Business

Unicorn delusions: Why Kit and Ace’s Chip Wilson has doused the brand’s billion dollar dream.

Yesterday, Kit and Ace cleared its throat, and fiddled nervously with its hands, and tried its best to put on a brave face as it made a curious announcement: It would be laying off 20 percent of its head office staff of 280; it would be closing a quarter of its stores over the next two years; and last (but certainly not least), the pugnacious Chip Wilson, he of Lululemon fame, would be taking over from there on out. His son JJ, who started Kit and Ace with his stepmother, Shannon, subsequently vacates his role as executive (but remains on the board), and gets a pat on the head from dad. “Nice try, son” seems to be the message.

The announcement arrives at an interesting time. The activewear market is absolutely heaving, having reached $270 billion in global sales in 2014, according to Morgan Stanley, and is on track to be a $350 billion industry by 2020. Kit and Ace is certainly seen as one of the more prominent players in the field. But to call their announcement surprising would only be true if you were taking reports of the brand’s supposed success at face value.

There have been a few tell-tale signs that signaled smoke leading up this. For one, they just laid off 35 employees in February. Not a good sign for a two-year-old organization; it says they either hired wrong, or hired too aggressively. At the center of all of the upheaval, however, lies their turbocharged international expansion strategy, which is really the source of their problems here.

At the start of 2015, Chip, in taking on a new role as advisor for the new family business, invested a relatively modest $7 million into the company, and spoke of his intention to take out an (absurd) $300 million in debt over the next few years to fund global expansion. The hope was to reach 95 stores by 2019 — and in the words of then-CEO, Darrell Kopke, to make Kit and Ace a billion dollar brand.

Today, they stand at 60 stores worldwide. Judging by numbers alone, that’s impressive. But with context you start to understand the issue here: 60 storefronts for a two year old modern luxury brand is unprecedented, and not in a good way. Secondly, they’re selling in activewear, a market that’s becoming more bloated by the day. Still, the backbone of their retail model appears to be intelligent. They open small storefronts in contemporary markets where their core customers are most likely to reside, places like Seattle, San Francisco, the Nolita neighborhood of New York, even second cities like Detroit. In each location, they work hand in hand with local artists and tastemakers in creating a unique space that reflects the neighborhood, and they use the stores as gathering places for intimate dinners and events with key influencers in these locations.

Truthfully, it’s a considered and thoughtful approach to doing retail. It’s an experiential model, and a smart play on the surface. But the problem is with the scale of it. How can a company so young in a market so flooded — new activewear brands are coming to market every quarter, and even Walmart and Kohls have jumped onto the bandwagon — expect to grow so quickly without hitting some major potholes?

I was asked to share my thoughts on Kit and Ace in early 2015 with someone who was curious about their model and was interested in potentially investing if they could find a way in. I noted that their expansion plans were unusual for a company so young, but the future looked bright for them. My notes are as follows:

At a time when newer brands of this ilk are waiting first for e-commerce momentum before slow brick-and-mortar expansion, not only is this unusual, it also runs the risk of expanding too aggressively on a good thing and bottoming out too fast, a la Michael Kors. If you can find a way to hitch a ride on this quick expansion early and bail before the valuation hits a brick wall due to saturation, this is a great prospect.

That was a rather prescient assessment. Because here we now stand, with Kit and Ace coming to grips with the fact that their piece of the pie is only so large, given the amount of competition, and that perhaps they got a little ahead of themselves with this whole global domination thing.

In response to the news yesterday, retail analysts (with just a hint of schadenfreude) happily offered their assessment on the company. There was talk of the brand’s heavy hype beating out true substance, and that for all their ‘technical cashmere’ talk, they were really just another contemporary clothing company. Retail analyst Raymond Shoolman, of DIG360 Consulting, called the brand “a case of a lot of hype and very little substance”. “I’m a fan personally but there’s nothing really different about them,” he added. “Really it was just another store.” Then came the rather insightful suggestion — remember: criticism isn’t worth much without an accompanying solution — to put global expansion on the back burner, and focus on dominating the market they reside in right now. “Shoolman said Kit and Ace needs to establish its product in Canada and maybe a few large U.S. cities before going overseas,” wrote Susan Lazaruk of the Vancouver Sun.

As we’ve already covered here at Lean Luxe, even the most ambitious modern luxury firms, Warby Parker and Everlane, to take two examples, are fully focused on building out their North American retail presence first. But even Neil Blumenthal et al understand that too many stores too quickly poses a huge risk. Warby Parker has 37 stores in the US and Toronto to Kit and Ace’s 60 worldwide. (Plus, many of Warby Parker’s are shops within preexisting boutiques, rather than stand alone Warby Parker stores.) Everlane, fanatically focused on online sales, just opened its first location this summer, having been firmly opposed to opening any permanent bricks-and-mortars up to that point. Both Everlane and Warby Parker will celebrate their seventh anniversaries in 2017. Nearly a decade old, they’ve taken a gradual, methodical approach to physical retail. So it’s odd that at just two years old, Kit and Ace has felt the need to do the opposite, especially given the proven power of online sales.

By no means does this announcement signal the end of Kit and Ace. They’re still quite healthy, one would assume, and will continue to exist as a prominent modern luxury player. But the fact that they are reining in their once lofty expansion plans tells you that they misjudged the speed at which they needed to scale (and perhaps the power of their brand). It’s clear now that, in trimming the fat, the team — bruised ego and all — finally understands that decelerating and downsizing represents the best course for building something long term. Paul Wilson, the man in charge of Chip Wilson’s holding company says the brand will ‘continue as a ‘smaller organization.’” And there’s certainly no shame in that.

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