In the last three weeks, two of the early smart luggage brands, Bluesmart and Raden, have shut down. What does this mean for the rest of the new luggage startups?
Following an announcement late last year, many major airlines banned smart luggage with non-removable batteries starting January 15, 2018. The ban applied not just to checked luggage but also to carry ons.
Bluesmart was doomed by its non-removable battery. Per the company's closing annoucement:
The changes in policies announced by several major airlines at the end of last year—the banning of smart luggage with non-removable batteries—put our company in an irreversibly difficult financial and business situation.
Despite having raised $25.6M from crowdfunding and VC, Bluesmart closed suddenly after less than five years in operation. The company provided few options for its customers who had paid as much as $700 for a now useless suitcase and supported the brand's crowdfunding campaigns.
- Any Bluesmart products that are available at retail or online are no longer supported or warrantied in any way.
- Returns or replacements of Bluesmart products will no longer be accepted or refunded by our Support Team.
Last week, Raden announced its closure too. Raden had raised a modest (for tech) $5.6M in VC with no crowdfunding. The company lasted just over three years.
Curiously, Raden's announcement cited the same policy change as Bluesmart, even though Raden's suitcases have removable batteries. The Points Guy included Raden among its list of "Bags That Meet the New Rules" at the time of the announced rule change.
The changes in policies concerning batteries in luggage in December by all major airlines severely impacted the usefulness of our products, their value to our customers, our business performance and ultimately the ability to continue operating.
Liz Segran, writing for Fast Company's Moving the Needle newsletter, talked to Raden's founder Josh Udashkin about the company's closure.
Udashkin believes that if he’d raised more capital he might’ve been able to pivot Raden, perhaps repackaging it as a lifestyle brand or developing new tech features. But Udashkin had deliberately tried to build a lean business; he had only raised around $5 million, while Raden’s closest competitor, Away, has landed $31 million in VC money.
The obvious question is why couldn't these companies find a short-term infusion of cash, whether debt or equity, to get past a fixable problem? Replacing or fixing suitcases wouldn't have been cheap, but, if their businesses were promising enough, why didn't a VC put in some money as a lifeline in a time of need? Given that neither company is accepting returns or exchanges, why not launch a new, compliant product and blame the airlines for the old, non-compliant ones?
The Underlying Problem
Even so, more cash probably would’ve proved just a short-term fix, Udashkin reflects. He now believes there are far deeper problems with trying to sell suitcases on the internet. E-commerce startups spend a lot of marketing dollars acquiring new customers, but unlike fashion brands that can sell new clothes every season, luggage is an infrequent purchase. “Millennials in New York and San Francisco don’t have space for a bunch of suitcases,” he points out. “There’s a limit to the lifetime revenue you can make from each customer. Your margins are so low, it’s hard to scale.”
Now we're getting somewhere. Why are the margins so low on these $300+ suitcases?
Perhaps they're priced too low. Companies often try to "buy growth" by selling artificially cheap, VC-subsidized products. For example, Uber rides.
Maybe Udashkin is including marketing costs in his comment about (net) margin. Many modern, direct-to-consumer brands are dependent on advertising, especially on Facebook, to drive sales.
A recent Inc. piece on v-commerce brands emerging from business schools outlined the problem.
[F]or companies reliant on paid marketing, their digital customer acquisition cost (CAC) is a lot like paying for brick-and-mortar stores in the old model, or selling wholesale. Essentially, this undermines one of the most basic precepts of the DTC movement, that these companies are cutting out the middleman and therefore can afford to charge much less for higher-quality goods.
Put simply, "CAC is the new rent."
Both closures, especially that of Raden, which shouldn't have been as impacted by the airlines' rule changes, are red flags for the new era of luggage brands.
The remaining smart luggage brands, including Arlo Skye and Away, are no longer competing with each other. They're competing with copycat smart luggage products from more entrenched brands with better distribution like Rimowa, Samsonite, and Incase.
Away has smartly diversified its product line to include bags and toiletry cases. Their challenge is to sell more products to the same customer thereby increasing that customer's lifetime value. Failing that, they'll be dependent on high margin first purchases and lots of marketing spend to acquire new customers. The online mattress companies are in a similar spot now as they diversify away from their first product to also selling sheets and seat cushions. Samsonite may be known for suitcases, but it sells a much wider range of products and owns diverse brands including Tumi, High Sierra, Speck, and eBags.
If new luggage brands have as low of margins as Udashkin claims, they're in trouble.
A low margin first purchase is workable if you have other products to sell to that same customer. The entire point of taking less margin on an initial purchase is to get that customer onto your list and into your funnel to sell them more products in the future. Emailing new offers to a past customer is much chepaer than trying to acquire a customer via advertising.
Not having anything else to sell is a problem. A strategy dependent on mostly one-time purchases only works if the margin is high enough to re-invest money back into acquiring new customers. This is how a mattress company can work.
Right now, many direct-to-consumer companies are in this bind and relying on piles of VC money to fund new customer acquisition. If they can't increase the margin on their first sale or build a line of diversified products before their investors want a return, the money will dry up, and they'll find themselves in the same position as Blueamrt and Raden: out of business with an apology letter for a website.
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