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EPISODE 046 : 01/27/2022

Simeon Siegel


Simeon Siegel is a Managing Director and Senior Retail and eCommerce Analyst at BMO Capital Markets, a full-service North American financial services provider. Simeon has been named a Rising Star of Wall Street by Institutional Investor and a Rising Star of Equity Research by Business Insider. He has been a guest lecturer at Harvard Business School and is a regular guest on CNBC.

Host: Ned Hayes and Ashley Coates
Guest: Simeon Siegel

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Topics discussed in this episode

  • The idea of direct to consumer – how is that implemented within the retail industry 
  • Common beliefs that there are around direct to consumers
  • The value of the middle man & what role they play in wholesale
  • Brick and mortar versus e-commerce – how it affects the total revenue for a company in the end
  • Covid and the impact on the retail industry

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Audio Transcript

Ned Hayes [00:00:01] Welcome to SparkPlug, where we talk to smart people working at the intersection of business and technology. Brought to you by SnowShoe your smarter loyalty leader. SparkPlug is happy to welcome Simeon Siegel to their podcast today. Simeon is a managing director and senior retail and e-commerce analyst at BMO Capital Markets, a full-service North American financial services provider. Simeon has been named a rising star of Wall Street and a rising star of equity research by Business Insider. He’s been a guest lecturer at Harvard Business School. He’s a regular guest on CNBC, and we’re really happy to have him here today on SparkPlug. Welcome, Simeon.

Simeon Siegel [00:00:49] Glad to be here. You do me much more honor than I am worth, but great to be here. 

Ashley Coates [00:00:54] We’re so happy to have you here Simeon, thanks for showing up and being here on SparkPlug. How about we start by having you provide a little bit of a background, possibly even your educational background and training and what led you to where you are today? 

Simeon Siegel [00:01:08] Let me think how far to go. My favorite color is green, no, so I went to college in New York and majored in economics and philosophy, which again is not something that I generally get to reflect upon. But historically, when I would mention that it would garner a lot of confusion, eye rolls, and what in the world were you thinking that has nothing to do with each other? And the reality is, from my perspective, I think that the beauty of economics and philosophy is that both our schools of thought that look into materials people can see and try to find and unlock hidden value. So it’s simply the idea that there is information all around us. There’s data all around us. The question is what you pull out from it and how you internalize what the actual value is. And that to me, was the common denominator. And I think that you overlay that with the idea of game theory. You think about the psychology of what makes people think what makes people spend. And that essentially is what pushed my career or what we look towards with my team to find interesting opportunities and stories. And generally speaking, what I love to focus on is brands and want based shopping so effectively it’s taking products that look like commodities but become something special. So whether it’s a bike turning into a Peloton, whether it’s an oven turning into a Traeger, or whether it’s a pair of pants becoming Lululemon leggings, there’s obviously an emotional attachment that, through very compelling storytelling, allow the companies to charge more for them. That is ultimately, I think, the most fascinating part of retail and this idea of figuring out brand storytelling, pricing power, et cetera. It makes a nice full circle back to my college majors, which I’ve not thought about in quite some time. So thank you. 

Ashley Coates [00:02:53] Yeah, absolutely we saw that you had studied economics and philosophy, so thank you for sharing that. And we also saw that you were named one of the more intellectual students of retail on Wall Street by Women’s Wear daily. That’s quite an honor.

Simeon Siegel [00:03:06] I have to say, I wouldn’t have thought that being called a student would have been such an honor, but thank you to Evan over at WWE Women’s Wear daily for that. I think that there’s so much around there, and I think that if we can keep on it, the beauty of retail is it’s constantly evolving, which means we have to constantly be learning. So let us all be students forever. But I think it is just so much fascinating evolution and revolutions going on in this industry right now and those that put their head in the sand are those that are going to be left behind. And so I think that it’s really interesting as a case study where there’s no such thing as the new normal anymore. It’s just the current normal. 

Ned Hayes [00:03:43] Part of the reason that we wanted to talk to you, Simeon, was the DTC report. The headline is DTC is not all that it’s cracked up to be raises questions about the DTC versus wholesale debate. So can you give us very briefly a summary of what this report covers? 

