Good afternoon, and welcome to this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel and accessories brand sector here at Goldman, and it is my pleasure to introduce our next fireside chat session with Warby Parker. Here today with me is Neil Blumenthal, co-founder and co-CEO. Welcome, Neil.
Thanks so much. It's always awesome to be here and chatting with you, Brooke. So thanks for having me.
Great! Let's kick it off with an update on your outlook for the U.S. vision care market. What trends do you see today, and what do you think of Warby's opportunity to gain market share?
Sure. So, we're optimistic. This has been a challenging period and an unusual period in the optical industry. You know, typically, sort of pre-pandemic, the optical industry always tended to grow above GDP, usually 3%-5% per year. Recently, it's been flat to down. While nobody wants to talk about COVID anymore, we are still experiencing some of the lasting impacts from it in our category because it's an infrequent purchase. So, what we saw, like a lot of categories, in 2020, was a decline and then a bounce back in 2021. Because Americans tend to buy glasses every two to two and a half years, right?
Some of that breaking of the cycle led to outsized growth in 2021, and sort of a shortfall in 2022 that also carried through to the first half of this year. So, we're already seeing sort of green shoots and sprouts and some normalization within the category. You know, for us, we tend to gain share whether it's a good market or a bad market. So, in 2020, when the optical industry shrank, we grew 6%. When it bounced back, we grew 37%, whereas the category grew 21% that year. If you look last year, also double-digit growth. You know, this past quarter, 11%+ growth, while other public peers in our category were only growing, like, 2% in North America.
We feel good that we can always sort of outgrow the market and gain market share and put ourselves in a position to really take advantage, as sort of purchase patterns sort of return and normalize.
For investors who are new to the Warby Parker story, can you help us understand what are the competitive differentiators that allow you to drive that ongoing market share growth?
Yeah, I think the big part is just we provide exceptional value. And what we mean by exceptional value is great quality at a fraction of the price of what it would cost elsewhere. So our entry price point, $95, that's a unified, simple price of high-quality acetate frames, single vision lenses with anti-scratch coatings, anti-smudge. It's already sort of an elevated lens. It's polycarbonate, so it's lightweight, it's thin, it's impact resistant. And on top of that, just amazing customer experiences. That's the... Our number one focus is always how can we create better and better customer journeys? And that goes back to having this direct relationship with our customers.
So while we launched in 2010, and we did so purely online, it wasn't because we were so dogmatic that we would only sell glasses online. No, it's because that was a cheap, quick way for us to launch a brand that would have direct relationships with customers, and our competitive advantage is that we have the shortest feedback loop from when we hear something in the market, we hear something from a customer, and how we get that into every aspect of our business, from eyewear design to manufacturing to marketing to our online or offline experiences. And that's how we keep iterating and innovating and really just making sure that our experience is better than anyone else's. One of the things I'm constantly telling the team is, happiness equals reality minus expectations.
Expectations keep rising, namely because we deliver a great experience, but also because folks are having great experiences with Uber and Amazon. So we need to be constantly creating a reality that's better and better.
Talk to us a little bit about the competitive environment that you see today. How intense is that competitive environment relative to historic levels, both in-store and for online-only players? And has that dynamic changed at all in the last year?
Yeah, I don't want to paint too bleak a picture from a competitive landscape perspective, or bleak meaning, like, easier for us, because it might invite more people to enter the category. But we're fortunate in that still 50% of the optical industry in the U.S., and this is a $76 billion market, so pretty big, it's still independent optometric practices and optical shops. And these folks do not have the capital or technological resources to invest in the customer experience like we do. So, they're also beholden to buying frames and lenses from some of the big players. So again, on a value standpoint, they can't compete. So we see ourselves taking some share from them, and that part of the market will continue to decline over the next decade.
Given that sort of weak competition there, when we take share from some of the bigger optical retailers, they don't feel as much pain because they're able to continue to take it from that 50%, of that more fragmented per se. We are seeing more online players emerge as expected. The optical category has been under-penetrated in e-com, and when we launched the business, that was one of the things we were most excited about. That being said, you know, 13 years in, if you told me—if you asked me in 2010, what do we—what do I would think the online penetration of the category would be? I thought that would be maybe closer to, like, 20% or always trailing other sort of categories, but far more than it is today.
