👄Retail Partnerships Blossom Everywhere (Long Limiting Lease Exposure)👄

SmileDirectClub Expands its Reach with CVS Health Corp. Partnership

In “Retail Partnerships Abound (Long Survival Instincts),” we noted how Birchbox had entered into a partnership with Walgreens Boots Alliance Inc. ($WBA) and CVS Health Corp ($CVS) with Glamsquad. We concluded:

People need drugs. People need food. So why not go where the customers are rather than try to generate independent traffic through your own brick-and-mortar location? Use someone else’s lease rather than incurring the liability. This all makes sense. And so there’s every reason to believe that this trend will continue — particularly where a company brings real brand cache to bear.

This week CVS announced another partnership: SmileDirectClub will be bringing its teeth-straightening services to hundreds of locations over the next two years. Per CNBC:

CVS is trying to keep up with its changing customers. People are shopping online more, especially on sites like Amazon, hurting CVS and other drugstores’ sales of everyday items like vitamins and toilet paper. CVS thinks focusing on health and beauty products and services will be a way to draw people in.

This is a trend that we very much expect to continue. Is it beyond question that, ultimately, we’ll start seeing “health courts” much like we see “food courts?” We can see it now: a murderers’ row of previously direct-to-consumer retailers like Warby Parker, Ro, Hims and SmileDirectClub all in one place so that you can cover your health and wellness needs all in one fell swoop.

Caspar the Friendly (Non-)Restaurant

Walk through the streets of Manhattan these days and you are bound to see a lot of “for rent” signs taped to the windows of empty commercial spaces. In Captain Obvious fashion, Crain’s New York last week noted that Amazon is affecting a lot of mom-and-pop brick-and-mortar: revenue is down due to the online competition and rents in New York, despite tons of vacancy, remain unsustainable for many business owners. 

It’s rather simple: online retailing is eating up brick and mortar and there aren’t enough Bonobos, Birchbox and Warby Parker showrooms to fill the gap. After expanding to seemingly every corner of the City, banks are in contraction mode: there are now a number of shuttered Capital One and Chase locations in the City. And restaurants? We’ve covered that in detail: forget about it. Art galleries? Mwahahahahaha.  

Under the radar are the ghost restaurants that are quietly undermining the commercial real estate market and contributing to the over-supply of space. Wait, what? Ghost restaurants? Picture this: you're on billable hour 26 for the day and you're hungry. You go on Seamless and find a restaurant with glossy food-porn photos and reasonable prices. You order and 35 minutes later you're indulging in your tasty delights while questioning the meaning of life.

A week later, you've got 20 minutes free from the office and your significant other suggests going out to eat. You say, "I know a great restaurant with awesome food. Let's go." You look for an address but you can't find one. Because there isn't one. The place you ordered from has no physical presence whatsoever or, alternatively, is just a kitchen with no seating space. Now you're rubbing your belly and really having an existential crisis. WTF.  

With sky-high rents and quick turnover the norm, companies like the Green Summit Group are coming up with varying and unique restaurant concepts, locating themselves online only (or, at best, securing a small commercial space with no seating), skipping the long-term onerous lease with commercial landlords, partnering with commercial kitchens, and using Seamless and Grubhub for distribution.

This model promotes improvisation. One benefit of avoiding an actual storefront is the ability to test different food concepts and pivot menus if there are lower-than-anticipated sales. Rebranding is remarkably easy: just a new name, some different food porn photos, and an update to Seamless. To the extent that one company is running different concepts - say, Middle Eastern and Greek - it can also cross-pollinate by offering the exact same menu items per "restaurant" and sharing ingredients in the kitchen. This limits the need to source new ingredients or engage in extensive food prep training for each and every concept. 

It is questionable how sustainable these experiments are long-term. You can read more about some of the cons - loss of alcohol-related sales, no walk-ins, logistics complications - here. The fact is, though, that this represents yet another headwind confronting established restaurant companies. And that potentially means EVEN MORE restaurant bankruptcies in the near future.