Simeon Siegel [00:04:01] I love that chuckle at the end, people hear that they’re like, What are you thinking, man? Like, everyone knows digital and DTC is better, so. So by the way, one thing to level said, I want to be clear when we say direct to consumer, we’re talking about both stores and online. So it’s a company’s own channel versus wholesale. And what I thought was so fascinating. And to be fair, and to be clear, this was a six month process that my team put a lot of work behind that drove very surprising conclusions. So as shocking as that headline sounds, it was definitely shocking to us as we went through it as well. And I think that what was so fascinating that what we found is DTC costs more empirically because I can be opinionated, which means I can definitely be wrong, but the vast majority of this specific report was actually predicated on empirical data. What we found was as companies pivot to direct away from wholesale, they did not drive higher revenues. They did not drive higher gross margin. They did not drive higher profitability rates. And they did not drive higher profit dollars. And all four of those things are shocking in and of themselves, and we should dig into them and talk through them. But they were factual. And I think that what’s so interesting is you think about this and you say having a middleman naturally costs more, therefore, the mantra of DTC was cut out the middleman and you’ll make more money. But what we found was the middleman serves a purpose, and that purpose actually makes companies bigger and it makes them healthier. And that’s this idea of the largest brands in the world, and the healthiest brands in the world are the brands that embrace wholesale from the beginning. And I think that’s what is contrarian. I think we’ll look back several years from now and realize that this shouldn’t have been as contrarian. But right now, I think that companies both large and emerging should embrace this idea that wholesale is not as evil as it is now being made out to be. 

Ned Hayes [00:06:02] So what you’re saying is that when a company builds an ecosystem around their product delivery and actually involves other groups, other companies, middlemen that they’re building a healthier financial picture for themselves as well? 

Simeon Siegel [00:06:17] Exactly. I think perfectly well said. I think that if we think about it as wholesale becomes a free sales force that helps distribute your brand and product and doesn’t cost you for doing so. All of a sudden, it becomes clear why it helps brands get big and why it helps brands get profitable. The obvious question is how do you trust someone else to be a careful steward in a long term steward of your brand? And I think therein opens up a lot of the values of going direct in their qualitative, and they’re focused on the customer and they’re focused on data. But what they are not is quantitatively enhancing, and that’s what I thought was so interesting. 

Ned Hayes [00:06:53] Just to back up a bit, let’s go back to the beginning of direct to consumer. Where did that really start? Where was the pressure coming from to do that? 

Simeon Siegel [00:07:02] Oh, I love that question. Direct to consumer started when the very first person had an idea and transported that idea to someone. So the beauty of direct to consumer is to totally oversimplify in an unfair way. I think retail can be distilled down to a creator of a product or a creator of IP, then has to distribute that product to a consumer. And whether that means someone creates a sweater, whether that means someone writes a song, creates a movie. Ultimately, there is a creator of IP and there is a consumer of that IP. And the question is, how do you bridge that gap? And back to the bazaars or the department stores or the physical marketplaces or the boxes, the subscription boxes at the end of the day, curating other people’s goods is not a new concept. So the direct to consumer idea simply says, Well, if someone else can curate my product, surely I can treat it better and I can find my customer. The growth of the internet is one stage, and the notion of DTC becoming somewhat synonymous with digital makes a lot of sense when things like social media can help you directly target and isolate your brands. However, going back many decades to the growth of the specialty store, the reality is, though they would never be called DTC because DTC is viewed as digitally native; American Eagle and Gap and Victoria’s Secret. These are all DTC businesses. They don’t embrace wholesale and the people that spearheaded that don’t embrace wholesale, they were of the view that they could do it better. And I think that when stores were allowed to become thousand box fleets, they carried similar benefits as wholesale. But you had to pay for your rent and you had to pay for your labor, whereas in wholesale you didn’t, which is why it was more profitable the other way. But at least it helped you scale. So I think it’s a very interesting question that probably could take up 14 podcast in and of itself, but DTC has been around forever. The question is when it hit certain tipping points, and I think the advent and the introduction of specialty retail was one massively important stage where companies could become their own department stores. And then I think obviously the proliferation of e-commerce took that to a new level. I think the third piece happens near every excitement where you have a lot of venture capital that finds companies that otherwise would not likely be able to make that jump. And those companies increasingly are focused on going direct because the mantra of digitally native companies is certainly that’s their mantra we talked about with DTC companies. If you eliminate the middleman, you can save those dollars and have them focus on marketing. 

Ashley Coates [00:09:46] So, Simeon, when you were giving us an overview of the report, you started to mention some of the realities that your research uncovered that turned out to be in contrast to some common beliefs that there are around direct to consumer. Can you go over some of the biggest surprises that your team uncovered? 

