COMMUNITY CREATES CULTURE
©The Wall Street Journal
Companies like Rapha, Ryzon, or Soho House have managed to create communities that speak to the human need for belonging. From nature, us humans are social species. People desire an identity and are motivated to become part of a community.
WeWork’s community-adjusted EBITDA
People have long been talking about the importance of a ‘community’, but the term has gained further popularity, when WeWork published a community-adjusted EBITDA as part of their planned IPO. WeWork unveiled its filing for an initial public offering looking to raise USD 3.5 billion in the second-biggest IPO of 2019 following Uber. Aside from its still significant burn rate, WeWork surprised potential investors with interesting accounting metrics. The term community-adjusted EBITDA lead to a few people rolling their eyes, as WeWork devised to measure net income before not only interest, taxes, depreciation, and amortization, but also “building- and community-level operating expenses,” a category that includes rent and tenancy expenses, utilities, internet, the salaries of building staff, and the cost of building amenities. By adding back non-cash charges, such as a depreciation, to operating profit, curious investors can get a handle on how cash generative a business’ core operations are. The approach is particularly useful when figuring out the level of interest payments a business can handle, for instance.
WeWork also highlighted a number of additional user interesting metrics, i.a. ARPPM (annual average membership and service revenue per physical member) representing the firm’s membership and service revenue (other than membership and service revenue generated from the sale of WeLive Memberships and related services) divided by the average of the number of WeWork Memberships as of the first day of each month in the period. Creative accounting is known in the business world as non-GAAP accounting: GAAP, or generally accepted accounting principles, being the legal standard for financial reporting. Companies do like to invent new metrics to remodel required reporting numbers into more attractive figures arguing that non-GAAP numbers can be a more useful measure of their the business. The proliferation of non-GAAP measures has caught the eye of the US Securities and Exchange Commission reinforcing the correct handling and reporting. Nevertheless, WeWork valuation multiples underline the significance of a community and engaged users.
Facebook paid billions of dollars to acquire users
While it may not be directly related to the idea of a community, the relevance of valuing users as WeWork has done in its SEC filing is not unusual, compared to Facebook acquiring Instagram in 2012 and WhatsApp in 2014, which was driven by number of users each mobile application had. Facebook has bought the photo-sharing start-up for USD 1 billion in 2012, which now has more than 1 billion monthly users, including 500 million daily users of the Stories feature, which was introduced in 2016 to compete against a popular feature of the same name from Snapchat. That growth has resulted in Instagram being valued by analysts at more than USD 100 billion, or about one-fifth of Facebook’s total market cap, becoming a key driver of Facebook’s growth and valuation.
In February 2014, Facebook paid USD 19 billion to buy messaging company WhatsApp. At that time, WhatsApp was the fastest-growing company in history in terms of users. Before the acquisition, WhatsApp's growth and usage was absolutely mind-boggling. Five years after its founding, the company accounted for 450 million active monthly users, of which around 315 million use the messaging service every day. A few years later, WhatsApp announced today it has crossed the mark of 2 billion users, which Facebook itself reached in 2017.
How has Rapha created a strong community?
Rapha is sometimes being referred to as the ‘new’ Harley-Davidson community, just for cyclists instead of motorcyclists. Both companies have managed to create a tightly knitted community of dedicated and loyal members, who are willing to pay a relatively high annual fee to become a part of these communities. Creating a community with a membership-fee is an interesting and different way of thinking ’The Network Model’, because the value increases as the number of members increase.
Simon Mottram, founder of Rapha, says that the success was shaped by three core principles namely: commerce, content and community. Rapha has developed into a global cult and has certainly played a major role in the revival of the bicycle. This cult had turned Rapha into an acquisition target and opened people's eyes, one of those belonged to the luxury behemoth LVMH, but after months of negotiation, RZC Investments had won the race, apparently paying an astonishing 44x EBITDA multiple. A couple of years after its foundation, Rapha has turned into a global high-end lifestyle brand focused on cycling. The company not only produces forward-thinking cycling gear, but also creates content, arranges events and operates 23 Clubhouses around the world, which are used as physical community hubs for the members of the Rapha Cycling Club (“RCC”), which counts around 15.000 members around the globe. The brand also offers virtual venues through Zwift, where RCC members can create their own avatars with special RCC bike rides and then compete in digital races.
