Winmark: Resale at Scale - [Business Breakdowns, EP.159]

0:03This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from. and we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus .com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers or affiliates may maintain positions in the securities discussed in this podcast.

0:45This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Welcome back to Business Breakdowns. Today, we explore a major player in the reseller economy that is Winmark. You're likely familiar with some of Winmark's brands like Plato's Closet or Play It Again Sports, but together, Winmark operates five brands through a franchising model. Our guest to break down Winmark is the current CEO, Brett Heffes. Now, we listen to our audience and we try to be cognizant of the guests we invite. The overwhelming majority of our audience prefers investors to management teams.

1:25So why did we explore this episode with Brett? Well, Winmark doesn't host conference calls, and their investor relations are generally limited to financial reports, some very basic management commentary, and some rare public appearances. That alone was intriguing to us. But I'd add, when we talked to Brett, it was very clear this was not an investor relations exercise. So during our conversation, we get into the broader reseller economy, the dynamics of managing those brands and different franchise brands, and how Winmark approaches this and thinks about growth. In the back half of the conversation, I also made sure to talk to Brett about his thoughts on capital allocation, focusing the business, and yes, on investor communication.

2:09Winmark has been a very interesting business to me. So if you're looking to learn more on top of the episode, don't hesitate to reach out, send me a message, email, social media, whatever you prefer. Now, please enjoy this breakdown of Winmark. All right, Brett, excited to have you here on Business Breakdowns. We have gone into the world of franchising before, but I think Winmark sits in a very unique category in the resale market that we certainly haven't covered. And I think it's going to be of interest to our listeners. I thought we could just start out with an introduction on Winmark. It's not necessarily a household brand.

2:48I think some of its franchises are household brands. So maybe you could just kick us off there with an introduction to the business. Sure. Thanks, Matt. Really appreciate being on the podcast today. I mean, we talk about Winmark. We're Winmark, the resale company, and we believe we're the resale company. So we're responsible for a network of 1 ,319 locally owned buying centers in communities all across North America. And we have a very simple and pure mission to provide resale for everyone. And we do have five brands. We are more well known for the individual brands, like you said. They're Plato's Closet, which is teen apparel, and that's our largest.

3:27Once Upon a Child, which is children's apparel and hard goods. We have a pretty big sporting goods business and play it against sports. And then we have Style Encore, which is men's and women's apparel, and Music Around, which is musical instruments. Our focus as a company is on value -oriented items. So think Walmart, Target, Carters, Old Navy, Adidas, Nike, Under Armour. These are the brands and the items that really sell well in our stores and the brands that we're buying from our consumers every day when they come in to the door. So we provide access to quality used products at value pricing.

4:03And the thing that's so interesting is these lower priced items, they have less places to go when you're done with them. And unfortunately, they end up in landfills. So as a result of this focus, we've been doing this for over 35 years. Winmark's been a leader in the circular economy. And our environmental and community impact is absolutely massive. We've kept 1 .7 billion items out of landfills since 2010 and have returned over a billion in cash to the communities we serve in the past 24 months alone. And I think the last piece of this is our resale business is delivered through a franchise model, Matt.

4:39We don't have any corporate stores and we think that franchising is a very appropriate model for the resale industry. I'm certainly familiar with your brands played against sports being one major and I think I will be increasingly familiar with their brands as I have young children growing up and those clothes, as you mentioned, there's a lot of use for them, and then they have nowhere to go. And I want to get into that resale market a bit more. It's this interesting, as you referenced, circular economy, which I like that phrasing there. Can you just share a bit more about what that economy looks like?

5:14I think it makes all the sense in the world that we should be focusing on that more and more as consumers. but just a little snapshot of it as you seem like you're a key player in that space and how you would, if you can quantify that market sizing, any of the dynamics that have gone on in terms of the trends there. It's something that I think is increasingly important, but maybe not talked about nearly enough. When I joined Winmark over 21 years ago, I don't even think the word resale was a term that was being used. We thought of ourselves as a franchise or of concepts that buy and sell gently used goods.

