Ecommerce Is About To Evolve - Taylor's Stord Summit Presentation

[00:00:00] Speaker: Hi everybody. I'm Taylor. I'm the, uh, CEO of Common Thread Collective. We're a e-commerce growth agency that's been around for about 12 years now, which sort of makes me, uh, an anthropologist of sorts of brands. I've seen thousands of them I've gotten to study for many years. The evolution that they have gone through.

Are we gonna get on the screen? Almost? Boom. There we go. So today what we're gonna talk through a little bit is what I've witnessed. Throughout this process and how it applies to what I think is happening in the future, um, and how we ultimately progress as a species. Uh, so the species here that we're gonna be studying is D two C brands, and we're gonna talk a little bit about their evolution over time.

And the evolution for me, really sort of, you could divide into four eras. Um, so we're gonna talk through each of those. We're gonna ignore, ignore really the, the, what I call the, uh, BC era, the before COVID era. 'cause we were just sort of like learning to walk upright and figuring ourselves out. Uh, but really the dynamic changes that I wanna focus on happen from 2020 on.

And, uh, the big idea, I'm gonna cover a lot of data. The point isn't to remember it all, take pictures. If you wanna keep it. I can send this deck out after. But the big idea that I wanna present and really have you wrestle with is this, it's 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 D two C history.

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[00:02:03] Speaker: Um, generally not an optimist. People will see me more as a cynic. I tend to try to find the, all the problems and every issue as I can, uh, and so you can trust that this one has been explored. I don't say this lightly that I'm confident in where we're headed, but I think that there are some.

Adaptations and evolutions that are happening amongst the brands that have survived through these past years that are leading to really powerful ideas. Um, so that's what I want you to interrogate as I go through this today. So to start, I'm gonna take us on a little journey of history about the environments that have crafted the brands that we have today.

Uh, so this is my illustration. Thank you chat GPT for my illustration of the COVID era. For D two C brands, it was an era marked by excess in every way, shape and form. Um, and it really began with an excess of capital, is that in 2021 we saw a massive influx of venture dollars into our industry. Over $5 billion poured in, um, from what had been a very steady, slow progression and sort of middling interest from venture firms in consumer brands.

But in all of a sudden, in 2021, across all of the sector, there was a massive explosion, um, on top of that. Well-worn ideas here. None of this is too novel, but interest rates fell to, uh, a historical low. It was over decades before the prime rate had been down at 3%. Um, and that led to a really cheap availability of debt.

And anytime the Fed prime rate is this low, you get this arbitrage of lenders that can push the risk curve out further and still build a yield model that makes sense. And so you had a bunch of vendors that popped up and all you had to do was connect your Facebook ad account and in 24 hours you could have money.

Um, and that sounds like a magical idea, but really, uh, inherent in that is a lot of what we now to know to be a ton of, uh, un uh, unexplored risk. But the point was you could get really cheap debt. There was a ton of venture dollars about available, and it wasn't just the excess of capital. There was also a massive excess in demand.

Um, this is from an article that I wrote. In April of 2020, uh, when it had become really obvious to me that we were experiencing this Black Swan event, and so I wrote across CTCs portfolio. We've seen revenues rise every week since the nationwide lockdown started staggering figures to rival Black Friday and Cyber Monday, in some cases smashing it.

We were witnessing just this massive influx of demand into e-commerce. All stuff you guys are aware of. Um, and what that led to was, um, we're gonna use this graph a second for a brand that's a customer of ours that recently to be clear. And, uh, we're gonna use it to walk through these eras and you're gonna see how this transformation plays out over time.

And this graph is what we would call a cohort specific return on invested capital chart. And it just allows us, I'm gonna use my clear, uh, laser pointer here. So it allows us to look at a cohort of customers. So in this case, a. Customers acquired in January of 2020, how many customers there were, what the cost of acquisition was for that cohort, the expense, this is like an all in variable cost.

So total fulfillment, cost of goods, payment, processor fees, et cetera. First order profitability, and then 360 days. So a one year marginal return. So if we look at this for 2020 for brands, what you saw was that in a year, this brand made $72 on an initial investment of 76. That's almost at a hundred percent return on cap.

Okay. And if you go through each of these cohorts, what you'll see is like the return on capital ranged from about 90% to 150% in a year. Okay? Uh, I'm not a personal financial advisor, but if I was, and I brought you an opportunity that said, Hey, you can generate 150% return on your investment in a year, you would give me all your money.

And that's what happened. See, a lot of people think like the mania of 2020 was illogical and it's not. It was actually perfectly logical. And one of the things that happens is that capital flows directly to the areas of highest return. There wasn't a better return on capital in 2020 than investing into customer acquisition.

It was yielding massive returns across almost every brand at real scale. Um, and this continued into the next year, but what you start to see. Is a trend is that the next tranche of growth as COVID sort of dissipates and retail slowly begins to open up, becomes just slightly more expensive. So the same brand is able to basically double their customer acquisition.

So if we look at January, you'll see 7,400 customers in January versus 4,000, February was 8,000 versus five. March was 12,000 versus five. So almost doubling the amount of customers, but. The efficiency of that acquisition was just a little bit more expensive, right? We're not hitting first order profitability as often, and the one year return on capital pushes into the range of like 30 to 60%, but still, hey, that clears cost of capital easily.

