DTC is Dead… Or Is It? The Rebirth That’s Coming in 2025

Well, so, today I'm going to be going through a talk that I gave recently on an event out in Wyoming on what I'm calling D2C evolution and how we progress as a species. And I'm going to do a little bit of back history about our, where we've come from as the species of D2C brand and where I think we're going and why I think I'm optimistic about it.

That the environment that we are being forced to live in is actually going to be really productive to our evolutionary development. So, we're going to take a little bit of a journey through history across time. We're going to ignore much of the early primate stage, the early days of Ecom, because I think they, they offer us the least in terms of learning for today.

It was very early development. We were trying to figure out our way through the world, but things were fairly normal. Where we, the story really begins is in 2020 when we enter this era of excess known as the COVID era. And then, which is followed sort of very closely by a dramatic swing into the last couple of years, what I'm calling the Ozempic era and then an evolution into what 2025 brings.

And we're going to sort of talk about each of these and go through some cool data about. The implications, but the whole point, what I want you to sort of interrogate as an idea is this statement. It's the idea that the extreme environments of the past five years have forced evolutionary changes in brands that will lead to 2025 being the start of the best era in DTC history.

So I have recently sort of been a purveyor of both a doomsday message about our present state and some of the concerns that I have, but I also really believe that experientially from what I'm seeing in other brands and what this is a forcing function for is that the modifications that we're going to be forced to create in this period are actually going to produce The healthiest brands, if you will.

And it's sort of the hard times built good brands, good brand, good times build bad brands type vibe here. But let's start with a little history to understand what were the environments and what did they produce in us? And how does that inform where we are today? And we have to start by looking at the COVID era because it is so important to really contextualize what it did to our industry.

It was an an era marked by extreme excess, excess of demand, excess of capital. Existed in many different forms. The first of which is related to the amount of venture and equity financing that flow dramatically and rapidly into the space. So when the 2021 COVID explosion sort of happens, there's a lagging tail to that, which is that all of the equity dollars show up under this pretense about the future of e commerce as a percentage of retail.

And what it's going to grow to become. And so you have this massive influx of venture and equity financing into our space, about 4 billion suddenly showed up overnight. And that just poured into all of the brands in the space. Many of them taking really high valuations, extreme balance sheets. So you had the founders getting secondary.

You had a bunch of just expectations. You have some lagging effects related to that relative to The liquidity preferences that were supported by that money. Like there's all sorts of consequences that these dollars create when they come into the space. And they were coupled with the lowest all time historic lows in interest rates.

So from the era of 2020, and again, this all starts in March and runs really very specifically for two years, you have the fed prime interest rate at about three and a quarter percent. And on top of that, anytime the prime rate is really low, you get this sort of arbitrage of lenders that show up and build further and further out onto the risk curve.

So the way that lending works, right, there's always this relationship between the underlying cost of capital at the prime level, the fed level. And then that underscores how much risk a business can take on and still make money. And the cheaper the capital is, the more risk you can build into your lending model and still have it produced in theory.

Profit and so you had all these people show up under this pretense that you could just sort of connect your Facebook ad account They could underwrite your meta performance and provide you money, which is just looking back is just batshit crazy That is a wild wild idea that that would be an underwriting principle that would make sense But it happened and people were getting shipped large sums of money overnight in addition to that, it's not just the availability of capital.

The capital was actually logical in some ways in that it was following demand. There was a massive increase in demand that showed up. This is from an article that I wrote in that period that illustrates that across CDC's portfolio, we've seen revenue rise every week since the nationwide lockdown, staggering figures to rival Black Friday, Cyber Monday, in some cases, smashing it.

We saw demand show up in the middle of spring that looked like Black Friday, Cyber Monday, of course, due to. Retail shutting down. We were all locked in our homes and we had a bunch of excess money. And what that meant was that brands in this period of time were able to acquire customers at a return on invested capital that actually made the flow of capital logical in our space.

Now, this, this is the thing that I think is important to understand is that. In a capitalistic market, money flows actually really in some ways perfectly towards the present return on that, the potential return on that capital. And so if we look at this era, and we're going to use one brand here as an illustration of this walkthrough of history to see what I'm talking about, is that you'll see in 2020.

This brand was able to deploy the cost to acquire of customer of somewhere in the neighborhood of 50 to 70 and generate a marginal return on that investment. So this is fully loaded marginal dollar return of almost 100 percent in some cases north of that 72 on 48 is more like an 150 percent annual return on invested capital, right?

So if you think about customer acquisition as a mechanism by which you're deploying dollars against some return profile. It actually makes really logical sense that if you think about all the investment opportunity that a venture capital or a PE firm or any lending lender would have, you could go take the index rate at 8%, you could go try and get PE portfolios that run at 15 to 20%, or you could deploy money into new customer acquisition inside of an e commerce brand and generate 100 percent return on capital in a year.