5:46But over the years, the business has evolved, the market's evolved, and there's been a lot of new entrants. All of these things combined have really dramatically pushed the industry forward. There's new estimates that come out every year. Frankly, sometimes they're hard to believe, but the most recent numbers that I reviewed were a US secondhand apparel market of over 40 billion with resale accounting for 23 billion of this. We also participate in Canada, and then we participate in sporting goods and musical instruments. There's not as much data around those categories, but they're also very, very large markets for previously used items.

6:22So in the past, if you look at the history, the growth of the market was really driven by younger people, by early adopters and value conscious consumers. But it's pretty clear now that there is just very widespread participation in this market. And a recent study that I reviewed shared that over 50 % of consumers shop secondhand apparel in 2023. So it's very wide in terms of participation. There's a few other things to touch on about the variety of the business models. I think it warrants some discussion because not all resale companies are created equal. And we've defined a very specific positioning in the industry.

7:01I mentioned earlier, we believe we're Winmark, the resale company, because true resale is what we do. Our stores buy and sell used items on a daily basis. And we believe we're the only company doing this at scale. So what that means is we pay you cash for your items. And on average, each store paid out over $400 ,000 in cash to customers in the community. That's over $1 ,100 a day they're paying out. We focus on the value end of the spectrum. And that's why we're set up the way we are, because we can actually buy and sell low -priced items profitably for our franchisees. And we think that for those class of goods, it's the most sustainable option.

7:42There's no packaging, there's no shipping, there's no robots moving around the warehouse. And more importantly, the goods get shipped into the community once and they stay there. There are a variety of other models. Some of them are very different than ours. Consignment is a big one. That's a concept that we get confused sometimes. People think we're a consignment company, but consignment is a big area. And that's where the players in the marketplace, they're not principals, they're agents. So you'll see companies touting terms such as take rate or GMV or other metrics. And when you hear companies saying that, it just means that they don't take ownership of the inventory and there's less certainty for the consumer.

8:17You bring in your kids clothes to our store, we'll tell you, we want to buy it. We don't want to buy it. Here's the price. So it's very clear. The other models just don't provide that certainty. And to be clear, they're very valid models. They're more prevalent than ours, frankly. They're just different. There's a donation model out there. Everyone in the States at least knows about Goodwill or Salvation Army or Savers. It's a very different business model because they're not paying for their inventory. They're getting it as a donation, but it's also very good for the environment because they handle huge volumes.

8:48And then there's a peer -to -peer business. Think about Facebook Marketplace, Poshmark, eBay. That's when you do the work on your own, you're going to list that item yourself, typically better for higher priced items, because you're not going to take the time and energy to do that for a $2 or $3 item. And then brands themselves are starting to get into this as well. Because when you're a brand, a branded apparel company, a branded sporting good company, you make a trust and you make quality items that have a long life. Right now, they're only getting remuneration one time when it gets sold. So all the brands are trying to figure out how do I participate in the second, third and fourth time the goods traded hands.

9:28And we've started some sustainability partnerships in the sporting good business with Rawlings Baseball, with CCM Hockey, and in the disc golf business with Inova and Elon Skis. And we're able to showcase these brands as sustainable options. So they feel good about working with us and consumers feel good about shopping with them. A major competitor though, and I still think the biggest competitor to us is the landfill because still too many people just don't take the time to pursue one of these options or they're not aware of these options. I think the industry needs to be very focused on being more convenient so that more customers can responsibly dispose of their items.

10:10You pointed to an interesting differentiation point for your business versus the rest of the industry. And that is that you take ownership of the items, you put the cash out. I'm wondering, how do you work with your franchisees in order to make those purchasing decisions? Can you just bring us into the store experience that is managing risk in some ways, in terms of putting cash out and ensuring that you can then resell that item on the back end? How is the system set up such that you can educate your franchisees and the business owners in order to do that effectively? We've been developing a point of sale system for over 20 years.

