ShoeDazzle Inc. is trying to regain its foothold in the online fashion world after a rough stretch. Its chief executive has resigned, layoffs have been reported and criticism has mounted over the retailer’s move to abandon its pioneering business model.
Bill Strauss stepped down as the Santa Monica company’s chief executive Sept. 24 and was replaced by ShoeDazzle founder and nonexecutive Chairman Brian Lee.
Strauss, who had only assumed the CEO post from Lee in September 2011, was the driver behind the company’s move in April to drop its longtime membership model, which required members to pay a monthly fee of $39.95 in exchange for a pair of shoes or accessories based on personalized fashion recommendations.
In its place, Strauss installed a more traditional e-commerce model in which members only bought shoes, handbags and other accessories they desired, paying varying prices. They also continued to receive the site’s style recommendations.
While it’s unclear how the change has affected sales, multiple media reports late last week said there were layoffs at the company. The Wall Street Journal’s All Things Digital website reported that “a low double-digit percentage” of workers was losing their jobs, citing an unnamed source at the company.
When the business model was changed earlier this year, critics jumped on the change, which was followed by a first wave of executive turnover in the summer when ShoeDazzle’s president and its chief operating officer left.
Independent brand analyst Denise Lee Yohn wrote a blog post in April that argued dropping the monthly fee would hurt both ShoeDazzle’s bottom line as well as its relationship with customers. She said last week she was not surprised by the more recent exit of Strauss.
“There is a constant pull to take companies away from core ideas. I think this is a cautionary tale for everyone,” she said.
Lee and other ShoeDazzle executives did not return calls for comment.
Lee began ShoeDazzle in 2009 – along with celebrity Kim Kardashian, who is an investor and spokeswoman – pioneering the monthly subscription concept for online fashion sites; it’s essentially a book-of-the-month club with an ecommerce and footwear spin.
The company became a leader in L.A.’s burgeoning tech scene, spawning an array of imitators. Among them are Beachmint Inc. in Santa Monica, which has a mini-empire of sites that sell jewelry and home goods, and JustFabulous Inc. in El Segundo, which sells urban apparel designed by Kimora Lee Simmons. Other nonfashion companies followed, including Santa Monica’s Dollar Shave Club Inc., which gives subscribers a set of new razors every month.
Last month, ShoeDazzle, JustFab, and Beachmint had more than 10 million visitors, double what they had a year ago, according to Boston web analytic firm Compete.com.
While there are no precise figures on how much business these sites do since they are private, combined sales are likely under $1 billion. That’s a fraction of the multibillion-dollar ecommerce world, dominated by the likes of Amazon Inc. and its shoe site Zappos.
Jeremy Hermanns, a fashion analyst at Onestop Internet Inc., a Rancho Dominguez brand consultancy, said there was no need for ShoeDazzle to change its business model.
“It’s still a tiny slice of the market and a new way of buying online,” he said. “There are plenty of people out there who’ve never heard of ShoeDazzle who could be potential customers.”
Just prior to the switch in business models, ShoeDazzle had been trumpeting strong sales and booming membership.
In March, the company announced it reached 10 million subscribers, making it by far the largest such site, though not all those people signed up for a paid monthly subscription; the number includes visitors who just provided their fashion preferences. Also many members defer their monthly charge if they don’t want to buy anything.
But competitors were growing fast as well. JustFabulous, which was established in 2010, has raised $100 million in venture capital and is expanding to markets in Germany and England.
Adam Goldenberg, the co-founder and chief executive of JustFabulous, said he was surprised when he noticed ShoeDazzle’s had dropped its subscription model, which inspired his business.
“Personalized selection and great merchandise in exchange for membership – that’s the foundation of what we’ve built,” he said. “(Lee is) one of L.A.’s best entrepreneurs and hopefully he can turn things around.”
ShoeDazzle’s decision to drop the subscription model seemed to draw new members. Company officials boasted in August that the site had gained 3 million members between May and July and was up to 13 million. When Strauss and Lee spoke with the Business Journal in August, the two expressed confidence in the move, with Strauss attributing the gain in membership directly to the new model.
The subscription-free service also was designed to smooth over member gripes about monthly fees. Members have always had the option to opt out of a payment, but the change was supposed to give people more freedom to buy when they wanted.
“Customers didn’t want to feel obligated to buy monthly and that created some friction,” Strauss said at the time. “We didn’t want any so we dropped it.”
The change also was intended to reduce the huge hit ShoeDazzle was taking every month in offering free shipping and return charges for members who didn’t want a shoe some months but forgot to indicate so, according to a source at the company that asked not to be identified. And customers who called the company complaining about charges or the shoes placed a burden on the company’s call center.
ShoeDazzle executives and board members also said dropping the subscription model was vital to expanding the business by weaning it off a steady but limited monthly charge.
“A subscription can be a bit of a drug. It’s customers buying because it’s an automatic charge,” said ShoeDazzle board member John O’Farrell in August. O’Farrell is a partner at Menlo Park investment firm Andreessen Horowitz, which invested $30 million in ShoeDazzle.
Most products now cost $39.95, though some are as low as $29.95 and some cost as much as $49.95.
However, another source close to the company said abandoning the subscription model has not worked out as planned, with members not buying at the rate expected without the automatic charges.
“Those people stopped buying enough shoes for the pricing to make sense,” the source said.
When Lee handpicked Strauss to run the company, the plan was to bring in an all-star executive to build up the business while Lee attended to a new venture, Honest Co. Inc. – a subscription ecommerce site that sells products to parents of newborns.
Strauss had previously worked as the chief executive at ProFlowers, an online flower delivery service in San Diego that went public and was acquired in 2006 for $477 million.
The move to hand off a business had worked for Lee before. Before ShoeDazzle, he founded Legalzoom.com Inc., now in Glendale, which provides online legal forms and services. Lee stepped down as chief executive in 2007 and the company continued to grow. In an IPO filing this year that was later postponed, the company was valued at more than $480 million.
Lee, who will retain his executive role at Honest, will now run the day-to-day operations. It’s unclear whether he will return to the subscription model or tweak the new one.
Lee already is pushing forward with raising more cash. ShoeDazzle filed paperwork Oct. 2 with the Securities and Exchange Commission indicating it plans to raise an additional $6 million in private financing. The company has raised $66 million in venture capital since its founding.
Lee Yohn believes ShoeDazzle tried too fast to take on the big guns of online retail.
“It’s in this fashion category where you have such dominant competitors like a Zappos. Establishing a relationship with a customer is far more important than opening up to the masses,” she said.
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