Is JustFab the Next H&M, or Direct-Marketing Black Magic?
Bring up the name JustFab in L.A. tech circles, and you’re likely to get some variation of this response about the company’s co-CEOs Adam Goldenberg and Don Ressler: Those guys are direct-marketing geniuses.
What most people mean by this is that the two men leading the subscription shoe company have nearly perfected the art of cost-effective marketing to attract new customers, get them to subscribe and then keep them enrolled indefinitely.
On many levels, that expertise has been a hit. JustFab, which is essentially an online shoe-of-the-month club that has added purses and apparel to its portfolio over the years, has raised more than $100 million in venture capital, and recently merged with its main rival in the subscription-shoe e-commerce category: ShoeDazzle (though, in reality, many considered it an acquisition by JustFab).
The two brands are expected to combine for $400 million in revenue next year, and to reach profitability next year, according to Goldenberg.
But the subscription approach has also come under fire, with frequent accusations on customer-complaint sites of deceptive marketing. When a shopper buys their first pair of shoes on JustFab, they are automatically enrolled into a monthly VIP member program that charges their card $39.95 a month unless they actively make the decision to check out as a regular member. That monthly charge comes with a pair of shoes of their choice, but if they don’t want to buy a pair that month, they have to notify JustFab within the first five days of the month.
Here’s an edited version of a recent chat I had with Goldenberg about the subscription program, why bringing ShoeDazzle into the fold makes sense and why he has no interest in taking the company public.
Have you guys just perfected the art of aggressive direct marketing, or have you built a sustainable brand that shoppers will love and respect for a long time?
Adam Goldenberg: What we’re doing in building JustFab is building the next generation of fast fashion. I believe we’re on track to create the next H&M or Zara-type brand. In e-commerce, it’s all about execution and about having the right product. One thing that separates the companies in L.A. that are doing really well from those that are not, is that you have to have a great product with great value proposition.
It doesn’t matter how great you are at customer acquisition and customer service. If you don’t have the right product with the right quality at the right price that’s also hitting a need, you’re not going to be successful.
In the end, we’re a fashion company, not an e-commerce company. What consumers remember is not our shopping-cart product that we studied 97 versions of. They remember whether they liked the shopping experience and liked the product.
But there have been complaints that the subscription program is misleading, and that it’s hard to un-enroll. What do you say to those complaints?
Ninety-five percent of people who shop with us love the program. We have monthly churn that’s incredibly low — under three percent.
It’s definitely not the case that it’s hard to cancel. We explain upfront how it works, and inside the box we show how to cancel, and how to skip a month. You can’t get to a business that will do $400 million in revenue by making it difficult to cancel.
Subscription commerce is not for everybody. If you have a very, very small minority who don’t like it, they can still be very vocal on social media channels.
(Goldenberg followed up through a PR rep with screenshots of how they disclose the program to first-time shoppers in two different places, one of which is the Terms of Service, and one of which is on the shopping-cart page. Still, one could imagine less-than-diligent shoppers overlooking these notices.)
How much customer overlap is there between JustFab and ShoeDazzle?
It’s about 25 percent. What is really interesting, is that for customers that overlap, they spend twice as much money shopping than those on one service.
Any plans to one day combine the companies under one brand?
No, the ShoeDazzle brand is a huge part of why we did this deal. The demographic is similar, when you break down and look at age, household income and ethnicity. But, style-wise, it’s different; JustFab relies more on humor, and ShoeDazzle, edgy, sexy, glam. By having the two brands, we get significantly larger penetration in North America.
What efficiencies will you see from the merger?
One, we’ll be able to give more business to the factories, so we’ll get into the best factories more easily, order larger quantities so we’ll get more margin, which we can take and put back into the product.
And we have own fulfillment center in Louisville, while ShoeDazzle went through a 3PL (third-party logistics firm). Now, just by them using our own fulfillment center, they do not have to pay storage; we’ll have completely full containers coming to us rather than partially full, and we’ll see over $3 million a year in savings, just on that alone.
I’ve seen a good amount of complaints on social networks, and heard a lot about customer service issues at ShoeDazzle. Is it a problem?
On the customer-service side of ShoeDazzle, it has been an area where they’ve been understaffed. One of the first things we’re working on is helping there. In the next 60 days, they will be at the same service levels as JustFab — 98 or 99 percent of calls will be answered. JustFab also had some issues in the beginning of this year. We grew faster than we anticipated, and it was a challenge keeping up with it all.
You just opened your first retail store in L.A. How does that fit with your strategy?
If you just think about traditional footwear companies, they spend significantly more money per year on advertising. We know the ROI on all of our media dollars, that we are making a return within three to four months.
From a style or fashion perspective, you have H&M, Zara and Forever 21, who do a great job in apparel but not in shoes.
We’re bringing in new styles every single week and, because of our volume, we have amazing pricing. If your entire business is retail, you have to cover capital expenditures and build a brand, and still turn a profit.
For us, we will very much use this as a customer-acquisition tool. If we can just break even, but acquire 5,000 to 10,000 new [subscribers], that’s worth it.
At some point in the next couple of years, I’m assuming you will seek an exit. Would you prefer an acquisition, or to take this company public if you had the opportunity?
I’m not interested in running a public company. We’ve had inbound (acquisition) interest in the last year, but we haven’t even opened dialogue, because we’re not for sale at this point. We are VC-backed, and we are going to at some point look at how we get liquidity for our shareholders. But, at this point, we’re highly focused on executing the business.
My general experience has been, if you build a big company that’s growing faster than everyone else, and double-digit EBITDA margins, you’’l have a lot of options.
Personally, I’m not a huge fan of operating a public company. I was COO at (Myspace parent company) Intermix Media, which was fairly turbulent, so maybe I’m just jaded.
It’s just very hard to do the right thing for the business long-term when you have quarterly pressures.
But, if we were to go public, we’d have to be doing a half-billion in revenue, with a clear path to a billion. And have double-digit EBITDA margins, with a clear path to 20 percent.