How Grove Collaborative revamped its business model to focus on profitability

0:28Hello, everyone. Welcome to the Modern Retail Podcast. We've been here for about a year, is that correct? Yeah. But the business model has changed. It's expanded in new ways. We're at a really interesting time in e-commerce compared to what it was four-ish years ago. I want to dive into all of that. But Jeff, how are you doing? I'm doing great. Thank you for inviting me to be here. Absolutely. And for those listening, this is a really special episode because it's actually in person. So usually we do it over Zoom, and this time we're looking each other in the eye, which is rare and a joy, to be completely honest.

0:55So true. So let's start with you. You have a very venerated background in e-commerce. You've worked at some companies. Can you want to just give a brief rundown of the companies you worked at and what you've been focused on? Sure. So I've been in the space for about 20 years. I joined Amazon a little bit after business school. Andy Jassy was my first mentor that I would meet with regularly. And I had a handful of different roles there. But the first real big role was they asked me to replace a founder of an e-commerce company in Madison, Wisconsin called Shopbop. and what was interesting about ShopUp was it had a business model that was so different than the core of Amazon.

1:29The core of Amazon's wide selection, low prices, fast shipping. And this was one of the only businesses within Amazon that had a strategy that went against some of that. Think curated selection. Not always the lowest price and shipping was still important but it wasn't core to the business model. So learned a lot there, joined the week of Lehman Brothers going bankrupt and we somehow turned it around went from a$100 million company to a billion dollar company in short order. Amazon asked me to run some larger businesses like the Amazon clothing business and private brands at Amazon for a few years.

2:04I was responsible for developing and designing those brands. And then most recently, I was at Zulily. And again, the commonality there was I was replacing a founder and I've just always been drawn to strategy and culture. If you got to know me, I'm just a people person. I love the idea of working with large teams to try to achieve something pretty hard. And so that's what drew me to Grove, but also Grove's unique compared to my past. Yeah, Grove is a different sort of target, I guess you would say. Yeah, like we are all about sustainability, human and environmental health. And what's really extraordinary is I think our company, our culture, like every single person working there is bought in.

2:44It is the common thread that connects all of us. And so I was drawn to the mission, started meeting the founder and other board members. And I was quick to join. And I joined about a year ago last month. Wow. All right. And so let's, can you just give a little background for those who didn't listen to the episode in 2019? Well, like Grove, I feel like a lot of people know it. They've probably seen the products on some store shelves because you've been in store shelves recently. But how has it grown and how has it changed? It sounds great. So at a high level, Grove creates and curates high performing planet first products.

3:18And we're doing that because we want to transform the CPG industry into a force for human and environmental good. And so you see some of our products. Some people might say it's private label products. It's actually not. It is one of the only times I've seen where a retailer's own brand is actually positioned as a premium with higher ingredient standards, with higher sustainability standards, and often priced even higher than some of the alternatives. And that's how we think of Grove Co., our private brand, our own brand. It's not like a substitution for a lower price. It is a substitution for a higher bar on sustainability.

3:58And so for us, what we are really trying to do, going back to the mission, is to transform this industry. We've got to step back and just talk about this industry. We haven't always been the best to the environment, right? No. I mean, it's disposable products, correct? Disposable products were pushing consumerism at times to the industry and to customers. But when you think about plastic waste, this is what moved me. I don't know if you've ever, I remember where I was when I watched the frontline special called Plastic Wars. And now you don't have to watch the full frontline special. You can pick up CNN earlier this week or New York Times or the Journal.

4:39Increasingly, customers are realizing a few facts about plastic. And those facts about plastic are kind of scary about the impact of both the environment and human health. And we're the leader. We're the first plastic neutral retailer in the world. And happy to talk more about either the plastic problem or how we're attacking it. I mean, I want to talk about all of that. But I want to talk a little bit about the model because you've been very member focused. And you started DTC only. One of the things that I find so fascinating about your business model is that, in my opinion, and this goes into you talking about plastic free, where there is a divide between what people say they want to do and where they actually put their money.