It's better than a lot of other places that you could deploy money. It's still pretty dang good. Things are great. But you're beginning to see the signs of what will trend. But, but all of this leads to two years, um, of massive revenue growth across the industry. So we're part of a data consortium called the D two C Index.

Uh, if you wanna follow along, you can go to ddc index.com, um, and track the data that we share every month in a newsletter there. But, um, it is a partnership with Vero, no Commerce and CTC to aggregate a really large data set of stores that we can track benchmark data and present insights out of n. So this is about $10 billion in GMV that we track through these periods of time.

So we can map the history of D two C, but in 28 and 2019, you saw an annual growth rate on average per store of about 16%. And if you've ever seen, you guys ever seen like the e-commerce as a percentage of retail chart, right? You guys all remember this one was very famous during COVID. Um, 16% is about, if you go back through the last 20 years, it's about the annual growth rate of e-commerce normalized.

It's about 16%. So in a normal environment, that's about what had been happening over and over. Steady, progressive compounding of the industry. And then in these two years, because of both the influx of capital and demand, you had explosion. You had triple or quadruple that growth in 2020 and 21, 60%. Uh, in 2020.

70% in 2021. And of course, all of us thought this game was gonna last forever. Um, and at the time, like it's hard to reflect back into that period knowing what we know now. But at the moment, everyone believed this. We all thought we were becoming China and e-commerce was going to 50% of, uh, revenue overnight.

Zuck thought it, Toby Luki thought it, I thought it, everybody thought that was what was happening. It was the pervasive, um, idea. And it made sense because the demand was going that way. And we had no idea how long this COVID thing was gonna last and growth was everywhere. Um. But 2022 is really when things started to change.

Retail opens back up. Um, you have the post iOS 14 era where suddenly now all of a sudden there's these privacy concerns on meta and the game just isn't working like it was before. And for the first time for this brand, you see one year cohorts at various times where the one year return on capital is now negative.

And if you look at the volumes, let's go back to January, you're at 8,000. 7,400. February, you're at 9,000 versus eight. March, you're at 11 nine versus 12 one. All of a sudden, not only is it way more expensive to acquire these customers, but you're getting less of 'em. And so this is the start of the problem.

Now, what's hard about this is that new customer acquisition volume. Is actually a leading indicator to growth problems, not a present problem usually because most of the marginal value that brands are extracting is actually coming out of their existing customer cohort growth. And so it was hard to see this in 2023 because brands were still growing.

They were growing off the back of all those new customers they'd acquired in the previous years. And they were still doing it fairly profitably. But this was the canary in the coal mine, and this is what happened. Growth started to slow. It goes from 70% in 2021 year over year to 38% in 22. And this is the start and the end of this COVID era and the beginning of what I, uh, refer to as the Ozempic era.

Um, so, uh, for CTC in 2022, we were riding this wave just like everybody else, and then seemingly overnight. Towards the second half of 2022. It was like a switch flipped, and everybody went from caring about revenue growth to only caring about EBITDA and profit like overnight. All of a sudden, every budget changed, every, the focus was different and everybody realized that they needed to take their medicine and get, uh, lean.

And this era is marked by that effort. And it's really a function of the environmental context as it relates to the availability of capital, because e-commerce to fund growth. Is really expensive. It's hard, and to do it out of operating cash is really challenging. You can't grow very fast if all your growth has to be self-funded.

And so suddenly what happened is all of the venture dollars went away. They took their bags of money and they ran because at the public markets, all of the e-commerce businesses got obliterated, right? Figs, solo brands, go look at every stock chart, and it's like this 97% down that way. And so they went, wait a second.

If there's no clearing price at the top of the market. Then there's nothing to be made at the bottom of the market either. We're taking our stuff, we're gone. All the venture dollars dried up, interest rates go through the roof. All of a sudden, the cost of capital is way higher. All those risk profiles change overnight.

Suddenly connecting your Facebook account isn't enough to get access to money anymore because when the yield curve or when the risk or the the interest rates go so high on the underlying capital that these businesses use, then the expectation for return in the lending becomes way higher. It's way harder to get access to the money.

No venture dollars, very expensive debt, and continuing decline in efficiency of acquisition. If we look out into 2023, now you start to see brands because they're so desperate for growth, pushing further and further and further out beyond their marginal frontier generating massive losses. In the process of acquiring customers, trying to grow the top line to get overnight, last year's benchmark, grow the business, grow the business, we have to do it.

And they're just deteriorating cash, lighting money on fire. It is hard. Um, one of the things that I don't know that I'll ever be able to explain to the world is how much advertising waste that there. Billions and billions of dollars just being handed to Uncle Zuck with no profile of return whatsoever.

It's insane. And then this is like common across every, uh, not every, but a lot of the businesses that we encounter about how this era went. And it's because there was an expectation of growth. The growth had to be met, um, in this era, and you had a really high benchmark of expectation for what that was.