And so all the money went here. And at the time, it made a lot of sense because the return profile and the demand. Match the efficiency of acquisition and you were able to grow a ton in a way that was profitable on an annual basis. But of course what happens is as brands continue to push further and further into that growth profile, the next tranche of acquisition becomes a little bit less efficient.

And you have sort of this convergent of factors where one competition shows up. And so there's this mass influx of demand CPMs increase in 2021. You actually begin to deal with some of the privacy concerns. Retail starts to slowly open back up. And now that a hundred percent return on capital in 2020 starts to look more like.

47 on an 88 investment, that's more like a 50 percent return on capital in a year. And you can see how negative this first order profitability begins to become. But, looking out from an annual basis, it's still pretty close to justifying that. Spending 106 to generate 40 in return is still a 40 percent return on your money.

It's still pretty darn good. And so plow away, we went, we grow more and more and more. We fund this growth more and more and more. And we're creating a bigger and bigger expectation for next year's growth. And so you can see this inverse trend where the efficiency of the acquisition begins to decline.

The volume expectations start to rise. The market under dynamics underlying it start to degrade. And all of a sudden you start to create an environment for challenge. But in these years, 2020, 2021, you have massive growth, right? So this is the average revenue growth per store coming out of the DTC index and data aggregation between ourselves, Veros, and NoCommerce.

And you can see that in 2019, pre COVID, e commerce is growing about 15 to 16 percent a year on average. And if you look at that graph of like retail or e commerce as a percentage of retail, That's about what it was. It was growing 15 to 18 percent annually for a lot of years in a row, for like 10 years in a row.

That was a steady standard expectation of growth of the sector. And then all of a sudden you have these years of explosive growth where 2020, you get 58 percent growth and 2021, you get this 70 percent average growth per store in the dataset. And so there's this sudden massive influx of demand. But as we go out into 2022, what happens is brands now see this and they've got to make 2022 better than 2021, right?

Nobody goes into a year and forecast growth down. We're all forecasting growth up and we've lost sight of the fact that the baseline expectation should be 15 percent annual growth. And now we're trying to comp to 60 percent and 70%. And we have this really degrading underlying acquisition engine. So in 2022, this same brand in one year had 120 to 130 percent return on capital for new customer acquisition.

Then it became 50. And in 2022, you see the first signs that within one year, this same brand is unable to produce a one year positive return on capital. They're losing money. The payback period is now pushed out. More than a year out in many cases, you can see that some of these cohorts are better than others.

And if we look at the volume, we can see like, okay, in January of 2022, 8, 000 new customers. If we go back and look in 2021, 7, 400, February, 8, 000 next year, 9, 400 March, 11, 9, 4, 7, March 8, 3. So now not only are we trying so hard to comp year over year growth, but by March, We are unable to comp it now. All of a sudden we can't even acquire as many customers as we did last year.

And the efficiency of that acquisition has degraded tremendously. And this is, this is the story for almost every brand that's going in this era. Some are able to offset this longer, meaning their TAM is bigger, their products better, there's less competition, whatever it is. And so this effect is more lagging, but this effect shows up for everybody.

And in categories where the barriers to entry are really low or where the demand was really concentrated because of COVID things like outdoor products and Those kinds of categories, the effects are faster and more dramatic. And in some categories they're slower, but they all show up in this similar way where suddenly this acquisition just becomes wildly negative.

And as a result, we see a step backwards. So 2022, the average growth rate slows from 70%. To 40%. And not because again, that's still a lot of growth. We're still outperforming that pre COVID years, but much of this is related to the existing customer growth from the previous year's acquisition showing up in 2022 and your new customer acquisition begins to be flat.

And that's the canary in the coal mine that signals to us that we're moving into a different era where there's something ahead that is actually very problematic. And it kicks off what I call the Ozempic era. This really begins at the start of 2023. Where the era of excess has come to an end and we have this canary in the coal mine of new customer acquisition efficiency degrading But all of the expectations still remain for brands Although the balance sheets are stuffed all of the valuations that you have to go deliver against are still high All these underlying problems exist and it forces us into this problem And so what we see then the starting point is all the money leaves They realize, Oh shit, the allocation of this capital into this space is no bueno.

Every stock that went public in the COVID era is down 80 plus percent in the public markets. All of the dollars are downstream from that effect. And you see a 97 percent decline from 21 to 23 in the amount of venture dollars and equity financing that flow into the space. You see a giant increase in interest rates.

So all of a sudden the cost of capital goes through the roof. So no more equity dollars, no more debt available. All the lenders adjust their risk curve and suddenly you can't get any money. And so what happens is this acquisition engine, the year over year comps get worse. The new customer acquisition is now down from 9, 000 in January to 7, 000.