Simeon Siegel [00:10:05] Absolutely. So starting at the top was the top, revenues did not improve for companies because they went direct. And so initially, that sounds silly, because if Nike, for example, is going to sell its shoes on Nike dot com or they’re going to sell it shoes to any other distributor, naturally they’re going to get a higher markup, they’re going to get the higher dollar or the shoes direct. So it doesn’t make sense intuitively that you would not see this growth. And yet, when we aggregated all of these businesses, the businesses that pivoted to direct did not see high revenue growth the other way around. If we work backwards, try to figure out why. I would hypothesize that what we’re seeing is that by going direct, the company can earn more revenue per item, but by abandoning wholesale, they give up more units and that becomes the dominating factor. So the units that are given up by not selling and wholesale offset the revenue improvement per item by selling direct. And what’s so amazing to me about it is that I can give the explanation now and it starts making sense. But it’s not a hypothesis I would have thought, and nor was the hypothesis that we started with. So going further down and just getting to the bottom on an operating profit rate basis, I’m going to throw out fake numbers here, right? It’s just oversimplified. Generally speaking, the math of it should be at the gross margin. So simply, the savings on the cost side by selling direct should be 20 percentage points higher than sold at wholesale. So two thousand basis points, 20 percentage points of an improvement in gross margin if you sell direct. On the flip side, if you run a store and again, these aren’t the real numbers, but roughly, let’s say there’s 15 percentage points paid on occupancy costs all in and let’s say there’s 15 percentage points paid on store labor, all in about sooner. That encompasses all the store costs. You just went from 20 of a good guy to 30 of a bad guy. So plus 20 for going direct on the gross minus 30 on every other expense. Your net negative 10. If you then say okay, that stores willingness to strip out the labor, strip out the store, rent by going digital and then add back in pick, pack, ship, fulfill return, reverse logistics, hire, marketing, etc. All the reasons that e-commerce became a lower margin business in the first place, and that takes that place as well. So what we found there again, not what we would have thought, but what we found is that the rate, the operating profit rate is worse direct and it’s worse by about 10 percentage points. So what we then know is if you’re operating, profit rate is lower and your revenues are lower, well, then obviously your operating profit dollars are lower. That’s just math. So that helped me explain three of the four conclusions. Although surprising, at least ex post facto, I can understand why revenues are lower. I can understand why that rate is lower and I can understand why ebit dollars more the profit dollars are lower. The one that was the most confusing and still is to me, and the most intriguing is when we looked at across a broad range of companies the gross margin, the merchandise margin, the product margin, whatever we want to call simply the cost of goods. It would seem a no brainer that if you sell the same product, it has the same cost of goods direct at your own website or your own store, and you get the full markup. It would have to mathematically carry a higher product margin than if you sell it for lower to a wholesale. The problem? And I certainly did not expect to come up with this. The problem is that if you take a big set of the largest companies that we can see and you line up their merchandise margins, what you find are that the third party retailers, so the department stores, et cetera, they have the lowest gross margin. That makes sense. They’re selling other people’s things. What you would then expect is on the flip side of that barbell that the direct only businesses should have the highest because if they have gross margins that are 20 percentage points higher, they should be the offsetting factor. And then the brands that embrace a hybrid are in between should be somewhere in between. But it’s not what we found. After seeing the third party retailers on the right with the lowest margin, we found there is a complete mismatch. And so that’s where it became fascinating, where you had brands that had 40 or 50 percent of their business at wholesale. Still, with higher merch margins, higher product margins than brands like Abercrombie and Fitch or American Eagle, or brands that were just direct only. And so we ran a lot of hypotheses has tried to grow and we still are. And to the listeners and to you, if anyone has potential hypotheses, I would love to be presented with them. And I would love to talk it through and we could talk to the ones that we played with. But at the end of the day, the numbers, the ordering, that was face and it was shocking.  

Ned Hayes [00:14:58] Right. So let’s talk a little bit about merchandise margins. I have a hypothesis that e-commerce and Amazon throwing good money after bad for a number of years distorted the margins and distorted the supply chain in a way that’s kind of a natural and that eventually we’ll see a correction. That’s my hypothesis, I don’t know, do you think that’s valid? Do you think e-commerce did distort the margins or the way that Amazon did e-commerce? 

