Allbirds: The Rise and Fall of Direct to Consumer | 5

0:09In the 2010s, direct-to-consumer companies were sprouting up everywhere, promising to remove the middleman and deliver innovative new products right to your doorstep. with one-click shopping. By 2021, the stock market saw more than 1 ,000 IPOs hit the trading floor, with a portion of these belonging to DTC companies like Warby Parker, Poshmark, Rent the Runway, and the star of today's episode, Allbirds. The sustainable shoe brand had a fast and meteoric rise, but it wasn't long before investor demands and the punishing trend cycle started to hit the company hard. When Allbirds went public in November of 2021, their iconic wool runner was a hit, and the company was valued at nearly$4.1 billion on the first day of trading.

0:56But behind the scenes, this Silicon Valley darling was starting to crumble. They had to contend with pressure for growth from investors who'd shelled out more than$250 million in venture capital funding. Their stock began to slide, and by March 2024, both of their co-founders had stepped down as co-CEOs, leaving the company at a crossroads. As investors size up what's next for Allbirds and the DTC movement as a whole, we're lacing up our sneakers and walking through the company's past to understand where they lost their footing and what it means for the future of the DTC brands we've come to love.

1:36Stick around.

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3:49From Wondery, I'm David Brown and this is Allbirds, the rise and fall of direct-to-consumer.

4:17In 2014, Allbirds co-founder Tim Brown, no relation, had a vision to improve the planet starting with a shoe. What if you set out on a crazy journey to make a shoe out of wool, and in doing so found a way to make footwear that was more comfortable than, well, everything. In this Allbirds promotional video from 2016, Tim strolls through the New Zealand countryside, surrounded by rolling green hills and plenty of fluffy, woolly sheep, the source for his vision. Why wool? Because it's the world's most miraculous fiber. Inspired by these guys, we found a way to turn one of the world's most amazing renewable resources into a wickable, breathable, comfort experience that's like being upgraded to first class.

5:00Tim didn't come from a retail background. He was a soccer player and one of New Zealand's best, competing in the World Cup and wowing audiences on the national stage.

5:14So much of his life was spent running around the field in clunky cleats made of plastic and other synthetic materials. He started wondering if there wasn't a better way to design a sneaker that used materials from the natural world. Here he is giving a talk for a New Zealand business organisation in 2019. It became about natural materials when I visited my first footwear factory that I found on the internet in the off-season. I realised that the footwear industry is this incredibly old-fashioned category that defaults to making things out of synthetics and leathers, and it was an opportunity to make shoes out of natural materials, and possibly this was an insight that had been overlooked.

5:53And I think that sparked a lot of idea for him about, you know, could we make this in a way with less plastic? Could we use different fabrics? What would be more comfortable? That's Ann Guillen, a reporter who covers retail for the independent tech publication The Information. Ann says that after that factory visit, Tim started to learn about the versatility of wool, figuring out how to spin it into a sleek, simplified sneaker with no obnoxious logos. I think the original pitch was it's this really comfortable, really minimalist shoe that you can wear in a lot of different situations. You know, you can wear it to work, you can wear it on the weekend, you could even wear it on a hike or something.

6:36It's made out of merino wool, which is supposed to be this very comfortable fabric. To help bring the idea to life, Tim connected with Joey Zwillinger, an engineer from San Francisco with experience in the venture capital and biotech worlds. Tim and Joey's wives had been friends since college and introduced the two men. Joey also had a passion for sustainable product design, but felt there was room for improvement. He talked about that in an interview in 2019. Sustainability also feels like there's a tension. Either it's more expensive, it's lower quality, it's not as good. And we fundamentally believe that that is a tension that shouldn't exist.

7:17And that's a paradigm in consumers' minds that's just been embedded because of the way people have done. We actually fundamentally believe that using plastic from petroleum is just stupid. With Tim's vision, Joey's engineering skills from his time in biotech, and a whole lot of wool, the two men began developing a prototype for what they thought would be a game-changing sneaker. They called it the Wool Runner. We dispense with flashy logos, unnecessary detailing, and a focus on synthetics to create something we think the footwear industry has been crying out for. Something better. Once the prototype was finished, Guillen explains it was time to find funding.

8:02They originally launched it on Kickstarter, which is very early 2010s, I feel like. But they launched it on Kickstarter, got tons of interest there, and then they were able to shop it around to a bunch of different investment firms and kind of get the company going that way. The Kickstarter was a massive success. In just five days, Allbirds raised almost$120 ,000, which was$90 ,000 over their goal. A donation could get you a pair of the prototype wool runners and the opportunity to unofficially name one of New Zealand's 31 million sheep. Names included Obama and Woolma. Tim and Joey's timing couldn't have been better.

8:48Allbirds was formed in the midst of a direct-to-consumer boom that dominated in the 2010s. Better known as DTC, direct-to-consumer businesses saw an opportunity for creating bigger margins by cutting out the middleman and using the Internet and social media to sell customers via online platforms. A big part of the DTC boom was telling a compelling story that grabbed consumers' interest. Brands were out to convince buyers that their product was forging a new path that was better than the old way of doing things. And Tim Brown sold that story. There is a revolution going on at the moment, certainly in the States and I think in New Zealand as well, where old, established categories are being disrupted by this new type of way of doing business.