Sarah Clark is the Chief Marketing Officer of Rapha said: “We stopped being in wholesale two years ago. That means that everything is direct through our website or our clubhouses. That is incredibly important because we want to be the ones to help deliver the whole holistic experience to the customer. It is not about the relationship of buying another jersey. It is about a relationship of the customer on a journey with cycling.” Rapha’s direct-to-consumer business approach combined with the exclusive network model of the RCC are creating a strong customer lock-in, thus increasing the customer lifetime value to the firm.
Similar to the Soho House community, not everyone can become a member of RCC. While Soho House requires you to be a creative soul and not wear a blazer, Rapha has set a minimum speed for all of their Rides, which means that only “true” cycling enthusiasts can join the club, and preferably you wear RCC lycra gear. In addition, there is a special etiquette concerning greeting other riders on the road, waiting for those who are trailing behind, and helping those in need. Members embody Rapha’s brand identity in exchange for a daily free coffee and they get to choose from more than 150 rides per week in over 80 countries. Besides, travelling members and do not need to haul extra luggage for their bikes, but can hire their two wheels at every clubhouse. Rapha is a prime example of how a brand can build an authentic community around a clear purpose. They have a Latin motto; ”Ex Duris Gloria” – ”Honor through suffering”. It almost feels like a religion that members devote themselves to.
Soho House is a way of life
From small beginnings in small Georgian premises at 40 Greek Street in London in 1995, Soho House has developed an all-embracing live-work-play-sleep concept. To a lot of its members, it has become a way of life. People love hanging out at the houses, socializing, working, getting fit, watching movies. It is a 24 hours membership. Nick Jones, founder of Soho House, says “more people who have hooked up and had relationships, more people who have created companies or made ideas from Soho House and that is what a community is.”
Soho House praises itself that its take on community has not really changed much since 1995. Jones opened the first club with the intention to offer his friends a space to have a good time and do what they wanted. In simple terms, all Jones has done since then is scale that idea into almost every area of life and expand the community across the world, which is highly appreciated by existing members as the community gets more diverse and interesting. In the near future, Soho House, which is owned by Ron Burkle (60%), Richard Caring (30%) and Nick Jones (10%), plans to open in Rome, Tel Aviv, Paris and Austin. In addition, they are looking to be in Shanghai, Tokyo and other cities in Asia. South America also offers big potential with Mexico City being the first city to welcome a Soho House.
Jones says that “you cannot suddenly make a community out of a brand.” Soho House has been founded 25 years ago with the same principles. The idea of a club where you could do anything and everything was driven by its members, which currently stands at more than 70,000 people worldwide. The business model is based on an individual spending a monthly or annual fee as well as of the consumption when people are at the house. It is something the members are personally as well as financially invested in, thus feel a strong intrinsic connection to the brand, similar to Rapha’s Cycling Club.
Peter Chipchase, the company’s chief communications and strategy officer. “People are looking at the nine-to-five, corporate way of life and rejecting it. They want more flexibility. Because of that journey we have created not a lifestyle brand but a way of living for our members, morning, noon and night, an amalgamation of work time and personal time.” This community is now looking to expand into the virtual world with the idea that anything you can do in the physical houses you can do digitally through an app. “A lot of connection has happened in Soho House over the years, a lot of businesses have been created and personal partnerships made. The things you can get through LinkedIn, Tinder, Bumble, we have been doing in a physical sense for a very long time.”
Access trumps wealth
Continuing Soho House’s take on community, Soho House’s chief marketing offer Dan Habashi spoke to Stephen Pulvirent for Hodinkee Radio (Listen to the podcast: Click here). Dan's focus has always been on building communities through shared passions bringing together like-minded individuals. The conversation between Dan and Stephen starts around 35 minutes into the podcast focusing on his tasks at Soho, but also looking at the development in the sneaker scene and streetwear culture, which has attracted a look of attention in recent years.
What used to be a niche collective of people that have simply shared a passion for limited products, has dramatically changed in recent years, most probably reaching a peak, when The Carlyle Group acquired a majority stake in Supreme at a valuation of USD 1 billion. In fact, cultural credibility is the secret ingredient that turned Supreme products into status symbols for youth tribes around the world. In the process, Supreme subverted the definition of “luxury” to a point where high prices and exclusive designs are no longer the sole drivers of desirability.
