Hodinkee Isn’t a Case Study in the Failure of Content-to-Commerce; It’s An Example of Poor OpEx and COGS
While we continue to leave the pandemic behind us, there’s no denying that decisions were made during that period based on a fundamental belief in a massive paradigm shift. This was the era of people dropping tons of money on NFTs, Pokemon cards selling for extremely high prices, and people really getting into different kinds of collectibles.
And watches were no different. According to the WatchCharts Overall Market Index, which is comprised of “60 watches taken from the top 10 luxury watch brands, sorted and weighted by transaction value,” the Index went from 27,335 in January 2021 to 47,604 in March 2022. As of March 2024, we’re only up to 29,455. That’s only a CAGR of 2.5%.
Yet, during the throes of the pandemic, things looked really good. But hindsight is 20/20. The reality is that the best strategy can still struggle when the financials get out of whack. And if we look at Hodinkee, that seems to have been the problem.
Last week, Adweek reported on many of Hodinkee’s struggles, including audience revolts, a failure in its Crown & Caliber acquisition, and significant layoffs. It’s a well-reported piece with concerning parts, including where Hodinkee’s founder, Benjamin Clymer, told Adweek that the company hadn’t been profitable for the last three years.
But this reads less like a failure in the overall content-to-commerce strategy and more poor management of OpEx and COGS. I spoke with AMO reader Mat Yurow, Sr. Director of Growth at Thrasio. He explained, “I have acquired nearly a dozen content businesses intended to drive commerce revenue. Many have had a similar outcome [to Hodinkee]. The few that have worked have had a few common principles.”
The important one was strong operating margins, a point I bring up because Hodinkee was not profitable for the last three years. As Yurow explained:
We wanted the acquired company to remain profitable and self-sustaining as we integrated commerce products into the mix. We pursued businesses that would positively impact the company’s overall EBITDA margin, while also leaving room for strategic investment.
But in 2020 and 2021, many companies disregarded profits in exchange for growth. While I disagree with this business approach—I’ve long written about the need for media companies to be profitable—many businesses were being judged on their revenue growth. And many, many businesses solved the growth problem by hiring. As Adweek explained:
In 2023, it laid off staff in January, and then reduced headcount by 20% in August and another 50% in November. In March, the company shrunk further: 10 to 15 staffers were either laid off or left, including the chief operating officer, chief product and technology officer and the head of Hodinkee’s VIP program. Only the August 2023 cuts have been previously reported.
The company, which had around 150 employees in September 2022, declined to provide an updated headcount. Internal sources placed the figure at between 30 and 75 people.
Interestingly, the editorial side doesn’t appear to have missed a beat. Despite talk about audience revolt, YouTube videos still seem to be getting consistent views, and the team’s still publishing a healthy slate of content on the site.
So, the question is, does a business producing niche content about watches need that many employees to begin with? I suspect not. Seeing the team drop from 150 in September 2022 to maybe as low as 30 might be a vital step to right the ship. Getting the OpEx under control is critical if Hodinkee is going to start moving in the right direction again.
The COGS is where things get particularly screwy for Hodinkee. Crown & Caliber works by purchasing used watches from people, fixing them up and cleaning them, and then reselling them. The idea is that Crown & Caliber might buy a Rolex from someone for $5,000, spend some time (OpEx) on maintenance, and then resell it.
But what happens when the watch doesn’t sell? Every week, more of your operating capital gets locked up, especially if you’re continuing to buy more watches. Again, not so much of an issue when the price of watches continues to go up. But then the market fell out from underneath them. In March 2022, the Index for luxury watches was 47,604. By January 2023, it was 34,569. That’s a 27% drop.
As Yurow explained:
The success of the commerce vehicle hinges on its ability to drive better margins than you would have captured as an affiliate. When you are an affiliate, you don’t have to worry about the margins of your partners (to a degree). They pay you [10%] of GMV, and you don’t really care how they make the rest of the business work. All of that changes when you own the business. Not only do you want to capture at least that 10% on every unit sold, but you are now also responsible for its other liabilities, including salaries, benefits, inventory management, etc.
This challenge is further compounded when the acquisition takes place at a time of peak valuation for one or both of the businesses, especially if the assets are initially unprofitable. In the case of Hodinkee, it appears to have been a double whammy.
And so, what we’ve got here is three things:
- OpEx went up as the company chased growth
- COGS got out of whack when the market fell out from underneath it
- The businesses were valued on a paradigm of collectibles sticking around and the market disappeared fast
But the thing that isn’t true is that content-to-commerce doesn’t work. Hodinkee is actually a clear example of that in a couple of ways. Ironically, one of those is selling watches. In October 2020, before Hodinkee announced that TCG had invested in its Series B, I interviewed Clymer for the AMO podcast. And he said:
We sold 500 Omegas in 19 minutes for $3.4 million. We had like the Shopify screen up on our TV in the office, and just to see it go from zero to $3.5 million in 20 minutes is just wild. These things are flying all over the world. It was really a neat experience.
And then there’s the insurance business. A month ago, Blymer posted on LinkedIn:
We started Hodinkee Insurance just over three years ago, and since then we’ve underwritten almost a billion dollars in policies, while offering clients the best possible – and most dynamic – interface directly from our native app.
Typically, when people think of content-to-commerce, they think of selling stuff, but this is another type of content-to-commerce. It has built a following of watch enthusiasts who want to get their watches covered. And it’s monetizing those people by selling policies. That’s not a bad business.
Is the business model hard? Absolutely. Is it easy to lose sight of the financials? 100%. Did that happen to Hodinkee? Yes, I think so. But that doesn’t mean that the underlying thesis is wrong. As Yurow said to me:
Despite Hodinkee’s challenges, I am still very bullish on the content to commerce (and commerce to content) model. Content is a powerful marketing device – it has an unmatched ability to aggregate audiences, build trust, and convert that trust into action. Despite the challenges along the way, combining content and commerce strategically holds immense potential for businesses.
And I agree.
How Publishers Are Using LinkedIn Tools for Audience Development
This is an excellent piece from Chris Sutcliffe, in which he talks to a couple of media companies about how they’re using LinkedIn tools to help them grow. Take, for example, MIT Technology Review. Last year, 15% of its newsletter sign-ups came from organic social. The team also knows that “LinkedIn followers are, compared to our followers on other social media platforms, the most likely to convert into paid subscribers.”
One area that has really helped is LinkedIn newsletters. Because LinkedIn notifies every subscriber of a new edition, it minimizes the impacts of algorithmic changes to the feed.
As always, a word of caution: LinkedIn’s priorities will differ from publishers’, so we must be careful about becoming overly dependent on the platform. However, it might be a good way of driving quality traffic for business publications.
Check out the full piece here.
As always, thank you for reading today’s AMO. If you have thoughts, hit reply or join the AMO Slack to continue talking. Have a wonderful weekend!