Simeon Siegel [00:15:22] So that’s really interesting. I guess the question is, does that answer this? One example to looked at in the report was that Ralph Lauren has a higher product margin than Abercrombie and Fitch, and Abercrombie and Fitch has next to zero wholesale and Ralph Lauren has 40 percent. So in theory, I think you’re absolutely right. I think there are certain companies that have lost leaders. I think there are certain DC funded businesses that are allowed to run out due to the economic losses for a time. So I think there is definitely a distortion. And to your point, at some point that should normalize. I guess my question is presumably that would impact Ralph and Abercrombie in very similar ways. And this isn’t a normative judgment. They shouldn’t say one is too high and one is too. It’s just simply to say both have a lot of international. Both have a lot of outlets. Both are large. Both sell various forms of apparel. One has 40 percent of their business done in a channel that’s supposed to be drastically lower. Margin one has zero, and the margin structure that we see appears to be counterintuitive. If that makes sense. 

Ashley Coates [00:16:20] So let’s talk about the middle man. It’s a word that implies that they are just passed through. But let’s talk about the value that they add, both to product presentation as well as the bottom line. What value does the middle man add? 

Simeon Siegel [00:16:34] Yeah, it’s a fantastic question. I think that in the history of time, there’s always someone doing something in between. There’s always a connector. And if done right, the connector is expanding the reach. And I think the question of wholesale, and this is helping you to internalize with wholesale is just wholesale essentially become a free to almost free sales force or brand, right? All direct to consumer brands have sales forces. So does this middleman effectively become that an outsourced sales force? And what that means is that all of a sudden starts changing the light as to whether department stores are good or bad? I love retail because retail is full of platitudes, and platitudes are always wrong. The platitudes, is that one of the primary platitudes here is that department stores are evil sales only bad if you don’t trust the wholesale partner. If you trust the wholesale partners and they’re helping to expand your reach and they’re doing it in a very profitable, economical way for you. I had this moment where we were going through Traeger, the smoker that’s fairly early on on their mindshare and has a tremendous opportunity for awareness with high growth. And they said very contrary to most brands, that they’re very excited about the opportunity to grow their wholesale business. And by the way, there are physical wholesale. It was this idea that they get to have a sales force in a retailer that gets to show their product in real life, effectively create a showroom. And the only cost they have to pay is not taking the full markup. But other than that, basically this is a business where they can trust that their brand will be presented in their best way by people that are intelligent about their brand. And it was this really interesting moment because most brands you and I will hear about now will all be talking about the idea of removing the middleman. The middleman is inherently bad if instead of thinking about the middleman as someone who’s taking an incremental fee instead of thinking about it as a double markup, which is the perception we’re now allowed to think about it as an outsourced sales force that can be trusted to help enhance the brand. Well, guess what? Name me a digitally native brand that is maniacally focused on not having a middleman that does not pay a boatload of money to an outside media agency. What happened was marketing became everyone’s outsource. Why is that different than outsourcing the sales distribution arm? 

Ned Hayes [00:18:57] That’s a really fascinating comparison. So the cost of doing marketing really has a verifiable impact on the direct to consumer model. 

Simeon Siegel [00:19:06] I agree with everything you said. The problem is it’s verifiable because it’s a verifiable cost. 

Ned Hayes [00:19:10] Mm-Hmm. 

Simeon Siegel [00:19:11] Right. What is the primary metric for stores? It used to be sales per square foot. What is the primary metric for marketing return on ad spend? One has the word expense inherently built into it. One has the word revenue as its sole driver. I think the fascinating thing is marketing is quantifiable because marketing is a very clear expense. Whereas with stores we care about sales. What we’re focused on is the top line. Do you know why? Because you pay once you pay your rent as a base rent ignoring obviously, there’s some contingent based around sales base rent, but rent is primarily our base rent, scale up the business, everything is gravy, which is why the primary metric for stores was always top line driven because once you hit a certain threshold, the expense no longer exists, for all intents and purposes, marketing every single dollar, every single unit becomes their sales based metric or return based metric where it has to keep on going. No one turns off marketing when they’re doing really well if theres still competition. Honestly, they ramp it up, and I think that inherently is the problem where DTC, I think at the end of the day, you have to decide as a brand whether you’re going to spend recurringly, don’t know if that’s a word, but we’ll go with it. You have to decide whether you’re going to spend recurringly on distribution or on marketing and creativity. I think and I’m making up, I’m falling prey to my own issue. You’re making a platitude. I’m over generalizing, so I recognize that. But I think generally speaking, the business model doesn’t work. If you have to continue spending perpetually on both creativity/marketing and on distribution. So historically, the stores you spent one time for distribution so that you could continue to merchandise continue to be created that that sense could be the recurring spend. The problem is when marketing becomes your distribution, when your DTC, when you need to focus on and this is more of a digital conversation when you’re constantly spending, where’s that incremental spend ever end? But where do you get the relief? And inevitably, sometimes what that means is you actually spend less on the creativity on the product and the merchandise. So again, that’s an over generalization, but I think it’s important. 

