says, “That’s where the outsize returns are!”
Tondon and Northart are very much aware of the seeming incongruity. To a certain extent, they are even banking on it. Just in terms of press coverage, the Lord & Taylor purchase generated scads of headlines. That’s useful marketing buzz for a startup seeking to bolster its brand in an extremely competitive marketplace.
But there’s more going on here than just a media play. For starters, Tondon and Northart tell me they’re responding to what their online customers have been demanding for years: expanded opportunities for “touch-and-feel,” hands-on interaction with apparel. And armed with years’ worth of data on customer preferences, the duo is confident that it will be able to personalize offline offerings in a way that old-school retailers just haven’t been able to.
They also landed a unique deal with Lord & Taylor’s previous owner, Hudson’s Bay Company: Le Tote doesn’t have to pay any rent on 38 Lord & Taylor stores over the next three years. That’s a lot of free time to experiment and breathe new life into the retail model.
As Tondon and Northart explain all this, it’s clear that their point-counterpoint pitch has been polished to a fine sheen — even if there’s more of a “we’ll figure it out as we go” aspect to their road map than most retail analysts might be comfortable with. But between the lines, a deeper narrative emerges that makes my initial “Are you crazy?” question moot.
That’s because if you look closely at the world of retail, you’ll see a curious shift. Many people once feared that the internet would replace physical stores. It’s why brick-and-mortar stalwarts like Walmart, which came late to the digital party, have been racing to improve their e-commerce chops. But at the same time, the flow is going in reverse: Brands that began life online — from Warby Parker to UntuckIt — are now opening on street corners, too. Why? Because news reports notwithstanding, most of us still leave home to shop. Brands that aim to survive the ongoing shakeout all seem to agree: They need to be wherever the customers are.
“The reality is you are not going to be digital only, or offline only,” says Northart.
“Everyone is trying to close the gap.”
Image Credit: Courtesy of Le Tote
Tondon, 41, a native of Kolkata, India, and Northart, 35, a Californian from Sacramento, met a decade ago while working at Ridgecrest Capital Partners, a boutique investment bank headquartered in San Francisco. Neither had a background in retail, but both were alert to the potential of e-commerce.
The idea for Le Tote, says Tondon, came when he saw his wife swapping clothes with her friends while going through her second pregnancy. Few mothers want to keep their maternity clothes, but they keep having to buy new stuff over the course of nine months. Wouldn’t it be better, he thought, if they could just rent the clothing instead?
This idea was already in the air. In 2012, Stitch Fix had established a subscription model for online clothes purchasing, and Rent the Runway had pioneered a rental strategy for special occasion looks. Le Tote combined the two. With the maternity hook and a simple catchphrase — “Netflix for fashion” — the pitch was good enough to get Northart and Tondon into the Y Combinator accelerator program in 2013 and secure venture funding.
Today, Le Tote customers pay anywhere from $59 to $129 a month to rent clothes and accessories, with an option to buy anything they like for a discounted price. The company does not currently release figures on customer retention and sales, but as late as 2017 it was projecting revenue “well north of $150 million” and claiming annual sales growth rates of 100 to 150 percent.
But, undeniably, the biggest players in the market remain Stitch Fix, which went public in 2017, and Rent the Runway, which was valued at $1 billion after its latest round of funding in 2019. Le Tote, in contrast, is estimated to be worth around $180 million, after raising $75 million in venture capital. (The startup borrowed an additional $75 million to purchase Lord & Taylor, with another $25 million due in two years.)
With less name recognition than those leaders, it makes sense that Le Tote felt it necessary to pursue an aggressive scaling-up strategy. Tondon says that as early as three or four years ago, customer requests for an offline Le Tote experience got him thinking that a physical store presence would be a smart move. Soon it felt like a necessary one.
“A lot of these digitally native brands are realizing there is a ceiling to how much you can scale, and how much you can really connect with a consumer online,” Northart says. “There are real limitations, there is no tactile experience, there is a lot of lag and latency in the shipping experience.”
But in sharp contrast to other e-commerce brands, which move into the brick-and-mortar world by leasing new stores under their own brand names, Le Tote decided to skip a few steps. It will move into Lord & Taylor’s existing physical domain — meaning it won’t have to build stores and it just bought a base of new customers who are already walking in the door.
Tondon says they’ll present it like this: “Lord & Taylor, powered by Le Tote technology.”