I recall from my time living in London, when I would line-up outside Supreme’s store in Soho for their Thursday drop, or at Foot Patrol to cop the latest sneaker releases, it would always be the same kids out there. It felt like a ritual. The first person to arrive in the morning would set up a list, where everyone signed up to reserve their size. If you would leave to grab a coffee from the bakery nearby, you would return with a tray of coffee for the rest of the sneakerheads. Yet, slowly throughout 2012 things started to change as we noted “strangers” lining-up, which turned out to have been paid by some else to purchase the “sneaker of the day”.
A couple of years later, the whole sneaker and streetwear industry has changed, as resale websites like GOAT and StockX have enabled people to access limited products by paying a premium price. While I did not fully materialize on this trend, I have also resold a number of sneakers, t-shirts, hoodies and caps through Facebook groups, which was before the reselling industry was a thing. Yet, I still generated solid returns upwards of at least 2x the retail price that I had originally paid. Nevertheless, Dan rightly points out that “real recognizes real” and you cannot simply buy into the market. While people can gain access to products, they cannot purchase the heritage or the understanding of the culture. So, being fortunate enough to own specific products will always remain the “real currency of cool” outperforming the actual monetary value.
In turn, it means having access clearly trumps wealth, as Dan referred to his Hublot Atelier Watch. A couple of years ago, the renowned Swiss watchmaker took a different approach towards strengthening the relationship with its clients. Hublot offered their customers an “Atelier Watch” as a replacement for their personal timepiece, if they had left their watch behind for a check-up, service or repair. The Hublot Atelier Watch was not for general sale and had only been available at selected Hublot boutiques. Nevertheless, through connections and a few coincides, Dan had been able to get his hands on a pair. It is certainly not his most valuable timepiece, but the most limited watch that he possess.
The Rise of The Basement
The Basement has become one of the most influential youth communities that developed into a family boosting more than 100,000 members online and a powerful network of creatives around the world. Constantly pushing the boundaries and collaborating to further one another’s aspirations have augmented many members’ lives, influencing their senses of belonging.
Originally, it was a closed online community, where you could not just become a member, but you had to request to join and required approval. Those who found out about The Basement did so via word-of-mouth among the streetwear community in London. The Basement had quickly developed into a support network and ecosystem through which young people were taking care of one another. Young people were using The Basement as a support system to empower and to collaborate with one another based on the trust given by the sharing the same streetwear backbone. People were using the community as a safe space to come out as gay, to find shelter when they were locked out of their homes in the middle of winter, or seek advice for the next vacation. They were using the community to find paid employment and start their own brands.
The group’s admins have also been smart to create sub-communities to keep The Basement from getting diluted. For example, a Basement sub-group called The Bathroom, which is meant for sharing “all the silly jokes on the Internet," says one of the members. Then there is The Waiting Room, a group solely made up of members banned from The Basement who are waiting to get reinstated, which actually turned into a community in itself. Moving away from the virtual world, the group have also organized physical pop-ups where members can connect and buy The Basement-themed goods. It goes without saying that all of these products are immediately sold out.
Imagined communities
Today’s branding has become so sophisticated that, when done successful, for some a company’s voice can replace religious institutions by giving people a sense of community, identity and self-expression. When political scientist Benedict Anderson coined the phrase ‘imagined communities’, he set out to explain the sources of modern nationalism. In his words, imagined communities are bound together by a deep camaraderie between unfamiliar people. They have not met but they possess common affinities, beliefs, interests and attitudes. Today, we are going through a renaissance in Anderson’s thoughts on imagined community. Modern brands have arisen as social constructs. They represent a form of belonging – a link between culture and a spirituality left vacant by the loosening influence of traditional institutions. Just as these historic communities represented their nations and believes, the modern equivalent are loyal fans, who are willing to defend their favorite brand’s ideology over the philosophy of a competing brand – Ryzon versus Rapha, Bandier versus Outdoor Voices (Read more about Outdoor Voices’ strategy: Click here), or Pas Normal Studios versus Pedal Mafia – yet, all these brands share common grounds as they are bridging stereotypes, eliminating racism and bringing people closer together, no matter of their background, or a swoosh versus three stripes.