9:33We know deeply what we're about and we're able to connect with our consumers through our business model and tell that story better than anyone else. So the purity of that connection is central to the business model that we've set up to support our product. Ann says venture capitalists were also hooked. Not just Allbirds, but Everlane, Warby Parker, they had kind of become the hot new brands, and they really were generating a lot of buzz online and on social media. So all of these brands were growing really quickly, and investors were willing to put hundreds of millions of dollars in investment into these brands.

10:12By the time Allbirds was ready to launch, they had received$255 million in venture capital funding. For context, Everlane, a direct-to-consumer clothing brand founded in 2011, raised about$100 million in funding. The Allbirds investment was massive, especially for a company that had no proof of concept. But Ann says investors weren't worried. I think the wisdom from investors was, well, if you can keep attracting new customers and you can keep making sales, you can figure out the profitability piece later. When Allbirds officially launched in March of 2016, they quickly caught on. Time magazine called the wool runner the world's most comfortable shoe.

10:55And if you didn't agree, you had 30 days to return them, no questions asked. They also got a boost from the co-founder of Google and top executives at Twitter who were sporting the sneakers. If you walked into an office in San Francisco or in New York, at a certain point in the 2010s, you would see a lot of Allbirds. It started out as this very techie, very male shopper. People were wearing them outside of Silicon Valley, too. Celebrities like Ashton Kutcher, Mila Kunis, Jennifer Garner, and Sarah Jessica Parker were all seen in their Allbirds. Even President Barack Obama was photographed at a basketball game in wool runners.

11:33The company garnered more visibility and goodwill at the height of the COVID-19 pandemic in 2020 by giving out a free pair of shoes to health care workers. They distributed a total of 50 ,000 pairs of those wool runners. They also began including carbon footprint labels on their products and dropped their first running shoe. Mile after mile after mile. The tree dasher keeps your feet going while reducing your carbon footprint. Allbirds. In CEO Tim Brown's eyes, by 2020, Allbirds was poised to become the next Nike or Lululemon. And even though the company wasn't profitable, they were growing extremely quickly, riding the direct-to-consumer wave straight to an IPO.

12:25That was a really great day for them. But the problem was then in the aftermath of that, things didn't go so well for the brand. When we come back, what happened when Allbirds' luck started to run out? Stick around.

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14:25Welcome back to Business Wars. Let's go back in time to November 3rd, 2021. It's Allbirds IPO. Well, this is cool. Who would have thought we'd be here after just five years, but we're just getting started. This is a journey to create a hundred-year-old brand that shakes up the industry, and we're just getting underway. That was co-founder Tim Brown speaking at the NASDAQ stock market bell ceremony. Cheers rang out throughout Tim's speech from his enthusiastic team.

15:04There was so much hype around Allbirds' IPO. Elizabeth Seagrin is senior staff writer at Fast Company, who's been writing about Allbirds since its founding. You know, it was considered a huge success that a sustainable brand that had created an innovative new product was, you know, on the public markets. Allbirds' IPO came at a time when direct-to-consumer brands were experiencing a surge in popularity following the pandemic lockdowns of 2020. Anne Guillen of The Information explains. It really was kind of the perfect time for a lot of these companies to go public. A lot of people were still stuck at home.

15:44They're buying a lot of things online to not only entertain themselves, but a lot of people have extra income that they're looking to spend. So e-commerce is really booming in 2021. And so a lot of these companies, like Allbirds and the other direct-to-consumer companies, they've been around for about a decade, give or take at this point. And all of their venture capital investors on their cap table are waiting to cash out. Interest rates are low. The IPO market is booming. But there was a small problem. While they're growing sales, you know, their expenses have grown right alongside that. Allbirds was opening more brick-and-mortar stores, increasing employee headcount and dropping new products.

16:36The company was on a spending spree. We'll figure out how to be profitable later on. We'll just flip the switch. that proved to be a little bit more challenging, particularly now you're a public company and you have investors and analysts, you know, looking at your financial results every quarter. When asked about profitability on CNBC, Allbirds co-founder and co-CEO Joey Zwillinger remained optimistic. You know, as I said, we're quite young in the life yet. A couple of years before the pandemic, we were already very close to and on the path to break even. So this is something, well within our sights.

17:14And we see a very clear and short-term path, else we wouldn't be coming public. Despite the confidence from Zwillinge, Fast Company's Elizabeth Segrin noticed a shift emerging within the company once they went public. That was a really great day for them. But the problem was then after that, things began to take a turn. The brand stock price began spiraling downwards. I think consumers just sort of lost interest in Allbirds, and so their revenues seemed to decline. There were lots of complaints about the quality of the product. People were discovering that it didn't take long for holes to emerge in their sneakers.