So the end result is 2023 was marked by a 97% decrease in venture flooding and 195% increase in the cost of capital, and 130% decline in media efficiency. And that translates to margin pressure everywhere on your p and l. And the other problem was that your balance sheet was under the same pressure. One of the things that happened during this time was everyone thought the growth was gonna continue.

And what do you do when the growth is gonna continue and you feel like you missed out on the last area 'cause you didn't have enough product. You order lots of product and so now you have declining demand, overstuffed balance sheets, no availability of capital. This is how brands die. And the end result was discount rates just soar, right?

So we've tracked, um, discount rates by brand over the last four years and every year the discount rates keep going up. Across brands because they have to move this inventory, and it's not just the balance, the, uh, inventory on their individual balance sheet. Excuse me. It's that the supply in the sector grows dramatically too, is that a ton of brands enter the space, excuse me, enter the space in the COVID era as well.

Uh, and so you get a massive influx in competition. Uh, a category that illustrates this really easily for me is we worked with solo brands during this time, uh, and they have a business called Aisle Surf and Sub, they stole standup paddleboards. And if you track the price of paddle boards, uh, from the beginning of the COVID era till the end, it's like a run up in price and then it absolutely collapses.

Because everybody had a commoditized inflatable paddle board at the same exact price and the market at the same time. They had too many of them and they just kept undercutting each other, trying to mo get outta the inventory, get back to cash. And so people think about inflation as a dynamic that's happening, um, a lot in the general consumer index, but in e-commerce we're almost always deflash deflationary because of these pressures and discount rates just keep rising, and if discount rate goes up, your gross margin goes down so bad marketing efficiency.

Declining gross margin, higher cost of capital and bloated opex is because we thought we needed all these humans. Jacob and I were just reflecting on our personal experiences during COVID. We all hired everybody in the world. All of a sudden there's teams were enormous there. Like the influx of hiring our industry was crazy.

And so you had bloated opex is bad, gross margin, declining margin efficiency, uh, and the growth just continuing to slow down. 38 to 21. And a pattern beginning to emerge. And the reality was that like many people didn't make it out, a lot of people died in this era. Um, and there's still more to come as this gets worked through.

Um, but there was a large, uh, influx of bankruptcies that occurred in this period. And, uh, those that did make it out did it by getting really lead. So that's my ozempic metaphor here, is that everybody had to figure out how to run a business lean, and there was mass layoffs across our industry. Uh, almost every business I know through went through some version, uh, of this problem, um, along the way where they had to reset what it looked like to staff and build an e-commerce business in the new era.

Um, and then they also just pull back on spending. Those dollars at negative contribution of new customer acquisition. And when you sort of reset the expectation that I can't acquire a customer unless they generate positive increment, um, incremental contribution, what you get is way less new customers.

So this is a chart, this is a very big e-commerce business. Um, one of the biggest on Shopify. And you can just see how dramatic this runup is. Of what is functionally like, this is like artificial demand. This is not real. Like this is inflated COVID demand that then you are trying to beat and trying to beat, but ultimately you have to capitulate to the reality that you can't finance, um, unprofitable growth.

There's no more capital available to do so, and the end result was 2024 was maybe the worst year of all of them. It was really hard. Growth was basically non-existent in part because everybody was pursuing a different objective. They had to capitulate to top line growth and go, we have to stay alive. We have to generate a bottom line outcome.

We need to produce profit, those different environments. Now, each of them taught us different things. We evolved different skills at the time, and they're actually both important. Um, the COVID era taught us how to scale up. You guys are in the logistics industry here. Many of you like, you know how hard it is to suddenly have a massive influx of demand and all the pressure that puts on supply chain and fulfillment.

Well, we learned those skills. We figured out how to do that in the COVID era. We grew massively. It's an important skill actually, because demand in our industry is actually very hard to predict. It changes for all sorts of different reasons, and it will in the future too. Um, and alternatively, the, the Ozempic era taught us how to be lean.

It taught us what roles we really needed. It taught us how to run a team that was smaller, what software maybe we didn't need to be paying a rev share on. I don't know, whatever it was, we figured out how to operate a business more efficiently. Both of these things are really important skills. Um, so I wanna talk a little bit about where we're at today.

And this is the part where I'm gonna get a little nerdy. I wanted to make sure I did some fulfillment talk for all of you here, but, um. I wanna talk a little bit about the challenge of why growth is stalling, absent availability of capital in our industry right now and how we fix it. Okay, so Final Loop is a partner of mine.

I love Leo, uh, the founder of there. I think he's a super sharp dude, and they pulled together for me some benchmark financial data from 508 figure brands about where they sit today, um, on their financial profile. And, uh, so we'll sort of walk down the p and LA little bit here. You can see media net sales at about 86% of revenue.

You have median gross margin at about 55% of revenue, median contribution margin at about 27% of revenue and median EBITDA for brands in 2028. Figure brands in 2024 at 8%. Now, 8% on the surface doesn't sound that bad. The reality is our industry runs it pretty lean margins, it's generally pretty hard, but the challenge with 8%, um, for a business that wants to grow is that 8% EBITDA is not 8% cash.

And if you want to grow into the future, the requirement for the purchase of inventory really begins to put pressure on your capacity to do that even at an 8% ebitda. So here, here's what I wanna walk through. So the other thing I had them pull was, what is a brand? What, for those brands, what is their, uh, average or the median cash conversion cycle?

