Stitch Fix Layoffs, CEO Change Prove Digital Won’t Fix Bad Ideas

Stitch Fix, like Zillow and RedFin in the real estate space, used charismatic leaders and the glow of everything digital to cover their broken business models.

StitchFix (SFIX) - Get Free Report seemed like a brilliant idea until you really thought about the company's business model.

When it launched, the company's goal was to have personal stylists provide people with clothing choices that me their specific needs. The idea, from founder Katrina Lake, was to make having a stylist something that more people could afford.

The problem is that while that sounds like a good idea "everyone can have a personal stylist," the reality was very different. First, having people do anything is expensive so the company quickly tried to use artificial intelligence (AI) to help match customers with clothing. Second, having the inventory to match everyone with the right items for them also costs a lot of money.

Basically, Stitch Fix promised something it could not deliver at any sort of scale. It's possible that at a high enough volume, some of the inventory costs would have been more manageable, but there was no easy (or likely possible) way to deliver personal service using AI. 

That's not the biggest problem. You have to look a little deeper to see that Stitch Fix is built on an inherently flawed idea.

Essentially, the company's core audience is men who want to look stylish but don't like to shop or have any sense of style. That customer exists, I'm sort of that person, but that's a niche audience at best.

Now, Stitch Fix has laid off 20% of its workforce (not its first layoff) while CEO Elizabeth Spaulding stepped down and Lake will step back in on an interim basis. Lake has proven charismatic, and many have lauded her genius, but her business model was always flawed and every attempt to save it has failed.

RedFin and Zillow Are Based on Bad Ideas too

Zillow (Z) - Get Free Report and Redfin (RDFN) - Get Free Report fell into a similar trap. Both companies wanted to disrupt the supposedly broken system of Realtors/real estate agents that supposedly plagues the housing market. The problem is that the current system both works well and is actually quite cheap.

The incumbent way to buy or sell a home involves both the buyer and the seller having a real estate agent. That person is ideally an expert in the local market that can properly market the property to get the highest price while on the seller's side, a real estate agent helps you find a home at the best price possible.

For providing those services the seller pays the two agents (or a single one if the listing agent finds the buyer) a maximum of 6%. That means that any attempt to disrupt this market has a grand total of 6% of the sale price to make money on.

Yes, agents can make a little extra with kickbacks from home inspectors, insurance companies, and even mortgage brokers, but the core business is the 6% commission.

So, basically, RedFin and Zillow added a lot of unnecessary bells and whistles to a process that's actually based on building a relationship with another person. I don't need a "Zestimate" because my Realtor told me the exact price my home would sell for when we listed it.  

Just Saying "Disrupt" Isn't a Business Model

People selling their homes sometimes don't like paying a 6% commission split between the buyer and seller agents because it's a big number when you consider home prices. If you sell your house for $400,000, that's $24,000, which seems like a giant number, but it's generally a fair one in most markets.  

When you're selling a house in a seller's market, your agent's job is to get you the highest price possible from a buyer that's likely to be able to close. It's the same thing in a buyer's market, but in both cases, the agent does real work where experience matters.

RedFin and Zillow weren't doing a better job than traditional real estate agents, they simply added a digital layer to replace some human contact. Like Stitch Fix, both of these companies sold an idea that sounded good, but was actually paper thin.

All of them have struggled, had layoffs, and are fighting to survive. If they do, it's either going to be as very minor players or by switching to a different business model.