5:24That's fair. And with that, I think it's really interesting that you have a membership model, you have an e-commerce platform for people to buy things that they could also just buy at the grocery store. So A, how has the business model changed and how have you been able to get that buy-in so that people are actually following their beliefs? I love it. Okay. Okay. So we started off with real innovations in product. And so think of a durable soap dispenser or like a durable multi-surface cleaner that's glass. And then we would sell concentrates that you'd mix with water and it performed just as well.

5:57It was better for the environment, eliminate single-use plastic. And that was in some ways how we began. And then we realized, we built initially a subscription model. Like when I arrived, there was a subscription model. And what that meant is if you came as a new customer, there was a set basket that we suggested for you to buy. It included a bunch of free gifts. And then we would often introduce our products to these customers, and they loved them. And they would come back regularly. But it kind of was like we would always, if someone called and said, hey, can I end my subscription? Of course we would do it.

6:26Our NPS scores are through the roof. But it was not the most customer-friendly approach, in my opinion. It limited our addressable market. You had to really love subscriptions. And so when I arrived, I thought one of the most important things we had to do was just to bring some of the best practices from e-commerce to the table. And a lot of this comes to working backwards from a customer needs and saying, how do we deliver on those needs? And so from my point of view, I wanted to enable subscription, but I wanted to create an incentive for customers to subscribe, not to force them to subscribe.

7:00So we opened it up on February 29th of this year. We launched and it almost felt like a new business. Of course, the same brand and the same great quality products. But when you think about the type of advertising you have upstream, the messages you're telling, the type of customers you're reaching out to, they may be all a little bit different. And so the last four or five months, we have just marching down the list of customer pain points. And the first was opening up the business, offering it to anyone who is interested in buying, creating incentives for customers to subscribe. We can come back to that.

7:34And then most recently we eliminated something called the supply chain fee that was lingering from the pandemic time that just was creating more friction to the customer. So now we think we have a model that when a customer subscribes, they can build the most planet-friendly, wallet-friendly, human-friendly box with high-performing products. And correct me if I'm wrong, I was looking at your earnings. Your DTC customer growth has been positive over the last few quarters, has it not? No, we are hitting a trough. So this is actually really interesting for the people listening about D2C. I think the smartest private equity firms, some of the smartest equity research folks are really studying customer cohorts.

8:15I found some firms say, I don't even want to see your P &L. I just want to see your cohort model. And so what happens with cohort models is you're tracking every quarter. Are people repeating and how stable they are? And what's amazing about our business is once you're at about eight quarters, it's almost like an asymptote. It like flattens. And so we almost always are getting a certain amount of revenue on average per customer after about eight quarters. So what ends up happening is if you ever had a time when you suspend a lot on marketing, until you get six to eight quarters in advance, you're comping that and it's actually really challenging.

8:50So our revenue has actually been down year over year. We are a public company. We've guided to the street that we will be growing in Q4. and when you're growing sequentially in Q4 in a non-seasonal business, it hints that we're nearing the trough of this kind of customer cohort situation. And what we're not talking about is the business where when I arrived, okay, great brand, great NPS scores, 700 ,000 active customers, 5 million total customers who have purchased with us. A lot of leading indicators, but we had not been consistently profitable. The last four quarters, correct? Four quarters.

9:25So what we did is, like when I arrived, we got our team together. We surrounded ourselves with customer comments to make sure we were listening to customers. We were trying to understand where our business was, not just financially, but from a customer experience perspective. And we said, look, the goal was profitable growth. But we felt like we had to start with profitability. So for four straight quarters, we've been adjusted EBITDA positive. That's not the end goal. Like I care more about cash flow than adjusted EBITDA. But right now, that's where we are. And then growth, we're approaching real sequential growth, which will lead to kind of continued growth going forward.

