Madan Somasundaram's Profile

Thanks for your comments Kevin. Warby Parker has indeed been a success story and have experienced tremendous year-on-year growth thus far. As per my comments to Purple Haze above and to your point on profitability, Warby Parker is making little or no profit at the moment and is currently focused on sales growth. This has been the case at other successful startups such as Uber and Amazon, among others, endured several years of negative earnings, before starting to turn profitable. Warby Parker is also created around a social mission as well and is an important consideration when we analyze true profitability objectives. In saying all this, the issue of profitability is definitely real for Warby Parker and the company will need to further explore ways to cut costs (may be through pressing suppliers) in order to achieve positive margins.

Thanks for your comments Raysana. You bring up a couple of great points and definitely potential areas of issues for the company.

a. While having practical leadership experience is often crucial, I do think that it is not impossible for the company to succeed long term with the current Head of Production. Only time will tell but there have been several cases at both startups and large manufacturing and consumer facing companies where certain executives have been positioned in areas where they have previously not had tangible experience but have still proven to be a success. Critically, for this job, having an executive with strong interpersonal and communication skills is critical and it is entirely possible to learn on the job and be successful. From my interaction with one of my friend’s in the corporate strategy team of Warby Parker, it is clear that the company is extremely meticulous in its hiring decisions and potential employees are carefully vetted to ensure that they fit the culture and dynamics of the organization. I believe that at an early stage, having employees with strong track record in previous jobs and being fully immersed in the company’s culture is as critical or more critical that specific operational experience. A lack of experience in a certain job can be complemented by having other individuals within his team with more hands-on experience.
b. Regarding vendors, Warby Parker provides relatively limited information on the number of vendors they have and the location. Although I am afraid I do not know specific details of their contracts with vendors, Warby Parker procures from overseas and I believe they have partnered various vendors to ensure they are able to meet demand. Although the company is still in the growth stage, the past 5 years would have enabled them to have historic demand data and estimate growth as new stores open. Consequently, they probably baseline commitments with vendors with the option for increased supply in periods of unforseen demand.

Thanks for your comments Raysana. You bring up a couple of great points and definitely potential areas of issues for the company.

a. While having practical leadership experience is often crucial, I do think that it is not impossible for the company to succeed long term with the current Head of Production. Only time will tell but there have been several cases at both startups and large manufacturing and consumer facing companies where certain executives have been positioned in areas where they have previously not had tangible experience but have still proven to be a success. Critically, for this job, having an executive with strong interpersonal and communication skills is critical and it is entirely possible to learn on the job and be successful. From my interaction with one of my friend’s in the corporate strategy team of Warby Parker, it is clear that the company is extremely meticulous in its hiring decisions and potential employees are carefully vetted to ensure that they fit the culture and dynamics of the organization. I believe that at an early stage, having employees with strong track record in previous jobs and being fully immersed in the company’s culture is as critical or more critical that specific operational experience. A lack of experience in a certain job can be complemented by having other individuals within his team with more hands-on experience.
b. Regarding vendors, Warby Parker provides relatively limited information on the number of vendors they have and the location. Although I am afraid I do not know specific details of their contracts with vendors, Warby Parker procures from overseas and I believe they have partnered various vendors to ensure they are able to meet demand. Although the company is still in the growth stage, the past 5 years would have enabled them to have historic demand data and estimate growth as new stores open. Consequently, they probably baseline commitments with vendors with the option for increased supply in periods of unforseen demand.

Thank you for your comments. I totally agree with both the points you raised – these are issues faced by most successful start-ups as they move from the initial introduction, through growth and eventually to maturity. To your point on profitability, it is true that the company is making little or no profit at the moment and is currently focused on sales growth. Several other successful companies such as Uber and Amazon, among others, endured several years of negative earnings, before starting to turn profitable. Additionally, as you mentioned, the founders created Warby Parker around a social mission as well and is an important consideration when we analyze true profitability objectives. In saying all this, the issue of profitability is definitely real for Warby Parker and the company will need to further explore ways to cut costs (may be through pressing suppliers) in order to achieve positive margins.
I do also believe there is still significant growth trajectory to be had for Warby Parker. While they currently have a footprint in a few states in the US, there is room for further penetration in the US market, as well as the possibility for international expansion further along the way.
In terms of competition, It is not entirely surprising to see companies with a similar model pop-up. This has been the case in several other industries as well where imitations of successful companies have come up. Competition is currently not a huge threat for the Warby Parker but this can quickly change and it is necessary for the company to continuously innovate and maintain its trendy, hip status among consumers. Crucially, for Warby Parker, they have a strong brand name in the market and there is a strong brand association among customers with Warby Parker.