So we're acquiring less customers. It's still too expensive. I don't have any money. And I'm in real starting to, it's starting to show up on my P and L and in my bank account where the money is drying up and I don't have access to more and I'm in real trouble. And the end of 2023, a lot of these brands have to make this dramatic pivot out of their current acquisition strategy into a new one.

Because what you get is a 97 percent decrease in venture funding and 195 percent increase in the cost of debt and 130 percent decrease in media efficiency. All at the same time. So the money disappears, the marketing efficiency degrades, and on top of that, because everyone bought so much inventory, because they were trying to comp to the growth from the previous years, they have all this excess on their balance sheet, and so you see discount rates also continuing to rise.

So now you combine increasing discount rate, which has an effect on gross margin, against worse marketing efficiency, and no availability of capital, and you've got the recipe for a disaster. And that's what happens really, the growth stalls even further. We get down to a 20 percent annual growth in 2023.

So we've now gone from 15 to 60 to 70 retraced to 40 retraced to 21. And all of a sudden, a lot of brands go belly up. And so the end of 2023, we see a bunch of announcements of bankruptcies. Not all of them were big enough to make the news, but there were lots of them. A lot of brands went under in this era and those that survived were the ones that took their medicine, hence the name of the Ozempic era and got really, really lean.

There were layoffs everywhere. Everyone had to get their OPEX under control because they had all built these underlying offices and staffing, there were expectations of growth that didn't exist anymore. So you either went broke, or you got lean. Those are the only way, two ways to survive this era. But that begins the evolutionary process, which is we learn how to work lean.

We learn how to operate lean. We understand what it actually takes to build this business. But we've got this. Problem that's beginning to cascade which is that we don't yet have an obvious path to new customer acquisition and growth. And so this is, this is a chart for one of the biggest e commerce brands on Shopify that illustrates that shows you just how dramatic the run up was of their new customer acquisition volume and what has happened since where it's just been a perpetual decline every month of their ability to acquire new customers.

And the problem with this is that if you can't invert this curve at some You just die. You just, this is the spiral towards death as you depend on your existing customer base to prop up your marginal value. But the acquisition of these customers isn't generating positive contribution margin. And if you can't figure out how to invert this curve, you're headed towards death.

And in 2024, we saw the lowest annual revenue growth rate. That we saw at any period of the last five years. There was only a 10 percent average store growth rate for that year. And that is in part because everybody tried to get lean. They couldn't acquire new customers. The comps were too big. The discount rates were too high.

All of these problems are conflating at once. And that leads us to where we're at right now, which is a really important thing to study. So I partnered with Final Loop. I love those guys. I think Leo over there is super sharp. And they have access to as much. e commerce financial data as you can find.

And for me, when I try and understand sort of the root of what's happening in our industry, I don't want marketing metrics. I don't want to hear from Meadow or Shopify. I want to see the financial data of the businesses in our industry because I've come to know talking to brands is that I believe nothing that they say until I see the PNL.

I believe nothing that they say until I see the balance sheet. And so what I've what I love about this data is it gives us a glimpse into the financial reality of our industry. So this is a sample from 500 eight figure brands. Okay, so this is excluding any nine figure stores. This is eight figure stores only.

And what you'll see is that their median net sales margin So think of this as after discounts is about 87%. You can see the discount rate increases in Q4, right? So this is the net sales margin. The median gross margin is about 55%. The median contribution margin. So after. Ad spend is about 27 or 20.

Yeah, it's about 27%, which tells you that the average marketing spend from gross margin to contribution margins, about 28 percent of revenue. So four quarter accounting, you can get the general idea there. It's about 28 percent marketing spend, 55 percent gross margin, and that leaves you with an EBITDA that ends up at around 7%, 7, 8 percent of the median.

EBITDA for eight figure brands. Now on the surface, this doesn't actually sound that bad. E commerce is not a large margin business. 8 percent EBITDA actually sounds not too shabby, but it actually is really problematic and actually underlies why the growth rates are shrinking the way they are. And this is where I'm going to get a little nerdy on you guys.

You got to stay with me cause we're going to go deep onto some of the accounting principles that, that are connected to that idea of the 8 percent EBITDA. The other metric I had, final loop pull for me, was the median cash conversion cycle for these brands. Because the cash conversion cycle underlies the realities of how that 8 percent translates into operating income and working capital to try to understand, can I grow?

My business when there's no capital and I have 8 percent EBITDA. And so what we found is that the median cash conversion cycle is about 92 days. So if we have COGS as a percentage of revenue with a 55 percent gross to margin, your cost of goods is about 45 percent of revenue. A 92 day cash conversion cycle indicates you're effectively financing around three months of inventory.