Ashley Coates [00:21:24] Yeah, absolutely. And so can we actually dig in deeper to the difference between the nature of expenses for brick and mortar versus e-commerce? You started to talk about rent being a one time expense for a brick and mortar store. What are the variable expenses for e-commerce? How do they compare to brick and mortar and how do both affects their total revenue for a company in the end? 

Simeon Siegel [00:21:50] Yeah, and it’s a great question that I think will be the answer will be constantly evolving. So the genesis of this conversation, we’re talking about a report that my team did that you referenced. We did a similar report about 10 years ago about e-commerce that was back when people thought e-commerce was going to be accretive. It was going to be the greatest block on the profitability basis. We had about a revenue basis on a profitability basis for retail. And so we set out not to challenge that notion, but simply to show it, to verify it, essentially to give an encyclopedia of ecomm costs. And so we did it 10 years ago, and what we found was that when you took the shipping costs, when you took the fulfillment expense, when you took the incremental marketing that digital afterpay, as opposed to the marketing that come simply by rent with the windows as people walk by, we found that there actually were, as companies suggested, a 1000 basis points, 10 percentage points lower expenses online than in stores. The problem was they were all variable. So once a company is committed to paying rent, once a company has committed to paying certain fixed costs, they essentially become a corporate cost. And again, these numbers are stale because this was 10 years ago. But what we found in that report was that the 10 percentage points that looked better by going online actually to a company become 250 basis points, 2.5 percentage points worse. When you internalize the fact you still have rent, I think about it like you still pay your mortgage when you go on a vacation and stay at a hotel. The hotel is a variable spend. You’re just adding another expense. You still have the first. Well, then the logic answer is close all your stores. The problem is, you don’t scale. So if you’re always staying in a hotel, you’re always paying that amount. So I think that what we have found is e-commerce is somewhat structurally a unit economic intensive business, meaning every unit comes with a pick pack ship fulfillment cost. And that’s before accounting for the fact that obviously those higher return rates have higher marketing dollar expense as ongoing systems that need to be updated. So I think that that’s generally the push. Now what I will say is in the last 10 years, that challenge went from being contrarian to consensus, stating that everyone gets right over. We watched e-commerce erode the margin structure across the landscape, and Ned that goes to your point as well. So A) it’s tied to the variable expense, but B) it’s also, as you pointed out, companies like Amazon, other companies. Honestly, I think it’s less Amazon, to be perfectly honest. I think it’s more the ability that three of us with a sewing machine and some venture capital could start a company tonight. But I think the fact that there was a limitless space of competition allowed for people to lower the price to charge less than they otherwise would need to want to sustainable basis. But I think that ultimately that drove margin erosion that could not be ignored. And I think what’s interesting now is after everyone finally accepted that and grew comfortable with that. And you see pockets of people starting to question and starting to say, no, no e-commerce can be better now. I think that that’s going to be an interesting thing to watch because are we just falling prey to whatever the definition of retail insanity is? Are we just going to be a slave to the past history where we’re starting to believe the same hopes that tripped a lot of people up a decade ago? 

Ned Hayes [00:24:59] But one of the key findings in the report, too, is that although revenue per unit may grow with direct consumer, total company revenue doesn’t always grow. Can you talk further about kind of revenue mapping there? 

