E127: The Real Cost of Chasing Growth

26:39It's like, I'm really impressed with our team at like the fact that we can actually, we've actually figured out how to do this, but I still think we can be so much better at it, all of it. The, I mean, yeah, I certainly cannot help you with demand planning because we do everything on demand. And I think, Sean, you've very publicly said you guys were awful at inventory for so long because you would just buy so much of it and then get stuck. Well, not get stuck, but you would be sitting on a year's worth. I think at the beginning of the tariff thing this year, you were sitting on a year's worth of inventory.

27:13And I think on the pod, you were like, we're just going to make a decision to make that last two years if we have to. So, Sean, with you guys, you do the annual thing with your team, right? Like you get everybody together. Is that the planning cycle for the company? Like, do you guys get everybody together and it's like everybody shows up and there's a ton of work that happens where you guys look forward in time? Like, here's how we're going to build the company. Here's the new categories. This is what we're going to do. Or is it more look back? Like, I don't think we ever actually talked about like, what do you guys do at this, at this big annual thing that you put together other than just like have fun and party?

27:52Yeah, yeah. That's just a party. I think there's two separate functions. The next question we're talking about is going to be product development. And the reality is product development takes two years. So if you don't have a product development team, you are two years away from having one, right? It is not software. You can't just vibe code something and launch it. We typically try to get into two different categories every single year. So two net new categories. and we have two categories coming out next year that we've been working on for probably four years or something, right? And like, it's, and when you hear that, it sounds like we've been grinding our ass off for four years to get this done.

28:32No, it's just like, it takes really long to like, go through, yeah, go through dev cycles. Yeah, I mean, Mike knows better than anybody, right? You know, he worked on a lid and that lid took like, whatever, nine months of engineering time. It's like, that's just how long. It's amazing. There are lids to Sean's point. We're coming out with a product in the next week that I think is my favorite product we've ever made. And we started work on the bottle design before COVID. Wow. I mean, this one's got a long and winding road for a variety of reasons, but it just it illustrates Sean's point that it's just like getting healthy and product takes way longer than you would think.

29:19And then, you know, as it relates to demand planning, when you do like if we release a new water bottle, that's going to blow up everything. And that's where the demand planning really gets tough is when you're disrupting yourself. You're like, okay, this is the Tumblr we've been selling for the last three years. And we could maybe kind of project what it's going to do. But we have no idea what it's going to do because our new Tumblr is coming to market. And is that, does that grow the pie? Does that totally cannibalize? It gets very, very dicey. It's a good point. Because like, I think, Sean, is that the second part of it?

29:53It's like there's the development cycle for new products, right? And then there's the, how much of the existing stuff are we going to sell? every year right oh well the second part is actually the sales cycle right so like you know the product runs on its own timeline um and we talked to people from yeti who do product and like yeah they know what they're going to make in 2030 already right like that's how long you have to think out like if you're trying to launch two categories so like there's there's a product cycle and we put those on a uh like a launch calendar and so i know what's going to come out all next year right and we have colors which take you know way less time we have partnerships take a little bit longer.

30:30Then we have new product, actual development that takes the longest amount of time. And we say, okay, this is going to be ready by this date. This is when it's going to launch. Then we stack that against what do we think sales are going to be, right? So that's just me and Connor work on that project. So we tried to bring in a finance team. We tried to have finance do it. And they just had such a worse understanding of our business. Very smart people, way better at financial planning, had a way better... They're like, okay, we're going to look at website visitors. This is what we think web visitors will convert at.

31:01We don't do it that way. We're like, what will last your sales? Let's go month by month, week by week and be like, what do we get right? What do we get wrong? What did we learn? Where do we think there's still meat left to actually extract from the bone? So we do that together. We'll do that in December, probably the last two weeks of the year. Connor probably, he'll be in LA by that point. So we'll be hanging out every day just doing that. And then we try to find reasons to grow, right? And that's the big thing to take away from this conversation is that left static, your business will stay the same or shrink.

31:34So we've been able to grow at Ridge because our MER went down every year. And the only years where it went up, there's probably two years in company history where the MER went up, it was because we launched a new product category that was net new to the business that could grow revenue out of higher MER. So we have to look at reasons to grow. If you're like, I'm going to do the same thing and I'm going to spend less money on ads, but revenue is going to grow, that does not happen. There has to be a new reason for people to come in. So me and him work on that together. We'll get that done probably by January 1st.

32:10Then I'll spend the first week or two weeks of the year locked up doing my own annual report. So I'll look back, I'll pull all the data and I'll put it together. Then I'll put it to the whole company like, you know, by the end of January, they'll know what our goals are for the rest of the year. They'll know what the strategic objectives are, the projects we're going to work on, that type of stuff. But so two separate functions. It's like product, whatever products will be done that year go on the calendar. But I can't be like, hey, get this product done on time and put it on the calendar. It's like, it just doesn't work like that in product development.

32:42I try to make it work like that. And I beat my head against the window. Um, cause I do come from software where like, I just feel like you can make anything and ship it whenever you want. So like being in physical goods now for eight years running this company, um, it's incredibly frustrating because if house, like how long listening to you guys, it's actually kind of therapeutic. I like this. It's like, there's an old adage. It's like about the old adage about inventory. You, you buy your inventory wrong a hundred percent of the time. You're either too heavy or too light. You know, it's just the year is finding out which way you missed.

