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PODCAST - Unpacking the digital shelf

Roundtable: Will Casper ghost us?

This week, Peter and Rob do a deep dive on Casper's IPO filing and what it means for DTC. Plus, mockery of US states via their 2019 top Walmart purchases.

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Transcript

Peter: Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age. Hey everyone, Peter Crosby coming to you from the digital shelf Institute studios in Boston with our weekly episode of quick takes on the industry news that you might just want to pay attention to. Rob's here, and he brought his brain. So first starting up, we're gonna before we get to the meat of the podcast, I think it's important that we start by making fun of a few States. Rob, Walmart released a map with the top selling products from walmart.com in each state across the US and I, we got to dig in on the detail of this cause it is quirky and interesting. So this is in store people going in actually buying it, taking it away. So, uh, where do you want to start?

Rob: Oh my. So we're in Massachusetts and I feel obligated to make fun of New Hampshire in particular because in the year 2019, the number one item sold in Walmarts in New Hampshire is Titanic on Blu-ray.

Peter: Like, what happened in 2019 that made a bunch of New Hampshire-its want to trundle off to Walmart to pick up a blue Ray of Titanic.

Rob: I don’t know.

Peter: At least it was Blu-Ray.  

Rob: I mean, there's two questions here. First, why Titanic and second, why Blu-ray? Everybody streams stuff. Buy it on Amazon prime and watch it anytime you want.

Peter: I'm just glad it wasn't VHS. Uh, so the, the one that that stuck out to me, actually, it's two. I will, I will group them together. Texas and Oregon both had, um, whitening products for teeth. So Texas had, uh, Equate Maximum Strength Sensitive Extra Whitening Toothpaste and Oregon had Crest 3D White Professional effects White Strips. That must be the first time that residents of Oregon and residents of Texas have been anywhere near in the same category.

Rob: No kidding. I, I'll, I'm going to, I'm going to do a hat tip to, to two States right now for making good choices. The first is California for the Nintendo switch console. That's, Which is really, I mean, Nintendo Switches are awesome. And secondly, Oklahoma for the Lego Classic Creative Fun.  

Peter: Classic, you gotta love it.

Rob: Gotta love Legos.

Peter: Well I noticed that number one up in North Dakota was Q-tips, Original Cotton Swabs.

Rob: Very practical.

Peter: Very practical indeed. What else we got? Oh, Florida is tuna, StarKist tuna. Um, which you would think they're right on the water, can't they get their tuna from someplace else? But nonetheless, that was number one. Um, what else stood out at me?

Rob: Well, I mean the most like obvious one in terms of, Oh yeah, you be you, is Vermont. Cause you know, Vermont is kind of a little bit of a hippie state. Very outdoors-y, very preserve your own food and uh, ball jars. Mason jars one for Vermont. I mean it's just the most predictable one on the entire site

Peter: There was some discussion in the studio about what was going into the Mason jars in 2019. Um, probably hooch. Um, so I do have to point out when you pass over the border from North Dakota to South Dakota, you switch to Pupperoni. Uh, I guess that's like pepperoni, but Pupperoni uh, Mix Sticks, Turducken Flavor Dog Treat.

Rob: That’s Incredible. Um, we'll link to the whole list and this is just a phenomenal, phenomenal map in the show notes.

Peter: It's just, like when you think of the top selling items, some of these are just so freaking quirky. You think it would all be sort of just the staples of getting through life, of living. Well, I guess in a way they are.

Rob: Yeah, I mean Titanic.