I recognize that some portion of CCC also involves payables and receivables, but the main driver for e commerce is usually inventory. So if we think of that as 45% holding 25 percent of the annual value, so three months, a quarter of the year at 45 percent of revenue, you're holding about 11 percent of your annual revenue in inventory.

Okay, so stay with me here as we continue on. With a 55 percent gross margin, a 92 day cash conversion cycle, two to 3 percent of revenue and annual inventory carrying costs is a reasonable ballpark. You can adjust it up or down depending on your specific cost of capital storage fees and how much of that 92 days cycle is truly tied up in inventory.

Okay. Now, if we walk down from here with this underlying reality, 92 days, 11 percent of inventory, 45 percent gross margin. And we'd go back to our 8% EBITDA. So EBITDA earning before in our interest tax, depreciation and amortization. So to get to cash, we actually have to walk down through those things.

So DNA, depreciation and amortization. We'll subtract the DNA to get to EBIT for an e commerce brand with relatively light capital assets. DNA might be about 1 percent of revenue or less. So let's call EBIT. Right around seven percent. Now, the interest expense. If part of your 2 3 percent carrying cost is financing, maybe 1 percent of revenue is interest.

Subtracting that gets you closer to 6 percent EBT. Now, I actually think that these brands in many cases are carrying more debt than just the inventory financing. They're also carrying with them historical debt, and all sorts of factors. So, I think the 1 percent interest here is being conservative. But let's just give it to them as a 1%.

Taxes, at a typical 21 25 percent effective rate, you lose another 1. 5 percent of revenue to taxes. That leads you with about 4. 5 5 percent for net income. CapEx, let's say another 0. 5 percent to 1%. Technology, warehouse, equipment, laptops, whatever. It's not usually hugely capital intensive, but there's something there.

Now, let's call it we're between 3. 5 and 4. 5%. So, if our net income, closest to our operating cash flow, is closer to 3. 5 to 4. 5 percent of revenue, here's the challenge with e commerce that we all know so well, is that we actually have to use that to buy future inventory. And depending on the growth rate that I have planned for my business, I'm limited at how much inventory I can actually buy, how much growth I can actually fund to the tune of when revenue grows 15%.

Inventory and possibly accounts receivable generally scale up as well. So if we go back, remember our brand is holding 10 to 12 percent of annual revenue and inventory for that 90 day cycle growing 15 percent might mean you need an additional one and a half to 2 percent of revenue invested in inventory next year.

So if I want to buy January, February, March inventory, I'm going to have to increase the amount of revenue that's going to that purchase process. So another 1. 5 to 2 percent of my revenue is gone. So you finance that extra working capital from your operating cash flow, which directly reduces free cash flow.

If you were expecting a 4 percent free cash flow off of net income in a no growth scenario, so you're going into next year with no growth, the incremental 1. 5 to 2 percent going into inventory could bring you down to 2 percent free cash flow of revenue as all else being equal. And this is why you get to Sean from Ridge talking about how there's brands doing 50 million where the person is distributing a hundred grand of value to themselves.

And you're like, how is that possible? That's because in this scenario, 2 percent of revenue is attributable as cash. 2 percent on a 10 million business. And that's at a 15 percent growth expectation next year. Very few brands that I have ever encountered. Look at the eight figure level, look out next year and go, you know, it'd be happy with 15 percent growth.

Almost all of them are more ambitious than that. And if a business with these underlying fundamentals grows faster than 30 percent per year, under these assumptions, the bank account actually goes negative. You actually can't fund it. So you can't even grow 30 percent if you have an 8 percent EBITDA in a 90 day cash conversion cycle, 45 percent gross margin.

And that's the median result. That means half the brands in our industry are worse than that. And I think like if I was running an e commerce business and I was producing 8 percent EBITDA, I'd be like, dang, you know what? I'm doing a pretty dang good job. I'm doing all right. I ate figures profitable and your growth is functionally stalled.

Because there's no available capital to even do the, to, to fund growth beyond this, or it's very difficult to get. And your interest line item is just going to go higher. It sort of creates this perpetual problem. And that's where we sit today. That's the environment that exists and brands know it. But what happens is there's another side of that curve, right?

If the 8 percent is the median result, there's a whole other set of brands that are going, okay. Given these realities, given the lack of available external financing, I have to create better free cashflow for myself. I have to create better operating income in order to work and they're evolving to do it.

And I've seen some incredible brands create some of the best business models I've ever seen in e commerce and challenge so many of the underlying realities about what we expect to be true. Does OpEx really need to be 20 percent of revenue? What if it was 8? What if I was able to get better cash conversion cycle?

What if I was able to improve my margin? What if I found all these other ways to go after the underlying assumptions that the previous era carried? And this is the, what I think kicks off what I call the flow era. A focus on a new kind of business. And we're going to use a specific illustration using my friend Bear here.

