They sell luxury fashion at cost. Yes, at cost. They claim to source high-end fashion products from the same manufacturers that produce for established luxury brands and give them away at the landed cost. How do they make money? They charge $100 a year, billing $8.33 a month.
It's an interesting experiment.
The other company that does something similar but in the Grocery space is Thrive Market. In PipeCandy's estimate, they did about $90M in revenue in 2019. Of course, there is Costco which perfected the art of memberships and there is Amazon which continues to prove that any kind of membership program will build a solid predictable revenue stream and competitive moat.
Here's how the models compare:
When you buy a product that is not branded from a membership club, the brand is the membership club. That branding does not come free. So, brilliant as it is if you compare Italic with Costco and Thrive Market, it is closer to Thrive than it is to Costco. It's an unfair comparison as well because Costco would have had to spend a lot on branding in the early days. Today Costco spends about 9% of its revenue on SG&A expenses. In contrast, Target's SG&A is 22% of revenue and Walmart's is around 20.8%.
The upside of a business model such as Italic's comes from the fact that the branding cost is front-loaded, unlike a DTC brand that has little ability to cut down on the SG&A costs. Eventually, Italic can get to under 10% SG&A. Or can it? For that answer, you should look at Farfetch's first year as a public company. Farfetch is like Italic but they don't have a membership. They don't have inventory either. They are a dropshipper of affordable luxury products.
The SG&A cost of Farfetch is telling a story and it's not a pretty one. They are facing class-action suits.
Italic might be in a better place than Farfetch with tighter control over the SKUs and stickier customer base due to memberships. It may not have 60%+ SG&A cost. But unlike SaaS companies where the typical SG&A of public companies is at the 20% mark, there is no land and expand in Italic. Growth has to come from memberships only. The company is already 100% private-label (-ish). There is no new margin arbitrage there. That's already squeezed out. To make $10M in revenue, they have to have 100,000 members. Costco, on the other hand, needs 35,000 members per $10M in revenue. The choice of category, replenishment, recurring shopping rates all make this model a perfect fit for the Grocery category (unless we all burn a lot of scented candles and replenish them every week from Italic).
I love the promise of Italic. For it to not go the Farfetch way, it would have to find a really good way to grow memberships without insane acquisition costs or put in a margin and/or increase the annual subscription cost. Luxury purchases have a lot more price elasticity than Grocery. So they may after all be able to do just that.
- Ashwin Ramasamy
PipeCandy is a market intelligence platform that tracks the global eCommerce & 'direct to consumer' landscape.
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