33:15And I think that that's the thing with planning. One other thought I had as Sean was talking that I've learned is that really you'll have people on your team who are great backwards thinkers. They can look at and document things that have happened and then kind of say in light of that, here's what I think is going to happen in the future. And then you have people that are great intuitive forward thinkers who are able to say, hey, in light of really a lack of information in the past about this new product line or about whatever, I can still kind of project out what I think is going to happen in the future.

33:52And you have to have both in the planning process. And people that are backwards thinkers tend to be really concrete. And so it's very difficult for them when you're like, hey, there's this new product and it's going to do, you know, 20 million in revenue. They're like, I don't know that I believe that. Like, why do we think that? And you're like, well, usually you'll have some reasons for thinking it, but it is more intuition. And so you just have to kind of meld these two personality types, the kind of vision and forward looking with the backward looking in order to continue to grow as a business, but have a workable plan.

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36:13Think about that. You're going to get a bunch of customers coming to you. Q4 is just around the corner and they guarantee 30 % reduction in human tickets in the first 60 days. If that's interesting to you, go to richpanel.com slash demo to book a demo. That's R-I-C-H panel.com slash demo. Get started today. Thank you so much, Rich Panel, for supporting the world's number one e-commerce podcast and being on the greatest show on earth. Let's get back to it. Well, Sean, how like Jason made a comment, Mike, you're just making me think of Jason's comment about how difficult it is to be accurate in your sort of forecasting and budgeting and that yet there's a need, like the public markets sort of almost insist on like, you have to be very good at this.

37:01And anybody who's ever had investors, investors, I've always like, one of my bigger points of contention with my board and my investors has always been, why are you holding me to a higher standard than public companies when it comes to forecasting? Like Apple during COVID, they all suspended forecasts. And my board was like, well, what are you guys gonna do next year? I'm like, bro, like the biggest companies in the world can't do this right now. Like, what do you mean? What am I going to do? Like, I don't know. There's a there's a great passage in Apple in China where they've been growing. Basically, they didn't think the China business would be very big.

37:38And then they got totally blindsided. It was massive. It just like no matter how much they got there, they could sell it. There's this crazy story, basically, like the organized crime got involved in buying these phones and reselling them. and there were only like two Apple stores at first in China or maybe only one. And one of these crime bosses goes and he tells the manager, he's like, I have infinite demand. I have infinite money to buy iPhones, as many as you can get. He's like, really? He's like, yes, come here. He takes him down to this warehouse and it's just full of money. Like think about like in, you know, like the dark night or whatever, where there's just that huge pile of money.

38:15He's like, there might've been$50 million in this warehouse. And he's like, I will buy every iPhone you bring So anyway, this iPhone is like huge for Apple. It's growing. It's growing. It's a massive part of their business. And then they launched, I think this might have been 17. I can't remember what year it is, but they launch a new phone that they think is going to be like, it's a little bit more budget conscious. They think it's going to be great. And they are totally blindsided by like a 50 % miss. They're like their miss on their forecasting is like it's so big. It's like 50 million units.

38:52They thought they were going to have like 100 million units of demand and they had like 50 million units. And it turned out that the answer was Huawei and that the market just kind of turned pretty quickly on them. But it's like, listen, if Apple can miss a forecast by 50 million units in a country over a six month period, then like, you know, any business is going to have a tough time with planning. but how i guess how maybe this is just like i immediately go to the media buying comment jason because you know so much of your business is d2c and so much of that is driven by like this big line item very little line which is ad spend sean how do you guys think about like how would you solve jason's problem for accuracy and like you spend this much money you generate this much demand i can tell the market this is what i'm gonna do like i'd be curious to know like how you think of that as like the ad heavy guy on, on the show?

39:43Yeah. Well, first with, with product development, think, think about it. Like you're like, you have to think about what you're going to swing before, before the pitches come and you have to lock in those swings 10 or 20 pitches ahead of time. So, you know, the problem with that is we, we, we've hit a couple home runs, but then the next launch coming out, you can't change it because it takes two years. Right. And inventory's been bought and it's coming out. So if you really do as many launches as me, I have 10 or 20 shots a year. I know one or two of them is going to be a massive hit, but I have to swing at every one of them like they're a home run.

40:22And sometimes you make horrible swings, dude. I've launched some products that nobody buys, right? But you have to not dissuade you from the next thing you're going to launch. And then when you do find a hit, you have to be okay being like, okay, the next five pitches, I'm abandoning them, even though I bought them, even though whatever, because I have to go back and just make sure I capitalize on the home run I hit. So anyway, that's one of the challenges about product development is that even if you're great at it, no one knows your customer, no one knows what people want. I think all that's bullshit.

40:56Intel is out there in the real world and people are buying it. You just have no idea, right? And you just have to take a bunch of shots to find the actual winner. Now, if I was Jason, I was trying to be a public company. What public companies have is diversity, right? Like, okay, Apple can miss 50 million years in their China business. They probably missed forecast by 2 % because they have a services business. They have massive geographies everywhere else. They have all these different lines, right? They're not just iPhones. They have iPads. They probably had a TV at that point. They have all of these different devices.

41:31and the diversity smooths out the business. And that's what makes forecasting probably, it sounds more complex, but it lets you just cover up more mistakes. You can have a massive mess in a market if you make up for it someplace else. The other thing is, there aren't a lot of great public consumer brands. I mean, Nike just suspended forecasting this year. And they were worth$100 billion. And most of the great consumer brands are conglomerates because they have diversity of business. So it's really hard to be a hex clad where you have one massive product category. You control all of the sales volume yourself.

