BUSINESS PROBLEM-SOLVING CASE A Nasty Ending for Nasty Gal In 2006, Sophia Amoruso was a 22-year-old hitch- Amoruso took customer feedback very seriously and hiking, dumpster-diving community college dropout believed customers were at the center of everything with a lot of time on her hands. After reading a book Nasty Gal did. When she sold on eBay, she learned to called Starting an eBay Business for Dummies, she respond to every customer comment to help her under- launched an eBay store called Nasty Gal Vintage, stand precisely who was buying her goods and what named after a song and 1975 album by the jazz singer they wanted. Amoruso said that the content Nasty Gal Betty Davis, second wife of the legendary Miles customers created has always been a huge part of the Davis. Nasty Gal brand. It was very important to see how cus- Nasty Gal's styling was edgy and fresh-a little tomers wore Nasty Gal's pieces and the types of photo- bit rock and roll, a little bit disco, modern, but never graphs they took. They were inspiring. hyper-trendy. Eight years after its founding, Nasty Gal Social media is built on sharing, and Nasty Gal gave had sold more than $100 million in new and vintage its followers compelling images, words, and content to clothing and accessories, employed more than 350 share and talk about each day. They could be a crazy people, had more than a million fans on Facebook and vintage piece, a quote, or a behind-the-scenes photo. At Instagram, and was a global brand. It looked like a most companies the person manning the Twitter and genuine e-commerce success story. Or was it? Facebook accounts is far removed from senior man- When Amoruso began her business, she did agement. Amoruso did not always author every Nasty everything herself out of her tiny San Francisco Gal tweet, but she still read every comment. If the cus- apartment-merchandising, photographing, copywrit- tomers were unhappy about something, she wanted to ing, and shipping. She got up at the crack of dawn to hear about it right away. At other businesses, it might make 6 a.m. estate sales, haggled with thrift stores, take months for customer feedback to filter up to the spent hours photoshopping the images she styled and CEO. When Nasty Gal first joined Snapchat, Amoruso shot herself using models she recruited herself, and tested the water with a few Snaps, and Nasty Gal fol- ensured that packaging was high quality. lowers responded in force. She would inspect items to make sure they were in In June 2008, Amoruso moved Nasty Gal Vintage good enough shape to sell. She zipped zippers, buttoned off eBay and onto its own destination website, www. buttons, connected hooks, folded each garment, and slid nastygal.com. In 2012, Nasty Gal began selling clothes it into a clear plastic bag that was sealed with a sticker. under its own brand label and also invested $18 million Then she boxed the item and affixed a shipping label on in a 527,000-square-foot national distribution center in it. She had to assume that her customers were as particu- Shepherdsville, Kentucky, to handle its own shipping lar and as concerned with aesthetics as she was. and logistics. Venture capitalists Index Ventures pro- Amoruso had taken photography classes at a com- vided at least $40 million in funding. Nasty Gal opened munity college, where she learned to understand the a brick-and-mortar store in Los Angeles in 2014 and importance of silhouette and composition. She bought another in Santa Monica in 2015. vintage pieces with dramatic silhouettes-a coat with With growing direct-to-consumer demand and a big funnel collar, a '50s dress with a flared skirt, or higher inventory replenishment requirements driven a Victorian jacket with puffy sleeves. Exaggerating by new store openings, Nasty Gal invested in a new everything about the silhouette through the angle from warehouse management system. The warehouse man- which it was photographed helped Amoruso produce agement system investment was designed to increase tiny thumbnails for eBay that attracted serious bidders. warehouse productivity and shorten order cycle times She was able to take an object, distill what was best so that Nasty Gal's supply chain could better service about it, and then exaggerate those qualities so they its mushrooming sales. (Order cycle time refers to the were visible even in its tiniest representation. When the time period between placing of one order and the next thumbnail was enlarged, it looked amazing. order.) The company selected HighJump's Warehouse Amoruso has been a heavy user of social tools to Management System (WMS) with the goal of increase promote her business. When she first started out, she ing visibility and overall productivity while keeping fill used MySpace, where she attracted a cult following of rates above 99 percent. (The fill rate is the percentage more than 60,000 fans. The company gained traction of orders satisfied from stock at hand.) on social media with Nasty Gal's aesthetic that could Key considerations were scalability and capabili be both high and low, edgy and glossy. ties for handling retail