As the direct-to-consumer brand space matures, there’s a growing opportunity for the DTC department store.
Neighborhood Goods, which raised nearly $6 million in May in an investment round led by Forerunner Ventures, will carry around 15 digitally native brands in its first store, set to open this fall in Plano, Texas. The brands that will be included at launch are still being finalized, but they’ll span categories including accessories, apparel, home goods and furniture. All brands will sell as vendors, rather than as wholesale partners: They’ll get a dedicated space in the store to set up a shop-in-shop and sell product, as well as introduce customers to the brand. The brand activations are arranged around a communal area, with a coffee bar, restaurant and space for branded events. Complementing the in-store experience is a mobile app that details more information about each brand, and lets customers ask questions, request product try-ons and make purchases. Neighborhood Goods plans to offer different commission plans for the brands it works with, with options to share revenue, pay a fixed fee per month or work out a hybrid of the two.
Founded by Matt Alexander, who has experience developing brands and pop-up concepts, and Mark Masinter, the founder of Open Realty Advisors, Neighborhood Goods is making the bet that, eventually, well-funded modern brands will need the boost of a retail platform to hit their next level of growth.
“Pop-up retail and physical retail is expensive, traditionally speaking. Even if you’re in a high-performing retail store, and there aren’t loads of those anymore, it’s still very expensive, but it is incredibly effective,” said Alexander. “You can generate more revenue from stores than from the web, as a brand. It’s increasingly clear that you ought to be going into physical retail as a digitally native brand, so we want to help brands navigate this space.”
It’s not the only one. Brick-and-mortar startup Bulletin sells digitally native brands (exclusively those founded by women) at its three New York stores, and traditional retailers are catching up to the appeal of DTC brands, as well. Nordstrom recently overhauled its merchandising strategy to account for brands born online without the margins for wholesale accounts. These retailers are looking to position themselves as the best partner for digitally native brands that are looking for ways to grow profitably, as prohibitively expensive marketing and customer-acquisition costs stem how much they can scale online.
“The new model for multibrand retail is built on flexibility,” said Richie Siegel, the founder of retail advisory company Loose Threads. “It’s a nuanced evolution of the traditional model, where brands have more control over what the experience should look and feel like.”
Neighborhood Goods, according to Alexander, is targeting brands by promising in-store context for the brand’s carefully articulated online message, access to new and potential customer data, and a cost-effective way to test products in a multibrand retail setting. The company will staff brand activations with their own employees and offer flexible month-to-month leases. The company’s technology platform will be continuously updated to offer the easiest connection of digital and physical inventory for brands to manage, and checkout will be universal for all brands, through the app. That means that brands on the receiving end of customer data will get access to new information, like what brands customers like to shop alongside them.
“These brands are used to having control over everything, so it’s hard to give that up. The plan is to build a space that can respond to individual brand needs, whether those are marketing and customer acquisition, new product testing or gathering customer data,” said Alexander.
The multibrand retail setting is the final frontier for direct-to-consumer brands as they evolve past the startup stage of business. According to one brand founder, for these brands to scale, they’ll have to let go of some of the limitations set by the brands themselves: First it was selling online only. Next comes retail partnerships. If brands navigate these relationships properly, said the founder, they’ll be a boon for both profitability and awareness. For Neighborhood Goods, it’s using Plano, Texas, as a testing ground for the first store iteration. From there, it will explore opening more locations like San Francisco, Los Angeles and New York.
“We’re offering e-commerce granularity for individual brands in a physical setting. Department stores are grasping for relevance right now, and the main tools they’re using to that end are relatively gimmicky: smart mirrors, more screens,” said Alexander. “It’s like providing e-commerce-level granularity in the physical world. For brands that are participating with us, we want to provide you with the things you’d be looking for in a physical space that are difficult to do, unless you can afford to invest in them.”