May 06, 2010

Fetzer's Footwear: Growth

My first meeting with Lauren Fetzer, the CEO of Fetzers footwear, is at Southside Park, a popular local park where tourists watch the orca whales swim by. Ms. Fetzer is "as advertised", wearing a beanie cap and white earbuds tethered to an iPod Touch. Ms. Fetzer sees me approaching her, pulls the earbuds from her ears, and greets me.

Kevin: "What are you listening to? I hear you like listening to music from the 1990s, is that correct?"

Lauren: "Absolutely, the 90s rock! I just finished listening to Montel and 'This Is How We Do It' ... I can't shake the image of Ellen parading through the audience, dancing to this song on her show.

Kevin: "So, what do you want to talk about today? And by they way, it's cold here, the wind is absolutely whipping around, isn't it?"

Lauren: "You get used to it. It's late spring across most of the country. But here on Madrona Island, summer doesn't really kick-in until about July 10. Anyway, each time we meet, we're going to talk about any of a number of business issues. Like growth.

Kevin: "Growth?"

Lauren: "Yes, like how the heck are we going to grow our business in the future? Ok, here's the deal as I see it. Growing a business via classic e-commerce ... that's a door that is closing."

Kevin: "It is?"

Lauren: "Absolutely. Every one of us that runs a mid-sized business knows that the big boys are going to dominate. I can't compete with Zappos in a traditional sense. Somebody buys two pair of shoes from them and they pay $6 for shipping but think they get free shipping because the price of shipping is embedded in the item. My customer buys two pair of shoes from me at pays $5 shipping and grumbles to our customer service team about how Zappos gives them free shipping. And Zappos has the scale to deliver the shoes to you in twenty-four hours, I can't ever accomplish that. All of us mid-sized brands have an online competitor that can clobber us in this manner."

Kevin: "Sure."

Lauren: "But that's what makes this fun, Kevin. Every problem has a solution. And just because Zappos kills us online doesn't mean we can't beat them in some other way."

Kevin: "Do you really think it is the perception of free shipping?"

Lauren: "I think it is the perception of free shipping and the fact they get you shoes in a day and that they are perceived to have great customer service. But you know what? They sell a commodity product. And at some point, that means you are at the mercy of the brands you sell. I learned early in my career to control distribution of my own products. I got tired of dealing with the big boys and their rules. So now, we have fat margins, 65%, and we've earned those margins."

Kevin: "Sixty-five percent?"

Lauren: "Absolutely. That's the way you make money, Kevin. We retain 55% of our customers, year-over-year ..."

Kevin: "That's a good retention rate in footwear."

Lauren: "... and they love us because we give them something they can't get anywhere else. It seems like you have three choices online. You can sell high-end brands, you can sell merchandise at the lowest price, or you can control your own destiny and control your own margins and then manage the living daylights out of expenses."

Kevin: "And that's why you are always somewhere between 8% and 15% in annual pre-tax profit?"

Lauren: "Right. For all of the kudos and back-slapping that the folks have earned at Zappos, they were only at 3% or 4% pre-tax profit prior to being purchased by Amazon. Before the recession hit, we generated four times as much profit per dollar sold that Zappos generated. Granted, we're not World Wrestling Entertainment ... can you believe they generated 24% profit/EBITDA last quarter?"

Kevin: "And you don't have any debt, either."

Lauren: "That's what a healthy gross margin does for you. It allows you to print money, and having cash means not having to borrow. Once you start borrowing, you pay interest, and interest kills you. I'd rather be under a hundred million in sales and have cash in the bank than to be a half-billion in sales and owe my soul to an investment bank."

Kevin: "It sure helped you ride out the recession."

Lauren: "Two things about the recession. Yes, by not having debt, we weren't crippled by a change in customer spending habits. More important, we got to spend time thinking about how to please a customer by producing great products. Others had to spend time thinking about how to simply survive. And I don't really buy into this concept of a recession. When your sales plummet during a recession, it simply means that, as an Executive, you failed to anticipate how customer behavior would change if economic conditions changed. Honestly. You failed as an Executive. It is your job to anticipate changes in the economy, and to provide solutions for customers when the economy changes."

Kevin: "Barring the spread of debt worries in Greece and Spain and Portugal and anywhere else, the economy appears to be changing again."

Lauren: "Exactly. So it is my job to think about how this business grows in 2012 and 2013 and 2014. And I don't think growth is coming from e-commerce anymore. E-commerce has cannibalized the majority of the sales it can cannibalize. Going forward, sales are going to be won or lost by stealing market share from competitors. And even more interesting, mobile devices and tablet devices are going to form a fundamentally new channel. Most of my e-commerce peers can't see that, yet. They see mobile and tablet devices as being complementary to e-commerce. They're not, as far as I am concerned. They are going to pull demand away from e-commerce, to a new channel that we cannot yet envision."

Kevin: "It's freezing out here."

Lauren: "And that channel, which we cannot yet envision, that's where I want to be. I think what we'll see in three years is no different than what we saw back in 2001 or 2002 or 2003, when classic direct marketing was being cannibalized to death by e-commerce and nobody in classic direct marketing could see it yet. We have a generation of e-commerce experts who don't see the storm on the horizon. They're busy trying to game their AdWords Quality Score, or they are trying to be friends with a customer on Facebook, or they are tweeting about some glorious 10% off promotion. It's all tactics for most of my peers. We get paid to be strategic."

Kevin: "So how do you grow when you can't yet see what the future is like?"

Lauren: "You invent the future, Kevin. You test everything. You hire different people for different purposes. Half of my Executive team is asked to manage the business, it is their job to extract as much profit as possible from the existing business. The other half of my Executive team works with me on charting a course to the future. That's how we are going to work together, Kevin. You're going to give me the data I need to get to my vision of the future."

Kevin: "And what is your vision of the future?"

Lauren: "That's for another day, Kevin. Look at the boats up to the north. Those boats see whales. Look at the seaplane hovering above the boats, the pilot sees whales. That's the blessing and the curse of living on Madrona Island. You get to see the orca whales go by all the time. The blessing is that man-made technology tips us off as to when the whales are coming. The curse is that the whales are always being peppered by man-made technology."

Kevin: "Sort of like e-commerce, right? Man-made technology allows us to see when customers are searching for hiking boots, but the curse is that, as a customer, you are always being peppered by man-made technology."

Lauren: "Interesting. Now let's stop talking about business, and let's wait for the whales to go buy."

Kevin: "I'm still freezing."