He's the inspiration for my graphic of the flow era. This is Bear Hanlon. He's the CEO of Born Primitive, former Navy SEAL, and he has taken on the burden of evolving his business out of many of these problems that existed for him in a very similar way to solve them, to build one of the best e commerce businesses I've seen.

And so we're going to use him as a case study because he's very generous. To let me do this to illustrate some of the ways in which he's turned his business from one of those ones that was following the exact COVID pattern to one of the best businesses in the industry today. And to illustrate this you can see that born primitive experienced the same growth that many brands did in COVID and actually had a retracement.

Between 2022 and 2023, but unlike everyone else where 2024 was their worst year ever, he grew about 60%. In 2024 off of 2023, there was a massive growth for him. This is just their e commerce sector by itself, but they had an incredible 2024, their most profitable year ever. And so while everyone else was struggling, he found a way to win.

By evolving in some specific ways that I'm going to tell you about. He evolved four different traits that I think are illustrative of the kinds of attributes that businesses in this new era are going to possess. The first is about defining constraints. What I have witnessed inside of many of these brands is that they constantly capitulate the standard of efficiency that the business needs under the pretense that they just don't think it's possible to do better.

And what I watch happen is it's like a slow boiling of a frog. If we go back to those acquisition charts, what I see is that every month, someone inside of the organization convinces themselves that in order to grow, they just have to be willing to take a little bit worse and a little bit worse and a little bit less efficient and a little bit less efficient and a little bit less efficient.

And that's the best thing that's possible. And your entire system then becomes designed around the fact that that's an option. It's always an option to lower the standard. And to just degrade the efficiency a little bit more and the system will behave accordingly. And so what born primitive did is we were actually dangerously stuck in a very similar cycle as their partner.

When we went into 2023 bear had given us this expectation that he wanted to, he used this metaphor called fill the big house. He wanted to fill the big house, the university of Michigan football stadium with new customers. It's like a seat's like 110, 000 people. The goal for the year was to do that.

And so we went in to executing as their partner with that goal, get as many new customers as possible, even if it means degrading the efficiency of that acquisition, we're going to push volume. And we were going after that. And every month we had to press a little bit harder and a little bit harder and a little bit harder.

And we were watching the same thing happen to us that had happened. To every other brand before us that in order to get to that next tranche of growth, because we, as the partner, the only control of the lever that we had was to say, well, Oh, we don't have control of your product. We don't have control of the story.

We don't, so we're just going to take a little bit worse and a little bit worse acquisition to continue to increase the volume of new customers that we could acquire. But eventually what Bear stand up and did is he drew a line in the sand and he said, we will no longer accept, no longer accept breaking first order profitability.

It is not an option inside of this company to capitulate that standard. It will not happen. So when you bring me solutions, don't bring me that as one of them because it's not acceptable as a solution. And what that creates is it's a forcing function for creativity. You remove the option that that is a way that you can move forward and you have to figure out alternative paths.

And so what we did was out of that, it didn't happen rapidly and easily, but we drew that line in the sand and we were able to find alternative methods to improve the business such that you can see 2023 99, 000 new customers. 8. 72 average margin to 2024 this last year, 125, 000 new customers at almost triple the first order profitability.

Same business, worse economic environment, worse underlying fundamentals of reality. Way, way, way, way better volume and efficiency. It wasn't just a trade off of one or the other. And it all began with drawing this line in the sand. But of course that's not where it stopped. There's lots of other factors.

I'm going to go through them. Evolved trait number two. That they understood as a business is that it was going to be product evolution, not meta that was going to drive their future growth. Okay. What we understood was that when we started in 2023, this was the underlying mix of product that this business was selling.

It was driven almost entirely by women's leggings and sports bras. Okay. When born primitive started, they were selling men's and women's fitness apparel and they had a an organic SEO ranking for women's CrossFit sports bra. That single keyword SEO placing drove a lot of volume for the business. And they lasted off of that as the CrossFit community grew, they grew, and they had this placement and embedding in this community around leggings and sports bras that drove a lot of the growth through the business through the COVID era.

And in many ways, it wasn't just COVID. CrossFit went through the same cycle, right? Where it grew really big and then it's kind of retraced. But for a while, this was the reality coming into 2023 is this is the mechanics. But the problem with the leggings industry is that I don't know that there is a single product category from an e commerce standpoint that was subject to more influx of demand than leggings.

There's basically no barrier to entry. Every brand on earth, including some of the biggest like Lululemon and Alloyoga and Gymshark and Fabletics, All were creating product and many of them were doing so at prices that were constantly being discounted because there was just so much excess supply relative to the demand for leggings as a category.