42:13There's no retailers to go to. You can expand geos, but they're not mature yet. So with a non-mature business that's still growing, there's just a lot of room for bumpiness. How do you smooth out with the ambition? if the true ambition is to go public and you need to get to predictability with the variables that Sean just outlined, right? Where you don't have like, I think a lot of the great consumer companies that are public, they have these like long retail cycles too that give them predictability in their forecast. So like they know that Walmart's going to buy$50 million next year because the POs are already placed.

42:48But like in D2C, dude, like you actually don't know your MER next year. You could take a swag. you could say like, well, I know it's going to get 30 % worse next year because that's every year. Meta's got to take its tax. But how are you guys like at Hexclad? Because I think this is a very important part of planning. Like you're trying to build a brand and if you don't have like absolute meteoric demand, you got to do what Sean is talking about. Like what is the reason somebody's going to show up and buy 4 million wallets next year? What are the reasons? So how do you do that right now? Yeah, look, it's really, really hard.

43:23And, you know, we've built a really good team of really smart people. I think we're really good operators. We've interestingly ended up like the point about, oh, well, you just lower your MER and you grow. We've, we kind of defied that for a couple of years and we didn't defy it last year. And that was like the big slap in the face wake up call. And then we've actually kind of gone back to just not chasing growth. So having more reasonable growth aspirations this year. I think tariffs kind of, the only good thing about tariffs is that it's given us a really good mechanism to look back at everything we do and all of our growth, all of our objectives and the way we manage everything and say, you know, this is sort of like your zero-based budgeting comment.

44:16It's like we can just like, we're kind of rebooting the system. We're doing a soft reboot of the system this year. And I also, what Sean said, product development a bunch of times, a bunch of us said product development a bunch of times. We know our biggest opportunity and biggest weakness as a company is product development because we were able to very, kind of very easily launch new cookware pieces because we know what people need, right, to add to their collection. But at some point, the marginal cookware piece is just like not as important. You know, once you have like the 20 pieces that you need, 21 and 22 are not as important.

44:58So this year is the year that we have really just said, all right, we're going to reboot product development. We're going to totally reboot product development. And we're doing it in a very hex clad way, which is like the rules don't apply to us. The way people do things are just wrong. And it's just like old school. And, and we're just done. We're not just like following the old school playbook. We, we really changed up. We don't have the team that we need yet. And we're going to work on that. But we did like reposition a bunch of people in the company to like change your focus. And so I think for us, you know, that diversification comes through product and through geography, but everything you said was absolutely correct, right?

45:44Like all these come, there's just so many more inputs and it's just, it's less, less concentrated in, you know, these bigger businesses are just less, right? So that's why you don't have, that's why small public, it's really hard to be a small public company. That's why a lot of these guys got absolutely destroyed the ones that shouldn't have been public in the first place. But, but maybe we're riding that like, you know, high growth consumer bandwagon in 2021. That all got exposed because like, once you start missing, you're dead, like you're dead, right? All those guys are dead because they just, they disappointed Wall Street so many times as like portfolio managers simply cannot invest in them anymore.

46:25Like there's just no way. So we're learning from those mistakes and trying to do things properly, but it's actually really, really hard. Yeah. It's actually really, really hard to be hex clad as much as like we are a darling to so many people. And it's really amazing what we've built. It's really, really hard to be hex clad right now. And I love every minute of it. But it's, it's like, it doesn't get easier. you just go faster. Well, I was going to say, hang on though, but I think the, can I, my challenge to you would be that, is that not just of your own making? Like you guys are just setting higher and higher bars and setting like loftier goals.

47:08And I guess like higher bars for excellence, Jason, because like, you don't need to go public. You don't need to get to a size where all of this has to be true. You could just maintain like being a cash machine. Could you not? Yeah, we could run a 10 % growth forever, right? We could run a 10 % growth forever with very pretty solid profit margins and just do that. But that's boring. Okay, that's an important point. But there's also you just have more and more constituents that you're answering to, you know, like, for example, Gordon has equity in right. Right. Right. And so, like, as you start to get more people that own equity, like they want liquidity events.

47:55Right. And then as you have more and more employees, you just have more and more people that are dependent on you. I was around somebody recently that's a, you know, runs a multibillion dollar corporation. And I was just realizing that like the only thing that changes is that the numbers are just bigger and there's just more and more people depending on you as your business grows. Like you still have tons of problems. You still have stressors. And it's easy. It's easy to think like, oh, if my business was 50 percent bigger, 100 percent bigger, it'd be great. But it really is just more responsibility kind of consistently is what I hear.

48:30I don't know. Maybe that's the wrong perspective. But I like what you're saying, Matt, that like you don't have to do any of these things, but there also does become an inertia as you get bigger and bigger that just your community, all these people, all these different constituents are depending upon you and pressure ramps with that. I think it's a – I think no matter what though, my challenge would be like we have a choice, right? You have to fight very hard for those choices. Like as you get bigger, inertia is something that you either fight against or you just let it take you and you manage it.

49:03And I think what Jason's describing is like they're at such a size and there's so much momentum that right now what they're just trying to do is like manage it and do it at a level of excellence that like him and Danny and the other guys are like, we just want to perform at this level. That's a choice, right? I'm bringing it up because I don't want people to think that this is an absolute as you get bigger, no matter what, this is just true. you can choose like there are yeah i am sure uh sean one of your favorite companies is james purse right like i am sure that that company does not run this way like they have been around a long time they seem to make the strangest like their product roadmap i don't know they made like a pool table at one point or they got a hotel like they're just a very different animal from what i can see i don't know how much you know about the company but like that to me is also the on the other end of what Jason's describing.

