Eyewear retailer Warby Parker recently took steps outside the U.S. market with its first international store in Toronto. Co-founder and CEO Neil Blumenthal told Bloomberg that the company chose Toronto because it was a "densely populated, cosmopolitan, cultured, diverse city" like its home city of New York. Blumenthal noted that the brand generally "flourishes when there's a large creative community."
The Toronto store is Warby's 35th retail store. Out of its 34 U.S. stores, 13 of its stores are in California and New York, while other states only have one or two stores. Let's discuss what that expansion means for Warby, and whether or not it will alter its original business model.
A strategic shift
When Warby Parker was founded six years ago, it sold its glasses online to avoid brick-and-mortar markups and designed its own frames to avoid brand licensing fees. That streamlined business model enabled the company to sell affordable, custom-designed eyeglasses for less than $100.
Positive media coverage in Vogue, Elle, Esquire, and GQ generated plenty of publicity with minimal advertising. Warby's trademark "Home Try-On" program, which ships five frames for customers to try on at home, made it easier for customers to buy glasses online. Customers could also upload selfies to "virtually" try on glasses, or order exclusive frames by following the brand on Snapchat. It also promised to donate a pair of glasses to charity for every pair purchased.
Simply put, Warby Parker was the antithesis of Luxottica (NYSE:LUX), which dominates the eyewear market with its Oakley, Ray-Ban, and Persol brands, its portfolio of licensed brands, and brick-and-mortar chains like LensCrafters, Pearle Vision, and Sunglass Hut. But by opening new stores, will Warby's margins decline and its business become less streamlined?
Why Warby is opening stores
Prior to its brick-and-mortar push, Warby sold its eyewear at temporary "pop-up" shops across the country. Blumenthal claims that those stores opened up a "road map" for a proper brick-and-mortar expansion to boost its brand awareness in hip, densely populated urban areas like New York and Toronto. That's a stark contrast to Luxottica's brick-and-mortar approach, which focuses heavily on suburban malls and retail outlets.
Warby's brick-and-mortar stores enhance its e-commerce business instead of replacing it. For example, store employees can take pictures of customers trying on frames and email them the photos if they don't want to make a purchase right away. Afterwards, the customer can purchase the frame via a one-click checkout from the email. Looking ahead, Warby plans to build its own point of sale system to process those payments and analyze customer relationships.
Warby is still launching pop-up shops to reach new markets. Last August, it signed its first national retail partnership with Nordstrom (NYSE:JWN) to open curated pop-up shops within its upscale department stores.
What about margins and profits?
Warby's revenue nearly tripled from $35 million to $100 million between 2013 and 2015. The company isn't profitable, but it's unclear how deeply it remains in the red. But considering that Warby's workforce grew from 60 employees to 500 employees between 2012 and 2015, and it keeps opening new brick-and-mortar stores, it's likely that its expenses are rising and its losses are widening.
Warby doesn't seem worried about near-term profitability, but its business model might need to be altered if its losses widen significantly or it goes public. To control costs, Warby might need to raise the cost of its frames, stop donating glasses to charity, and shutter stores that aren't attracting enough foot traffic to strike a delicate balance between its brick-and-mortar and e-commerce operations.
Could other overseas markets be next?
Expanding into Toronto isn't a huge leap for Warby Parker, but it might become a stepping stone into other Canadian cities like Vancouver. If it gains enough momentum in those markets, it might consider opening test stores in Europe and Asia. If that happens, Warby Parker could lay down the groundwork to challenge Luxottica -- which doesn't have much meaningful competition -- in the future.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Nordstrom. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.