In short
The Modern Retail Podcast - Episode Summary
Episode Title
Klarna's Losses Double, Dockers and The Vitamin Shoppe Find New Buyers & Bansk's Chief Supply Chain Officer Talks Tariffs
Hosts
- Gabi Barkho
- Melissa Daniels
Summary In this episode, the hosts discuss recent trends in the retail industry, focusing on Klarna's financial struggles, acquisitions in the sector, and insights from Liran Golan, Chief Supply Chain Officer at Bansk Beauty.
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Key Themes & Discussions
- Klarna's Financial Challenges
- Losses Reported: Klarna’s quarterly losses reached $99 million, doubling from $47 million the previous year.
- Default Rates: An increase in the number of users defaulting on their Buy Now, Pay Later (BNPL) loans is raising concerns about the company's financial health.
- Market Presence: Despite losses, Klarna maintains a significant global user base of 100 million active users.
- Consumer Behavior: There is confusion about the incentives for completing BNPL payments, with some potential users viewing it as a way to "get things for free".
- Retail Acquisitions
- Dockers Acquisition: Levi Strauss sold Dockers to Authentic Brands Group for $311 million as they focus on core products.
- The Vitamin Shoppe: Acquired by Kingswood Capital Management and Performance Investment Partners, this deal follows the company filing for Chapter 11 bankruptcy last year.
- Struggle of Traditional Brands: Both brands illustrate the ongoing challenges traditional retailers face in adapting to modern consumer trends.
- Interview with Liran Golan (Bansk Beauty)
- Role of Supply Chain Officer: Liran explains the comprehensive responsibilities of his role, including procurement, order management, and logistics.
- Impact of Tariffs: The discussion highlights how changes in tariff policies can influence supply chains, product pricing, and sourcing strategies.
- Nearshoring Strategy: Bansk has been moving towards nearshoring to reduce complexity and enhance agility in their supply chain amidst rising tariffs.
- Supply Chain Challenges: Golan shares insights on the need for effective supplier selection, emphasizing quality, service, and cost in maintaining robust supply chain operations.
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Key Takeaways
- Financial Health of BNPL Services: The growing number of defaults could spell trouble for Klarna and similar BNPL services, indicating a potential shift in consumer behavior and economic pressures.
- M&A Activity: The retail landscape continues to shift with acquisitions being a key strategy for struggling brands to regain market relevance.
- Tariff Effects on Supply Chains: The current economic climate is significantly reshaping supply chain operations, necessitating a reevaluation of sourcing strategies.
- Consumer Trends: Increased use of BNPL may indicate a reliance on financing options among younger consumers, but there are risks associated with this model that could affect long-term financial health.
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Conclusion This episode of The Modern Retail Podcast offers valuable insights into the evolving retail landscape, highlighting financial challenges, strategic acquisitions, and the critical role of supply chain management in navigating economic uncertainties. The discussions underscore the importance of adaptability in an ever-changing market.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:02This episode is brought to you by Clearco, the capital partner built for e-commerce. Shoppers today are looking at price, ratings, images, return policies, shipping speed, and brand reputation before they buy. That puts pressure on founders to act fast across inventory, marketing, and fulfillment. ClearCo provides fast, flexible funding with no equity, no personal guarantees, and no upfront costs. Learn more at clear.co.
0:39Hello, and welcome to the Modern Retail Podcast, the show all about the ways the retail industry is changing and modernizing. I am Gabby Barco, senior reporter at Modern Retail, and I'm here with my fellow senior reporter, Melissa Daniels. Later on, we're going to hear an interview by Melissa with Liren Golan, who is the chief supply chain officer at Bensk Beauty. They're going to be talking about all the ripple effects of tariffs that they've been seeing, you know, on their supply chain. So really excited for that. But yeah, first up, Melissa, how are you doing? I'm doing well, Gabby. I'm excited to chat today.
1:22You know, we're speaking ahead of Memorial Day weekend, wishing everyone a restful and reflective Memorial Day. Do you have any big plans or things going on this weekend, Gabby? You know, as of a few minutes ago, I made some sort of, you know, spontaneous plans to go see Beyonce, who's here in New York, well, New Jersey, but, you know, at MetLife. And yeah, I'm excited because I was not the plan. But as many people know, ticket master prices have been dropping the closer that the closer you're at to the concert date. It's something about dynamic pricing. I'm not an expert, but I think that's what I'm going to be doing.
2:02So I'm excited. I love it. You're a case study of the very trends we write about. And also, what an amazing show you're going to see. I saw Beyonce in 2009 at the Houston Rodeo, and it remains one of my favorite concert experiences. Yeah, she had an all-female band dressed in all white, and it just blew my mind in so many ways. But speaking of trends, Gabby, curious, you know, when you were buying that ticket, you know, you mentioned dynamic pricing. Did you also happen to use a buy now, pay later plan for your ticket? You know, I knew this would come up. And no, I've actually never used it BNPL, funny enough.