17:59The brand also began producing clothing, but many of the clothes had lots of quality control issues. there was one set of leggings where they were sheer. And so, you know, people could see right through them. And so there were a lot of problems that emerged in the aftermath of that IPO that has contributed to Allbirds' decline. Another misfire for Allbirds, those brick and mortar stores. They followed the path of other direct-to-consumer brands like Warby Parker that started online but expanded to include in-person shopping. It was a way to increase visibility and to draw in new customers who could touch and feel the products in person and ideally convert those interactions into sales.

18:43Allbirds opened its first store in 2017, and it was right next to its San Francisco headquarters. I actually remember visiting that store as it was opening, and it was this really sleek, minimalist store that reflected the aesthetic of the sneaker. But with more and more stores opening every year, Elizabeth says this represented another push for growth that wasn't resulting in profits. With all of the funding that they had received, they began opening stores in quick succession. And it was important for them to be opening these stores because it was a way for them to introduce the brand to new consumers.

19:23At a time when social media advertising was so expensive, the brick and mortar store operated kind of like an enormous billboard on a high traffic street that would introduce people to the brand. But the problem is that as more and more stores came back after the pandemic and began opening, it was hard to get people's attention through a brick and mortar store unless the store was spectacular in some way. And while Allbirds stores were, they were lovely. I mean, you could try on shoes there. I don't think that they caught people's attention the way that they really needed to for that to succeed as a way to win over new customers.

20:06In 2022, the company also started wholesaling with retailers like Nordstrom's, Dick's Sporting Goods and REI. something that Tim Brown had pledged to avoid just a few years earlier in that 2019 talk he gave to a New Zealand business group. It is about an online presence. It's about a skewing wholesale. It's about a deep relationship with the consumer, no one getting in between that. So the purity of that connection is central to the business model that we've set up to support our product. By 2023, two years after its IPO, it was clear that their approach wasn't working. Their stock price had fallen from around$24 a share when they launched to around 80 cents.

20:55Allbirds was in desperate need of a way to reframe the narrative. So in November of that same year, they decided to relaunch their first and most iconic product, the Woolrunner. The relaunch of the Wool Runner was supposed to be kind of like, OK, we've heard your feedback over the years about the Wool Runner. We've addressed some of the quality issues, the comfort issues. You know, we're going to address the issue with your toes poking through the front. And so this was supposed to be kind of the first step towards the new Allbirds or, you know, getting Allbirds back on the right track. What if you set out on a crazy journey to make a shoe out of wool?

21:36And in doing so, found a way to make footwear that was the most comfortable in the world. And what if you worked out a way to make it even more comfortably? Introducing the all-new Wool Runner 2. Quite simply, the world's even more most comfortably-ish shoe. Yeah, sheepy, sheep, sheep, sheep. And while the shoes launched on time, Anne explains that things behind the scenes were bumpy. Because they were working on such a short timeline, When Allbirds corporate employees first received pairs of the shoes prior to the launch, they noticed that there was an issue with the sock liner, which is the fabric inside of the shoe, and that it didn't fit properly.

22:19Shoes were already being manufactured at their factory in Vietnam and being shipped to their fulfillment center in the United States, where they'll then be shipped to customers that order them. And so that led to kind of a scramble behind the scenes to correct the fit issue, remake the sock liners for tens of thousands of pairs of shoes and get them switched out, you know, even for some shoes that had already left the factory and were already in transit. it. I think for a lot of employees, that was just reflective of, OK, this is supposed to be kind of our first step in the right direction. And even with this, we're still having a lot of challenges.

23:04And so I think that that contributed to a lot of the frustration behind the scenes. Allbirds was never shy about their desire to become a legacy brand like Nike. It was a major part of their pitch to investors and a long-term goal for the business. But Liz says they were overly optimistic about just how long that would take. Allbirds was trying to achieve Nike's dominance in a very abbreviated amount of time. They were hoping to become as big as Nike in maybe a decade. But we have to remember that Nike is decades old, right? It's 60 years old. And in its first couple of decades, it grew at a slow and steady pace.

23:48It was focused on product development, creating really high quality, high performing sneakers. It was spending a lot of time thinking about its marketing strategy. You know, it took time to come up with the just do it, you know, slogan that we're all familiar with. It was partnering with athletes and creating all of these different franchises that we are so familiar with today. Nike did not become Nike in 10 years. It took half a century for Nike to become Nike. And so it was, I think, an unreasonable thing for a brand like Allbirds to believe that it could achieve that kind of scale in such a short amount of time.

24:29Oftentimes, companies boast about the level of investment they get. But there are times when a sizable investment works against a company. That's what happened with Allbirds, says Elizabeth. At the time, there was so much money from VC companies that was pouring into any startup that had a good idea. And I think it was very hard for founders at the time to say no to that. But actually, all of this VC capital comes with so many strings attached. And it prompted a lot of these companies to focus on growth over profitability. I think that they just sort of collapsed under the pressure of all the investment that they had received.

25:12Coming up, Allbirds announces leadership shakeups and a turnaround plan it hopes will save the company. But whether they can deliver on that promise is still to be seen. That's when Business Wars returns.

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