I think we estimate that maybe it's 10%-12%, and frankly, we're a big chunk of that. What we tend to see online is mainly low-cost players trying to serve lower-income customers. And our competitive advantage is we have online and offline capabilities. We're able to invest more in technology, like our Virtual Vision Test, to renew prescriptions. So we feel like we can compete very effectively online and off.
Omnichannel is a big part of your growth strategy. So let's talk a little bit about your stores. Can you give us an update on the strategy here? How is that strategy changing as you think about infill versus new markets, urban versus suburban? And is there any other tweaks to the store that needs to happen as you get more penetrated?
Yeah. So, you know, probably one of the big changes in the last few years is all of our new stores we're building with eye exam capability. And eye exams are a nice traffic driver into the store. Customers that have an eye exam with us and buy glasses and contacts are worth 2.2x somebody that just buys glasses from us. So, you see us continuing to open stores with exam suites and hire doctors. Versus probably the early days of our rollout, we are opening in more suburban locations, and that's just because, again, historically, we opened a lot of street locations to start.
We also are less focused on central business districts, like most retailers, given the slow return to office and how, you know, we believe that most, sort of, white-collar office work is gonna be hybrid going forward, like Warby Parker, where back in the office Tuesday, Wednesday, Thursday, Monday and Friday are optional. And as you can imagine, not that many people come in on Mondays and Fridays. So that's something that we take into account as we think about our real estate strategy. That being said, our stores that were in central business districts have already started to rebound and doing sort of far better than they were, you know, immediately sort of post-pandemic. You'll continue to see us open around 40 stores a year.
We think that that's a nice clip, and one that we can do very effectively, and sort of from a capital allocation standpoint very efficiently. Our stores cost well less than $1 million to build out. They continue to pay back within 20 months at four-wall margins of 35%. So we feel really great about our retail expansion strategy, and the fact that it continues to sort of perform in this sort of diminished optical demand environment also tells us that there's room to grow there. Where we've sort of been focused a lot and have seen almost an anchor or a drag on our growth has really been in our e-commerce channel.
And, that's because, around this time last year, maybe a few months earlier, we started to pull back pretty significantly on marketing spend, and that has the most immediate impact on our e-commerce channel. And the reason we were doing that is because we noticed CPAs start to rise, as we saw sort of softness in the category. But now we're in a position where sort of we're comping that period of low marketing spend, so marketing spend is now comping positive, and we're starting to see better momentum, particularly in our e-commerce business, which is exciting because that...
You know, if we're growing 11%+ in Q2 with sort of being -5% in e-commerce, that bodes well as e-commerce returns to growth in the second half of this year.
You know, the e-commerce point is a good one, and it's been something that's been dragging your momentum. One of the most frequent questions that we get from investors is how to think about a normalized run rate of e-commerce growth. As you think about the long-term strategy, both in terms of all of these new stores that you're putting into new markets, but also the growth in your e-commerce business, what is the normalized growth rate of e-commerce?
Yeah. So if we look over the past few quarters, right, our retail business has been growing north of 20%, again, in a low-demand environment and a low marketing spend environment. The first half of the year, our marketing spend was down 30%. So we expect sort of retail growth to accelerate faster than that. And then the question is: Hey, does e-commerce sort of comp as a single store? We don't think that makes sense. Does it comp as a channel, as retail does? We expect it to be more similar to that. And if you think about also our different product categories, contacts has been a big growth opportunity for us, and e-commerce will sort of experience a very big sort of upside from that.
You've mentioned marketing a few times in this conversation, so let's move there. As you begin to lap last year's pullback, you've kind of previewed a few brand marketing investments that you'll be investing in, in the back half of the year. How are you thinking about those investments, and how are you measuring to make sure that that is driving brand momentum?
Yeah, I think we have a bunch of different strategies with different goals in mind. So, one is how do we continue to sort of increase awareness, right? Knowing that people can't shop from us if they don't know that, that we exist, and we still have relatively low awareness. We're less than 15% unaided awareness, so, we have certain activities that are really just driven to drive awareness, and we measure that through various surveys that we conduct. I think this is also the beauty of being a vertically integrated brand, right? Is that we've built a lot of consumer insight capability that's able to analyze the customer data that we collect, and that we have at our fingertips.