It all makes for the kind of grand experiment that industry watchers love. It’s big, bold, and high-profile, and retailers will want to know: Can online and offline brands truly benefit each other? Or is this just a well-financed startup trying to stand out from the pack and a dying legacy brand with no other options?
In a few years, we’ll have our answer. It could change nothing…or everything.
There are plenty of Lord & Taylors out there — which is to say, established brands without an obvious future. But for Northart and Tondon, Lord & Taylor carried particular appeal.
For one, it’s unique. The company bills itself as the oldest department store in the U.S. Its regional footprint has historically been concentrated in the Northeast, catering to an affluent though not necessarily trendy clientele, with big-box, 150,000-square-foot stores. But despite that uniqueness, it was also distressed. After a series of ownership changes that started in 2005, when Federated bought 55 Lord & Taylor stores as part of its $11 billion acquisition of the May Company, the chain suffered from a sustained period of corporate neglect. In 2019, its most recent owner, the Hudson’s Bay Company, sold the 106-year-old Fifth Avenue flagship in Manhattan to WeWork for $850 million.
And yet, despite all that, the brand wasn’t dead. Many Lord & Taylor stores still exhibit strong cash flow. And of course, three years of free rent was simply too good to pass up. (As part of the deal, Hudson’s Bay received a 25 percent equity stake in Le Tote.)
“We are carrying no long-term-lease liability,” says Northart. “We get the loyal customer base, and we get a lot of inventory effectively for free. We also get cash flow out of the deal and the opportunity to take an iconic brand, dust it off, and make it mean something different in the market. For us, that was really compelling.”
But now they’ll have to actually fuse a digital startup with a dusty old brand — and plenty of industry insiders are skeptical. Lord & Taylor’s clientele, notes Shawn Grain Carter, a professor of fashion business management at the Fashion Institute of Technology, “is geriatric.” Le Tote’s average customer, by contrast, is 39, part of the very generation blamed for the demise of the mall.
Scapegoating the internet for killing the mall, however, isn’t completely accurate, says Mark Cohen, the director of retail studies at Columbia University and a veteran of the clothing industry (including a stint at Lord & Taylor). Decades of overbuilding set the industry up for a fall. The Great Recession exposed structural weaknesses long in the making. The internet, says Cohen, served as a “handcuff key,” freeing customers from the chains they felt forced to visit.
“There was an enormous amount of duplication,” says Cohen, “and now it’s become a killing ground.” But that doesn’t necessarily mean shoppers prefer going online. They may have just preferred the many new options — which can be replicated in physical spaces, too. There’s evidence of that. As late as 2018, e-commerce still accounted for only 14 percent of all retail sales worldwide.
Nevertheless, Cohen is puzzled by Le Tote’s purchase of Lord & Taylor, which he calls “a nearly dead, antiquated brand.”
“Here’s a business that’s lost most of its brand equity,” says Cohen. “It’s not making any money, and Le Tote believes they have some sort of a crossover strategy from internet-based rental to reposition it. I just think it’s one of those deals where one party has more money than brains and the other party is desperately trying to get an asset off its balance sheet.”
FIT’s Carter disagrees. The real estate alone, she says, is well worth the obvious risk. “They can put their rental showrooms directly into these stores so the customer can physically test the merchandise before they rent it,” Carter says. “This gives Le Tote an omni-channel business strategy. It’s smart.”
In fact, it gives Northart and Tondon an immediate edge that many other digital-first businesses have spent years sharpening. If their bet here is right — and yes, that’s a big if—then it could be one of the defining ideas in the next phase of retail.
Image Credit: Courtesy of Le Tote
There are online stores, and there are physical stores. And for years, they seemed at war with each other. In 2012, Michael Preysman, the CEO of the online clothing store Everlane, told The New York Times Magazine, “We are going to shut the company down before we go to physical retail.”
That’s changed. Today, Everlane has one store in Boston, two stores in New York, and three in California. Men’s clothing chain Bonobos, founded in 2007 as an exclusively online retailer, has 62 stores. Even Casper, creator of “the internet’s favorite mattress,” has opened up a chain of shops.
At the same time, a host of brick-and-mortar veterans are getting into the rental game. Now brands like Macy’s, Urban Outfitters, and Banana Republic are offering services like Le Tote’s, where consumers can rent and return clothing.