10:51And that pricing matrix in terms of what to pay is inherent in that point of sale system. If we wanted to, we could teach you how to buy under 30 minutes. It's that easy. So we look at the style, the brand, the condition, and they're sort of standard retail price points that we know consumers wanna hit. So with a few touches of the touchscreen, it really points out what to pay for the item and what the item will sell for. So it doesn't need a big team of data scientists. It's really not that complicated, but it's a ton of brands. It's a ton of price points, and it's all organized really easily for the franchisee.

11:26And now we also support the franchisee with training, with style and trend guides, what to buy, what not to buy, because there is fashion component to this. And we do our best to stay on top of those and also to continually communicate with the franchisees about what's working. We have a very good understanding of what brands are selling, what brands are not selling, and passing that through the system. And do the franchisees ultimately have the decision -making capability such that when it comes into items where they are more fashion -oriented, they can make the decision? Are there guardrails set up?

12:01Because it is a tight relationship where you both rely on one another. And I'm just curious how much leeway they have when it comes to those decisions. All the purchasing decisions at the point of attack are the franchisees. So it's 100 % theirs. We have the system in place. We train them how to do it, but ultimately they make the call on what to buy because it's their capital. It's really easy for me to sit here and say, buy this, buy that, but it's not my capital, it's theirs. So they take that responsibility very seriously. the worst thing we can do for a customer is turn away an item that's a quality item, because then they lose confidence in that store in that location.

12:35So our stores really want to buy everything they can, we train them to want to buy everything they can, but sometimes they can't. How you communicate that to a customer is a really important part of the training, because we don't want people to feel bad. We're not judging the quality of their items or their lifestyle or anything. We're just saying, hey, this particular item isn't going to sell well in our stores today, so we're not going to be able to purchase it. And is all of the inventory then managed, I assume, at the local level as well? Oh, absolutely. Absolutely. That's one of the keys of our business model at Winmark.

13:06I mean, the reason why I think franchising is the right model for this business is because each store is paying out that $1 ,100 a day. It's their capital. They're hiring the people. And when they buy, when they have excess inventory, they need to figure out how to clear it. And we help them with that. It's this network. You're not on your own when you're in the local market because you have 1 ,318 other colleagues all around North America, but sometimes they feel like they're alone. And that's the give and take of being a franchisor and a franchisee. I don't think this would work at a corporate level to have a bunch of corporate employees trying to commit capital on behalf of the mothership.

13:45No, I certainly agree with you. There's some unique aspects to skin in the game and allowing that decentralized management while also having the centralized education system and everything that goes into that. Maybe we can transition a little bit into the business model itself. I understand there's a royalty stream that comes up. But when you think about operating the business, you described how many franchises you have. How would you walk through the business model and any important components to it when you're thinking about it? There's a couple of things. I think the one thing that we need to do a better job as a company is our customers, our families, their individuals.

14:24In the apparel business, we can serve men and women's fashion needs from newborn to retiree. If we're doing our job right in the community, we can acquire you as a newborn customer and keep you for more than 50 years. The span of it doesn't really get talked about all the time, but it's really impressive in terms of there's not many businesses where you can keep a customer for that long. maybe a toothpaste or consumer products or something like that. But in our world, there's really not that many out there. So if you think about the business model, the vehicle for which we provide our services is franchising.

14:57And at its most basic level, think of it as like a distributed system of locally owned buying centers. I touched on that before. All we want our stores to do is advertise, bring us your gently used items and we'll pay you cash on the spot. And if you treat them well, if you're fair, if you evaluate the items, you pay them cash for the things that will sell well in the store. If you communicate why we're not purchasing the things we can't purchase and you educate them on how it all works, they buy also, and they buy a lot. So we buy the inventory, those goods get put on the shelf and they get sold from like 50 to 80 % off a regular retail for the comparable new product.