That's sort of far more than other brands, but also that capability then can be used in for the overall, all market. That's actually a competitive advantage in our space because there's not many sort of market research groups that are really focused on the optical category, so there's not great data for competitors to access. So having that proprietary data and that in-house is incredibly valuable. Other marketing initiatives really focus on customer acquisition, and again, we're able to measure that on a minute, daily, weekly basis. In fact, my co-founder and co-CEO, Dave, and I are in a meeting every two weeks talking about capital allocation from a marketing perspective, and we're able to allocate capital, different channels, literally on a weekly basis.
Often, linear TV, you're purchasing that, you know, at two to four weeks in advance, but streaming, paid social, all these other channels, right, we're able to shift spending literally on a daily basis.
We frequently get questions about the customer growth of Warby Parker, and it seems like it's something that you're very focused on right now. Last quarter, Warby's revenue was largely driven by AOV, with a little bit more limited growth in customer count. Can you contextualize the opportunity for Warby's customer count to accelerate over time?
Yeah, I, I think the first piece is that we made some changes last year to help increase sales within the household. So our active customer sort of count was didn't sort of paint the entire picture as we sort of think about sort of customer growth. Second, that sort of we view sort of Q2 really as the low point in customer growth, and as we mentioned during sort of our earnings call, that we've already seen sort of momentum build both in the back half of Q2 and the beginning of Q3. So that's exciting. It's also was expected as we sort of went from sort of negative marketing comps to positive marketing comps.
While we're on the topic of the Warby customer, I'd love to hear an update on what your customer looks like today. What demographic profile does your median customer have now? Whether that's household income, age, regional, demographic, et cetera, and how is that changing as you've been expanding your demographic or your geographic reach?
Yeah, you know, it's always been sort of an affluent, tech-savvy, early adopting customer base. So, our customers' median income is over $100,000, which I think sort of, at least we found, sort of bodes well in, you know, shaky macroeconomic times. So I, I wouldn't-- I feel well-positioned versus some of our competitors that are more focused on, on the lower end of, of the market. As we've grown, in over 13 years, you know, some of our customers have grown with us.
So over time, you know, our customers are getting a little older, which is actually great, 'cause in, well, every category, right, older, more affluent customers tend to spend more, but in particular, in the optical category, as folks reach 40, 45, right, and start needing reading glasses, well, if you've needed prescription glasses, then suddenly you need progressives, or bifocals. And those generally cost 2x-3x-4x the, the cost of single-vision glasses. So, as we think about sort of avenues for growth for us, one is the aging of our consumer, and increasing awareness with older consumers, who will buy more progressives from us. So it's roughly 20% of our business. In the category, progressives make up 45% of, of the total.
And to give you a sense, right, if our entry point, single-vision glasses start at $95, our entry progressive glasses start at $295. And then, this year, we introduced a premium progressive offering, Precision Progressives, which start at $395, and these are still a fraction of what it would cost elsewhere. Premium progressives at other optical retailers are typically $1,200-$1,300. So we're excited to be able to provide that level of value while providing a product that has higher ASP, higher gross margins for us. So we're pretty excited about sort of the our future progressives business.
You talked about the success in progressives, and earlier you mentioned contact lenses as well as other holistic eye care products. What inning are we in for Warby for non-glasses, for non-single vision glasses penetration? And what is the opportunity for further AOV expansion, both in the near term and on a normalized basis?
... Yeah, so we think we're in the first inning. Maybe not the top of the first, but perhaps the bottom of the first. From a progressive standpoint, as I mentioned, right, we're about like 20% of our eyewear business, right? Typically, it's 45%. From a contacts perspective, it's roughly 8% of our business, growing quickly. A typical optical retailer, it's 20% of their business. Given our digital heritage, right, there's a question of, you know, could it be more than your typical optical retailer? Eye exams also have been a big focus of ours. When we launched. Again, when we launched, we have a philosophy at Warby that I think probably many businesses try and follow: KISS, Keep It Simple, Stupid, right?
How do we take the path of least resistance, get really competent at something before expanding into something new? So we started with acetate frames, with single-vision lenses in year one. Year two, we introduced sunglasses and prescription sunglasses. Year three, we introduced mixed material and metal frames, right? Slightly different sort of manufacturing process and vendors. It wasn't until year four that we introduced progressive lenses. And then, several years later, did we first introduce contacts, and eye exams. And the great thing about eye exams is they tend to be traffic drivers. They, right, are profitable in its own right, but then also drive sort of increased glasses and contact sales. And one of the things that we found is, we're a sort of preferred employer of optometrists.
