Is my business wounded to death or is it just a bump in the road?

[windchaser]

I have been working on this business for the last 3 years together with a business partner and we have been growing steadily and profitably (specially since Fall of 2020). However,during the last 3 months we have been struggling with declining sales, an increasing CAC and a big increase in production costs that is taking a toll in our margin.

I am trying to determine if this is just a bump in the road or if my company is letally wounded.

To do so, I am trying to analyze things with perspective and the most objective way possible. Any feedback from other forum members would be extremely valuable.

Some background:

The business is a kids fashion brand selling B2C via our own website. 95% of our sales are in Spain and 5% in Europe and Latam.

Most of our sales (75%) are organic via Google, Instagram or word-of-mouth, around 5% are from email marketing and the rest come from Facebook ads (now we are starting with google ads as well).

Our conversion rate is 1,51% (it generally varies between 1,30% and 1,92%) and 42% of our clients are recurring (the last 3 months even more, 50%). Our returns rate is less than 1% despite our policy of 30 days free returns. Our overhead is low (cheap office and no employees). Our main expenses are fabrics and manufacturing, and some ads.

Things started to get ugly on April ( with -45% sales yoy), it is true that it was a strangely cold April in Spain and that certainly played a role, but then on May and June we were -13% yoy on May and we are -15% month to date (even after advancing sales for a week).

Any significant changes these months? Several.

1) We increased prices between 5-10% in 85% of our products (we are in a mid-high price range (for Spain) but we cannot increase prices much more).

2) Our CAC on facebook ads increased 30%

3) Our organic reach on Instagram (our main source of organic traffic) got slashed more than 60%.

4) Travel restrictions on Easter holidays resumed for the first time in two years and there were 2 long weekedns on May withouth travel restrictions. So disposable incomes of many consumers went mostly there.

5) We had to advance sales season as all competitors did it and it was reflecting on our sales.

6) Our materials costs went though the roof (we mainly work with cotton fabrics).

7) The macro situation as a huge headwind.

As for the sales, 90% of our sales used to come from the baby clothes, and in summer, the smaller sizes generally sell better. However, these months, the sales of baby clothes dropped (except larger sizes) and girls´s dresses became the new bestseller collection (mainly driven by recurring clients).

I believe we are in clear breach of the commandment of control (as a change in the instagram algorithm slashed our web traffic and sales) and we are failing to acquire new clients successfully. If this is the only problem, it is solvable, just a bump in the road.

But my biggest concern is that I believe we may also be in breach of the commandment of need, and, if that is the case, then we will just be prolonging the agony.

What makes me think this? The huge effect our competitors actions had on our sales (like advancing the summer sales) and the higher than expected price sensitivity of our clients. Also the fact that our product is not indispensable, and it is actually one of the first things you cut in difficult times, like the ones ahead.

The number of returning clients and the low return rate and love messages say otherwise. However, if costs keep increasing and I cannot increase prices further, we are doomed...

Any thoughts or feedback is welcome!

Many thanks!

 

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[fx.lukasx]

Hello,
I'm probably not the best person to give you advice, since I haven't really executed my fastlane journey. It's also unclear what products you're selling. Is it something that I won't get anywhere else? (Because of design, material, type, or even story of the product...)
If it's something that could be a commodity (like a t shirt with beach pictures for example, that can be bought pretty much everywhere) then it's not really a good way to go. In this case you'd just be competing for the best price.

Which happened to me... for about a year I was trying to sell courses for solving rubik's cube. While this information is out there for free, I created PDF files to accompany it as well (it was supposed to be something that made my product different). I turned out to be struggling with the sales and if I sold, I had to make my price comparable to other courses online. I failed at the commandment of need. The worst thing is that I was SURE that my course was unique in value, but people didn't really need my PDFs I guess.

Not sure if it helped you, but maybe focusing on the product and making it more unique and / or something that you can't get elsewhere could be better than optimizing your ads and running campains. (Just speaking from my experience)

Like I said, I'm not unscriipted myself just yet so I may be wrong with many things.
Cheers.

 

[windchaser]

Hello,
I'm probably not the best person to give you advice, since I haven't really executed my fastlane journey. It's also unclear what products you're selling. Is it something that I won't get anywhere else? (Because of design, material, type, or even story of the product...)
If it's something that could be a commodity (like a t shirt with beach pictures for example, that can be bought pretty much everywhere) then it's not really a good way to go. In this case you'd just be competing for the best price.

