Bankruptcies, VC tumult & TikTok: The Modern Retail Podcast year in review

0:02Hello, everyone, and welcome to the Modern Retail Podcast.

0:30And I want to go into some of the things that they've covered and what they think it means for the year to come. We're going to talk about everything from the onslaught of bankruptcies that we've talked about in the past, what's happening in the world of marketing, something if you read Modern Retail, we write about all the time. We'll talk about payments, which saw a huge transformation this year, and then go into some other things. VC deal flow, the overall economic state of the world. We're going to hit it all. But Gabby, Melissa, how are you guys doing? Great. Doing great, Kale. Thanks for joining.

1:02So I thought we can start off with Melissa. One thing that you've written about a lot has been the rise in bankruptcies. So what's going on? Who has filed for bankruptcy that you think is especially noteworthy? Yeah, I mean, to me, the story of the modern bankruptcy can really be told through the lens of the Bed Bath & Beyond story. You know, that was a company that struggled, became a meme stock for a minute there, and then eventually filed for Chapter 11, only to see its IP being bought off by competing brands who are now reinvigorating Bed Bath & Beyond and its other partner brand, Bye Bye Baby, under new ownership.

1:42And, you know, I think there's other sort of ones on that level. You can think about like Rite Aid, you know, and some of the issues that have been going on with that chain as these big national retail chains that seem ubiquitous. And it's something that consumers don't see. You would not have thought walking into a Bed Bath & Beyond in December 2022 that, hey, this is a brand that's going to go bankrupt. You know, that association probably wasn't there. There was also some smaller companies that have filed for Chapter 11, like Hello Bello, the celebrity-founded baby care company. Luna, the very silky luxurious sleepwear company.

2:18These are brands that, for one reason or another, kind of ran out of lifelines on their finances and found themselves unable to handle their debt loads. Got it. There was one thing I wanted to ask, which is a couple of years ago, like bankruptcies happen in retail. They happen in business. I feel like with the major ones many years ago, they were all sort of the result of earlier moves, like leveraged buyouts being bought up by PE so that they could get quick returns, but then wouldn't have a great long-term business model. Would you say that for the bigger guys, like we talked about Rite Aid, we talked about Bed Bath & Beyond, is that what is happening here?

2:54Or were there different reasons for why some of these bigger players went bust right now? You know, I think a lot of it comes down to cash flow and how to retain, you know, sort of a liquid environment while you're still racking up debt and have all these sort of like huge debt loads behind you. And I think we're seeing brands not really able to come to terms with what all that debt means, especially in an environment where, you know, let's face it, consumer spending isn't always reliable. You know, we've seen a lot of changes and things can kind of turn on a dime. People are still spending, but on what they're spending and how they're spending can change very drastically based on outside factors like global pandemics.

3:34So I think we're going to see, too, these companies that are going bankrupt just having way less money way quicker compared to maybe how it looked five years ago. You know, you're coming in with companies that have kind of taken bigger hits. That actually leads to my next question, which is for the smaller companies, was it just an issue of that they ran out of possibilities of getting more money? Like, you know, this has been a time of economic uncertainty. The VC landscape has been weird. We're going to talk about that in just a second. So like, was that really what happened when we see these smaller brands file for bankruptcy?

4:10Yes, I think that's a good way to think about it. It's almost like, okay, if this had been our plan A all along and then all of a sudden that falls through, what can we do? I mean, bankruptcy is definitely a last resort. It's not something to take lightly. But I think companies might be able to find a way to restructure themselves strategically as a part of that. So it's not even so much like, oh, this is bankrupt. We're calling it a day. It's, hey, is this way out of this mess? Got it. Got it. I want to switch gears, but also stay in the same gears and bring in Gabby into this conversation. Because Gabby, you've written a lot about venture capital and sort of where and where not investors are investing.