49:58Yeah, well, let's talk about measurement of growth, right? So we talk about growth being top line revenue. You could also talk about growth being EBITDA or profit. You have a growth being new customers, right? There's a bunch of different ways you can grow as a business. James Burst hasn't grown revenue in like a decade, right? But they put up$40 million a year in profit every single year, right? And they probably are acquiring less customers than ever before. but they just raise their prices a bunch until the people who really want it and will stretch for it will actually end up purchasing it.

50:34And who might have to tell them that's stupid or bad? Right. Yeah, everybody has a different definition of winning. But they have a constituency that's happy with that. And I think Mike actually made a very valid point, which is that we've made decisions that created constituencies inside our organization that require certain outcomes at some point. We can always change that. you know, skinny that up. There's ways to do it. But, and also you have like, you know, your employees that want to, you want to attract the best talent. Um, and I think if you have like a certain path that you attract a certain level of talent and if it's just like, Hey, guess what guys, we're going to grow, you know, we're going to just run this thing and we're not going to grow anymore, but we're going to keep it profitable and we're going to kind of do what we want and run a lifestyle business.

51:22You know, we could absolutely do that. And I'm sure like half of our really good people would be gone. And the other half, we'd have to just like, we'd have to pay them more. So it's almost like it equals itself out, right? It's like the, it's like almost like there's an efficient market for this stuff. There's like a level of efficiency that's still going to make it difficult in different ways. So there's, it's interesting. Yeah. Being a millionaire is not easy it's like it's like being like running a really awesome brand we make a ton of money like man i wish it was a lot easier yeah dude i think all of us do it being difficult is just you know uh the nature of the game jason what what do you like about saris you were gone for the past week in italy were you checking saris dashboards i wasn't checking anything in italy But I will say this, like whenever anyone on my team, like growth team or anywhere else, like sends me data anymore, it's likely coming out of Saris.

52:19And every once in a while, I'll get something from them and it looks really slick. And I'm like, where'd you get? Is that Saris? Like, yeah. And I always feel really good about our investment. I do get a daily email of some metrics out of Saris that comes through. But one of the things that I've been thinking about a lot lately is AI. I mean, duh, right? Everyone is. Duh. But like, I finally woke up a few weeks ago. I finally woke up a few weeks ago. I was like, I got to get serious about this. And I was actually talking to the Ceres guys. And they launched a next generation AI powered stuff in their platform, which I'm excited about.

52:54It's Ceres IQ. It's invite only right now. If you mentioned Operators Podcast, you can probably get access, hopefully. But, you know, the next level of all of this is how you first with AI, you need to have all your data. somewhere. I mean, it's going to be really messy to just drop stuff into different AI platforms. If you have your data in one place and then you can leverage, you can really leverage AI. So the way I've thought about our investment in SaaS analytics was getting all of our data in one place, understanding our customers better, understanding our marketing metrics better, but then being able to lay your AI on top of that is, I think, the really exciting next level here.

53:35You brought up bringing in Costco, Amazon, and Shopify. The ability to have all sales channels with the same data is so important. If you're listening to this and you sell on Amazon, you know how painful that platform is. You have to wait a couple extra days to pull your reports. The SKUs aren't the same as the rest of your SKUs. The titles are different. So to get actually clean data to compare, it's very manual. Using XS Analytics, they matched all that up for us. So they cleaned all that data. So I can actually look at what is the true margin profile of an Amazon sale? What's Amazon return rate?

54:08What's Amazon customer frequency? Like all the type of data compare it to our dot com and have like a comprehensive overview. And now with their new AI tool, I don't have to look at it. I could just ask it. I could just tell me cool questions. So doing that across our five Shopify stores as well. We have an EU Shopify store. So now I can compare EU ring customer cohorts versus Canadian ring customer cohorts versus Amazon ring customer cohorts. So now we're getting to different functions of my business across different channels, different categories, and actually looking at the margin, the repeat rate, and like, is it worth investing in these different things?

54:41So if your business starts to feel like a spider web and just like keeps going and going and going, it's just like this nonstop proliferation of different channels. Maybe it's time to check something out like Sarah's Analytics. I remember, Sean, at the very beginning, this is a very typical Sean thing. Sean was like, what is this? Why do I need this, right? and I'm actually really happy that you've come to understand how important having a data warehouse is and what it does for managing your business because you are not like a true believer from the beginning. No, I was angry when you told me I needed to pay for something new.

55:20But Jason was right. He convinced me. He got me on board. I'm using it. So a rare Jason W. So thank you, Jason. Very rare. I'm on Saris Analytics. He's on Saris Analytics. Proud sponsor of the Operators Podcast. So if you want a data warehouse and you want an AI-powered data warehouse, tell Saris about the Saris IQ feature and then you crave it. You're demanding you get access to it. So, all right, guys. Talk to you later. To skip a couple of questions because you guys, listen to you guys talk about this particular topic, like growth, how intentional is it? What are you doing? there was a question from this guy named John Gattuso about capital allocation and how do you decide what you reinvest in the business versus returning capital to shareholders.

56:08And I think that's actually like kind of what I was getting at is like James Purse might generate$40 million a year. He's not growing top line, but like that, that might cut that company that might be their North star, right? It's like, we're just going to distribute as much cash to shareholders as possible every year. And that's the purpose of the brand. How do you guys think of this? Like, is there a target distribution, Mike? Like in your company, do you have like a target? This was like a ton of last year was trying to think through this once we got to like some of the EBITDA numbers we got to.