And so we're early on when we launched the business, the competition for on a search engine results page like this was moderate. This is a bloodbath. There are no profitable clicks on this page, not for one of these brands. Not one of these brands has a profitable click on this page. And that's the reality of every category in e commerce is that ultimately all the profits get competed down to zero.

And somebody is willing to pay a little bit more and a little bit more and a little bit more for the non branded click on women's gym leggings, and you end up. Taking a profitable acquisition engine and just degrading it. That happens on Amazon. That happens on Google. It happens everywhere. On top of that leggings also is a highly seasonal problem, right?

So we would have these big peaks in January. And then as the summer warms up, people stop, start wearing shorts. They stop wearing leggings as much. And then as the winter comes back around. You would get a big influx back. And so the end result was you had this business that was also highly seasonal. And so this is born primitives revenue over time.

We talk a lot about something we call four peaks theory at CTC, which is trying to identify these spaces where your business has a low in demand relative to the underlying product set and story and try and figure out how to fill it. And this was true for born primitive. We would go from about May to July, and it would be like the worst months of the year.

Because the core product demand would just go down a ton. And so if you think about this, the other thing that's hard about this kind of pattern is that the P. O. for this peak, the purchase order for the inventory in your largest moment of the year, has to come in the valent. Given the timing of production, if I want inventory for black Friday, cyber Monday, I'm often making a purchase when my cash is in the worst position.

So this creates a lot of problems for a business when you've got this underlying reality and the solution to it is not to make a better Facebook ad. And we tried that. We actually made like thousands of Facebook ads, but you can't alter the underlying demand for a cold weather product in the middle of summer.

You can try. And we made a lot of fricking awesome ads, some really, really good ones, but it just didn't matter. The efficiency was just holding constant. We couldn't get more volume and it was degrading. So what bear understood was that the solution to this problem was not in the meta account. It was in product evolution.

So they created a, the savage one. A footwear product and they launched a training shoe at the end of 2023 and footwear. It's not that it's not a highly competitive category, but footwear has a lot of interesting attributes to it. One, it's got more gross margin. So it moved the AOV up to the return rate on shoes is lower than it is on women's leggings.

Women's leggings get returned at almost 20%. So you have more gross margin you, and there was also some really interesting dynamics regarding the supplier that we'll talk about later. And I want to show you what this was able to create. Okay. So this is something we call a product sensitivity chart.

And what each of these bands represents is the product volume out of total skew sales by month. Okay. So don't worry about what all the colors are. I just want us to focus on these top three, this teal one, this blue one and this dark blue one in January, this middle section right here. Any guesses what it might be?

What's my best selling SKU in January? Brian, you're unmuted, I'm gonna make you guess. Leggings. Leggings, that's right. So in January, here's my best selling SKU, it's leggings. This dark blue band here, sports bras. Okay? This light green band, this is footwear. We start January, things are great, we're selling a bunch of leggings.

And then look at what happens to legging sales over time. February, March, April, May. June just declines. You can see sports bras kind of goes the opposite way, right? Sports bras, more of a summer product. So that has a little bit more continuity, but you can see how much the decline is on leggings. Now this bottom green bar didn't exist in 2023, right?

So imagine I'm in June and there's none of this bottom green bar. What happens is the whole thing shrinks. But what we were able to do with the footwear is you're able to subsidize the growth. Going into these key moments and offset all of the revenue lost from the leggings decline with footwear. It just changes the product mix where the total volume increases based on the time and seasonality.

And so we were able to go from a situation where the composition of the product in 2023 was about 35 percent women's leggings and sports bras. So you can see that shoes became two of the top five selling categories, women's shoes and men's shoes. And the business dependence on leggings and sports bras went from 35 percent down to 21%.

And so you're offsetting the risk by diversifying that portfolio. You're thinking about the seasonality. And then the other thing that we did was we didn't just say like shoes don't necessarily inherently sell better in the summer than in the winter. Shoes don't have that same seasonality in fact. So there's actually more work that you have to do to actually build story that connects to it as well.

So it's not just product, it's also the marketing calendar and how you think about it. And to understand that the evolution of the business is going to come through story, not iteration. The other hamster wheel that brands live on. Is this idea that the growth mechanism is next month. I'm going to take my existing ads.

I'm going to learn from them. And next month I'm going to make a bunch of ads that are better than last month's ads. And I'm just going to tell you right now that is a fool's errand, is a fool's errand. The idea that you will for sure next month make ads better than every other ad that you've ever made before is just bad math.

Especially when you're a leggings company like Born Primitive, where let's say we started 2024 having made maybe 5, 000 leggings ads. So imagine that next month, the next ad I make has a one in 5, 000 chance of being the best ad ever. It's just not going to happen. The likelihood is I've already made my best ad ever, and it's just not going to exist.