4:50That wasn't completely grammatically correct. We'll let it slide. Gabby, so would you say that this has been a terrible year for VC money? Well, if you ask a VC, no. But if you ask founders, the big rounds are pretty far and few between. Even anecdotally speaking in our inboxes, we're not getting these big$20,$30,$40 million rounds for essentially a grocery brand, which I feel like used to be the case. I don't know. Maybe would you say you agree a few years ago when the times were good? Oh, yeah, I agree. I also I'll just add and this is something that that investors have said to me and feel free to chime in, Melissa, if you have anything that the only deals that I remember seeing this past year, not only but for the most part have been smaller deals.

5:38And our VC said to me a couple months ago, if you're trying to raise a series A or a series B right now, like, good luck, pretty much. Yeah. And so the only exceptions I can think of, I was racking my brain earlier, since pretty much a year ago, December 2022, have been these pretty buzzy brands like your poppies, your goodles of the world. They have these big celebrity backings. They've been able to raise those sort of double digit series A's, even B's in some cases. But for the most part, the announcements have been pretty small. One thing I hear is, and maybe some of them are just probably too small to even announce.

6:17So like angel rounds, I won't name the startup, but one of them just announced like a$500 ,000 angel round, which relatively speaking feels small. But I think if you're a bootstrapped, one to two person company, that could be what takes you to the next phase or like trying to survive in the next 12 to 18 months. So it's all relative, I guess, because a few years ago when I covered venture capital, it was like you wouldn't even really blink an eye at these giant rounds. And now you have to be a really like almost already scaling, already in thousands of doors type of company to be able to ask your investors for that.

6:59Or you have to already be profitable, I imagine, which probably a lot of these companies aren't. As you were racking your brain trying to find the examples, did you notice any trends in terms of the types of companies that were able to successfully raise money or those that were not? Anything along those lines? I don't think a DTC-only company has an e-commerce DTC. I feel like this sounds obvious when you're saying it out loud, but it's pretty much all omni-channel type of retail brands. A lot of CPG, non-alcoholic brands, non-alcoholic beverage, I should say, the ones I just mentioned, are the ones that some of the investors...

7:42I guess like everything that you would, I call it like any brand could be a wellness brand, really. So anything that positions itself in the wellness space seems to be getting more traction. But other than that, we're not seeing like mattress companies, DTC mattresses announcing anything. No more DTC mattress companies. But let's say if I'm a wellness company and I have distribution at Ulta, I'm probably, I might be able to catch a few investors' eyes. Yeah, that seems to be consensus. I've been talking to VCs all week, so it's on my mind, but it seems to be like you have to give us a reason. Who is your customer?

8:19What's the incremental growth? You have repeat purchases, which used to be kind of an afterthought because it was all about acquisition previously, and now it's all about how to actually grow profitably and in a sustainable way. Which, not saying that this hasn't been the case, it's just been the last couple of years that we've shifted to this trend. So I wanted to ask you, and you sort of brought this up with a few examples, but you've covered this year a lot about food brands and CPG brands, which that does include, you know, beauty and wellness underneath that umbrella. But can you give me a little bit of sense of what the lay of the land for those specific brands have been this year in terms of why they have done?

9:00It seems like maybe they've done a little bit better or they've been more zeitgeisty. What would you say was the tying thread for those types of brands? I think, yeah, the tie-in might be, I mean, better for you, right? Anything that's going to be able to take share away from the big conglomerates that we all grew up eating or putting on our faces. But then, you know, there's the other end of the spectrum where you could say like Elf has been really bullish on acquiring some of these sort of clean beauty type of brands. And so that seems to be the through line. I don't think we're going back to like, let's go, you know, sugary sodas again.

9:39Like this is sort of like better for you sodas are here to stay, for example. How many winners will there be? That's that'll be the question. Yeah, I feel like I hear a lot about these better for you sodas and they announce big distribution. But that just means that my like when I go to Target, I see a lot of brands and how many of them can all be winners. I wonder like what will it be like a few years from now? Right, because in that case, they're trying to disrupt or go after Pepsi and Coke. So you have to really, yeah, be able to find enough distribution. And like, we're talking just the US now.