Peter: All right. My heart will go on. Um, so the, the big meat of the story today, we’re going to spend really the bulk of the podcast on this. Ben Thompson who writes a tech newsletter called Stratechery. And if you don't subscribe, you really ought to think about it. Um, I know for many of you, tech in particular is not necessarily top on your list, but the way Ben Thompson thinks about how businesses work, what the business models are, and he covers, because tech is so much more involved in retail and manufacturing, he ends up covering a lot of these companies that, and media companies, that we spend a lot of time trying to figure out. So really well written, always detailed, comes out weekly. Anyway, Ben Thompson, Stratechery, but he, uh, wrote a, um, a newsletter recently on, uh, Casper, uh, filing for IPO and really dug into, uh, the metrics of the business and, and how D2C companies are, are changing the market, but at the same time also noting the challenges that lie in front of them. Uh, and Rob, I thought maybe you could just start out by kind of giving an overview of, of what, what jumped out at you.

Rob: Yeah. So, so let's, let's go over some of the numbers that he covers. So Casper, um, has filed its S1 to go public and so all of this is now, now public information. Uh, I have a Casper mattress. I think it's wonderful. I think they've got a very strong product. They've got a bunch of loyal fans, um, and they've raised a lot of money in, in order to drive growth. So Casper in the most recent quarter had 127 million in revenue, a 24% increase over the same quarter last year, uh, and a loss of 23 million. And the loss is also larger than last year. Um, now what this means is that Casper is still spending money on sales and marketing to, to drive growth. And the growth at 24% is not as high as you as you typically will see in a technology company that's raised a lot of money and is growing, growing pretty quickly.

Rob: Um, but that's, that's actually I think a really interesting area to dig into. So the, if you take a step back from Casper and I want to cover the venture model in particular because venture and, uh, external financing is what's driving the growth of a lot of these D2C businesses. Venture typically invest in companies that have high upfront fixed costs. So think about the R and D required to develop a complicated piece of software or other technology and then low marginal costs. Um, you know, at the extreme, if you're shipping software over the internet, it can be zero almost in terms of marginal costs or, or directionally close to zero. If you're hosting a SASS product, it might be, you know, 10, 20, 30 points. Um, but that's not not that much. Right? Um, so you invest a lot of money up front, so, so venture makes sense in that in that area, right?

Rob: You invest a lot of money up front and then with low marginal costs you distribute to everybody. It's a big market and you're hugely profitable over time. So you might be losing money for a while and then at some point the bit flips and then you're just ridiculously profitable. Uh, with direct to consumer brands, the math is a little bit different because they, they have high upfront costs in terms of developing a new product. I mean Casper has the sleep science center where they've spent a lot of time developing, um, their, their philosophy on mattresses and testing mattresses and testing combinations of…

Peter: And sort of sleep and wellness in general. That's sort of how they're describing how their market can broaden, but we'll talk about that in a minute.

Rob: Yeah, yeah, yeah. And so, and so they put a lot, a lot of thought and energy and effort, which is expensive, into this. And then they actually have relatively higher marginal costs too because it's, they've got to manufacture each mattress and some of them are going to be returned and the ones that are going to be returned, you just can't repackage. I think you have to throw a lot of them out and so on and so forth. So they have high fixed costs, high marginal costs, and it's unclear how the profitability will work at scale. And it's unclear how scaling works at scale because it's, it's not like distributing software. Right. So Casper and a lot of these other venture backed, direct to consumer companies are reaching a point where they're big enough to go public right now and we're getting the first public look at their numbers and the numbers are um, you know, they're not like technology company numbers, numbers, but, but they're still really interesting numbers cause it's double digit percentage growth, which is more than than a traditional large manufacturer is getting these days.

Rob: Right. Um, so I just want to say I wanted to start there just to give color on it and then dive a little bit deeper into the mattress category itself. The um, Ben Thompson has a quote here about CPGs and mattress companies, which I'm going to read. It's a little bit extended, but bear with me, “the most important thing to keep in mind with traditional CPG companies is that they have long had a symbiotic relationship with retailers. After all that is where they actually made their money. To that end, CPG companies have long been focused first and foremost on scale. Scale, not only achieved the greatest efficiencies in head office operations, R and D, TV advertising, but also bargaining power with retailers for margin and shelf space. This is why going D2C is such a radical change to the status quo. It is not simply that a new age CPG company can keep the retailer margin or pass it on to the consumer in the form of low prices, but also that every aspect of their business can be reconsidered giving the removal of their most important strategic concern, which is the retails.

