Not long ago I got a friend request on Facebook. I had mutual optical industry friends with this person; I figured she knew me by reputation. I accept the request. I then get a message from her asking “am I in the optical industry”. So I’m going to work with the assumption nobody knows anything about me..
Briefly, I design eyewear. I’ve been doing it for 20 years. I do a nice boutique line. I also make some pretty cool custom pieces for fashion stylists and private clients. And I wrote a 400 page history of eyewear, which Taschen published. If you’re curious check out the rest of the site. This background is necessary context so the rest of this blog post will make sense.
I find Warby Parker interesting for a bunch of reasons. One of them, for me anyway, is as follows…
I was friendly with Kate Spade, who liked my work. Warby Parker had hired to help with their marketing when they started. She wanted to hook me up with them, at that time. I wasn’t interested and declined her offer. I’ve reflected on this since. Especially when I heard they’d had a $6.7B IPO.
They did a number of things really well. Better than any optical company in generations. Chief among these was generating consumer awareness of the brand . This is something the rest of the industry, from top to bottom, had been deficient at. To understand why they was so successful, beyond how capable they were, we have to look at industry history.
About 120 years years ago, jewelers and dispensing opticians were the main retail channels for eyewear. Dispensing opticians then formalized the profession of “optometrist” and lobbied legislatures worldwide to require licensure to dispense prescriptive lenses. Selling eyeglasses became the monopoly province of optical specialty stores.
One result of this was industry retail networks became insular. Eyewear manufacturers didn’t need to be public facing, or even known by the general public to succeed. Rather than building reputation with the general public, B2B strength, such as great distribution and fulfillment infrastructure became perhaps the biggest key to success. The ability to brand never developed as it did in other industries. Licensing became a way around this, but a growing segment of the public has come to understand this as simply “badge engineering”. Along came WP, who became the first actual eyewear brand in the past 80 years to build a strong Q score with end consumers. The existing landscape made this an open play.
So why was I not interested in being connected with them? Because I never thought they’d make money!
People unfamiliar with the industry thought selling prescriptive eyewear online was some new innovation. In fact Zenni Optical was in the space, and selling product for about 1/10th the price WP was charging. Zenni was vertically integrated and their cost of goods was almost certainly a lot lower than WP’s. Between WP’s generous try-on and return policy, their donation of a unit of prescriptive eyewear to underdeveloped countries for every pair they sold, and lack of true end-to-end vertical integration, I couldn’t see how they’d be profitable.
Eyewear is a category that requires more hands-on service than most. You can fit the right lenses, with the right inter-pupillary distance, but the frame often requires further adjustment before the customer can see out of it properly.
I felt the cost of the try-on policy, plus returns and shipping would devour their margins and then some. Around this time, I also received other offers to join online companies backed by great venture funds. I didn’t think any would work.
I then watched with fascination as WP rapidly gained unprecedented traction. They were everywhere. I well remember the terror felt by brick and mortar opticians; their jeremiads. They felt doomed. I mentioned to optician friends I didn’t think the paradigm would work. I don’t think they believed me.
Word then began leaking out that WP was not netting profits, regardless of their astonishing increases in scale. It was around that point a pivot occurred; WP began opening retail doors. The work they’d done getting the message out generated an avalanche of store traffic - reported sales of around $3K per square foot - comparable with Tiffany’s. Shortly thereafter I began hearing WP was finally in the black.
I recall the early praise for their online model. “The company that changed the optical industry”. Ironically, it apparently worked the other way around. I’m sure they always planned to be a brick and click business. But I doubt they expected the brick part to drive profits.
When I wrote about this five years ago, I speculated on exit strategies for their early investors. What sort of liquidity event was most possible?
In branding the company, they’d painted themselves into a corner. Based solely on brand traction they could have opened thousands of retail accounts very quickly if they created a line for wholesale. Problem was in branding themselves they’d vigorously attacked traditional optical retail, from top to bottom. So almost every player in retaill was openly hostile to them.