10:12So if we're going to go global, that'll probably take a few more years. Absolutely. All right. I want to switch gears a little bit because there's something that Melissa has written a lot about that I was skeptical on at the beginning, but it clearly is having a moment. And Melissa has done some really great coverage of it. And it's the, you know, there's fintech has been around for forever. People have talked about different financial technologies, platforms like Venmo, and then came the rise of buy now, pay later, which just sounded like layaway to me. But a lot of those companies have been doing pretty well this year, past years.

10:44So Melissa, let's just zoom out. It doesn't need to be just about BNPL, but what would you say the major payments trends that you've seen this year and that you've written about? Yeah, that's a good overview. And I feel like off the top of the bat, we can just say that, you know, Buy Now, Pay Later is in sort of a growth and scale moment. You know, it's not about, hey, let's try to get as many, you know, more new customers as we can. It's okay, how do we keep the customers we have using this? And how do we sort of scale the company into new sectors? so you can buy now, pay later your vacation.

11:16But yeah, we can talk a little bit more about that later. There's some other trends that I've been looking at. One is just everything you can do on your phone for payments. So think about the digital wallet you use that you can tap in store. Think about the PayPal or other app that's saved on your phone that links to a retailer that you're buying from so you don't even have to put your password in. All of these ways that we're sort of streamlining that process of like my bank account to the transaction, you know, and all there seems like there's way too many steps in between there, right? Given that we're just sort of moving, moving numbers on screens.

11:54And so all of the companies that are finding ways to make that process more faster and seamless, that's something that I'm really looking forward to watch in 2024, because I just think there's so much potential to make those processes faster with what we know about mobile payments and what we know about how to move money around in the world. On that note, I saw something really funny that people are starting to call it M-commerce. So it's not e-commerce if you're shopping on your phone. It's M-commerce. It's not online, an analog phone? It's M-commerce. And every time I see it, my brain goes, mmm, commerce.

12:29And I just feel like it doesn't work for me yet. But I'm going to keep an eye out for that as a keyword that people are trying to make happen. I will not allow that in a story. I'm just letting you know until a few years from now. We'll see. Until we write the story like why M-commerce never took off as a buzzword. Like that just needs to die before it's even out of the gate. Another thing I'm really looking at is biometrics. So this is an area, too, that personally I was very skeptical of. I was like really weirded out by the idea that like even face ID freaked me out. Like I didn't want to be associated with that.

13:04And now when my hands are very full with my child and my dog and typing and just life, Like, yes, I need everything to be as fast as possible. This is my face. This is my finger to open my phone. Let's do it. But I think biometrics and payments is also going to be huge. When you think about it from a security standpoint, there is few things as individualized to you as your fingerprint. So it is a way to really ensure that you are you as you're making a checkout. Another thing I think that's going to be big, and this is sort of payments adjacent, but thinking about loyalty and thinking about loyalty in payments.

13:40and loyalty to the brands that they're sort of connecting your rewards to how you pay, right? So is that something like, we're going to give you credit for how much you buy? We're going to give you credit for, I even see brands now doing, you can recycle your textiles and get credit to spend somewhere else because you're loyal to that recycling program. So there's all these different ways, I think, that we're coming up with ways to pay that aren't necessarily like your hard-earned cash, but sort of a more loyalty earned type of payment and credit. So I want to ask about the biometric question, because this has been something they've been saying for years.

14:13And we use biometrics on our phone. That has become acceptable and totally fine. And my theory is that that's because it's your own device. But Amazon, Whole Foods, I was in Whole Foods last night, and they had the pay with your palm thing, and I didn't do it. They don't know my palm yet. Do you think that that is going to take off on the more transactional consumer-facing fronts, or do you think that will stay within the confines of your own personal phone? I think it will become more of a retailer, you know, hardware, so to speak, when you get companies that can figure out how to do it affordably and efficiently at scale.

