Steven Alan warns emerging brands: “Don’t become a slave to your valuation.”

NEW YORK — Steven Alan, best known for the menswear brand that bears his name, recently sat down for Richie Siegel as a guest on the Loose Threads podcast. Among the key topics discussed: the dangers in promising hyper growth to investors, the DTC era, the pros and cons of ‘Made in the USA,’ and, of course, retail.

The rundown on Steven Alan’s small empire for context:

• He likes to get in early: He’s a big supporter of early emerging brands, is also an investor in BoF, and was Refinery 29’s first investor.
• Total Steven Alan stores today in the US: 22
• Steven Alan also has several licenses: Six Steven Alan licenses in Japan, plus an optical license (and four optical stores) headed up by Eponym’s Andrew Lipovski.

Top takeaways from the conversation…

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In a DTC era, he’s all in on brick-and-mortar (but not into wholesale):

“We didn’t have a huge amount of scale. We just had that one store, and we didn’t wholesale to department stores. We had the infrastructure cost, but we didn’t really have the ability to scale it. . . . [So] we opened up a few more stores so that we’d be able to produce. One thing that we realized, for example, is that if I want to make sweaters, and I have to make 300 sweaters, if I have one store, or even five stores, that’s a lot of sweaters per store. So if I’m not going to be a big wholesale brand, then I need to really focus on how I’m going to open up more stores. About four years ago, I found an investor that shared interest in how to grow the business, and we used that investment to grow out the retail footprint, and investing in key hires who could also help out in e-commerce. We just invested heavily in that infrastructure.”

On the DTC craze today:

“Pretty much everyone is trying to reestablish what their value proposition is. What’s interesting too is that you have a lot of people who are saying, ‘We’re direct-to-consumer, we don’t need retail stores,’ and all of a sudden, they’re opening up nothing but retail stores the next few years. I think they realize that people like to touch and feel things. It’s a big part of the story.”

On why made in the USA doesn’t always make sense:

In sum: The idea is to establish a strong value-to-price ratio, and opt for specialists, whenever possible — no matter where they’re located. Said Steven: “We’ve made stuff in New York, we’ve made stuff in Japan, and Peru and so forth. We try to just go to the best. Made in the USA is important, I’d guess about 60-65% of everything we sell is made in the USA. The reality is, we do try to make as much as we can here, but if we can make something better in Japan, we’re going to do that. I think there needs to be a really great value-to-price relationship with everything that you’re buying.”

On why DTCs have softened their anti-retail approach:

“I think some of them could exist purely online. But some of it comes from valuations. A lot of companies are raising money and guaranteeing this hyper-growth. And how are you going to get this hyper growth if you’re raising money at this crazy valuation? I mean yea, online could be great, and you could grow a lot. But are you going to grow 10,000%? You’re a slave to your own valuation. So yes, I think a lot of these companies could [stay purely online] — if they raised at a lower valuation — if they had [more reasonable] expectations they could grow very healthy. In some cases that would be better for companies over the long term. But in some cases, the high growth would be better, because the idea is you get a dominant market share quicker [in a super competitive market].”

On the scale correction:

“There’s a correction now, I mean you’re seeing a lot of companies go out of business, or they’re having down rounds — which you didn’t see before. Suddenly it’s like, ‘Wait a minute, you’re not growing at 10,000% — you’re only growing at 5,000%. That’s now what we signed on for, so now we’re going to give you more money but at half — or a quarter — of the valuation.’ They’re starting to get nervous.”

On how he played it:

“I just knew that I just always wanted to get better. I always thought size, for me, would be the way to get better. If I get bigger in a smart way, then I could hire really good people and I can make the products that I want to make and the products where I want to make them. For me I never wanted to grow in a reckless way.”

On why e-commerce is so capital intensive:

“It’s very capital intensive. More than what people think. I think that most people think, ‘Well, e-commerce should be killing it.’ Not from a growth side, but from a profitability side.

A few things to think about there would be: When you have a store, you have rent and you have salaries. Then you have your sales minus your costs of goods sold, and that’s your profit. With e-commerce, there are a lot of costs as well — you have your platform cost which could be extremely high. You have your marketing costs. And every single product needs to have a purchase order, needs to go into the system, needs to be photographed, retouched, styled, copywritten. Then the product has to go to a warehouse, and come out of the warehouse.

At every single touchpoint, there’s a cost. Most retailers that I know are trying to reduce the amount of returns as much as possible, [which requires more investment in photos, video, and website infrastructure.] I think I read somewhere that Net-a-Porter just became profitable, if not last year, then the year before, with an enormous amount of sales.”