56:38So in our business, we really had to start to think about this last year. The way that we approached our equity cap table is pretty much all of the people that built the business early joiners have some form of equity. They had to buy that equity. So the equity is a big part of their net worth and they purchased it. So I want there to be a return. And the business was making significant money. So my CFO and I sat down and we looked at it and we said, we want to be reinvesting in the business. That's growth. So this would be like what Sean's talking about. This is product launches. This is buying additional inventory that's speculative, like, hey, we're going to go to Europe, whatever.

57:27We're going to get into this new sales channel, but we're going to have to invest working capital to do it. So that's one bucket. Another bucket is just the working capital for growth on existing products, things that we're already doing. Okay. Walmart wants to be, you know, put us in these additional facings. They want to put us in the baby section. We need some working capital invested there to earn a return there. And then there's dividends. We're a C-Corp, so it's dividends and be distributions if you're an S-Corp or LLC. And then there's redemptions, which is everybody on our cap table is asking, hey, it's great that the company has this nine-figure valuation.

58:11How do I actually recognize that? Because I don't have plans on taking this public. This is another thing, going back to what Jason was saying, having equity is great, but there is always going to be the question of how do I sell that equity someday? Being a public company at least answers that when you're a private company, then you have to kind of have an answer of like, okay, here's how you're actually going to be able to cash out. And then there's taxes basically. And I guess we have another bucket, which is giving. So you take how much money we make, you take out your giving, you take out your taxes, you take out how much working capital you need for existing business growth, You take out some money for product launches and speculative growth.

58:52And then you split what's remaining between dividends and redemptions is how we're doing it. And the way that we approached it is I basically said, I think we should be able to run the business first. Actually, another thing we said, we're just not going to have debt. Like we're going to knock out debt. And then once we get to that point, we're going to say – I think what we said going into this year was something like 35 % of EBITDA is going to go out in dividends. 10 % to 15 % is going to be used to redeem shares. And then the other 50 % is going to a combination of taxes and kind of growth initiatives, working capital initiatives.

59:36And so we kind of at the beginning of every year, we will give all the shareholders, hey, here's the guidance of what we think we're going to do. If you're growing slower, I think that number can get bigger. You need less money going into working capital. If you're growing faster, vice versa. And how much we're doing on redemptions also, I think we'll move around over time. But anyway, that's how we're thinking about it is dividing it in those buckets. Sean, do you guys have a similar allocation? Dude, no. I mean, yeah, Mike's thought about it. I think this is a benefit of being a C Corp, right?

1:00:12Is that like the company has taxes, the company can hold capital. Where when you're an S Corp, all of the capital held in the business has been paid. Like it has to be passed to shareholders and taxes have to be paid on that first, right? So like essentially like an S Corp essentially needs to be drained every year, right? But that doesn't really happen. there has to be working capital in a business that capital is post-tax somebody had to pay tax on that money so um ridge has a very unique tax structure that i'm not going to get on here but like essentially um we're all in it together so like you know there's five or six of us that own this business uh we all essentially pay each other's taxes like we are all locked in on this on this thing because because of the nature of the business so um it's really ultimately my call So it's like, you know, we have a net income number.

1:01:07We also don't have any debt in this business. We have a net income number. I make sure we have enough taxes to cover everybody's taxes. That gets distributed first. Then I have to leave working capital in the business. And then what's left over, we do out as dividends. We've never thought about redemptions. Nobody's tried to sell any shares. But Sean, so you're doing it the right way for like a pass-through entity. We're an LLC, but we do it similar, right? You got to number one, it's a pass through. So you got to give people money to pay the taxes on the profit. Like there's no way because otherwise they have to go out of pocket.

1:01:42I'm like, I'm like Mike, who's a C corp. And if they don't pay dividends, the taxes are at the corp level. Right. The and then you need money for for working capital, for inventory, etc. And if you're growing fast, that's actually there's not a lot left. We've talked about this before. Right. There's just not a lot left because taxes are real money. and paying for next year's inventory as real money. I think the question that Matt had, which we really didn't get to the answer so specifically, is so like there's whatever is left, you can reinvest in the business. So there's working capital, which you just have to do.

1:02:19You just have to do that. But whatever is left, you either reinvest it in the business or you take it out in profit. And I think it's very kind of personal to everyone and their own philosophy and the business, how they do that. But does Ridge think about that? Like there's an amount that's left. You're obviously taking some out. You said you're doing some distributions. But is there also like money that's being earmarked for different growth initiatives or other things? We have never let our distributions get in the way of what the company wanted to do. That's it right there. What drives it, I mean, I thank you for bringing it back, Jason.

1:02:59But what Sean's saying is preach. it's like what does the business need what does the business have the ability to invest you start there yeah so you know new products are expensive right if we have a deal we want to do or if we want to buy something like you know we ended up buying a building we bought a factory all type of stuff we never let distributions get in the way of that right so distributions are always a third order effect where it's a fourth order effect it's got to pay your taxes got to buy inventory got to have working capital, got to invest in whatever the business needs to be successful for the next year.

1:03:36Whatever's left, we end up doing distributions on. Can one of you guys, maybe Jason or Mike, I don't know who wants to do this, but I'm just thinking of people listening. Can one of you define working capital? Yeah. I mean, really simply, you have to have money in things like inventory and property and plant in order to sell. And so your business has to have a certain amount of capital cash in it at all times in order to engage in selling. And the amount of capital depends on how much you're selling, how many weeks of cover you're carrying. You know, we don't run businesses where we have to invest in a lot of things like oil rigs or, you know, like we're fairly asset light in the sense that most of what we own is inventory.