So cash conversion cycle, the time from when I place a PO till I turn it back into cash. How many days outstanding does that require? And the median number is 92 days. So 92 days is the median cash conversion cycle for 8 508 figure brands in 2024. So if we start to look at this and we say, okay, here's some things we know.

COGS is a percentage of revenue with a 55% gross margin. Your cost of goods solds is about 45% of revenue. Okay? If you have 93 uh, days of inventory, a 92 day cash conversion cycle indicates you're effectively financing around three months of inventory. Caveats here for some portion of that is also involves payables and receivables.

But in e-comm, the main driver is usually inventory. So on average, you're holding about 11%, uh, of your annual revenue in inventory. So with a 55% gross margin, 92 day cost conversion cycle, that's about a two to 3% of revenue and annual inventory. Carrying costs is about a reasonable bar, ballpark estimation.

You can adjust it up or down based on the specific cost of capital storage fees. Uh, working with stored probably helps you and does it better than, better than this. And how much of that 92 day cycle is truly tied up? It depends on, like I said, inventory and payable. Okay. So, so I'm just trying to set a context here.

And this part now, um, stay with me. I know this is deep finance, but it's really important for understanding the challenge of brands today. So this is a walk down from ebitda. So if I said average EBITDA is 8%, okay, so let's walk down all the letters in this fancy acronym, right? So if we take depreciation in amortization.

Um, eCommerce, that's not much. We got some laptops. We got a few other things that we might be amortizing. It's about 1% of revenue, more or less, so you get down to EBIT at about 7%. Now, at the interest expense level, if part of your two to 3% carrying cost is financing, maybe approximately 1% of revenue is interest.

So you subtract that out and you get closer to 6%. For EBT, well now we gotta pay Uncle Sam and taxes a typical 21 to 25% effective rate. You're gonna lose another one of 1.3 to 1.5% of revenue. That leaves about four and a half to 5% for net income capital expenditures. Generally, again, pretty light, but you might still have some on technology or warehouse equipment or other investments.

We'll call that half a point to a point. And so you end up with a net like true net income at around 4%. Okay? But if revenue is gonna grow 15% in the coming year, okay, so I just finished my year at an 8% ebitda. I'm looking forward and I'm building my forecast and I say I want 15% growth. I just want some moderate growth, please.

Just a simple 15%. If we're holding 10 to 12% of annual revenue in inventory, growing 15% might mean that you need an additional one and a half to 2% of revenue invested in inventory each year. So you finance it out with your working capital from operating cash flow because we don't have access to additional financing.

I get it that there are some vehicles for that. It's just an illustration which directly reduces your free cash flow. So if you were experiencing 4% free cash flow in a no growth scenario. The incremental one point half to 2% going in inventory could bring you down to 2% free cash flow as a percentage of revenue, all else being equal.

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[00:22:26] Speaker: Okay, but here's so, so think of that one. That means only 2% of the money you could pay yourself with. Not that cool, right? Not a great way to go out and build a $50 million business. And then 2% of it is what I can pay myself, divided amongst the people. I, it's like, that's not very exciting and all this work, and that's what's left over.

But the real challenge is this. If you actually wanted to grow 30%. Okay. Which again, is not a I, I bet most of us have a goal next year that's more than 30% growth or is in the range of that at 30% with those underlying economics, 55% gross margin, 90 day cash conversion cycle, your cashflow turns negative.

The bank account will actually shrink down to. You actually cannot fund 30% growth. And so there becomes this ceiling on the rate of growth that's connected very intimately to the availability of capital and the efficiency of all those metrics along the way. And so the reason brands stall out and when they're self-funding growth is because of this mechanic, is because the connection between all these intertwined parts are complex.

It's hard to understand how your cash conversion cycle actually limits your growth rate. It's not your Facebook Ross. Like these are all mechanics now that plays a piece in it. 'cause you can expand margin, et cetera, of contribution. There's all pieces. But the point is, at the median level of outcome, these brands will produce a declining bank account at 30% growth in 8% ebitda.

What? That's so confusing. I'm winning the game. I'm producing profit every month. It's 8%. I'm winning. I'm doing the thing. Why is my bank account shrinking? That's what'll happen. That's what makes e-commerce so challenging. So, um. That's where we stand today. But there are those brands that have bucked those median trends, right?

That's just the middle of the curve. The thing that we wanna study, that we wanna understand to illustrate the next era, are actually the brands that are producing way better results than that. Um, and that leads me to what I'm calling the next era where I think we're headed. Which I'm calling the flow era.

Okay. So this is my, uh, this is my, uh, illustration of the evolving of our species and the inspo, uh, is this gentleman right here, um, he's actually among us. Bear you wanna stand up and right? No, come on. Stand up all the way. Okay. This is bear. Uh, and the reason he's my inspiration is 'cause I have a hard time conceptualizing that bear and I are the same species.

Um, we have this picture together. Uh, bear's been a customer of ours for a long time on this boat together, and I look like a little child with my arm around bear. I, I genuinely am like, how are we, uh, of the same, uh, species? So Bear, um, is a great illustration for evolution. Um, I think he's a, a, an evolved version of us as humans, but also as a business.