10:00And so we feel like we're hitting that trough in some ways of where we've been. The third element, though, is our balance sheet. So quick context for the listeners is the three years before I joined, we were losing about$100 million a year. It was a time when it was a zero interest rate environment, and we were more focused. You could go and just raise the money, right? And so we were more focused on how quickly can we get to a billion dollars in scale to get to profitability rather than prioritizing profitability. And in the new environment, I said we're going to focus on profitability. So we've done that.

10:39We've gone from losing$100 million a year to now being flat, and now we'll start seeing growth. But back in the time when we were losing that money, we had to raise some money. Equity markets started changing. We got a relatively good deal at the time, but it was a fair amount of debt. And so we're a micro-cap company. Enterprise value is somewhere between$50 and$100 million. But those of us who are there know that there's a much bigger opportunity. And we're not there to run a$50 to$100 million company. We see this big path. But I think the markets treat us like, well, you've got a lot of debt.

11:15So some of these other SPAC companies, they didn't make it. And maybe they're grouping us in with them. So what we did last quarter was pay down a fair, more than a majority of our debt. I saw that. That's$42 million. That's great. It's rare that you actually hear about that. So we're paying down the debt. I'm trying to take that existential risk off the table for investors. There are some investors who may think that we may not make it. And I just want to prove, hey, don't worry about that. We are going to exist. We're going to thrive. And we've got a team, a customer, a culture that can really transform this.

11:46So when you came in a year ago, can you give some context? because this is what I really wanted to dig into. So you have the subscription model where people are buying online, but you also have other channels where I can get Grove Co. in stores, correct? You can. So talk about, because when you came in, what did you see as the target business model for growth? Was it that you would be everywhere or that you'd be focusing on your direct-to-consumer customer? Great question. I love this. All right, so when I arrived, we were seeing retail as a major growth path, and we still do. I love our presence in retail.

12:21Our ability to be on target shelves helps us meet customers where they are in their sustainability journey. We're often merchandised against some of the other natural product cleaners. Like Seventh Generation. Seventh Generation, Method, Mrs. Meyer, some of the SC Johnson companies, and then some other smaller startups. We're just meeting our customers where they are. I would argue that our packaging, we're the only ones in aluminum. Others are in some sort of single-use plastic. right so when we ask our customers how'd you hear of us one of the top three answers is hey i saw you on target shelves so that it matters but like it's still a pretty small portion of our business and the lion's share of our business is d to c and so if we're going to drive profitability we've got to make sure that that core business is profitable and growing and then like you know d to c i feel like in the last two or three years has almost become like a bad word yeah do you I believe it's become a misnomer.

13:15But like 10 years ago, there were all these businesses. Shopop, when I was there, we were the leading contemporary fashion retailer. There were many people building a brand by serving customers incredibly well through the e-commerce channel. And I think there are just some investors out there, less customers, that just think, hey, Amazon's going to roll over you. And they've done that through a lot of players. And my lens, and one of the reasons I joined, is we're not going to let that happen. and I think if you study e-commerce there are a handful of companies that figure out there's a niche there's a segment that they will serve better than Amazon so Amazon's going to be everywhere for everyone everything store if you try to tackle them there you'll lose but like you know Chewy has said we're going to focus on pets and try to deliver an even better experience and they built a great sustainable business in clothing you can try to shop clothing and it's still challenging to shop sometimes.

14:11I used to run that business on Amazon, but it's still challenging. That is definitely one of the less, everyone said Amazon was good at peril. I think the jury's out on that. So totally get it. Like no judgment. I'm not offended, even though that was a business I was very deeply about. Don't worry, don't worry. But like where I'm going is, I think there is a segment out there of customers who buy natural products, who have bought environmentally friendly products, that maybe they shop at Whole Foods, They're very thoughtful about composting and recycling, and they try to make sure that their impact is less on the environment, and they have a really high bar for human health.

