Nasty Gal: When a Disrupter Isn’t Disruptive Enough

Supply vs. demand: What can we learn from the Nasty Gal bankruptcy?

Nasty Gal Inc., an online retailer focused on fast fashion for millennials, has gone from generating $85 million in revenue in 2014 to bankrupt in 2016…

What happened?

Founded by 32-year-old Sophia Amoruso in 2006, Nasty Gal’s rise and fall happened in less than a decade. It started as an eBay vintage store run solely by Amoruso and supported by her knack for stylish finds at good prices.

With gumption, she did what any entrepreneurial, then-22-year-old would do: turn to social media to promote her inventory and fledgling business. Her social savvy resulted in demand outweighing supply. By then she had a brand, an eCommerce website, and the start of an online empire. To match demand, she began approaching labels to bolster inventory.

In 2012, things began to pick up even more. The growing company began selling clothes under its own name, it procured a distribution center in Kentucky, and venture capitalists started to take notice—leading to at least $40 million in funding.

In 2014 and 2015, the eCommerce-founded retailer opened two brick-and-mortar locations in the Los Angeles area—following suit behind other digitally born retailers like Warby Parker, Everlane, and Amazon expanding their presence through physical storefronts.

However, the velocity of growth proved challenging for Nasty Gal. According to a recent Wall Street Journal article, former employees have said frequent layoffs, lack of communication, and high leadership turnover led to low internal morale over the last couple of years.

In 2015 and 2016, Nasty Gal was able to raise an additional $24 million in equity and debt financing, but at that point it was too late. Though Amoruso had already stepped down and the company was under new leadership, several business missteps had led to a point of no return. Nasty Gal entered chapter 11 protection in November of 2016. In November, it was optimistic— hoping to rebuild and emerge from bankruptcy. However, in February it announced it has instead agreed to sell its brand name to Boohoo.com, its U.K.-based business rival, for $20 million. The purchase includes full rights to the brand and includes eliminating its brick-and-mortar locations in Los Angeles and Santa Monica.

Supply vs. demand: What we can learn from Nasty Gal

Nasty Gal’s strong start can be attributed to the entrepreneurial tenacity of its founder. Amoruso started small, leveraged her social community, and built a brand that offered affordable finds to eCommerce’s largest audience: millennials. It entered the market as a disrupter—challenging the likes of Urban Outfitters, Asos, and Topshop.

However, Amoruso’s attachment to the brand and some business missteps made it difficult to scale and accommodate the rapid growth it experienced.

Investing in the wrong kind of logistics

During its peak years, Nasty Gal had no issue converting a first-time buyer. Its brand was compelling and the prices were competitive. But, because it operated at such low product minimums, it struggled to source quality factories that produced quality product. More often than not, real-life product failed to match its online appearance—disappointing customers and turning them away from the brand as a whole.

In spite of product quality and customer loyalty, Nasty Gal’s sales jumped from $28 million to $128 million between 2011 and 2012. To accommodate the $100 million delta, the business sought a new logistics and fulfillment strategy that included investing in a 500,000-square-foot distribution center in Kentucky. To many, this seemed like an old-school way to handle a young, disruptive business model. While most of its peers and competitors relied on third-party logistics (3PL) providers, Nasty Gal chose to rent and operate its own facility—essentially creating a financial sinkhole.

Instead of investing in the quality of the brand, product line, and customer experience, Nasty Gal chose to own its own infrastructure— the choice is common in retail, it just isn’t modern.

In old-school retail, there was a mentality that the health of the brand relied on self-sufficiency. But that’s changed. Businesses have become more dynamic, leveraging outsourced expertise and new technologies to help make the business more innovative, agile, and available to its customers—not the other way around.

That’s especially true for the supply chain. For many of today’s startups, outsourcing logistics and fulfillment is a no-brainer. With 3PLs and new warehousing technologies, there’s no need for a fledgling brand to build and rely on its own logistics center. Instead, it can outsource that part of the business to experts and focus on growing and establishing its market presence. Warby Parker, with 40 stores and an online market value of more than $1 billion, still relies on 3PLs to fulfill orders.

Nasty Gal’s investment in the Kentucky facility wasn’t the sole source of the brand’s demise, but it illustrates a valuable point for eCommerce retailers looking to scale. Investing where it matters most—in the customer and their satisfaction—is what keeps brands alive.

Logistics and the supply chain should augment that strategy, not take away from it. For a fraction of the cost, retailers can access warehouse space to support its capacity and fulfillment needs—all without having to worry about fixed fees or long-term commitments. On-demand warehousing solutions, short-term lease options, and pop-up fulfillment centers are just a few of the ways eCommerce retailers can take advantage of cost savings when it comes to managing the supply chain. Beyond reducing the traditional up-front costs associated with the supply chain, retailers can implement a warehousing strategy that improves customer satisfaction through faster shipping options at lower prices.

Nasty Gal disrupted retail with a fresh approach to an industry begging to be disrupted. In the last decade, fast-fashion has become a new business model in its own right and Nasty Gal was one of the first brands to catch people’s attention. However, its story is the same as so many others’ in retail: it relied too heavily on antiquated strategies that didn’t give them the flexibility they needed to respond to market demands.

It just goes to show that even the disrupters can be disrupted.

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