replenishment in addition to 387direct-to-consumer orders. HighJump's implementa- according to industry experts. The company had also tion team customized the WMS software to optimize opened a 500,000-square-foot fulfillment center in the business processes that worked best for an Kentucky to handle its own distribution and logistics e-commerce retailer that ships most of its items straight as well as two brick-and-mortar stores in Los Angeles to the customer, with a small subset going to retail and Santa Monica. Even in the hyper-trendy fashion stores. The WMS software was also configured to sup- business, companies have to closely monitor produc- port processes that would scale with future growth. ion, distribution, and expenses for operations to move Picking efficiency and fill rates shot up, with fill rates products at a scale big enough to make a profit. Nasty above 99 percent, even though order volume climbed. Gal's mostly young staff focused too much on the cre- Nasty Gal experienced tremendous growth in its ative side of the business. early years, being named INC Magazine's fastest- While it was growing, Nasty Gal built its manage- growing retailer in 2012 and earning number one rank- ment team, hiring sizzling junior talent from retail ing in Internet Retailer's Top 500 Guide in 2016. By outlets such as Urban Outfitters. But their traditional 2011, annual sales hit $24 million and then nearly $100 retail backgrounds clashed with the startup mentality. million in 2012. However, sales started dropping to As Nasty Gal expanded, Amoruso's own fame also $85 million in 2014 and then $77 million in 2015. Nasty grew, and she was sidetracked by other projects. She Gal's rapid expansion had been fueled by heavy spend- wrote two books. The first, titled # Girlboss, described ing in advertising and marketing. This is a strategy the founding of Nasty Gal and Amoruso's business used by many startups, but it only pays off in the long philosophy and was adapted by Netflix into a show run if one-time buyers become loyal shoppers. Other- with Amoruso as executive producer. Employees com- wise, too much money is spent on online marketing like plained about Amoruso's management style and lack banner ads and paying for influencers. If a company of focus. pays $70 on marketing to acquire a customer and that Amoruso resigned as chief executive in 2015 but customer only buys once from it, the company won't remained on Nasty Gal's board of directors until the make money. A company that spends $200 million to company filed for Chapter 11 bankruptcy on Novem- make $100 million in revenue is not a sustainable busi- ber 9, 2016. Between 2015 and 2016, Nasty Gal had ness. Nasty Gal had a "leaky bucket" situation: Once raised an additional $24 million in equity and debt it burned through its fundraising capital and cut down financing from venture-focused Stamos Capital Part- on marketing, sales continued to drop. ners LP and Hercules Technology Growth Capital Inc. Nasty Gal couldn't hold onto customers. Some Even though the funding helped Nasty Gal stay afloat, were dissatisfied with product quality, but many were the company still had trouble paying for new inventory, more attracted to fast-fashion retailers such as Zara rent, and other operating expenses. and H&M, which both deliver a wider array of trendy Within weeks of filing for Chapter 11 protection, clothes through online and brick-and-mortar stores Nasty Gal sold its brand name and other intellectual at lower prices and are constantly changing their mer- property on February 28, 2017, for $20 million to a rival chandise. The actual market for the Nasty Gal brand online fashion site, the United Kingdom's Boohoo. was quickly saturated. There was a limit to the num- com. Boohoo is operating Nasty Gal as a standalone ber of women Nasty Gal appealed to: Nasty Gal had website, but Nasty Gal's stores are closing. Boohoo a California cool, young girl look, and it was unclear believes Nasty Gal's arresting style and loyal customer how much it was attractive in other parts of the United base will complement Boohoo and expand global States and around the world. opportunities for growth. Nasty Gal also wasted money on things that didn't Sources: Sarah Chaney, "How Nasty Gal Went from an $85 Million Com- warrant large expenditures. The company quin- pany to Bankruptcy," Wall Street Journal, February 24, 2017; Shan Li, tupled the size of its headquarters by moving into a "Nasty Gal, Once a Fashion World Darling, Went Bankrupt: What Went Wrong?," Los Angeles Times, February 24, 2017; "Case Study Nasty Gal," 50,300-square-foot location in downtown Los Angeles HighJump, 2016; and Yelena Shuster, "NastyGal Founder Sophia Amoruse in 2013-far more space than the company needed, on How to Become a #GirlBoss," Elle, May 15, 2014. CASE STUDY QUESTIONS 10-15 How was social media related to Nasty Gal's 10-16 What people, organization, and technology business model? To what extent was Nasty problems were responsible for Nasty Gal's Gal a "social" business? failure as a business? 10-17 Could Nasty Gal have avoided bankruptcy? Explain your