And so we're gonna study a little bit about what has made his brand born primitive able to buck these trends and produce much better results than the median. And I think his adaptations and the changes that he has made along the way are illustrative of what I think is going to be the pathway that more brands are gonna follow.

Um, so I'm not gonna give any specific numbers away. I'm gonna speak in all percentages in generalities to protect bear. You can harass him later for any of the specifics, but his journey was not dissimilar. It just happened at a different pace. So you'll see a big runup in from 2020. A big runup in 20 21, 20 22 is kind of meh.

Uh, there's actually a little bit of a decline for him between 22 and 23. But the big difference where he bucked the trend where he decided to adapt and evolve different than anyone else is when everyone else's revenue growth declined even further in 2024 has exploded. And so in the hardest environment, his changes produce the best results for the business yet.

Um, and I think it's really important. To understand how he was able to do that in a different context than inflated COVID demand. How did he evolve to create those outcomes? Um, I'm gonna go through three, four evolved traits that I think Bayer developed, uh, and then I got to witness them, participate in that I think become, um, illustrative of how brands are gonna continue to follow this path and how I'm seeing more do it.

The first is that he understood that constraints breed creativity. One of the things that I watch brands do is that they capitulate to the idea that the only way to go out and acquire the next tranche of customers is to do it less efficiently. That it has been so hard for so long that they've seen that the next dollar, the next dollar, all it produces is less efficiency.

That organizationally, no one inside any longer has the imagination that it could be different. It's a real problem, and I get it. When you slow boil a frog and everybody's been sitting in the pot together. The idea that it could be different is really hard to understand. But this happens everywhere. The organization has just allowed for this return to just keep declining and keep spending and keep declining and accepting a lower return and a lower return and a low return.

And this happened to us in 2023. Bear gave us this organizational goal. He said he wanted to fill the big house, was his metaphor of new customer acquisition. And the idea was we're gonna go out and acquire 120,000 new customers to fill this. And we were going for it no matter what. And so, you know what we did?

We started spending. And in the beginning of that year, we started to fall victim to the same problem. We started overspending to accomplish that objective and we went from a business that had never violated first order profitability to start and to violate a few here and there it was happening. We had said, okay, in order to get there, the only way to do it is to spend more money and bear 'cause he is a good leader.

And occasionally we'll call and get riled up a little bit and let me know that we need to do better. Drew a line in the sand. We just said we're not doing this anymore. More, we are not allowed to violate this outcome. And what that boundary does as a leader inside of your organization is it just removes the optionality and forces you to think about something different.

If I say We can't do that anymore, well, I've gotta come up with other things to do. And so it began to unlock different passive consideration, I think, for himself. And for us as partners, and the end result has been since that moment we have just continued to expand the efficiency of new customer acquisitions such that in 2024 we produced way more new customers at way higher efficiency.

Like this is possible. It is totally possible to accomplish this. So anybody who tells you it can't be done, they're fundamentally incorrect. It cannot be done if all you're trying to do is the thing you're currently doing more. If you just take the same ad funnels for the same product with the same message, and you drive it more and more and more and more, the dynamics of the market will compete that down to less and less efficiency over time period.

So you have to do something different. And one of those things is, this is what I really believe is the truth for e-commerce. It's that product, not meta is the mechanism for growth. Um. Meta is a, uh, the greatest ad product ever developed in human history. It's, uh, I owe a lot to, uh, the product and what it's done, but I do not believe that the solution to any brand's business plan should be.

Last year we spent a million. Next year we're spending 1,000,005. That's how we're gonna grow. That won't work. And I watch brands bang their head into the wall over and over again, move through agency after agency, trying to find someone who will magically make that happen. Um, bear, uh, because his nature is to be a hundred percent responsible for his business and not to put it on anybody else knew that, that there was no path for that, that we had walked, uh, really relentlessly after it.

Um, and in 2023, this is what the business looked like from a product as a share of business. So this is January to June of 2023. You can see that the vast majority of BP's business was in women's leggings, in sports brass. Those were the highest product categories, uh, that existed, um, for bp. They had, uh, done an amazing job of tapping into, uh, the CrossFit community as well as some style trends.

They do a great job with product and had had immense success here. And for many years, that was how the brand grew through that COVID era. But the problem was, uh, just like everything else there, the barrier to entry for leggings is functionally zero. Thanks to all the awesome tools that get enabled in our community, the Klaviyo's and the stores and the ESP providers and everybody else.

It is really easy to start e-commerce businesses and in categories with no manufacturing mode. The barrier is basically nothing. And not only that, you have a bunch of people on the high end doing it too, where the competition in this category is insanity. And if every time you show up, and not only is there high quality brands with lots of brand aesthetic, more ad dollars than you.

You also are competing with the same dynamics related to price. What happens is that the value capture in this category gets diminished. Ultimately, all the profits get competed away, and when you have fixed digital real estate in an auction-based bidding system, this happens everywhere. Ultimately, in every category, every one of the clicks on this page become non-profitable.