Which happened to me... for about a year I was trying to sell courses for solving rubik's cube. While this information is out there for free, I created PDF files to accompany it as well (it was supposed to be something that made my product different). I turned out to be struggling with the sales and if I sold, I had to make my price comparable to other courses online. I failed at the commandment of need. The worst thing is that I was SURE that my course was unique in value, but people didn't really need my PDFs I guess.

Not sure if it helped you, but maybe focusing on the product and making it more unique and / or something that you can't get elsewhere could be better than optimizing your ads and running campains. (Just speaking from my experience)

Like I said, I'm not unscriipted myself just yet so I may be wrong with many things.
Cheers.

Many thanks for your input! I really appreciate it.

I would say the product is somewhere in between, it is not a commodity, it has a characteristic style and design (in fact, other brands have copied our designs several times) but it is certainly not unique in the sense that the need can be fulfilled by other competitors.

You mention a very good point about focusing in the product. We have actually been doing that using exclusive prints for you fabrics (instead of the ones everyone else uses as they go to the same providers). We also experiment with more unconventional designs amd those have actually been bestsellers (and could sell at slight premium).

However, even with that, there are certain price points you cannot cross or most clients don't buy and go to similar competitors instead. I can see a certain paralelism with what happenned to your courses in that aspect.

 

[G-Cream]

Hey, I see this was posted in June, hopefully things have taken a turn for the better. I think businesses have a way of testing you to see if your built for this life, and you might very well be at one of those crossroads. People always need clothes, so I doubt it’s the industry you are in. Keep pushing forward, try new ways to acquire customers.
Maybe it’s time more money was spent on marketing. Maybe broadening your market rather than the majority of business being done in Spain. Keep going back to the drawing board. Assume the business is going the way it is because of you. You can change how you approach your business but not how external factors affect your business. Best of luck you got this!

 

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[Kevin88660]

I have been working on this business for the last 3 years together with a business partner and we have been growing steadily and profitably (specially since Fall of 2020). However,during the last 3 months we have been struggling with declining sales, an increasing CAC and a big increase in production costs that is taking a toll in our margin.

I am trying to determine if this is just a bump in the road or if my company is letally wounded.

To do so, I am trying to analyze things with perspective and the most objective way possible. Any feedback from other forum members would be extremely valuable.

Some background:

The business is a kids fashion brand selling B2C via our own website. 95% of our sales are in Spain and 5% in Europe and Latam.

Most of our sales (75%) are organic via Google, Instagram or word-of-mouth, around 5% are from email marketing and the rest come from Facebook ads (now we are starting with google ads as well).

Our conversion rate is 1,51% (it generally varies between 1,30% and 1,92%) and 42% of our clients are recurring (the last 3 months even more, 50%). Our returns rate is less than 1% despite our policy of 30 days free returns. Our overhead is low (cheap office and no employees). Our main expenses are fabrics and manufacturing, and some ads.

Things started to get ugly on April ( with -45% sales yoy), it is true that it was a strangely cold April in Spain and that certainly played a role, but then on May and June we were -13% yoy on May and we are -15% month to date (even after advancing sales for a week).

Any significant changes these months? Several.

1) We increased prices between 5-10% in 85% of our products (we are in a mid-high price range (for Spain) but we cannot increase prices much more).

2) Our CAC on facebook ads increased 30%

3) Our organic reach on Instagram (our main source of organic traffic) got slashed more than 60%.

4) Travel restrictions on Easter holidays resumed for the first time in two years and there were 2 long weekedns on May withouth travel restrictions. So disposable incomes of many consumers went mostly there.

5) We had to advance sales season as all competitors did it and it was reflecting on our sales.

6) Our materials costs went though the roof (we mainly work with cotton fabrics).

7) The macro situation as a huge headwind.

As for the sales, 90% of our sales used to come from the baby clothes, and in summer, the smaller sizes generally sell better. However, these months, the sales of baby clothes dropped (except larger sizes) and girls´s dresses became the new bestseller collection (mainly driven by recurring clients).