Thank you Francisco – their model is indeed unique and has been very successful thus far. In terms of your queries, Warby Parker did indeed achieve success soon after launching. As mentioned above, upon launch, they achieved their annual sales goal within 3 weeks. In fact, the founders spent over a year and half creating and refining the brand, core values, strategies and the eventual product before launch. As they wanted to break into the ‘health and fashion’ wrld, the company met with over 40 top fashion PR and consulting firms in order to get buy-in, refine strategy and achieve a level of market testing. This was extremely crucial and eventually enabled them to be acclaimed by consumer periodicals such as Vogue, GQ, Esquire etc. Additionally, they used experts in the field to ensure they got the initial pricing right. Initially, they were planning on launching at a $45 price point, but after in-depth evaluation with a Wharton professor, they decided on a $95 to ensure they don’t come off as a discount brand. Employee recruitment and brand training was core at Warby Parker and the company spent significant time in ensuring every employee stuck to the company’s mission, which is crucial to their product offering and at the birth of a brand. The company also invested deeply in customer service. At an early point during launch, the company was surprised by demand and ran out of inventory. This had the potential to have a negative customer reaction, but the founders made it a priority to inform of the delay to every customer who had placed an order and be transparent with the issue. This transparency and honesty was critical in gaining consumer trust.
The Warby Parker model is applicable to other consumer categories and there have been instances where companies have introduced lower cost alternatives in a mature industry with varying degrees of success. The key to this model is having a strong control of the supply chain and ability to be flexible and nimble in operations. A big part of Warby Parker’s low cost advantage comes from the ability to source products directly from suppliers. However, a downside to this will be potential quality problems and also the ability of a couple of suppliers to meet demand if it skyrockets. HI believe the other aspects of the operating model, in terms of human capital investment and infrastructure can be replicated in other industries.

Thank you Andrea, this is a very interesting piece and pretty accurate picture of the investment banking landscape, especially in Canada. Despite an apparent misalignment in the operating and business models of firms serving this industry, it is interesting to note that firms such as CIBC, RBC Capital Markets, BMO Capital Markets etc continue to be very profitable. Inherently the investment banking business is a human capital business which provides huge margins for firms and hence I wonder whether firms in this industry are reluctant to change an age-old model that ensures profitability, despite the issues highlighted above.
Given the fact that there is limited differentiation between the big banks, do you think misalignment in the business and operating models is especially apparent at CIBC or whether this is a systemic industry issue and CIBC merely follows the norm? I ask that because the recruiting and staffing structures and pay at junior levels is pretty much the same at all the banks and hence is it really in CIBC’s interest to be the one bank shifting away from industry norms and risk being noncompetitive if other companies in the industry do not follow its move?
Given the uncertain work schedules, many banks have now resorted to increasing compensation at the analyst and associate level rather than having a shift schedule – do you think CIBC would be able to recruit talent away from these firms if they offer lower compensation in return for reduced hours? This is especially a difficult issue to tackle as many individuals at the analyst level view the investment banking program as a 2-year stint to gain experience and have a high salary right after graduation, and then move out to other buy-side finance or corporate opportunities.

This is a great post, Jeff, and especially topical given the current state of affairs in the oil & gas industry. Having focused on the oil & gas industry while working inf finance, I totally agree with you that, as a result of a disciplined operating model, EOG has been one of the star player’s in the oil & gas industry, investor perception on their stock has been one of the least negative relative to its peers. In addition to their ability to increas returns through investment in railroads and sand mines, EOG has strategically positioned itself by operating in basins with some of the lowest cost crude oil areas. EOG operates in the Eagle Ford, Bakken and Delaware basins and even at the current low oil prices, the company is able to generate positive returns.
If the oil price hovers at the current level, I would be curious to know whether you think the company will continue investing in exploration prospects, which ultimately will drive future value? Additionally, do you think they will undertake any form of asset sales in other more higher cost basins and consolidate their positions on 3-4 lower cost oil & gas basins?

Great post, Jeff. I echo both your’s and VA’s comments notion that Walmart has traditionally managed to align both its operating and business model effectively. While they have an immense focus on cost reduction, primarily through the ability to keep supplier costs down and enjoy economies of scale through it’s massive super centers, I am a bit skeptical of their future growth prospects and ability to continue enjoying the success they have done in the past.
There was actually a very interesting Business Insider article from October this year which essentially pointed out that Walmart’s “entire business model is crumbling.1” On October 14, 2015, Walmart’s shares endures the steepest one-day drop since 1988. All this was on the back of a profit warning from the company due increased wage costs, more competition from e-commerce companies like Amazon and supermarkets and dollar stores. This is in addition to its weaker international segment growth as a result of the stronger dollar. With this in mind, I would be keen to know whether you believe Walmart should re-focus it’s business by getting out of the many unprofitable stores, move from it’s traditional concept of super centers and possibly Sam’s club (which posted its worst sales figures for quite some time earlier this year)2. Particularly, with super centers, they are potentially getting out of fashion as people tend to shop more efficiently and hence it may make sense for Walrmart to open additional smaller super market type stores in the city. Do you think Walmart is at a crossroads with its business and operating model and how might poorer investor confidence, lack of growth in US and potential move to super market type stores affect it’s focus on gaining cost efficiencies?

1 http://www.businessinsider.com/challenges-to-walmarts-business-model-2015-10
2 http://www.newsmax.com/Finance/StreetTalk/Wal-Mart-Business-Model-Crumbling/2015/10/17/id/696702/