It's just how it works. The bidding will go until someone is willing to take less pain and less pain and less pain, and someone will take more pain. And that's how it works. And so ultimately it all gets deteriorated and this happens across most of the dynamic landscape. And it was clear that there was no way that we were gonna grow the business by making another better leggings ad it just wasn't gonna happen.

Not at the rate that we wanted to grow the business. The other problem with leggings is there's a seasonality to it. And so we would have this period in the summer. Where you just don't buy as many long pants as you do in January and in November and December's just the reality. And so the business would go through this period, uh, in the middle of the summer where there would sort of be a doldrum if you're, the demand for your best product dissipates for a period of time, like you can again make as many cool ads as you want.

There's an underlying macro to the cycle of purchase behavior that you cannot change. Uh, we are market takers more than we are. Market makers is a really important illustration. A lot of e-commerce brands think they make markets for products, uh, but they don't. They take markets. They are driven by much larger forces, at least when brands that we're talking about in the mid-range.

So, um, this was a problem and Bearer, uh, was acutely aware of this. He may not, uh, process how he got here in the exact same way, but the mechanism of his. Understanding that leggings were not going to be the long-term growth lever was important. And so he came up, uh, with the Savage one, uh, a training shoe, a category that uh, I think a lot of people, um, would have maybe warned him to out of, uh, shoes are very difficult and in particular fitness shoes.

There had been a litany of brands that had just failed in this space, uh, that had really struggled, uh, kind of catastrophically, um, to go after this. Um, I think somebody's wearing a pair of Savage ones. I think I saw them over there. Yep. There they are. Um. And this was released at the end of 2023, um, as a new product category that we could begin to go after higher a OV total.

More gross margin, total dollars less returns, a lot of underlying attributes that are better than leggings, uh, in many ways for acquisition. And what happened was, um, this is a cool graph. So this is, uh. A product sensitivity chart that we use to track sales by skew over time. And we'll do this for spend and unit sales to try to understand, uh, the composition visually and simply of where our revenue's coming from.

I just want you to focus on these bottom two lines. Okay. So this navy blue line represents the unit volume sales of leggings. Okay? So you can see in January it's about 20% of the business, and in February it's 20% of the business, but there's this normal decline going into the summer months. Okay, and he guesses what this bottom line is.

Shoes. Instead of trying to make this more efficient, you subsidize the revenue with an alternative product that meets that moment. And you can see it almost makes up for the entirety of the loss of that unit volume in that time. Okay, this is product-led growth. It's an understanding of the way in which your business opportunity meets different seasonal components and drives more value.

Now, part of this is we're continuing to unlock success in the ad account and drive more volume as well. Um, there's some other things in here that begin to become part of it, uh, related to tactile equipment. We're not gonna go into all the things that Bear has done. They're much more than just shoes. But this is just like really simple illustration of the substitution of value that would've just been previously lost.

Right, like it's just very simply revenue that would've not existed, that now existed into a different category. Um, and so the end result looks like this in that same time period, January to June 23 versus 24. Here's the share of business, and you can see that shoes for both men's and women's makeup, about 18% of the revenue, um, versus leggings is now 12%.

So you have a diversified portfolio, less concentrated risk, uh, more opportunity for telling stories, driving success in the ad account, et cetera. Um, and so that's been a huge factor in how he's been able to offset, uh, that growth. Um, this one is probably, I think the most important, and it's the piece I feel that has been the most lost for brands in this moment of time is that the third evolved trait that bear, uh, uh, developed was the understanding that it is story not iteration that drives disproportionate outcomes in your Attica.

David Ogilvy, I'm in advertising, had to throw in a quote. Uh, says you cannot bore people into buying your product. You can only interest them into buying it. And I think we've lost the bar for what is interesting. Uh, we've lowered it to, uh, hook rates and fast cuts and UGC that all looks the same and copying people's post-it note ads because some brands were running it and it's become this sort of.

Uh, mimetic, like repetition and copying of each other in a way that somehow that is a signal to us about what we should be doing instead of taking a step back and saying, what is interest doing to our customer? And one of the things we try and show brands every time that they start with us, um, is this, this is a scatter plot, um, of every ad that was created and run for born primitive over the course of 2023 through, uh, this is through April of 2024.

Um, and what I use this graph to illustrate to brands is that most ads fail. Most ads fail, like almost all of your ads will not work. And if anybody tells you that they can predict which of these dots will be these dots, they are a charlatan. They are a liar. You cannot predict the outlier events, and they're so small in their occurrence.

In this set of ads, there are over 5,000 ads. In this result of things we're trying new ad Try this again. Try it again. And you can see that like we define a, a high performing ad as, uh, an ad that SP is able to spend because all of our media buying is done through cost controls. Uh, it is able to spend one standard deviation above the mean, like that's not a very high bar.

And you can see that we get to about 5% of, uh, ads reach that level of performance. Um, and, and every brand I've ever seen, this is what their scatterplot looks like, and every brand ever yells at their current creative partner to outperform this ad. That's what all they care about is that every brand hates the idea that I have this ad from 2020 and no one can ever beat it.

It's because it's the 0.01 percentile outcome. You should expect to beat it once every four years, not every week. But this is what happens with Facebook ad creative, is that this iterative hamster will get stuck in this local maxima and the ad you're iterating off of performed like this, and then the subsequent ad performs like this, and then the subsequent ad performs like that and you get stuck in this very narrow band of performance and you can't unlock it.