Simeon Siegel [00:25:12] Yeah, absolutely. And, this is simply the idea that if you outsource your sales force, chances are you’re going to be able to sell more. And so we learn in Econ 101 first day in college. Price elasticity of demand. We learn that companies are built simply on prices and units. And then we spend decades trying to forget we spent decades trying to get all nuance in terms of what the channel, where should I sell geography? What the right, how many things do you sell? And what did you sell them for? Right. That’s all that matters. So by going direct, yes, you’re going to sell that thing in big quotes. That thing for more money questions. How many things you selling by leveraging the distribution channel of that wholesale partner? What we found again, surprisingly, but what we found, if you give up too many units now, that inherently wouldn’t be a bad thing. I’m a huge proponent of sell less, charge more. I think that’s what we found the biggest winners during the pandemic were those that internalize that they actually gotten too big and what they were able to do essentially structurally shrink their precocity of demand by firing their dilutive customers and focusing on their brand loyalists. So I’m very much in favor of companies that do decide to become smaller, healthier businesses. But that’s not what we’re talking about. We’re talking about the belief that by going direct will actually bump up the revenue. And that’s just what we did not see. And I think that’s where the question becomes. You have to decide, how big do you want to be and how do you want to get there? And that’s this element of embracing the moment. 

Ashley Coates [00:26:39] So we’ve seen a tsunami of change over the past two years for retail, Simeon. From your point of view, what was the impact of COVID on how brands sell and what changes accelerated with COVID evolutions that might already have been coming? And what challenges did brands face that they hadn’t faced before COVID? 

Simeon Siegel [00:27:00] Yes. So my team, who I am again, they are their phenomenal team and I’m so appreciative of all their work well, put out a report last year called Did COVID actually save retail? And the idea there was that there is a common refrain, stores are bad, right? Forget about wholesale back to stores, stores are bad and North America is massively over stored. Whether or not that’s correct, I think more than being over stored, I think we became overly promotional. And I think that whether it’s Wall Street’s poll, whether it’s other stakeholders fault, whether it’s just an insatiable need to grow. Who knows, for whatever reason, whatever the driver retail over the last several decades became grow for growth sake. And the problem is that no one knows how to perfectly compete. It’s not possible. So there’s one magical, invisible sweater in every company’s life that needs to be sold at 25 percent off. The problem is, no company gets to charge 25 percent less for that incremental sweater. As soon as they decide to get that incremental sale, they need to mark it down. Well, they need to mark down the rest of everything, also 25 percent off. So it’s not a marginal markdown, not incremental markdown, it’s a retroactive markdown, it’s a total markdown. And that problem there was that no one can ever see that sweater. Because if I told you exactly which sweater will cost your entire business twenty five percent, it would probably be easier for you to hold back and say, You know what? It’s not worth it. So I think what happened was, I think companies chase that incremental sweater to get that magical, horrible sweater. And once you do it, once you bite that forbidden fruit, all of a sudden, there’s a lot of ugly sweaters that need to be sold. And the problem is, in a world dominated by revenue growth measured by revenue growth, you cannot simply say I’m going to shrink to become healthier, and a few brands try to call five plus years ago. And the idea was they had gotten a bit large, the brand needed to focus on quality of sales. The company is focused on maintaining margin, but if you’re protecting profitability while shrinking revenues, the massive it says you’re going to become a smaller business. So what COVID did, I think was COVID forced revenues to implode. Covid took the largest companies in the world and shrunk the revenues to zero for a brief period of time. It took the largest revenues in the world, and it forced expenses to shrink by people furloughed employees. People didn’t pay inventory, people to pay rent, etc. Well, what’s a business that has no revenues and has no expenses? It’s a startup. What do startups do really well? They pivot. The first time in the history of time the largest brains in the world were allowed to pivot, so different brands that chose to, that chose to refashion their businesses for the future by selling less and charging more. Before the word supply chain told anyone there was going to be light inventory. These brands were able to say which of the customers that are better, which or not, which is that magical sweater. I don’t want it. And I think that’s what became released, but I think that’s what saved retail. And I think that’s what we found out that rather than simply closing, 200 stores focus on raising price 20 percent. And what we found was for those that were committing, those that were able to raise price, 20-25 percent in many cases could give up as much as 40 percent of their units for zero. And the math would still have them generating higher profit dollars, not rate. That was powerful. And that was shocking. 

Ned Hayes [00:30:28] Right. So one thing that you haven’t really spoken about that I think is incredibly important is the role of customer service and of actually treating your customers like they aren’t a number we’ve seen at SnowShoe, more customers accrue to us because we actually have people who work on our staff who know the customer’s names. So can you speak at all about the value of customer service in this kind of changing world of retail? 