Rob: The mattress market took all of this to the extreme. In the offline world mattress makers not only sought scale, but also work with retailers to effectively raise prices by making it extremely difficult to price compare. Different retailers would have identical mattresses with retailer specific names, none of which managed to undercut each other by too much, at least not when it came to list price. Consumers had to haggle as if they were buying a car to avoid getting completely ripped off and Oh, if that mattress didn't suit you, you know, expect to pay a penny in order to return it, if return is even possible. Right?

Peter: So, so disruption is what we're talking about here. Like taking this sort of established, closed market, that that was really opaque to the customer and they just sorta had to have one. So they went through it and saying, we can make this simpler, better, more enjoyable. Right? Is that where you're headed?

Rob: I like looking at these things from a purely financial perspective. So,if you unpack that that long quote. Um, what he's saying is that in the traditional mattress market, there was a lot of margin to go around. You know, they, they weren't, mattress companies were not competing on price. It was really hard to, price shop is really hard to do. Head to head comparison. Uh, you know, the, what you bought from a one mattress store versus another had different names. So it was unclear if you were buying the same thing or not. And so mattresses were relatively expensive. So that means that you could come to market, um, and, and there was a lot of margin somewhere to be gotten, right, if only if only you could get it.

Rob: But the issue was in the traditional model, that was the model you shipped through retailers and people went in to shop at the retailers and so forth with direct to consumer and in particular with the advent of foam mattresses and they'd be able to, and the ability to vacuum seal them and ship them relatively inexpensively. Uh, it meant that you could bypass the whole retailer network and therefore there was a lot of margin for you to play with. And you could play with that margin either by spending it on sales and marketing, or by having a cheaper product. And you know, it basically, those are the two major areas. And so mattresses were cheaper, like Casper mattresses were cheaper and also they had a lot of marketing.

Peter: But the result is that, but both of those things are kind of commodity things now, right? For the new online companies because everyone can go on Facebook and Instagram and all these places and sell their products. So the prices there are going up, increasing customer acquisition costs, and at the same time you make a mattress, you make a mattress. So it's hard to, what is the, the, the extra value that would, that would, um, welcomed this sort of public investment in these companies. So one thing Ben pointed out that because of these things are relatively low barriers, there isn't much of a moat around something like a mattress. In 2019 we ended up with 175 different online mattress companies. So what is Casper to do to really earn the valuation that they're looking for?

Rob: From a, from a big picture perspective, even beyond the mattress world. That's the interesting point here is that it's so easy to get started. You don't have to worry about the retailer distribution network and with good sales and marketing you can spend to get initial scale. And so you're seeing lots and lots of direct to consumer brands getting some type of initial scale, whether it's single digit millions or double digit millions or in the case of the Caspers, and the purples of the world, they're getting into the nine figures of annual revenue, which, which is not nothing. And, and in the mattress world, you have several companies like Purple and Casper in particular over a hundred million in revenue each. That's money that's coming in terms of market share right out of the traditional leaders. So it hurts to have a bunch of these companies hitting some type of moderate scale because it shrinks your market share. Right? Um, the issue is, what we're seeing is that these direct to consumer companies are now having to make a shift in order to continue to keep scaling in some way in order to make the unit economics work.