15:35And customers buy a lot of it. $1 .6 billion almost in sales last year alone. So it's a really straightforward model. I mentioned alignment before, but we're 100 % aligned with our franchisees. The only way we're successful at Winmark is if they're successful. There's no possible way for us to be successful without them being successful. Because as you referenced, our only meaningful form of compensation are those continuing fees based on sales. So it's very powerful because what it means is that our entire company is focused on supporting the franchisees. We don't have any locations, any corporate locations to kind of change our focus.

16:14And when you're all about teaching and training and support, you really approach things differently. Because I can tell you that every employee at this company comes into work every day trying to answer one question, how can I help the franchisees get better? That's all we care about. We completed over 3 ,000 support visits last year. And that's why we had a 99 % renewal rate last year, and we had our highest level of system -wide sales. So the business model is pretty straightforward, and that's about it. The description there in terms of how you're bringing customers into the store through buying items, we talk a lot about unique customer acquisition strategies, and it's definitely one that fits into there.

16:55It ultimately turns into a positive CAC in a lot of ways where you get that inventory on hand. Are there any data points just in terms of what set of the customers are both selling and buying? I would imagine that a large percentage are on both sides of the transaction over time. Yeah, a ton. I mean, it varies by brand, but you're well over 50%, well over 50 % or both. And that's the sweet spot for us. I don't believe that anyone is going to only buy used or only buy new. On the end of the bell curve, you have people doing that today. Some people still won't buy new, and there are emerging people, a lot of influencers on Instagram that are only buying previously used.

17:39But the middle two -thirds of the bell curve today, I think for quite some time, are going to be hybrid users. Your earlier point on maintaining a customer through their entire life, that journey, as you have it set up now, each of the franchises have their separate brands. Is there anything that you do strategically to allow that natural evolution to keep the customer jumping from franchise to franchise? That's harder to do on a national level, Matt. If I could wave my magic wand, I'm open. If you got any ideas for me, I'm open. It's more about the newborn comes into once upon a child, they hit 12 or 13, they go over to Plato's Closet, they hit 25 to 30, they go over to Style Encore.

18:25It's more about being in the community that has all three. So we're not there yet on a master plan to do that, but it's just naturally occurring. But yeah, I'm really open. any thoughts, shoot me a text or something. I only ask the questions. I don't have the answers. That's how this is set up. Yeah, it's fair. You need to have the places at the very least. When you look at the franchisees, do many of them own several franchises? What does it look like in terms of owning multiple franchises? Yeah, I mean, there are. We have about 940 franchisees at this point in time. And we have, at the end of the year, I mean, the actual number was 1 ,319 locations.

19:05So it's about 1 .4 is the number, but our mode is one. And we really like multi -unit owners, but if they can handle the second store and the third store. So we have a very cautious, it's not even cautious, it's just prudent model that we're not going to work with you on the second store until the first store is working right. And we're not going to add the second store unless you have an operational plan to have the second store. Because if you don't have another strong manager or a strong relative or strong partner in terms of operations, both of them are going to go down. So yeah, we'd like multi -unit owners, but our mode is clearly one here.

19:44And that's also something that's unique about Winmark is there aren't a lot of franchise concepts out there where you can be successful with just one concept and you can here. And so if you want a second store, great. We work with people all the time, but we don't sign territory deals. You're going to develop 15 stores in a market over a period of time. We've dabbled with that over the years. It's been a complete and unmitigated disaster for us every time we've tried it. So we're just slow and steady wins the race is our view. Curious just on what didn't work out with the territorial large build out?