Simeon Siegel [00:30:56] Yeah, I love that. And I think whether you’re a thousand percent correct in that, there are benefits of being direct and you control your brand. Again, I think a quality that I think you control your brand to control your data, you control your customer and all of that exists. What I will push slightly, which is not actually a push, is who does not love Nordstrom’s customer service, right? Simply embracing wholesale does not mean you are going to have a bad experience. And I think that’s the point. I am not necessarily suggesting just go willy nilly to whatever wholesaler is offering you an opportunity to sell more units right the same way that you wouldn’t open up your own store in a bad location, the same way that you’re going to be maniacally focused on where and how your ecomm presence is portrayed, do the same with wholesale. Let the idea of recognizing that that wholesale partner can be just as powerful of a customer service provider can be just as powerful of a brand enhancer. I think that’s what’s important now. I firmly believe that, and I think that’s the answer. Where I will call my own bluff is to say that, by the way, I think the off pricers, are a phenomenally important and increasingly important part of the ecosystem as well. And obviously, that’s not the customer service thing. But I think that there’s different places, there are different roles for different aspects of wholesale. But I think simply saying wholesale does not mean poor brand image, poor brand experience. And I think if you have a good partnership with a Nordstrom again, I just as an example, I’ve never heard anyone complain about the customer service that they’ve got and walking into one of those stores. 

Ashley Coates [00:32:41] Yeah, they’re the kind of quintessential customer service brand aren’t they?

Simeon Siegel [00:32:44] Take back attire, right? So the legend goes.

Ashley Coates [00:32:48] Yeah, so the legend goes, Exactly. So we’re starting to see the light at the end of the tunnel in terms of Covid. What are your thoughts, Simeon, on who the winners and losers are going to be post-pandemic? 

Simeon Siegel [00:33:00] Oh, the magic question, however, many million dollar question. Holistically, what I’m trying to differentiate is between the brands and retailers that actually improved their pricing power, as opposed to the brands and retailers that simply saw higher prices because of low inventory. I believe all of this conversation around supply chain issues. I think it’s a little bit misplaced. I think that last year everyone heard pandemic thought, recession thought 2008 and assumed we had 10 years of inventory build. And then they realized several months later that actually there’s no inventory because the supply chain shut down and there was simply no product. The supply chain isn’t shut down anymore. The supply chain has slowed down more so than dealing with an issue of creating. We’re dealing with an issue of transporting what that means is product is leaving Asia and getting onto boats. It’s just hard. But getting off those boats through the ports, it’s just slow. It’s getting through those ports to the truckers. It’s just minimal. But what it means is everything is still moving. It’s just moving slowly. That actually might be worse because what that means is that in my opinion, and I’ve definitely been known to be wrong on many occasions, in my opinion, this is not going to be a holiday without promotions last year with holiday without promotions, this year is going to be a holiday with divergent sales, stuff that is good product that is compelling won’t even make it to the shelves. Totally agree with that. There’s going to be very little of and it’s going to fly. I think we’re already in the motion where there missed deadlines. I think we’re already back to what we know is normally seasonally missing inventory, where it’s going to be near impossible to try and predict what containers you’ll be able to get through, which means inevitably there’s going to be slow moving products from within product drives, discounts, discounts. Obviously, we know what that means. So I think that this notion of if discounts appear, which of the brands that are appreciative and recognize that mark between selling less encouraging more, which will hold the promotional line versus which of the brands, they’re just going to achieve that to get to the clinical unit. I think therein lies the winners and losers obviously picking up. That’s easier said than done in terms of ally to none and I think there will be discounts this year. I just think they’re not going to be where you want them, right? 

Ned Hayes [00:35:10] Well in a recent interview on CNBC you discuss the pressure on big brands and small retailers to stop doing wholesale. So can you just sum up why this is a mistake for both big and small retailers? 

Simeon Siegel [00:35:23] Yes. So I think that the idea of enhancing the idea the same way that you would outsource your marketing arm, outsource your sales arm, you’re going to come up with your own creative, but you’re also going to internalize other people’s copy. You’re going to have your own distribution direct, but you should also, where appropriate, allow for others to sell your product. The question is simply orders of magnitude and what are the right relationships? It’s not blanket. And I think that’s what the ad I think both big companies and small companies can deal with this. Big companies should not, in my opinion, fully wholesale at the rate they are. And probably more importantly, because by the way, those big companies that are fleeing wholesale by definition, are the ones that embraced it the most. They’re actually the ones that benefited the most and should know what I’m saying to have been historically true, because that’s how they got to where they are. The more interesting and potentially important advice would be to the smaller companies that have been brought up thinking that direct is great and wholesale is bad, so they’re not even trying it. I think those are the brands that actually are at the greatest risk by avoiding the channel. And I think that there are some very interesting call it perceived to be digitally native companies that do this. I think Theory is a phenomenal example of a brand that we would all normally think about as being an online centric brand that not only has their own stores, but has very strong wholesale relationships. I think that’s what will become the difference between scalable, profitable brands versus perpetually tax funded brands. And the problem with perpetually tax funded brands is perpetually doesn’t mean forever. At some point, that runs up. And if you haven’t created the sustainable business model, the unit economics business model that doesn’t demand a perpetually funded marketing team, you’re going to find the battle for profitability is uphill to impossible. 

