Hello and welcome to Modern CEO! I’m Stephanie Mehta, CEO and chief content officer of Mansueto Ventures. Each week this newsletter explores inclusive approaches to leadership drawn from conversations with executives and entrepreneurs, and from the pages of Inc. and Fast Company. If you received this newsletter from a friend, you can sign up to get it yourself every Monday morning.
I’m rooting for Birkenstock. While I’ve never been a fan of the footwear, I’ve admired the 250-year-old company’s longevity and its newfound ability to stay on trend without compromising quality or comfort. Moreover, the business is profitable, reporting more than $200 million in net income in fiscal year 2022 on revenue of $1.34 billion. Much of the credit for the company’s success goes to CEO Oliver Reichert, who joined the company in 2013 and dramatically reorganized the family-owned business.
Yet Birkenstock’s debut on the New York Stock Exchange last week was a dud, with shares closing 13% below the offering price on its first day of trading. The tepid response to Birkenstock may reflect an overall cooling of interest in IPOs after a sizzling September (Klayo, Instacart, and Arm all went public), but as Nick Wingfield writes in The Information: “The investor reaction to Birkenstock is a pity. This isn’t some sickly direct to consumer business.”
The DTC dilemma
Indeed, Birkenstock’s profitability and operating model stand in stark contrast to direct-to-consumer (DTC) brands such as meal kit purveyor Blue Apron, which was just acquired by Marc Lore’s Wonder for a fraction of its peak valuation, and fellow shoemaker Allbirds, which was once valued at $4 billion and now has a market cap of $200 million. Many consumer brands spent heavily on social media to acquire customers. For a time, they thrived, especially during the pandemic, as e-commerce proliferated and shoppers wanted casual gear and home cooking. However, some expanded too quickly, others were caught flatfooted by supply-chain issues, many were apparently badly managed, and all are now facing pressure from investors—public shareholders and venture capitalists alike—to show and grow profits.
In a new article (subscription required) for Fast Company, contributor Ainsley Harris reports on how many DTC brands, in a bid to reduce their burn rates, have increasingly turned to outsourcing, relinquishing everything from manufacturing to brick-and-mortar retail operations, and essentially becoming zombies, or shells of their former selves. “Often only a brand veneer and intellectual property remain,” she writes. She highlights one exception that resulted in a successful exit: pet meal company Nom Nom, which sold to Mars for a reported $1 billion in January 2022. Nom Nom’s secret sauce? A proprietary manufacturing process.
Birkenstock bucks the trend
This brings us back to Birkenstock, which is something of an anti-zombie under Reichert’s leadership. According to a New York Times profile, he made the decision to invest in the company’s German factories. The company has said it also plans to expand a component-making facility acquired in Portugal. In its offering prospectus, Birkenstock cites its factories as a potential risk to investors because low-cost outsourced manufacturing of footwear is widely available and could allow competitors to price more aggressively.
But owning its factories allows Birkenstock to control quality and uphold sustainability standards, which is a competitive advantage for a premium brand. If Birkenstock can continue to produce strong financial results, it may find as many fans on Wall Street as it does on high streets.
Tell us about your “inside jobs”
What parts of your business would you never consider outsourcing because they’re your secret sauce? Are there things you’ve farmed out that you’d like to bring back in house? Send me your thoughts on outsourcing at stephaniemehta@mansueto.com. Your insights could form the basis of a future newsletter.
Read and listen: zombie mode?
Techstars CEO Maëlle Gavet on zombie VC funds
A founder’s guide to outsourcing
How to decide whether to make or buy key technology
What a new generation of DTC startups is doing differently