14:49Where do they shop? Where do they go online? Like, look, some of that product may be on Amazon, but it can be hard to find, right? And so what I believe is in the same way Chewy went after a certain segment, the same way clothing players, whether it's Quince in the private markets or Shopop before, like in the early days, there are so many players out there that are carving out a niche. And I think we have this niche. We believe it's a 57 million person addressable market in the United States. These are customers who bought natural products, who care about human environmental health. and we're going to serve them.

15:26We're going to obsess about serving them better than anyone out there. So this is where we can get into what you were talking about at the beginning where the problem of single plastic and getting people to buy that. But I guess my question is, Chewy is a really interesting example where people went to Chewy because they wanted to get pet products and they knew that when before they were just buying it at the grocery store. How do you do this for soaps and paper towels? Is that a question of marketing? Love the question. Marketing, you have got to get your story out there. And I think it's about brand.

15:54Like you have to build a brand where you're top of mind. In that 57 million addressable market, you are top of mind for that customer who's thinking, whoa, where should I go to buy X? You want to be top of mind for them. And I think that's harder to do when you spread yourself. But if you focus on a core customer segment, you can. So let's talk about the economics of some of this. I also need to talk about plastic. But let's talk about the economics. Where do you want to go first? Well, let's go. I want the economics. and I have a follow-up question about the economics as it relates to plastic and the business model.

16:23So we'll get into it. When I was studying the business before I joined, one of the things that really attracted me was the AOV, the average order value, and the number of items that were in every shipment. Because if we wanted to try to compete with Amazon with just selling one or two items and shipping it, you'll quickly find that you're going to lose. I think you will. Amazon's done that really, really well. And so what we have is a base of customers who are intentional in their shopping and like the idea of a regular box just showing up. In the same way you kind of know regular dog food needs to arrive in a certain type of rhythm.

17:04We've got our own algorithms to figure out what that looks like in terms of the frequency of needing to be refilled. And we don't have two items in a box. Our average order value is over$60. And it's continuing to grow. So week over week and quarter over quarter, we've been doing really well from an AOV perspective, especially year over year. But what we're seeing is once you get to a large enough AOV, the economics can be pretty competitive where you can give real value to customers where they feel like, wow, this is a great deal, and yet at the same time have really high-performing premium products.

17:41And so that's what we're doing. The magic, in my opinion, is the subscription. So subscription in other businesses, sometimes just shows up in a bunch of different boxes or maybe you can say, hey, I want to deliver it on this date or something like that. Our subscription's not that. It's almost like the old school Jet model or like Quidzy model where it's like almost filling up a box and then when there are enough things in that box, you can ship it for free. That's almost how our customers actually shop. So our best customers, our VIP customers, have dozens of subscriptions. Okay. And so we're not shipping all of them every month.

18:14The multivitamins may come every other month. then maybe the laundry is coming every month, then maybe the bamboo toilet paper is coming every month, but the multi-surface cleaner is every three months, or whatever that may look like. And so what happens is once you get a large enough box size, you can actually deliver real value to customers and I think have a little bit of a moat. I think our moat is obsessing over this customer base, this 57 million TAM, in a way that delivers a differentiated experience, and then the second element is our box economics. that allow us to curate, and then we haven't even talked about the Grove Co.

18:50brand, but creating really awesome products too and delivering them in one box to the customer. Keeping with the economics, one of the killers and why DTC has become such a bad word, as you said, is because the economics of e-commerce is difficult, especially on individuals. So is there something you changed in the unit economics or is it just that you were able to make things a little bit leaner or you were able to make subscriptions work so that people had a higher AOV, which leads to a better unit economics. I was talking about cohorts earlier where you figure out your CAC, you figure out your LTV, you figure out that ratio, you figure out when you get the paybacks and there are a lot of people that think that way.

19:27We think that way too but what we started focusing on was almost like customer pain points that then lead into a P &L. When we looked at the customer pain points, it was not uncommon that customers said, I love you. My NPS scores are through the roof but I just have enough of this product. Or I can't find enough things to put into my box to have a regular shipment for$50 or$60. And I don't want to ship it for$30 because it's not the best deal. I need to get 50 to 60 and then I'll feel great about the products. And if you get to 100, you'll feel great about the products, great about the value, all of it.