Ned Hayes [00:37:22] Right. So the battle for profitability. Well, if we look out five to 10 years, what does that battle look like for a direct to consumer business models? 

Simeon Siegel [00:37:30] Yes, I think the direct consumer is the question will be if if ecomm is in stores. The question will be the technology allow for some improvement. Because I think that’s the biggest pushback. I think that what I’m saying now will resonate with a lot of people and it will upset a lot of people. And I think to recognize again the pushback. And what I want to stress is, again, this was empirical and this was based on a lot of quantifiable data, looking back over a long period of time and looking over recent period of time. So it’s simply what happened and what didn’t. The pushback will be, the past is not going to be an indicator of the future because technology is going to drastically reduce the cost of running direct. Whether or not that’s true, it hasn’t happened yet and whether or not that’s true. The same question could be applied to economy businesses or the wholesale. So at the end of the day, it should still suggest, when done right, the outsourcer will be a powerful tool in terms of thinking to where the profitability goes. I think it depends on what the margin is. So what do you start with? What is the product? How do you maniacally focus on ensuring the brand carries brand equity that will not be competed away and that goes back to the cold? It’s retail conversation. Can you bear hug brand loyalists? If Nike were to charge $400 for a pair of sweatpants, I guarantee you people would buy it. Fewer people would buy it than if they’re $20. But I guarantee you there are people that are diehard swoosh fans, no matter what. So the question is figuring out the right balance of what level of brand loyalists versus what level of price sensitive shoppers do you have within your brand? And so I think that this is a very important question that probably can’t be painted with a broad brush stroke. But the key focus needs to be to be profitable. You either have to have a phenomenal gross margin, you have to have a very low operating expense control if you are both fantastic, but you can’t not have either. So figuring out over the next five years how to either create the most compelling and protective product margin or the absolute best operating expense structure, I think what we’re finding as direct comes with a high opex. So it’s got to be focused on the profit margin. 

Ashley Coates [00:39:34] Thank you so much, Simeon. That’s a great note to end on and just great things to keep in mind going forward and really appreciate you sharing all of your insights and the findings from all of your research. We do have one last question for you, which is as you are an industry leader, what do you hope to further accomplish and what would you like your legacy to be? 

Simeon Siegel [00:39:56] Oh man, it’s way too important of a question. You started by flagging the women’s wear daily quote of being a student of retail. I just think the beauty of this sector is that so many people are employed by it, so many people use it, we are all consumers, and it’s a very important area of our world and the notion of ensuring that we’re moving in the right direction, the notion that we can continue to create profitable companies that can employ people for a very long time. The idea that people can feel empowered to do that, I think, is very important. And I think that at the end of the day, that is predicated on having healthy businesses. That’s very important. So they don’t need it to be attributed to me. I don’t need it to be my legacy. Hopefully, my legacy is very happy and healthy family. That is just that’s kind of all I would hope for. I know that sounds cheesy, but that really is. I’ve never thought about that question beyond that. But if the work can help people push to create and foster healthy companies, that feels like that’s a greater win than I could ever hope to imagine, because that will help to touch other people that I will never imagine meeting, and I can’t imagine something better than that. And I promise this was not scripted because that sounds cheesy or a hearing it play backwards, but I could leave an imprint on the world. I think that one would be a pretty nice one. 

Ned Hayes [00:41:16] That’s a great imprint on the world. Well, it’s been great to talk to you, Simeon. Have a great afternoon and talk to you later. 

Simeon Siegel [00:41:22] Well, guys, this was great because a lot of fun. 

Ashley Coates [00:41:24] Thanks so much. 

Ned Hayes [00:41:25] Thank you. Take care. 

Simeon Siegel [00:41:31] Bye! 

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