That's as we think about the competitive environment, we find ourselves perhaps competing more on hiring optometrists than necessarily than going after customers per se, because there's only 1,800 optometrists that graduate every year, and the need continues to increase. By 2050, 50% of the world's population will have a refractive error that requires glasses or contacts to correct. So as the need increases, right, the sort of graduation of eye doctors has not kept pace. But we've been able to recruit and retain some of the best eye doctors because of our working environment, because our stores are new, the equipment is top of the line.
Because of our investment in technology, folks are, you know, able to focus on clinical care rather than administrative tasks, and we think that this will be a major competitive advantage going forward. And in the short term, it's been really a big investment, and we've had to, right, build out stores, hire optometrists. Over the last couple of years, we've actually transitioned about 40 independent optometrists to being under a PC model, where they're effectively sort of employed by us. And what we mean by that is that in some states, optical retailers can't directly employ optometrists.
So often, you lease space to an independent optometrist, the person comes in, the independent optometrist charges for the eye exam, and then hopefully, the person buys glasses, or contacts from you. We transitioned a bunch of independent optometrists to a PC-friendly model that allows for tighter integration, better customer experiences, and that all just happened effectively in the last 12 months, and that actually hit our gross margin line.
So as we think about where there's opportunity, right, we think there's lots of opportunity top line, there's some opportunity in the gross margin line, namely because we've in the last 12 months have increased some of the fixed costs of our gross margin, because optometry salaries, as well as retail rent and depreciation, we put in sort of the gross margin line.
Let's dive.
I know I went a little farther on that, but I get pretty excited about eye exams, and there's a lot of different components to it.
There's like five questions that I could ask as a result of what you just mentioned. But let's start on the last point on the PC conversion model, because you've only done that for the last 12 months. What have you learned from those rollouts so far, and how do you think about that opportunity to convert that eye exam customer into a paying customer for eyeglasses and other products?
Yeah. So I think the first thing that we noticed was that those patients that were going to see the IOD, the independent optometrist, had a lower conversion rate than if they were in the PC model. So we've seen higher conversion of those patients going to see now an optometrist sort of in our orbit, than when we just leased them space. So that's probably the biggest impact on the business. The other thing is just a much more effective handoff and better customer journey when it comes to scheduling sort of enacting the transaction. It's just a more seamless customer experience.
And then we've actually seen, sort of happier optometrists, 'cause we can actually now, you know, work with them on scheduling, help take on a lot of the administrative tasks that they were burdened with previously, and then also provide some, Warby equity, which, they really value.
That's great to hear. One of the most common things that goes hand in hand with that eye doctor visit is insurance... That's one of the areas where Warby isn't necessarily in network with some of the big providers that are often the vision insurance provider for many consumers in the United States. Can you give us an update on the measures that you're taking to ease those frictions for out-of-network customers? And do you believe that insurance is a long-term regulator on your growth?
Short answer is no. But one of the—as we look at vision insurance in America, the average out-of-pocket spend is over $250. So as we're thinking about our pricing and the value that we're providing, we're looking not only at what sort of our competitors are charging and making sure that we're a fraction of that, we're also looking at what customers are spending that happen to have insurance and go in-network as well, to make sure that we're competitive with what they're paying out of pocket as well. And I'm happy to report that it's still an incredible value, and sort of we see that again in our continued growth, that we continue to take share, you know, from folks that have that are in-network with the major players.
We currently are in network with providers that have over 18 million lives covered right now. You're going to see us continue to add to that and increase it. We recently rolled out a new feature online, Universal Eligibility Check, that makes it easier for folks to look up their in-network benefits with us, as well as to give them guidance on sort of how to file for an out-of-network reimbursement as well. And it is often a question that I ask whenever I'm visiting our stores: "Hey, do you get questions about insurance?" And I'm actually surprised by often what I'll hear, that when insurance does come up, folks are completely comfortable sort of filing for out-of-network reimbursement.
But we continue to test different tools to automate that on behalf of our customers.
We talked about some of the AOV opportunities, that you have, and in the answer that was a couple of questions ago when we had to dive into, you talked about some of the different frame price points that you had introduced to the marketplace, and you've added a few more this year.
Yeah.
And that's been one of the partial drivers of your AOV expansion. One of the questions we're asking all companies at our conference today is how they're thinking about pricing. And I know you're not taking, like for like, pricing on that base $95 price point, but how are you thinking about pricing next year as a driver of your business? Do you think that prices will rise, stay the same, or lower?