In other words, retail is becoming a big mishmash, with everyone moving into everyone else’s turf. And when Le Tote purchased Lord & Taylor, it came to embody this industry shift. The company is now a little of everything — a digital brand that went brick-and-mortar, and a brick-and-mortar brand that went digital. What happens next may be revealing, both for Le Tote and the industry at large.
Tondon and Northart say they have a detailed plan of experiments and innovations they are going to roll out in the next three years, though they are reluctant to provide hard details. (“Why tell our competitors what we are doing?” says Tondon.) But they will say this: Even though they took over Lord & Taylor, they don’t intend to run a department store.
By the end of their three-year trial, Tondon and Northart expect they’ll be moving existing Lord & Taylor workers into smaller, newer, more curated stores. They’re certain that the era of the everything-to-everyone department store is over, and they have no interest in letting the model linger. Convenience will be emphasized, and shoppers will be able to use stores as places to drop off and pick up rental boxes without the hassle or wait times of shipping. “What customers really, truly want,” Tondon says, “is the ability to buy online and pick up in-store, or go into the stores, swap out old clothes, and wear the new ones home.”
The part of their strategy that is the clearest— and the part that could actually make these new, smaller, more focused stores work — is their intention to leverage Le Tote’s greatest advantage: its data on what customers like and don’t like.
The majority of Le Tote’s products are rated on 15 different attributes, all related to fit, style, and comfort. After crunching data, Le Tote can pinpoint specific fabric materials customers found too itchy, or determine that certain sizes in specific brands are generating an excessive amount of fit complaints.
“We ask you very detailed questions,” says Tondon. “If an item doesn’t fit, we ask, ‘Is it too long, too short, too tight in the hip, bust, waist, shoulders, arms, inseams?’ So if, for example, customers who are size eight are all saying that an item is too tight in the waist, clearly there is a problem with the way we are creating those garments.”
Le Tote’s algorithm also takes into account more exotic factors, like “fashion adoption curves” that vary from city to city, as well as local weather patterns. The ensuing one-to-one personalization that decides which clothes will go into which boxes (and eventually, stores) results in different offerings for Los Angeles in the summer and for Cleveland during a cold spell.
“Customers get access to this unlimited closet,” says Northart, “and we are the trust layer that sits between those customers and the closet.”
This may sound compelling — the online world’s obsession with data, driving decisions in physical stores. But FIT’s Carter says it isn’t entirely unique. “All retailers say, ‘Oh, we know what our customers want,’ ” she says. “The customer votes every day. They either want it or they don’t, and when they don’t, it’s a markdown. There is no mystery.”
Perhaps. But to Tondon, data can be used to solve brick-and-mortar’s biggest problems. For example, there’s the issue of discovery. Fewer and fewer people want to spend their time searching through racks of clothes. He paints a future in which a Lord & Taylor sales associate will draw upon your Le Tote profile to know your preferences the moment you walk in the door, and therefore be able to swiftly direct you to exactly what your heart desires.
Lord & Taylor brings value to this equation, too. The average tenure of existing Lord & Taylor sales associates is a stunning 18 years — something Northart sees as a huge positive. Associates who are deeply embedded in their communities possess “tribal knowledge” about their customers, and that knowledge can be leveraged into helping those customers test out new services. But when I ask whether such veterans are likely to be comfortable with the new technologies Le Tote relies on, Northart shrugs.
“Some are, some aren’t, and that’s something that we’ll have to figure out as we start to evolve the experience,” he says.
In theory, Le Tote’s data on consumer preferences will also allow it to micromanage store inventory so as to satisfy drop-in customers without having to stock everything under the sun. “We want to get people a much more self-serve experience,” Tondon says. “The store will automatically recognize you and be able to give you recommendations, and then with a touch of a button, those items can be queued up in the fitting room.”
Whether or not the 150-plus-employee Le Tote will be able to turn around the 4,000-plus-employee Lord & Taylor is, of course, a question that can’t be answered in the short term. But what first sounded crazy — check out the online startup that’s moving into the mall! — may actually make more sense than the idea that there was ever really a fundamental difference between shopping in a store and shopping on a computer.
From the late-19th-century days of the Sears catalog, customers have always gravitated to the most convenient option. Can Le Tote and Lord & Taylor be the modern answer to convenience? Perhaps. If they pull it off, Tondon and Northart may create a blueprint for the next generation of retail. And if not? More storefronts will likely close — but new ones will also open, and customers will keep shopping.