I believe we are in clear breach of the commandment of control (as a change in the instagram algorithm slashed our web traffic and sales) and we are failing to acquire new clients successfully. If this is the only problem, it is solvable, just a bump in the road.

But my biggest concern is that I believe we may also be in breach of the commandment of need, and, if that is the case, then we will just be prolonging the agony.

What makes me think this? The huge effect our competitors actions had on our sales (like advancing the summer sales) and the higher than expected price sensitivity of our clients. Also the fact that our product is not indispensable, and it is actually one of the first things you cut in difficult times, like the ones ahead.

The number of returning clients and the low return rate and love messages say otherwise. However, if costs keep increasing and I cannot increase prices further, we are doomed...

Any thoughts or feedback is welcome!

Many thanks!

You mentioned that there are copycats. It could be declining margin due to increased competition. It could be a question on entry barrier.

If it is a need problem you would hardly have any sales.

All the declining roi on advertising could be just due to customers having more options of similar products.

Typical solution is either invest in scale to have cheaper per unit sales price or invest in branding to defend your margin.

 

[windchaser]

Hey, I see this was posted in June, hopefully things have taken a turn for the better. I think businesses have a way of testing you to see if your built for this life, and you might very well be at one of those crossroads. People always need clothes, so I doubt it’s the industry you are in. Keep pushing forward, try new ways to acquire customers.
Maybe it’s time more money was spent on marketing. Maybe broadening your market rather than the majority of business being done in Spain. Keep going back to the drawing board. Assume the business is going the way it is because of you. You can change how you approach your business but not how external factors affect your business. Best of luck you got this!

Hi! Many thanks for your input!
Actually, yes, thankfully things got a turn for the better and now my main challenge is production and stock.

We started with new channels to acquire customers and it is working. Also, we started selling through multibrand stores and now are negotating b2b sales in foreign countries, the problem we are facing is meeting demand to be able to serve them in a timely and efficient manner, but I guess that is a better problem to have than the previous one.

This being said, I still have serious doubts that the niche is bug enough. It seems it could be an excellent lifestyle business but not big enough to be fastlane.

I am actually considering handing it over to my business partner (who is ok with running this type of business) and go pursue a different venture.

 

[windchaser]

You mentioned that there are copycats. It could be declining margin due to increased competition. It could be a question on entry barrier.

If it is a need problem you would hardly have any sales.

All the declining roi on advertising could be just due to customers having more options of similar products.

Typical solution is either invest in scale to have cheaper per unit sales price or invest in branding to defend your margin.

Many thanks for your insight! I think you arr competely right and in fact we did that. This collection we focused on the products with higher margin and are more unique and it is being a success, in fact, we are back to having stock issues. About the copycat, they are out of business now.

However, I am still concerned that the niche is not big enough, and, from an opportunnity cost perspective, even if we do excellent, I am not certain is the best deployment of resources compared to other ventures I could pursue.

Many thanks!!

 

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[Kevin88660]

Many thanks for your insight! I think you arr competely right and in fact we did that. This collection we focused on the products with higher margin and are more unique and it is being a success, in fact, we are back to having stock issues. About the copycat, they are out of business now.

However, I am still concerned that the niche is not big enough, and, from an opportunnity cost perspective, even if we do excellent, I am not certain is the best deployment of resources compared to other ventures I could pursue.

Many thanks!!

The size of the niche is really the size of the total addressable market. I definitely do not think kid's fashion is small. It is literally those "billion dollar market size" market.

Comparatively it is smaller than adults' wear due to the shorter age duration of children, but its still a big market compared to service maintenance of luxury cars for example.

 

[G-Cream]

Hey! Glad to hear it has taken a turn. As someone who has recently closed a business basically on a whim (due to some personal reasons) my only advice would be to try to maximize what you can get out of it. It sounds like you laid the ground work, built relationships, and created a some sort of template for your product. There is value in all of these things.

I understand this could be difficult if you’ve already told your business partner that he can have your share of the business, but if not, maybe he could buy you out, give you a small percentage of the sales for X amount of time, or sell your share to someone else looking to get into that industry.

All of this being said, those are all things that I did not do with my business, and things are always easier said then done.
Best of luck going forward! If this business is not for you, I’m sure there are many lessons you can take away from it and apply to your new venture!