1:04:29But I'll give a really specific example from this year. Like, let's say on average that Simple Modern carries$20 million in inventory at any given point in time. It's probably$20 to$25 million. When we got a 30 % tariff out of nowhere, that means you're going to have six to like maybe seven and a half million dollars of extra cost. That's working capital. My working capital has to go up by six or seven million dollars because of the tariffs. So as a result, this year, we actually suspended dividends for a while because it was just like, well, you know what? there's a$7 million air ball that we've got to fill.

1:05:11And once we fill that one time, you don't have to refill it over and over and over again, but you got to put that extra$7 million in the business because now that's the ante, that's the cost of doing business. Yeah. The other thing is like working capital, how are you going to pay your rent and your people and your bills and all the things that come up if one of your vendors doesn't pay you for 30 days or 60 days or whatever, right? There has to be some amount of float in the business to cover those things. Like, you know, you have employees and they have their own, you got to make sure you pay them.

1:05:46And working capital is just a cushion to make sure that like, as a responsible business owner, if something happens, an outside force, that it doesn't cause you to do, you know, a domino effect inside of your business. So that's like, there's inventory and then there's just like, you do just need raw cash to cover expenses. This is also why with public companies, a lot of investors, the stat that they will look at is return on invested capital. Successful investors will often look at return on invested capital because it reflects on a management's ability to be very efficient with their working capital.

1:06:20So you can sell, I mean, you can brute force it. I'm sure if Sean, if we just gave Sean$50 million more in working capital, like he could grow sales, but there's diminishing returns. You get less and less efficiency on that capital as you try and go bigger and bigger. You don't have product lines to put it into. You don't have really good ideas to invest it into. And that's the point that I think Sean was making earlier is that you let the business and what the business can do dictate how much capital. I think being on the safe side where you're never distressed, where you're never cutting it too close is good.

1:06:57But then the other thing you're balancing with is you need to be earning a good return because you're taking capital that your shareholders could have and could have invested in the stock market or buying yachts or whatever it is that the Hexclad guys do. And you're having to balance those two things. You're working capital. Well, I think this is just a really interesting topic in general. I think if you have good opportunities to invest for your business, you should invest as much as you can, because that's why you're in charge. And you have a fiduciary duty to the business, to the shareholders, to run the business to the best of your ability.

1:07:41And investors chose to trust you by giving you the money and you kind of should do what you want. And if investors don't like it, well, they shouldn't. A, they shouldn't have gone into business with you and B, they hopefully get a chance to vote with their feet at some point. And it's, you're in a really great position if you have good business ideas and opportunities to go invest instead of taking out distributions if you don't need the money. I think like the Ridge team probably could take out more money to probably have taken out more money over the last few years. But like, you know, they just don't care to live a lavish lifestyle.

1:08:25I mean, And Sean bought a nice house. He's not in Hancock Park, you know? Like, he's not in Beverly Hills. And he bought himself a great place and he and his wife have a lovely home. And there's, like, at a certain point, you get to different stages in your life and you want different things. But if you have the opportunity to invest in, like, great things for your business, like, absolutely invest in those things. Just be really, you know, you just got to use really good business judgment and make good decisions and surround yourself with the right people. Yeah, it's risk versus, it's all risk allocation.

1:09:01It's like risk versus reward. Surround yourself by great people, by great advisors, great board, whatever. Hash it out. But at the end of the day, like you're in the seat and you got to make calls. It's almost like a curve where it's like early on, no money to distribute, bad. And then there's a point where getting to, hey, we've got a lot of money that we're making, but we can reinvest most of it and we don't have that much to distribute, that's really good. It's really healthy. If you're like, well, we made$20 million, but we could use$15 million to grow the business. The place you really don't want to be, I think, is where you're very profitable, but there's no idea about how to grow the business.

1:09:42And so you just have to jettison all the cash out of the business. And I don't know, maybe people would disagree with me, but - I don't know that consumer companies have this problem. Yeah, maybe you never - Google and Apple seem to have gotten there and Meta seems to have gotten there. But then they found this. My point is if you get there, I think it's like a harbinger of bad times are ahead. Like, cause you don't have a way to plow it back in the business. And it's like, even if you're really profitable, are you going to be able to maintain that consumer? LA, the only place people could talk about a multimillion dollar house.

1:10:13So true.

1:10:17i'm like i'm like jason but mike's mike's you know custom built a beautiful home for him and his family cost less than my my shack in la bro so we should compare notes but it is really crazy like being top top top of the market in oklahoma will get you like a condemned you know uh crack house in LA probably. This is how I made that comment in our other chat that I can always tell when a brand is started in Los Angeles based on how they price things. And I'm like, you need to take a plane into another part of the country. That is not what we humans pay for. I was really trying to be complimentary of Sean, by the way.

1:10:57I am sorry. I'm really not being a dick. Oh, yeah. There's no biscuit factory over here. Oh. Okay, it's no secret that margins are getting squeezed and profitability is a challenge for brands in 2025. Not a secret. That is where NorthBeam's profitability benchmarks come. It's a new feature. You could check it out. This is a tool from NorthBeam that tells you the exact targets that you need to hit to get to profit inside of NorthBeam. So no more guessing, no more month-end financial surprises. Hitting these targets helps you ensure that your ad campaigns are actually driving the right behaviors to make your business profitable.