14:52If I am a mom and pop grocer, you know, that's been owned for 50 years in, you know, Rochester, New York, it's really hard for me to upgrade all, you know, 15 of my checkout lanes in one year with a brand new POS that I'm not even sure if my customers are going to like. You know, that's a huge ask in a low margin business. So I think you're not really going to see the biometrics take off until there's like a really great piece of hardware that makes it easy for the companies to implement. Got it. I'm going to bring Gabby in for a curveball question that I didn't prepare her for. What you said earlier reminded me of a great story Gabby wrote.

15:23And so I wanted you to talk about it, which, Melissa, what you were talking about where you're seeing more of the payments app rolled in and have a lot of features. It's almost reminiscent of something called the super app, which Gabby did a bunch of research on. Gabby, do you just want to give a little bit of context about what a super app is? Yeah, a super app is basically a one-stop shop, and it's definitely consumer-facing, so not B2B. But I think the biggest example we usually cite is WeChat, so something that culturally feels like a one-stop, whether it's transactions or an engagement with brands.

16:01But my story was specifically about how no one's really cracked that code, at least in the U.S., but some are trying, including BNPL players. Some, maybe out of necessity, to, again, like we were talking about, retain those borrowers and others because they just need to keep expanding customer base. So we saw Klarna, Afterpay, all of these companies acquire these really expensive SaaS startups a couple years ago in the thick of the pandemic and all to mix results from what I found. Doesn't mean it's not going to happen. It just might not be soon. What were some of the offerings these quote unquote super apps were trying to have?

16:50If I opened the Klarna app, what were they hoping I would be able to do? Yeah, so Klarna, for example, in 2021, they went on a sort of acquisition spree. So they bought Hero, which is a virtual shopping startup that was$160 million, as well as PriceRunner, which is a price comparison service that they say they're baking into their app. So all of these are meant to be incorporated into the Klarna app that everybody actually opens. and shops from, that's very different than what we normally think of as, let's say, like a Shopify integration or something like that. Klarna said that, you know, they're on their way.

17:35They are making use of them. I think they're like, for example, they also bought an influencer marketing program called April. I think that's how it's pronounced. And that seems to be powering now their creator program. So it is happening. It just doesn't maybe always look like the most obvious feature to us. Got it. Well, speaking of Klarna, throwing it back to Melissa, Klarna is part of BNPL. It seems like it was a pretty big year this year for buy now, pay later. In a sentence or two, or more if you want to go deeper, how would you describe what happened to BNPL this year compared to years past?

18:10Yeah, I think this was the year for stabilization for a lot of these companies. Some of them had seen their stock prices really plummet too. And I think you're starting to see those climb back up. And that's a reflection of renewed faith in these companies, right? You know, there's a lot of debate and discourse out there on whether these companies are, quote unquote, good for people, if they are good for consumers. You know, I think any tool can be destructive in the wrong hands. So you need to be careful as any consumer when you're dealing with financial products, especially ones like this, that frankly don't have a lot of rules and regulations around them yet.

18:50So I think we're seeing the company sort of stabilize in the sense that the people who are using them and like them are continuing to use them and like them. We're seeing some changes on default rates as people, you know, adjust to the new realities of their income and inflation and their spending. And the companies are finding ways to, you know, I think just get in front of people in different ways. So, you know, when I see that button on my checkout. Oh, yeah, I remember I used Klarna or Affirm or Afterpay for my purchase of some new luggage a few months ago. Now it makes sense for me to do that for, you know, a new TV.

19:30It's something that they're just trying to build some familiarity around. So I wanted to ask you, and you mentioned this earlier, the categories that encompass BNPL have certainly expanded this year. When I first remembered it was about buying a big ticket item. So if I were buying a$500 TV on Amazon or on something, I could do it in installments. Now it's expanding to other products. It's expanding to entire shopping lists. So it's not just a product. It's also, as you said, expanding to a vacation. I can buy now, pay later a vacation. Do you think this is indicative of the companies trying to get more users?

