Building Businesses in Aftermarket Designer Merchandise: ShopWorn CEO Richard Birnbaum (Part 4)

Richard Birnbaum: Even though distributors around the world were back-dooring the goods into the United States through e-commerce, I personally believe that the brands just closed one eye. It gave them deniability. The deniability factor is very important for them because when the dealers would start to complain, the brand would say, “We have no idea how they got the goods. We didn’t sell it to them. We have no idea how they got it.”

The fact of the matter is, of course, the brand knew how they got it. They got it because they sold it to a distributor who gave them false promises. The goods ended up exactly where the goods weren’t supposed to end up.

Sramana Mitra: What about customer acquisition? How were customers finding you?

Richard Birnbaum: We never spent a dollar in offline advertising or marketing. Yahoo! was very important back then. We also had a Yahoo! store back then. Yahoo! stores in the early 2000’s were just huge. Several companies didn’t even have their own websites. They just had a Yahoo! store. Once Google became prominent and stole all that online ad revenue, it just became a Google game. That’s where most of our advertising budget went.

Sramana Mitra: Now you can fast forward a bit. What are the inflection points in your business? We are talking about very early on. What caused those inflection points?

Richard Birnbaum: We saw that the brands realized that they were diluting their image and were killing their own reputation by over-producing merchandise and being really greedy. Every product we sell now is made in Switzerland, France, Germany, and Italy. I don’t have any made-in-China product.

All the goods are made in those four nations. In all of those countries, cutting back production and laying off workers is not as easy as it is handing out pink slips in the United States. If you need to cut back production in Switzerland, you have to pay benefits for two years, medical insurance for one year, and six months of salary compensation.

The bottomline is it’s very expensive to get rid of people. Cutting back production isn’t necessarily an option. We realized that the brands were taking a big hit to their reputation. Their entire business model of the authorized dealer network was beginning to crumble because the authorized dealers couldn’t compete with goods being sold off-price on the internet.

The authorized dealers ended up becoming gray market guys themselves. A million websites would go out there and just put up a catalog of items with retail prices. They would put it up at 32% off retail. They would have the confidence that there were so many authorized dealers all over the world who were hurting that they would always be able to buy the item for 40% off retail right from the back door of a retailer.

All this business was being created online and off-price. The goods were coming directly from authorized retailers. We are talking about the distributor model with all the goods ending up on 47th Street. We saw the entire business model for the brands crumble. The authorized dealers were up in arms because of the transparency of the internet. The distributors were killing them with large quantities of goods being sold at steep discounts.

This segment is part 4 in the series : Building Businesses in Aftermarket Designer Merchandise: ShopWorn CEO Richard Birnbaum
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