1:11:32That is wonderful. The brands that track this stuff probably already do in Google Sheets. I know I do. I'm going to be checking out this NorthBeam new feature. And NorthBeam is kind of a big level up from this. And here's what sets kind of what I have seen. Here's what sets profitability benchmarks apart. So instantly you get to quantify your goals into clear benchmarks. Every ad gets measured against those targets right inside of NorthBeam. That's kind of cool, actually. And you see and you can kind of at a glance see which ads are doing well, which needs to go against profitability benchmarks, not just ROAS or whatever else you're using right now.

1:12:06You just get out the winners, you cut the losers, you know the drill. It is hard to argue that this is not great for brands. Profitability benchmarks from Northbeam is like having a speedometer in all your channels, campaigns, ads, so you can kind of see everything at a glance against profitability, not something else. So stop leaving money on the table, fuel your creative performance, make every ad dollar count in every channel, hold them all to the same standard. If you want to reach out to Northbeam, just let them know the operator sent you and they will take good care of you. Okay, I got one nerdy question on this topic for you guys.

1:12:38Do any of you actually measure ROIC, return on investing capital? I was actually about to ask about this. Yes, we totally do. And I want to know what the, well, we do, and I'm kind of curious what the standard is if you guys measure it, because we typically are like, we want 60 % plus ROIC. Holy. And yeah, so it's like, we have a pretty high bar. and I think that's kind of where the rubber meets the road here that we've been getting at is that functionally the way it should work is you're kind of like hey everything above x percent return we're going to keep money in the company and then everything below that we're just going to get that money out we're going to adjust in that so like and it makes sense if you think about it like that like if I have money personally I can invest in things and I might be able to earn you know whatever, a 12, 15, 20 % if I'm awesome return, but I can't hit, I can't compound money at 30 or 40%, you know, in my personal, plus it's post-tax.

1:13:35That's the other thing is that you take the big hit of taxes when you take money out, especially in a C corp. So anyway, like, do you, Jason, do you guys, I mean, you probably don't think about that way, Sean. I mean, maybe, maybe we're unique in this, but we look at ROIC all the time. Well, I think the thing to tell, like, Why are we saying invest money in your business? It's because your business has the ability to outperform the stock market. And if you get to a position where it's better to be in the stock market than in your business, that's why Mike's saying that's a harbinger of bad times to come.

1:14:05It means your business's enterprise value will underperform just buying the S &P 500. And none of our businesses are at that point. But a lot of companies just end up being - We're all way too small. Yeah. They end up just being dividend cash cows or whatever because they're only worth whatever their eBay generates. And that's not a place you want to be. That's where a business is worth 1x or 2x earnings or something. So we don't measure that at all, Mike. I'd love to know how you measure that. I've said this. No capitals ever came into Ridge. It was just the Kickstarter we did that one time. But I guess thinking about the cash going into new initiatives that it could go to my pocket, but instead of going to this, that'd be an interesting measure.

1:14:48Not sworn in to do that. What about you, Jason? I mean, we do not do it. I know exactly what it is. I read the McKinsey book that defined return on invested capital like in the 90s. And I think it's a little bit antiquated. It was written at a different time with like different kind of businesses with big capital expenditures. expenditures. I don't think it's worth the, I don't think the juice is worth the squeeze. I think what is, it's really you, what do investors care about? Growth and profit and run your business with growth and profit North stars. And it's just like a lot. I think it's just a lot.

1:15:32It's simple. I'm going to keep it simple. So we keep it simple. We have growth and profit North stars that we're trying to hit. And that's, you know, we're doing everything we can to do that. And we know if we hit those numbers, it'll allow us to do everything we want to do. But Jason, do you not, how do you, on this topic of like how much money you reinvest in the company, how do you guys determine what the appropriate amount is then? Right. Like, do you just have like, here's the project to grow and we're just going to put money in that. And this is what the P &L needs to look for. Like when you say, keep it simple, is that what you mean?

1:16:03You're like, this is just where we're going to put cash this year and we know it's going to produce. Our overall areas of expansion, we're not a huge CapEx business, number one, right? Like we didn't build our own factory. We're not a huge CapEx business. And so we're looking at like, do we spend half a million to go open up the UAE, right? Like it's actually less than that. Do we want to have like a net break even on a million dollars spent in the UAE over a year and a half? Is it worth it for us to do that? And we're looking at that. We think about that. And maybe there's some like good ROIC or other measure that will help us answer those questions.

1:16:52But there's lots of those questions throughout the organization. you know where do we want to invest and how much we want to invest but the numbers just ain't that big you know like we opened Mexico and this was because one day I went and shot my mouth off in someone's office is like dude stand up a site and I'm like stand up a site in Mexico like how hard is it like we just did candidates like it's not that hard sign a 3pl like run some ads I pulled like my Sean Frank moment just like go do it this is not that hard and then like two two years later, two years later, these guys finally did it.

1:17:27And by the way, three months after I shot my mouth off, I was kind of like, Hey, do we really want to do Mexico? Like, you know, it just sounds like, is it really worth, you know, is it really worth it? Whose idea was this? Why are we in Mexico? But I literally, but I like, I literally did, I like sucked it back. And for some reason, they didn't want me, they didn't want to suck it back. So we like literally launched Mexico, but there's, there's like, so for us, there's a lot of geographic expansion that we can invest and it's like, do we do it, right? We're really not Latin America, really not in India.

