How Brandless walks a tightrope as it rises in online retail

Make no mistake: Brandless is a brand — and one that its leaders want everyone to know.

The brainchild of Silicon Valley entrepreneurs, Brandless Inc. is an e-commerce startup that's relying on the skills of a Minnesota-based merchandising team to stake its place in groceries and household goods.

In just over a year since its December 2017 rollout, the company's focus on simplifying shopping, backed by eye-catching design and a flat $3 pricing strategy, has brought it attention. And last week, it announced an expansion into baby and pet products that made its pricing slightly more complex, adding $9 items.

As it reaches deeper into the household and competes with more retailers, Brandless faces many challenges, including one from its own name. There's a danger that customers may think Brandless means generic.

"That's probably the most insulting thing someone could say to our employees," says Rachael Vegas, Brandless' chief merchant and head of its Minneapolis office.

Generic products try to copy a name brand as closely as possible, she said. Brandless comes up with its own foods and other products, while giving them a shared look and pricing.

The Brandless name is a nod to what founders Tina Sharkey and Ido Leffler believe is an unnecessary "brand tax" imposed on consumers by traditional retailers with overly complex inventories. Their strategy is to eliminate distribution and marketing expenses that add cost to consumer products without making them better.

Sharkey previously founded iVillage and served as chief executive of BabyCenter. Leffler is best known for founding Yes To Inc. and Yoobi. Through associates and industry events, the duo met Vegas, who was vice president of merchandising for center-of-the-store grocery items at Target Corp., and offered her the job of chief merchant.

Vegas, originally from Maine, loved the business idea but told Sharkey and Leffler she wouldn't move to San Francisco, where Brandless is based. She and her husband arrived in the Twin Cities in 2003 with a plan to stay five years. "But now, with two kids who are Minnesotans," she said, "we aren't going anywhere."

She countered with a proposal to open a Minneapolis office, citing the region's deep talent pool because of the presence of retail and food companies like Target, General Mills and Cargill. The founders agreed.

Today, the company's 120 employees are split, about 70 percent in the Bay Area and 30 percent in Minnesota. Last month, the company moved its Minneapolis staff into a bigger office in the city's warehouse district. "At our last space, we had people taking phone calls on beanbag chairs in the hallway," Vegas said.

The company's own products, packaged in a rainbow of bright colors, serve as cheery decor in the new office's whitewashed space. The number of items for sale on Brandless.com has grown from 107 to more than 400.

But that expansion belies the enormous amount of choices Brandless' merchandisers have made to bring focus to the shopping experience and save time for consumers.

Searching for "lotion" on Amazon is going to produce more than 100,000 results. Searching for "lotion" on Brandless produces 10 — for body, face, hands and baby.

"Consumers are absolutely ready and willing to have someone who has done the homework to do it for them," said Marshal Cohen, retail and consumer adviser at NPD Group, a research firm. "The goal is to remove the clutter."

Costco has done this, albeit in bulk sizes and with a mix of its own and existing brands. Cohen said the model works on a smaller level. "The consumer wants to have a site that is fair and impartial to making my experience better," he said.

At Brandless, each item is packaged in a solid color label with as few words as possible while still giving consumers the most critical information.

That's where check marks come in on Brandless labels. The company determined what attributes consumers most desire with each of its products. It puts those front and center of its package, with a check mark next to each as a sort of values oath. On honey, there are check marks for "organic" and "true-source certified." On dish soap, they are for "nontoxic formula" and "EPA Safer Choice certified."

The company hasn't disclosed revenue. But between October 2017 and September 2018, customer spending on Brandless.com grew 413 percent, according to market-research firm Edison Trends.

As an online-only general merchandiser, Brandless is taking a slice of the retail pie from a little bit of everywhere: Amazon, Target and specialty direct-to-consumer brands. Business Insider named Brandless one of 2018's most innovative retail concepts.

Brandless has raised nearly $300 million from investors and they expect growth.

The key to its long-term success is earning customers' loyalty and turning them into repeat shoppers. Last year, 20 percent of customers who made their first purchase on Brandless.com in the second quarter also made a purchase in the third quarter, Edison Trends reported. That was a better retention rate than both Walmart and Target during the same period, but far behind Amazon's 48 percent.

"Online retail comes down to how [customers] experience the site and word of mouth from friends and family," Cohen said.

In addition to merchandising, Brandless is running customer service, quality assurance and packaging from its Minneapolis office. The company's food scientist is also based here.

Vegas said the company listens to its customers and will change products or add new offerings based on that feedback. That's how executives decided to add baby and pet products.

The company's target audience is what they call the conscious urban millennial. But Vegas said its highest growth right now is coming from shoppers in places in the middle of the country where some products Brandless sells aren't readily available in stores. Those customers have asked for larger sizes of certain products to reduce the number of purchases made.

It's likely the company will someday offer a larger size of certain staples, like coffee, while still selling its 6-ounce bag for $3, which is an entry point for those who want to test it before committing to more. Larger sizes would mean higher prices.

"We are not meant to be a single-price retailer forever," Vegas said. "We meant to be a simply priced retailer."

If the Brandless model works, more will follow, Cohen said. "Nothing breeds competition like success, and as soon as these guys are deemed successful, they'll have competition with a twist."

Kristen Leigh Painter • 612-673-4767