And people just don't comprehend this. They're always on this hamster wheel of trying to make a better ad and make a better ad and make a better ad and make a better ad for the same product where the underlying market's degrading over time or the seasonality is not in place and they force creative partners and other people to just try and.

Constantly iterate and outperform and it doesn't work. Instead, here's what I think you need to do. I couldn't do a presentation as an advertiser without quoting David Ogilvie. He has a famous quote that says you cannot bore people into buying your product. You can only interest them into buying it. And so the question that bear began to ask is what is an interesting story I could tell about my shoe that would spread it and allow me to drive.

More demand. And this is just to illustrate the point that I just made. This was the, this is a scatterplot of every ad that we have ever made for born primitive going back to 2022. And you can see, we have made thousands of ads for them, and you can see that the vast majority of ads fail. This is true for every business.

The vast majority of ads do not work. And the when the best ad ever comes along is really hard to predict and is random. And you can see that only 5 percent of ads are categorized as what we would call high performing. That means 1 in every 18 ads spends 1 standard deviation above the mean. So we have to make 20 ads just to get 1 to spend 4, 000.

And so if we were just to continue down that road, I'll tell you what it drives you towards. You can see that we would Play this iterative game. We did all the good creative things that D2C will teach you. Analyze click through rates and hooks and find commonalities and find the best ones and you can see that led us to a common theme in leggings.

Any guesses what that common theme was? Put a butt in a picture. That was the, what we found out was the best result. Put it front and center, great fit. People show off a bunch of different colors of leggings and you can see we had every kind of, we had UGC from different creators and cool angles and great products and all these different things.

We made tons of ads for this product, but you know what started to happen? You know what moved the needle a little bit more than everything else when it became an issue and we needed to drive volume. We started to rely on discounts. And so the brand would move towards a leggings flash sale. Cause you know what we would do when we ran the leggings flash sale, all of a sudden we'd get a little bit of spike.

This Ross would improve. It would feel like a win. And so we found ourselves on the same hamster wheel that everybody else was, was that our core product in order to compete in a market with increased supply, moderate demand was that we had to constantly try to win on price to drive the efficiency and volume that we needed.

And we were headed. To a bad place. We continued down that path. So what Barrett did was he realized I have to figure out a way at full price to tell stories that matter to my community in a way that would transform the business. And so he used the footwear. One of the benefits of that was that they could do limited supply runs of colorways fairly easy.

And he looked into the marketing calendar and he found a moment in the summer that would align with the brand where he could tell a unique story and drive product. And it was on the 75th anniversary or the 80th anniversary of the D Day invasion of Normandy. So Bear, veteran former Navy SEAL, very, a lot of his customers are first responders in the military.

And so he went out and he found that they were sending all of these veterans back to D Day to do this big ceremony. And it was, these guys, you gotta imagine, 80 year anniversary of people that were probably 20, 25 years old at the time. There's only a few of them left. And this is the probably the last time that many of these veterans will ever go back for a ceremony like this.

So what Baird did was he created a limited edition shoe the Operation D Day shoe. It was a 5, 000 limited edition run. And the funds from the shoe paid for those, these veterans trip back to Normandy. So you were actually funding their story to go back. And they created this really cool crate that came in an ammo container.

There was a a baseball card of all the different veterans that you were sending back. There was the a copy of the issuance from Dwight D. Eisenhower for the invasion of Normandy. And then they were actually able to get approval for, to include sand from the beach of Normandy in the purchase along with the shoe.

Limited edition batch that was all about story that build connection and community with their business. In the middle of their off season and that works so well, the bear went back to the well with this. He recognized again, how do I move the ad account? How do I create efficiency? How do I drive organic demand?

How do I create word of mouth for the business such that my marketing is a percentage of revenue goes down. I continue to lean on story veterans day, this year, three weeks before their biggest sale moment of the year. November 11th is Veterans Day. Bayer decides that on Veterans Day weekend, we are going to pay off 5 million of veteran medical debt using the proceeds from the sales of our product during that weekend.

That PR hit that he goes and puts out gets him three appearances on Fox Friends. The day he goes on Fox and Friends, they do a million dollars in revenue on November 11th on that individual day from that PR hit. He has all this incredible content of him on the phone with veterans telling them that they paid off debt, all these stories.

They end up being able to double it and they pay over 10 million dollars in veteran medical debt from the proceeds of that individual weekend. This changes the ad account. Not the 75th iteration of the leggings ad. This is how you create story that people share, that they tag each other in, where things change for the business in dramatic ways.

And this is the result. So these peaks, remember, the blue lines, were my revenue from the previous year. Okay? You can see 2023, these summer months. Two things happened. One, this moment right here, this first peak, this is the D Day limited edition shoe launch. Immediately, two weeks after that, we coupled the influx of demand that we were able to generate off that with a sale.