20:07Or is it indicative that they have reached Mindshare and users are comfortable using it for multiple different ways of shopping or a mixture of both? What do you think is happening? I mean, I think it's definitely both. I think at the outset for a brand, it's sort of an acquisition thing, right? Because if, you know, user A hasn't been using a buy now, pay later platform on their purchases of apparel, maybe they'll do it for electronics. You know, there is an ability to get in front of a different consumer at a different retailer, at a different brand, at a different sector. But there's also this idea of, hey, I used Pay and Four for a$200 jacket purchase.

20:43Why don't I use a longer term financing installment plan from one of these companies for a$5 ,000 European vacation? And try to find a different way to do that. Maybe it's six payments. The terms all vary based on the companies. So I'm speaking in generalities here. I don't want any of my sources to come at me. Please don't get in my inbox telling me I got your terms wrong because I'm being vague on purpose. But I think there's this idea that once you're used to it, you will use it for other things. Got it. And one last point about BNPL before we move on. But do you think the fact that you mentioned how default rates are changing?

21:21How does this bode for 2024? How does this bode for the overall economy? Is this a bubble similar to like, not exactly, but similar to what we saw, you know, 20 years ago, where people were getting loans that they later on couldn't pay? Like, what do you think is happening here? Yeah, I mean, I think if people stay employed at the ability that they have then and things sort of don't change too much more on the inflation side, we won't see a ton of major changes in the debt. I think it'll more just kind of creep up rather than like a big skyrocket. But consumer debt is bad. It's not great for the economy.

21:57It's great if I'm a banker, you know, maybe because I'm getting interest off of all these people and late fees. But as far as, you know, the overall health of the consumer, you know, consumer debt's not great. That being said, it's an incredibly valuable financial tool for people who are living on a budget and can do so responsibly. I know many people who, for example, have a credit card. They put all their purchases on it, pay it off every month to reap those sweet, sweet points and those sweet, sweet miles. You can have a very similar function with a buy now, pay later program when used responsibly.

22:28But lest I sound like an advertisement for them, you know, consumer debt is not great. Got it. Not good. We'll be right back after this message from our sponsor. Please stay with us. All right, let's switch gears. Gabby, I want to talk about marketing because we love to talk about marketing and market modern retail, don't we? We love it. I feel like this is when I joined modern retail in 2019. It was a question of the duopoly, you know, meta, then Facebook and Google. It sort of is still that, but then we have new entrants. We have TikTok. We have Amazon. So what would you say were the major marketing channels of this year, and were they different than in years past?

23:14Not too different, but they do kind of reemphasize the new so-called new channels that a lot of brands are using. So less maybe so of the, you know, your run of the mill Facebook meta ads and more so maybe things like affiliate marketing or user generated content, which is basically asking your customers to make content for you and then, you know, pushing that out onto your channels. out of home, nothing new again, but seems to be more embraced. And it's a lot more data driven now. So that helps some of the brands, you know, like you could literally target specific city block where your ice cream brand sells around the corner at that Walmart.

24:03So all of these kind of are creating this new, very, very diverse mix of a marketing channel. Whereas like you said, maybe four years ago, it was like, all right, we're doing these and then maybe we'll add on TikTok or something fun on the side. What would you say is the state of TikTok marketing right now? Because I feel like that was something that everyone's been talking about. Is it finally a major player right now? Yeah, I think so. I think specifically because TikTok Shops is now officially a thing that launched earlier this fall. And it seems like a lot of brands are at the very least trying to figure it out.

24:40So TikTok is definitely here to stay. And I think maybe we're probably past that wild west where brands could just go viral for free and make a bunch of sales. Now it's, you know, of course, understandably, TikTok wants to get in on that and build those tools out. The trajectory of marketing conversations was always about customer acquisition, but cheap customer acquisition. And then those costs have gone up every single year. So what how would you what has been the name of the game for brands in terms of figuring out how to acquire customers? Is it no longer just pure scale, get as many people as possible because it's so expensive?