20:04And so the subscribe and save was the first time we created incentives for customers to subscribe. The first order is a 20 % off. The second is a 5 % off. And so what it does is it starts filling that box for you, and then you go. And what we've recently been doing is giving you more reasons to shop and more things that are relevant that our customer's looking for that they can put into their box. So what are some good examples? If you are one of these sustainable customers, and you care about natural products, you care about environmentally friendly, you're worried about plastics, what frying pan do you use?

20:41What water bottle? What about in baby? What about nursing? Like, who is serving that customer saying, we've audited, we've researched, we've done the work to tell you these items don't include any of these, you know, forever chemicals. These items are hitting our bar. And that's what our customers started trusting us to do. The data point that moved me the most was a survey we did that said 89 % of our customers trust us, the old sustainable cleaning brand, to sell them vitamins, minerals, and supplements more than other retailers. 89%. Like, a few years ago, we didn't have any authority there.

21:21We didn't really know that much. They just trusted us to say, you've got the highest bar in e-commerce from an environmental perspective, and I'm assuming you're going to do that from a health perspective. And so we quickly started running into VMS. We got the right medical board, the right certifications, the right kind of curation process to make sure that we're enabling that high standard. And now what we see is an opportunity to add more selection, which then gives maybe you're interested in green pan, right? That you will add to the box that will get you over the$70 threshold or$50 threshold that will make it really exciting for you.

21:54Got it. And so this actually leads, we're going to get to the plastics, don't worry. But you keep adding new things that I want to talk about. So as you've expanded products, like I'm using Chewy just as an example because it's easy to understand as a conduit. That's pet products that is in the pet aisle. Grove Co. has expanded. It's gone into new. And so how are you thinking about telling that story and making sure the customers know that they can go to grove.co to buy the things when I imagine someone just says, I use the toilet paper or I use the soaps and I'll go there to buy my soaps. Okay, I just love this conversation.

22:29So there are probably two or three different elements here. One is recognizing that in the history of retail, people shop by category often. I think there are some spaces where the motivations of a customer segment usurp that. And I think this conscientious customer who cares about natural and environmental products is exactly that. They're looking for a trusted destination. It goes back to that 89 % trust number. So then how do we do it? Twelve months ago, we had a horrible search experience. Like, horrible. I used to, inspired by Clay Christensen, who's one of my intellectual heroes, just loved the man, got to know him pretty well.

23:05He had a thesis that was like, as a channel, a retail channel expands like e-commerce, new competitors will emerge. You can deliver a better customer experience for a specific kind of customer, like a pet customer or a natural customer. Well, you have to have the discovery tools to enable customers to find all of those right products. And so a year ago, we barely had the right search experience. Now I love our search experience. So some of it is a customer experience changing the way the site works, some of the algorithms behind the type of products that we're surfacing. One of our employees just said, I don't like our homepage.

23:42I want to run an A-B test. We've got a great testing culture. I mean, I love our people in our culture. And he's like, let me try this new layout. We tested it. A-B test. Strong, strong win. So now when you land on our homepage, you actually get to see more than just one big story. You see the breadth of our assortment. you see new seasonal items, and we're introducing more and more to our customers through either email or advertising or homepage experience, all of that. I think about all of this, but it comes down to brand. If we are not top of mind on those 57 million customers, we're underperforming.

24:20And so how do you become top of mind? I think it's a brand story. We're going to still measure it as much as possible and lean into performance marketing and a bunch of things to do it, but what you'll also see is a lot more on content and education. Because I think you need to have the authority to earn the trust of customers to say this is the right product. And I think you do that by being a trusted destination, trusted brand, trusted platform for them to go and say, oh my god, these guys really care and they're doing the research for me so that I know that anything I buy there I can trust.