Um. And we did all the best creative strategy practices like we know how to make creative and Facebook ads and BP's creative is really fricking good. The photography's amazing. The models are hot. The UGC is really clever and funny, like every best practice you could think of for a leggings ad it's been done.

And he guesses what the insight was that we generated about what the ad should include, but. Right. And so we would do this creative insight generation, which ads work best. What's the highest CTR Make an iteration. Adjust, adjust, adjust thousands of legging ads, performance just middling along. There was never gonna be a day where we showed up and went from a 1.3 to a three, just, it's not gonna happen.

It doesn't work like that. So we had to take a step back. 'cause the other problem that starts showing up when you experience is that you know what lever you go to, you go to discount. And so suddenly what we found, oh, you know what moves the needle, a flash sale. And so the leggings flash sale became a thing that was like, oh, that's a growth lever.

And so more and more you started to seep into the ad account. A little bit of this, like the only thing that's producing this sudden change in performance, this sudden improvement is if we discount the product. So we were on this train and we were headed in the wrong direction. Then Bear decided to try something different.

He decided to go back. And what I've seen him do multiple times during COVID Bear did an amazing thing where the gyms, uh. They were a big part of the CrossFit community and gyms were obviously really gonna struggle. And he created a way for each of them to create, functionally their own store that they could sell to their customers.

And all the proceeds would go back to the gym to serve their store. Uh, and it kept a lot of them in business, um, and time and time again. What Bear knows how to do is he knows how to go back to the idea of serving his customer, to think about who is the person that's connected to bp. I am them, what do I care about?

What would be meaningful to me? What would make someone proud to shop my brand? And how could I tell stories like that? Uh, and this is an example of one of those stories, uh, this past June, uh, was the 75th or the 80th anniversary of the D-Day invasion of Normandy. Okay. Uh, bear is a former, uh, Navy Seal.

He's very connected to the veterans community. He's been a part, um, of caring for that group of people is still obviously a member of that community himself, and so he recognized that this was a very special event. An opportunity to connect his brand to something really cool. And there's only a few survivors left.

They're obviously getting pretty old now. Uh, and this is probably the last time that some of them are going to be able to make that journey back to that very special place. And so what he did was he created a special edition of his shoe, um, that there was 500 of them, bear 500, and the proceeds would go to fund the travel for the veterans to go back to this event.

So if you bought one, you were sending them back to go participate in this event. As part of that, when you bought the shoe, it came in this really cool ammo box. You got beach or sand from the beach of Normandy. You got basically these cards that were like an illustration of the people that you were sending back, like almost a, a baseball card of each of them so you could learn about who they were.

Um, you got the, uh, the issuance from President Eisenhower on, uh, the invasion of Normandy. You got a cool, uh, uh, coin and it all came in this incredible packaging. Um. And part of that was like the 500 shoes isn't really the revenue point, right? You're not gonna make a ton of money off 500 shoes. But it was about BP's signal to the community and the participation and all of the content that was creative got tons of engagement and all of a sudden the energy around the soil of the brand was tilled up in a way that altered the performance for the business everywhere.

They had Navy Seals jumping out, uh, that, that skydived onto the beach as part of that ceremony. They were all wearing the shoes, right? So you can imagine like the quality of this footage versus the Leggings Act. Right. Like we could do that again, or we could tell a real story that really matters to people that would make them proud to be a part of it.

And I can just tell you one makes a difference in a different way. And Bear saw this and he knew it. And so he doubled down. He did it again. And so they've been doing a, a, a give back for Veterans Day for a number of years where they're. Been paying off, uh, veteran medical debt during Veterans Day weekend.

So if you shop BP during Veterans Weekend, and Bear came out and he made a really bold statement. He said that they were gonna pay off $5 million in medical bill debt for veterans on, uh, um, through that weekend. And he made that commitment independent of whether the sales came or not, they were gonna make that commitment.

Um, and you know what happens when you make a audacious claim like that to serve a community of people? People wanna talk about it. So Bear got multiple hits on Fox and Friends got picked up to come up and talk about it. The press sort of cycle began around the storytelling of that event. They got to create all this content where Bear would call the people and let them know, Hey, that $182,000 a you owe, it's gone.

People crying on the phone thanking him for it. You can imagine those interactions gotta tell all these cool stories about all these people whose debt was released, what was going on, the tension in their life, what they now felt. If you're a veteran and you're watching this brand engage this way, your sense of connection and identity that just grows.

And then, uh, it was so successful that they didn't just end up doing 5 million, they were actually able to double it. And bear just told me now that the actual total was $11 million in medical debt relief over the course of that weekend. That is not an iteration of your Facebook ad. It's just not. Um, it's a story that matters in a very real way that people will connect to and they'll make, it'll make them wanna be a part of what you're doing.

And that's how you deepen the connection. That's how things actually change. And so this is the result, right? So we, you see the blue line is the 2023. Um, this first.in that dry period of July, this is D-Day. Right, so you get this spike off of this story in moment, and then we do this thing, we call it progressive peaking, which is the idea that when you get a big moment of new customer acquisition, if you fast follow it on fairly closely with a promotion across the site, you're gonna leverage the incremental value off that existing customer base and drive demand.