Yeah, I think we'll continue to see sort of average revenue per customer increase, like it has over the past few years. And part of that is us introducing new products like our Precision Progressives. Also on the frame side, as you mentioned, we have introduced some new price points over the last couple of years. So yes, we have $95, we have $145, we have $175, and $195. And depending on if you're, you know, that progressive lens could be an incremental $200, or that premium Precision Progressives could be an incremental $300. So, we'll continue to provide products and services and let customers decide what they want to purchase from us. The guiding principle continues to be exceptional value.
How do we make sure that if we are planning to introduce something, that it still costs a fourth of what it would cost elsewhere? And we're finding that our customers are really excited about some of the more complex constructions that we've been designing and building and manufacturing in China and Japan and Italy, for example. And I think that's also one of the advantages to being vertically integrated, is that we can immediately respond to what we're seeing in the market.
One other question that we're asking all companies at our conference today is how they see the consumer backdrop shaping up into 2024. How do you see the optical consumer into 2024? Are they going to be facing more headwinds or less headwinds? And any trade up or trade down that you expect in the business?
Yeah, we expect it would go against physiology for the optical industry to have a worse year next year than we've had over the last 12 months, for example. It's just... Right, if you look at the history of the optical industry in the U.S., where people tend to buy on this cycle, it's been very consistent. Barring another pandemic again, it'd be hard to imagine that people do not need to replace their glasses. Certainly, they need to replace the contacts, but right, the physiology of the human eye doesn't... Well, that doesn't change, but their prescription changes, so they'll need to come in, and we feel like we're best positioned to take advantage of that.
From a macroeconomic perspective, we believe next year will be better than this year, so we should benefit from those two dynamics. Even if it's just flat or slightly worse than this year, we tend to benefit from people sort of grading down from their high-end independent optical shop, or from more costly sort of chain optical retailers. But irrespective, again, the dynamics of our progressives business will result in a higher revenue per customer, even if sort of that mix vis-a-vis frame price doesn't continue to rise as quickly as it has been.
Do you think that trade-down benefit is driving additional active customer growth for Warby Parker? Are you seeing, you know, price and value show up more and more in this macroeconomic time, in your customer surveys than you did, say, in 2021?
Surprisingly not. What we tend to hear most from folks is convenience is most important, and what they wanna see is more stores closer to them, and that we offer eye exams. So that's why that's been such a big priority over the last sort of 24 months.
Great. On capital allocation, can you talk a little bit about your priorities here, and how are you thinking about your ability to generate free cash flow?
Yeah. So, you know, we have north of $200 million on the balance sheet. We've spoken about sort of this year being pretty close to cash flow neutral. You know, the major use of capital is really in new stores, and those stores cost less than $1 million to build out, and we've been opening sort of 40 a year. So we feel great about our cash position and our ability to generate free cash flow. So we think about, again, this 20-month payback. If we also think about sort of the 40 stores next year being a lower sort of percent new store count relative to the total stores, store count.
We see the ramping of the stores over the last 18 months continue to sort of progress, and eye exams continue to grow, contacts, those all, it creates quite a virtuous cycle for us.
That's great. On technology, what additional investments or initiatives do you have there? You've been a leader there for quite some time. Is it AI that's next?
Yeah. So we've been using AI for a while, whether it's our Virtual Vision Tests and, like, determining distances, for example, whether it's the models that we've built to identify where to open stores, or how we read and transcribe prescriptions, for example. We're super excited about all the applications of generative AI in particular, and have already seen productivity gains of our software engineers, of our product managers, for example. You know, depending on who you speak to within the company, it could be 20%-50%, believe it or not, of productivity gains. Like, I'm sure everyone's been reading about just even tools like GitHub Copilot, right?
That's helping our engineers sort of finish lines of code just as Gmail serves up, right, their how you finish sentences on email. So we're still in an exploration phase, and actually, one of the mandates that Dave and I have for the entire team is to play with a lot of these generative AI tools. And we already start to accumulate learnings of how it can improve productivity, and simultaneously, how do we create sort of guidelines and best practices about it. But we think that this is on par with the Industrial Revolution, the the AI revolution, on par with the Internet revolution, and we think within our category, we're the best positioned to to take advantage of it.
That's great to hear. Well, Neil, thank you so much for your time today, and thank you to everyone in the audience for tuning in.
Great. Thanks so much.