20:20Was that more institutional capital that was coming in that maybe didn't have that same high touch neighborhood type approach? Was there anything else that made that result in a failure? Yeah. I mean, some of this predates me, but some of it occurred on my watch, candidly. And the stuff that predates me is an entire state was granted to someone. And then if they don't develop on schedule or they're operating stores that are below system average, it ends up hurting the brand. And you think it's exciting when you sign them up because you can tout new agreements, but new agreements that don't open or new agreements that produce below system average harm everybody.

21:06Not only they harm Winmark, but they harm all the other franchisees. So we've locked that all down. Candidly, Matt, we get criticized sometimes because people want to grow faster. And I guarantee you, there's not a person in North America that wants to grow faster than me. I can guarantee that. But we've also seen the downsides of making bad decisions on picking franchise partners that aren't qualified. And I look at these people in the eyes. We have a discovery day every other week. I'm at almost every single one of them. And we talk to them and we say, if you follow the model, you're going to be successful.

21:43And I'm just not going to yield on that. I'll take the heat for the growth rate that maybe people want. They want it a little higher, but I want quality. And you go back to that renewal rate, and I'm just really comfortable about how we've managed this. Yeah. There's a great saying, if you default on a million dollar loan, you've got a problem. If you default on a billion dollar loan, the bank's got a problem. And I think there's some truth to that that can extend into other industries as well. Appreciate the thoughtfulness around that. when you're looking at those applications, maybe we could just go through the lens of what a franchisee agreement looks like, any of the key data points that are important into what they look like from a length standpoint, what's expected, any of the metrics that you can point to just in terms of how those contracts work.

22:34There's a qualitative piece that I'd like to just touch on first, because we get so many leads. Some of the leads turn into applications and some of the applications turn into agreements. It's a classic funnel. But the screening out process, they select out sometimes, we select them out sometimes. It's really focused around operationally qualifying and financially qualifying. And on the operational piece, we just have to get people to understand what the actual opportunity is. The job itself is really complex. So we want to uncover for them, hey, this is the actual job first. You're the bottle washer, you're the CEO, you're everything.

23:11And you're responsible for financial management, you're responsible for marketing, you're responsible for operations, staffing, customer service, community relations. So it's not for everybody, but for the right candidate, it's an amazing opportunity. The other key trait is just follow the operating model. A lot of what we do is pretty straightforward, Matt. I mean, just follow the operating model. We got 1300 stores. We've been doing this for 30 years. We and our franchisees have made every mistake out there. So if you follow that operating model, we think you're going to have success. So then you get to the point of some of your questions around what's the contract look like.

23:50It's a pretty long legal document. There's a lot of regulations around what we can say and what we can't say state by state. It's a pretty complex document. But at the end of the day, it boils down to we're going to license the franchisee, our brand name. When Mark owns Plato's Closet, we're going to license you the right to use Plato's Closet. And the franchisee's obligation is to follow the business system that we have in a handbook. So hopefully they come in, we train them, we teach them the business system. Hopefully they follow the business system. and the financial piece of it is, there's a weekly percent of sales that we get paid and that's called the continuing fee.

24:28And there's a few other little things here and there. They're not profit centers for us. That's why I feel like this alignment concept is real because it's just about that continuing fee. And it's really good to be able to look someone in the eye and say, if you do better, we do better. It's never a situation where you do worse and we do better. It's impossible. Just impossible for that to happen. So it really enhances franchisee relationships because everything's never perfect. But I think that's the contract. It's really straightforward. If you want to talk a little bit about some of the traits of successful franchisees, I think you mentioned that.

25:05Yeah, I think it'd be interesting. You mentioned maybe framing it through the operating manual that if you follow this, that's really the path. maybe just discussing, you know, if there's certain things there that are common, such that if people aren't doing them, that's where you often see mistakes are made. Or if they really lean into it, that's where you see a lot of the successes and blend that with the traits of what makes for a successful operator. Yeah. I mean, the biggest thing that franchisees sometimes get off the path a little bit on is what we would call limitations. a lot of inventory is coming in and they feel like they have to slow down and stop buying for a period of time.