Peter: Yeah, like Casper is experimenting with retail experience with stores, seeing if, if people are going to come in and their assertion, to Casper's credit, they really are leaning into, we're creating a brand around sleep wellness. And so that won't just be mattresses. Consumers will come to trust us that we're doing the best to help their sleep, their sleep health. And therefore as we expand our product line to other, perhaps a more interesting, more differentiated products that help towards sleep, people will trust them and begin to buy. And you can imagine a whole, uh, um, and I mean you haven't been sleeping well lately with a new baby. Maybe you might want to listen to somebody that says they figured out the science of sleep and here's stuff you ought to use. But, um, what, what Ben Thompson points out is that, um, the, the usual things that you think of in tech enabled companies that gives them the advantages is, is some kind of network effect where selling happens without you spending more, um, or other, you know, other, um, impacts that affect customer acquisition costs coming down. But we don't see that here unless they literally, unless they can make the upsell really strong with their current customers or, or have a or cross sell effectively.

Rob: Right. So they've got, we've got a couple of glow lights. It's another product of theirs. The glow light is wonderful for when I'm like my baby's crying. My wife can sort of shake the glow light and get a moderate amount of light. It's not so much that it's going to wake me up and, or vice versa. I could do the same thing. And so one of us can be awake without having to turn on the whole bedroom lights and it's really great. We actually, we have one for our, our toddler as well. The toddler can manipulate the glow light to turn it on and off and it's, it's not having to require a light switch. And so they've got other products that are, that are really good, well thought out products. And I think the trick for them is can you continue to build out products in particular build out products that are not one to 10 year purchase but are but are more frequent purchases that are, may be a little bit higher margin given, you know, if you expect them the mattress space to just be really competitive given how easy it is. There's 175 mattress companies to start and compete.

Rob: Maybe there's other areas where they can use sleep science to differentiate and drive higher margin, more frequent purchases using the brand that they've developed. I think that's the strategy they're taking. And ultimately, you know, if you look back historically, that's how brands like Seventh Generation came up, right? They start with one great product and they expand to it to a whole product line that becomes trusted and they ultimately had a nice exit to Unilever. Um, so we're, we're, we're seeing the direct to consumer brands growing up, having to struggle with scale and stumbling a little bit on the way and having to figure things out. So Casper is still still losing money, um, which is fine. You know, when you're spending to grow, the growth rate is in the twenties of percents and uh, they, they probably need to find a way to keep that growth up or accelerate it if the public market is going to treat them well over the next couple of years.

Peter: I mean, not that it matters, but I'm rooting for them. I, I think they are creating a good brand. I think they're thoughtful about it, but the economics are actually at the end of the day, what's gonna make it work?

Rob: I mean, we talked about something similar actually a few weeks ago. We talked about Away, the luggage company, and when they made their CEO switch and, and you know, it was in the light of all that Slack stuff that came out. In my view…

Peter: The CEO is now back, by the way, now she's back as a co-CEO.

Rob: As a co-CEO? That's what I mean. It's like, I think that's the culture stuff or the Slack stuff or whatever is sort of, it's good media headlines. But at the end of the day, if the numbers are great, the CEO stays and companies like Away that have made big, fixed cost investments in storefronts in, in branding, and in advertising, and have hit a certain scale. They're now legit competing with the big boys, you know, the Samsonites and of the world. And they've got to figure out how to keep that, that growth and scale going beyond the initial, um, niche of people that they were advertising to. And like over and over and over. I think in the direct consumer world, I think you see this. So, um, my view is of course a couple of these companies are going to break out a cut. You know, you're going to get a couple of companies that are going to be billion dollar plus really great successes and then most of them aren't. And actually I think that's personally, I think it is reflective of the way that we shop and the way that we buy and the way that the culture is fragmented in the US these days. Everyone sort of picks a thing that's best for them rather than something that's good enough for everybody. And that that means that there's an opening for lots and lots and lots and lots and lots of different types of products that are suitable to like different niches of people, but none of which is going to really hit scale. But each individual niche is valuable. You know, it's just less valuable than a mass market product.