We ran a summer sale, unexpected that we didn't have the previous year. We turned one of our lowest moments into one of our biggest. And we try and always do this. We call this progressive peaking. You take a, a, a moment of new customer acquisition and you pair it with a bunch of demand capture.

Off of those new customers that you create for a sale. So same thing. Here's November 11th. Here's that million dollar day I mentioned on Fox News. Paired right immediately after with Black Friday, Cyber Monday. And you can see that basically all of the growth, all of the growth for the business is contained in the ability to create this moment and this moment.

The rest of it is sort of grinding out a similar amount. of expectation the rest of the time is like small bits of growth. I think at this point, like when we got to here, we were maybe like three to 4 percent ahead for the year, small growth, but this new product unlocked new stories. These moments that created generated all of the marginal gain for the business for the year.

But the story didn't start with about just revenue growth or even a growth that began with cash and the idea that flow is the problem. And so what bear really did. That transformed the businesses that he created on his new product category, different supplier terms than he had on all the rest. So I did a podcast with Barry.

You can go listen to this full story, but this is a quote from what he says. He says in our first year, we were able to get the supplier to do net 30. And they were like, Hey, if you guys want better than that, you need to get our trust. But then after our success, we went back to the drawing board and I'm like, Hey, we're going to take this thing to the moon.

You need to give us net 90. They were actually willing to take worst gross margin, pay a little bit more on an individual unit basis to get net 90 on delivery. So functionally turning his cash conversion cycle on his new develop skew or on the leggings, they're closer to like 50, 50, they're 50 percent upfront and then 50 percent on net 30 of delivery.

So the cash conversion cycle is decent, but there's still an upfront outlay of cash for the footwear. They were able to get to net 90 and on the limited edition stuff where you don't really know how much you're going to sell, they were able to create. They were able to drive pre sales of the product by doing pre sales on the limited edition.

He said, I mean, that's crazy. And you know, particularly for pre order items, I mean, you're paying for it nine months later. So they would do a pre order of the limited edition shoe, find out how many they actually sold because the story was good enough that people would want it, even if it wasn't immediately available.

And then they were able to get net 90 on delivery off of the pre order. That's like insurance level flow, nine, nine months later to pay for the product that sold like you're actually receiving all the money from the business. You could put that in a treasury yield account and then pay for the inventory way, way later, right?

It completely inverts the problem of cash flow. And so this evolution. Now, not all of us are going to end up looking like bear unfortunately in this process, but our businesses can if we can adopt some of the similar principles. We understand that the goal of the business should be to produce free cashflow, that we should orient ourselves around that objective.

We should understand that compelling brand story is the obligation. We have to think about stories that matter, that people are going to spread on their own. We have to get back to the principles of word of mouth and understand that if we have to pay for every individual impression is the only way our brand gets spread, it will never work.

The economics will ultimately degrade if your story isn't being spread without you paying for it. We have to go after acquisition constraints and limitations. We have to define those boundaries and we have to uphold them with our organization and not capitulate to them. We have to pursue supplier financing in a world where there is no equity capital where debt is really, really expensive.

Turning your suppliers into your financing partners and leveraging those relationships to do so is super important. And then many brands need to recognize that product led growth is the way to unlock next. The additional tranches of spend as they move forward in this new period. So that's, that's what I think is happening.

And I'm watching great brands do this, right? We're seeing stories of brands that are winning, but the underlying market, the bulk of where we're at is in real trouble. And growth is going to be hard as hard this year as it was last year, because these economics aren't changing. In fact, we're layering in harder things.

We've got tariffs now. Right? We've got an idea that likely our cost of goods is going to be under pressure, too. And so these things, they're not easy. And I don't want to make light of how hard it is to tell stories that matter. And how unique Bear's connection is to his community. But I think the reality is, is that if you want to produce disproportionately good results relative to everyone else, Then you have to do things better than everybody else.

And some of those things from product to story, to iteration, they're all pieces of it that go into making this happen. So, this is the DDC evolution. I believe it's what's happening. I'm trying to think about as a partner what role we play in this. But the sad reality for me, as someone whose primary job is to manage paid media on behalf of my partner, is that paid media is just distribution.

It's just amplification of a story. And what that story is, matters a lot. And the best partners I have feed me with the best stories possible. And in many ways as founders and leaders, our job is the definite, is the creation of the story. Who are we? Why does it matter to someone? And how do we build the deepest and most intimate connection we can such that this story feels deeply important and meaningful to those people in a way that they want to spread it and share it because it reinforces their identity and gives them a positive story about themselves.

So, this is what I'm watching play out. In some ways, the story wasn't necessarily just for you all. I know some of, some of these businesses are in earlier stage, the ones I'm referencing, but it is to start to say, all right, what is, what is true of the brands that are winning and how can we think about those fundamentals in a world that has shifted a lot?