1:17:56I mean, we had someone on the pod a while back who really knew India really well. It's funny because my, Jeff's wife works for BlackRock and she's got a team in India. She's just an Indian. She was there and she took a whole bunch of pictures of like hex clad knockoffs being sold in India that I think are actually being manufactured in India. So India actually has the capability to manufacture cookware, but is the market good enough? So that's the kind of things that we're looking at. Like, is the market for this good? Do we want to go do this product? And do we think we can make money? Is there like a measure that we should be using to help us make those decisions better?

1:18:35I'm just not convinced that there is one. I'm not convinced that ROIC is it. I want to make the case to you, Jason. I want to make the case. Yeah, yeah. I want to hear that. Here's the way that I think most people listening to this pod could use ROIC. ROSC can be used to compare different investment opportunities against each other. So it's less about like, hey, what's your overall raw number? By the way, I looked it up. Yeti's the last three years, 26%. Last five years, 30 something percent. So that's a public company in consumer, kind of like a ballpark. And like Sean said, that's significantly above what you can make in the market.

1:19:10But it's helpful whether you're looking at an ROSC goal of 60 % or 80 % or 30 % to be able to your team is going to bring you different types of projects you can invest in and it helps you to kind of compare against them. And I think practically the most applicable way to use this is when it comes to inventory. So I'll give two examples. In mass retail, the more product you have, the more you make sure you're 100 % on time and full when retailers order product, which means you're going to have more sell through. So you're constantly playing this game between, do I carry more inventory where no matter what demand is, I never miss an order and I get all my sales?

1:19:52Or do I carry less inventory where I might have some missed sales, but I have more efficiency? And so this is an example, right, of how like is my ROIC, my desire goes up, I carry less inventory, but I might lose sales. As my ROIC comes down, I might get more sales and more total profit, just a lower return profile. Another really good example that we've run into is deals with Amazon and, you know, the ability to engage in promotional activities throughout the year. Promotional activities are lower return on invested capital because your margins are going to be lower, but they're also incremental sales that when you engage in a big like, you know, Turkey 11 or whatever Amazon calls at this point deal, like you are selling a lot more stuff, but you're doing it at lower margins at a lower ROIC.

1:20:42And so the more that you can help your organization to think this way, the more you can make strategic decisions about how you buy inventory in different ways. Like just really simply, the more inventory you buy, the more sales you're going to be able to harvest and the more nominal profit you're going to be able to make off that. But the lower your return profile. And there's a point where it doesn't make sense to have more inventory because the return on that inventory is so small. But there's other times where it's like if you try and run too efficient that you have out of stocks and that's bad and you're leaving money on the table.

1:21:19So practically, I think it comes to inventory buying and how you approach it. There definitely is a need for better measures of how you invest in things. I think it's good discipline to use anything. Like the fact that using ROIC, it's good discipline to do it. I think, as you said, it works well when you're talking about, okay, we've got to go invest all this inventory. We've got to invest a bunch of capital in all this inventory. Like, does this make sense? So we're making choices about launching this line or that line, and we're going to have to tie a bunch of capital to do that. Yeah, I think ROC, so I will take it back.

1:21:59In those cases, it makes sense. in a lot of the small investment decisions we're making, like do we want to partner with this influencer? It's kind of like in the noise. I think what I'm taking away from this, and Sean, I don't know if you have any thoughts on this, but I'm taking away, because we don't use our ROIC, but I'm taking away that we need some measure of like, how do we know this was a good decision? Right? Like, is this a good reinvestment of capital in the business? and like how do we measure each thing against each other? So if there's five or six opportunities we're staring at inside the company, how do we actually put them side by side?

1:22:39It's like having common language for anything. I don't know that ROIC is some special metric. There's a lot of different ways, but in your organization, it's just important that everybody has kind of a common North Star that we all understand that when it comes to buying inventory, we're using this as the filter to think through it. Awesome. We've been going for an hour and 15. Do we want to wrap? That's the pod. I do want to say, I do want to remind people that I'm doing a killer trip to Israel in September. And it's going to be amazing. And we've got a bunch of really cool people already signed up to come.

1:23:16So we're doing the first e-commerce mission to Israel. We're going to meet with a bunch of high level people there in the government, in the investment community. and it's going to be super fun. Israel is an amazing country. It's a beautiful, beautiful place. And you don't know a place until you actually go there and see it, like any place. I've been to China. I've been to India. People have lots of preconceived notions based on what they hear in the media. And I think you really need to go someplace and see it for yourself. So I'm going with the Israel Tech Mission. There's a bunch of great e-com people coming with us.

1:23:51And I hope there's a few more slots left. I hope some of our people join. And if anyone has a fiscal reason why it's difficult for them, reach out to me because I can help. Jason, what are the dates? It's around September 14th, like week of September 14th. Beautiful. All right. That's the pod. Thank you, Matt, Mike, Jason. Any final words? I hope I look better next time. For the audience's sake, I hope you do too. All right. Bye. All right. Thanks for making it all the way to the end of this episode. Wherever you are in the world, it is awesome to have you here. If you do not already subscribe to this show, that is my one ask, is please go to whatever platform you are watching or listening to this on.

1:24:36It could be YouTube. It could be Spotify, Apple. I don't care. Just go hit the subscribe button. Please pump our egos up. It helps. And before we go, one more thank you to the sponsors, Fulfill, PostScript, Northbeam, Saris, and Rich Panel. Awesome guys running these companies. We all use them. These are our vendors. That's the only reason they're sponsors of the show. So thanks again to those people.