Peter: Yeah. Well last week we had Mike Moumoutjis from Goodbaby and he was talking about how they had a, as an experiment created a, um, a brand within their, their baby brand that was focused specifically on a niche that they felt like they could be number one in. And so they, they really focus their efforts on creating that new brand inside of their company and what to direct consumer on it. And he says, a lot of that point is one, can we pull this off but not put too much money into it? That's distracting from our main business. But also that we can take the learnings from that and apply it to the larger company. And I do wonder as we talk about Casper and these brands that are, that are coming up that may in fact and will, will be in future episodes be talking about a new report on VC investment and CPG companies, which looks at a lot of where our, where's the money going and then how does, how do these companies get absorbed into larger, um, CPG companies or larger companies that then can take them to scale. Do you feel like for a lot of these brands, that's their ultimate destination is to be acquisition targets of these larger brands that then can help it achieve scale through their established retailer network?

Rob: I would’ve said so five years ago, but I think, you know, you look at the dollar shave club and, and a couple of those other acquisitions, um, where the, the acquiring company I think hasn't seen the growth. Like, you know, dollar shave club hit a growth wall when, when Unilever picked him up. And, uh, it's, I mean, a great brand, great company. It's not, they're still around. They're just not growing like they were before. And in part because the large CPG companies are not going to continue to lose money on the brand to invest the growth. Right. Um, I, I tend to think that in most cases a venture model is not the right model for, for these companies anymore, right? Like, it's for all the reasons that Ben Thompson says, there is no network effect. Typically for a product company like a CPG product or a home product, um, there's not necessarily a frequent rebuy for these things.

Rob: Uh, at some point, when you get out of a niche, you have to go mass market and that's, that's expensive and it does mean to you, you have to deal with retailers at some point to get significant scale and you know, and so on and so forth. Right. I, I tend to think that, uh, for, for direct to consumer brands, maybe other models to stay core to a niche or a philosophy are better aligned with most founders. Right now there's, there are of course some ideas that are great for venture, for product companies, but a lot of them are not. And so I, I think of like, one of my favorite examples is a company Peak Design. They make a camera and you can use them for things beyond cameras, but they're initially they launched on Kickstarter, they had a bag that enabled you to carry camera equipment with you.

Rob: It's a really high quality, great bag. And they've since built out a whole line of bags that are high quality, first and foremost built for photographers that are on the move all the time. And then other people who carry on around a lot of electronics and they're really awesome, but they self-fund through Kickstarter and they've got a very small team and they're at like a great scale for that product. But they're not, they're not raising venture. Right? Right.

Peter: So they can afford to grow more slowly and, and, and experiment where the pressure of venture money, uh, is it's sometimes a blessing and a curse. Right?

Rob: Yeah. I mean there's, there's just, there's just, it's all economics, right? There's just return expectations. So, so you take the venture money, they're looking for big returns on a, on a 10 year timeframe and you know, that you got to grow. Yeah. You got to grow fast. And, uh, I don't, I think that there's a lot of product companies out there that really, really fast growth and large market is not the nature of the business. Right? So Casper, I think the way that Casper is thinking about sleep as a suite of products is the right way to think about it. I mean, I'm really excited to see what they, what they do in order to keep this growth up, develop more product lines that are higher margin, more frequent purchases, and potentially experiment with going through traditional retail. Um, in order to keep the scale growing. I, it's hard for me to see them continuing to grow without having some relationship with some of the traditional large scale retail channels. And maybe they'll show up, you know, a year or two in Walmart, frequent purchases in New Hampshire.

Peter: I doubt in New Hampshire. I think they sleep on the floor. Sorry, New Hampshire. Love you. Um, so I think, I mean, that's our deep dive for today. If we've, if we've made fun of States and looked at where, uh, an entire sort of sector of the industry is going to go, I think we've done our work for the day. So, um, thank you so much for joining us. Um, remember, if you love the podcast, please share it out with your, with your audiences, with the people that you work with. Uh, you can follow us on the institute’s LinkedIn page. You can tweet at us @windigitalshelf and thanks as always for being part of our community.