Luxottica was a particular target, painted as an egregious monopolist. Beyond Luxottica’s probable hostility, Luxottica “gobbling them up” would be a bad look for all. But based on WP’s valuation set by their last round of funding, there didn’t seem to be many other players in optical that could afford to buy. There were the optical subsidiaries of the big luxury conglomerates, but my opinion was they’d focused on building distribution for b/m sales. Likely resistance among retailers to carrying the brand made such an M&A unlikely.
I predicted an IPO. Operations were said to finally be profitable.. But profitable enough to generate a $1.7B IPO (which the previous round of funding valued WP at)? I figured it’d take time to scale b/m big enough. Overall, though, I was sanguine about their future. As I said at the time, I’d gladly trade my problems for theirs.
To my surprise, their IPO occurred not long after that - in September of 2021. To my greater surprise it resulted in a valuation of $6.7B! Wow. But it was not a traditional IPO…
A traditional IPO uses an underwriter to create new shares, which are pitched to investment banks, broker-dealers, mutuals etc. Interest generated then helps determine a realistic share price. Underwriters also charge a not insignificant fee. There’s also a lockup period, usually 90-180 days, in which shares can’t be sold.
WP did not have a traditional IPO. instead they had a direct to consumer IPO which generally entails selling already existing, insider-owned shares directly to the public. There’s no lockup period. A quicker exit is facilitated.
So a $6.7B valuation was created, which didn’t last long. Share value soon shrunk considerably and market cap now sits around $1.5B.
Because the company's public, I finally got a chance to look at a WP annual report. To my astonishment, they’re still not profitable!
The report gives some insight: WP generated $669.7M in total revenue in 2023. Online represented around 1/3rd of this at $226.7M. Marketing cost 12% of total revenue in 2023. The home try on program is listed as a marketing expense. You wonder how much of that 12% it makes up. I'd guess a significant part.
It requires a lot of resources, including production, shipping, even a separate logistics center. It's probably a good customer acquisition tool for an online company. But at this point, WP is a known quantity, and primarily a b/m company with 2.33M active customers. You have to wonder if it’s still worth the financial hit. You have to wonder what the aggregate cost of the try-on policy is. How many additional sales does it result in? High conversion rate, perhaps, but at what cost?
It would be nice if expenses were catalogued in a more granular fashion, but they're not, so let's work with what's in the 2023 report.
It says revenue, year over year, from online is shrinking, while b/m revenue has been booming. WP had 237 stores at the end of 2023. According to the report: “Stores that were open 12 months or more generated $2.1 million in revenue on average with four-wall margins in line with our target of 35%. Of course WP’s labs aren’t in-store and I’m not sure if those associated expenses are counted, but in isolation it would appear b/m operations turn a nice profit.
Conversely, online operations seem endemically unprofitable, even without the try-on policy. The report says WP has $216.9M in cash and cash equivalents. Current burn rate is around $70M a year. Something eventually has to be done to mitigate this. Since online seems to be the component generating the losses, perhaps it should be curtailed or just eliminated altogether. I realize it would be the apostasy of apostasies, but such change might well be inevitable.
And that would be the final irony.
So it looks like brick and mortar will be the prevailing optical retail channel - for prescriptive eyewear anyway - for the foreseeable future..
Otherwise, WP is in objectively good shape. Gross revenue keeps increasing at a strong clip. They have no problems that can't be fixed. I would still very gladly trade mine for theirs. I do wonder how that $6.7B valuation was achieved. Such matters are outside my wheelhouse. Seems I was right about their online paradigm not working, but these days such things appear irrelevant to a venture’s success. Funny old world.
So do I regret not taking Kate Spade up on her offer to hook me up with them early on?
Wouldn’t you?
While you're here please check out the rest of the site. I decided to build it myself, since I was unhappy with most of what I saw from designers I could have contracted the work out to. I hope you find it pleasant. Thanks.