So this is a sale moment that we added and turned the lowest seasonal moment in July into one of the highest revenue peaks, and then this is Veterans Day. Right ahead of what? The biggest sale promotion of the year, black Friday, cyber Monday. And if you look at the line in all the other periods of time, it's a little bit better in some places, a little bit worse in some places, but the growth of the year lies in the creation of those stories.

That's it. That's what happens is you take moments where there was a doldrum where you couldn't sell leggings in the summer, and you go, what do we do to make our brand matter? What product could we sell? What stories could we, uh, uh, promote and how do we create massively disproportionate effect on the business?

The last thing is, uh, goes back to the idea of a negative cash inversion cycle and set aside whether it's negative or shorter. The point is just that in a moment. Where there is no available capital in the marketplace from debt or equity, you have to get your suppliers to finance your growth. That's how this has to happen.

And so what Bear did was, and you know, you could imagine negotiating with Bear, he's got a little bit of a leverage in those conversations. He's good at it. He'll, he'll get in there and mix it up. But when he went to the manufacturer for the shoe through relationships that he had, this is a quote from a podcast Bear and I did that's gonna be released, um, or was just released soon.

I'd encourage you to go listen to the full story. Let him tell it. Um, he said that in our first year we did net 30 on delivery, and they were like, Hey, if you wanna go further than that, you need to get our trust. Okay? So we got 'em to take net 30 on delivery right away, which is pretty dang good already.

You're getting your customers to pay for most of that inventory. But then after success, we went back to the drawing board and we were like, Hey, we're gonna take this thing to the moon. You can imagine bear saying this, he's telling you we're building an exciting vision. We're going to the moon, you know, you need to give us net 90 on delivery.

They agreed. So now you go from leggings manufacturing, which doesn't have quite the same terms, they have pretty good terms with it to now your newest, fastest growing SKU has a net 90 on delivery to finance the growth, which is hard to predict 'cause it's early on. And so you don't know exactly how much volume you're gonna do.

So there's inventory risk associated with it, but it's deferred because the customers are paying for it. And then layer on top of that, when you do a limited edition like skew like this. Bear says this, and I mean, that's crazy. And you know, particularly for pre-order items, they pre-ordered the shoe. I mean, you're not paying for it till nine months later.

He had nine month float on the pre-order of this. That's like insurance float, right? Like you can sort of go invest that and increase the return on uh, uh, the cost of that revenue even, even further. And so, uh, this is another piece where if I think about building flow era. Part of it has to be a consideration for the efficiency of my marketing, how I tell the story, the products that I'm selling and the moments that I'm doing it.

And also, uh, the way that I get my finances invested in the, uh, or my suppliers invested in the financing of my business. And so this is the end evolution right here, right? This is everything we've got. We've got our supplier financing right here, just carrying it around. We've got product-led growth.

These are actually a product that Born P sells. Men's jorts bear cuts 'em a little shorter than they actually are. He likes 'em a little shorter, but. Um, product-led growth, acquisition constraints, a compelling brand story, and ultimately free cash flow. And the good thing is when we set these brands out into this market in 2025, they're gonna benefit from something else that's really exciting, which is that, uh, we have been tracking, uh, something we call the consumer confidence index now for almost two years.

In March, it'll be two years, and we do this with no commerce. No Commerce is part of the data consortium that I mentioned, and we, um, we send a survey out every month to 5,000 consumers on Shopify stores. Brands have opted in to allow us to deliver this survey off the back of their normal post-purchase survey, and we ask them a series of questions about their sentiment related to the economy.

Um, we do this as we mimic the questions and modeling of the CCI, the Consumer Confidence Index, which has been done by the OECD and the University of Michigan for over 60 years. Um, to help predict consumer sentiment about the economy. And so we wanted to do it for our industry. So we wanted to create what we call the Direct to Consumer Confidence Index.

You can go to DC dt cci.co. You can see this tracked. We publish it, uh, every month, and you can see that as of right now, we've reached an all time high in consumer sentiment as it relates to the economy. Um, and one question that, uh, we ask that I think illustrates this the most is that we ask customers the spread between their belief that the economy will be better or worse in the future.

So you can imagine if the spread is zero, that means you have like a 50 50, half the people think it's gonna be worse, half the people think it's gonna be better. Uh, the most recent result, this, uh, January of 2025, was the highest positive sentiment about the future of the economy that we've seen in two years of tracking this data.

So we're gonna be setting these evolved species that are producing free cash flow and telling stories out into an incredible environment, in an environment that may actually support them. Probably not in the same way that the COVID Tailwind did. But one that isn't a resistance and all the traits that they've adapted along the way.

The evolution of learning how to scale up fast. What does it mean if I have to run lean? How do I get to alternative financing? What is it like to build products? How do I tell stories? They're all in his tool belt now, and so if I'm betting on our industry, those that have made it natural selection has certainly occurred.

There are things that are no longer with us, but those that are here. I'm a big believer in, and I really believe it's why that 2025 is gonna be the start of the best era in DDC history, the end.