2:42So the reason Melissa is asking listeners is because during today's episode, we're going to be talking about just what's going on with Klarna. Given their most recent earnings, they're just racking up a lot of losses that have to do with basically users defaulting on their installment payments, which is why we kind of got on this topic. But no, I just used a good old credit card. Old school. The true millennial that I am. But I know a lot of younger, you know, especially Gen Z really took to buy now, pay later the last few years. And both you and I have covered this space pretty heavily. So I am excited to get into it.
3:27Yeah. And then also later, we're going to be breaking down some more sales that happened over the week. Just checking in on what some of the M &A in the retail industry is. But yeah, as Gabby said, Klarna reported earnings this week and that had Wall Street analysts and folks really kind of worried about the losses that were doubling due to users defaulting on their installment payments. The quarterly losses totaled$99 million, up from$47 million a year ago. But Klarna has 100 million active users globally. From my perspective, I believe that makes it the largest buy now pay later operator in the world right now.
4:00I think they're also operating in the most markets. But, you know, it's the debt that Klarna users owe that's really causing concern over the model's health right now. Yeah, I guess that explains why some people are looking to these numbers as a bellwether or at least some kind of indicator of the health of this model. The big question mark is like, what is the incentive for people to finish or complete those four installment payments before they receive their product? In this case, it would be like going to a concert in a couple of days. Right. So I guess this is where we saw. And just anecdotally speaking, I've been browsing social media and some people are like, well, you know, if Klarna goes under, I guess I'll just get this stuff for free.
4:46And we're going to get into, I guess, you know, the mechanics of how it works. But I do think there's a lot of confusion over how a buy now, pay later loan works versus a traditional credit card. Right. Which is kind of how we got here. Yeah, I mean, it's a totally different model, you know, as far as the customer being underwritten by the buy now pay later company, who then pays the price of the item you're buying, and then you are paying back that company. The consumer credit losses hit 136 million at Klarna this quarter. That was up 17 % year over year. So what that tells you is that people are not completing their payments.
5:27So maybe that is, you know, four payments over six weeks or three payments over four weeks or however the sort of payment plan is made up that people are not completing that. They're not putting it on auto pay and getting it deducted or they're not having enough in their account to cover it. Yeah. And, you know, this does come at a weird time for Klarna, especially because they had that highly anticipated IPO that was put on hold. I think it was supposed to be in April, obviously did not happen. And they gave the reason is just like the current climate and the economy. But, you know, now that we're seeing this debt or at least the default payments, you know, they did try to explain it away.
6:13I think a spokesperson told NBC News that that 17 percent figure, the jump in consumer credit losses, quote, doesn't tell you much about the U.S. consumer. Basically, they're saying that the total sum that Klarna loaned out or gross merchandise value of, you know, what was the transactions went from 0.51 percent to 0.54 percent. So they're arguing that technically, yeah, the 17 % is not actually reflective of the consumer debt. But with that, I think it's worth getting into, as I was saying previously, the BNPL debt and what some financial experts have been just warning about in the last few years.
7:00I know whenever I would speak to one, they would talk about how BNPL has a lot of upsides. It can be really a useful tool in some cases when it comes to purchasing. But it also does have some drawbacks or some confusion if it's not used correctly. Yeah, I think that's a great assessment. I think it's really interesting to me, though, just how much this area has grown, right? People are just so, so, so much more familiar with Buy Now, Pay Later than they used to be. You know, this year, an estimated 91.5 million American consumers will use Buy Now, Pay Later. That's projected to be up about 6 % year over year.
7:43That's data from Capital One Shopping. I also thought it was really interesting when I covered this over the holidays, how much Buy Now, Pay Later is really a phone-driven service. You know, Adobe's holiday shopping data showed that over 79 % of Buy Now, Pay Later transactions were made through a smartphone. and that's just telling you so so much about consumer behavior right that it's like you're sitting there browsing on your phone you want to buy something but you don't feel like paying you know 120 for that new pair of nikes but you know what i can split it up in four payments boom done i don't feel guilty about it and then i get my shoes in 72 hours right i mean it's just it's just so much about convenience and um efficiency and the way people want to shop and to me that's not going to go away you know i think people are still going to be flocking to that um you know You just want to make sure that people are using it responsibly.
8:34Right. And I think the mobile transactions also, to me, point to a younger or relatively young user base, which makes sense. I mean, that's, you know, if you're just starting out and you don't have a big credit history or probably using one of these services to split up something in installments. Yeah, so the users tend to be relatively young and have just on average lower credit scores than the average shopper, right? Which I guess that's kind of where we get into where we are now, which is that we're seeing some people defaulting on their payments, which could also result in obviously your credit score being hit.
9:17Yeah, you know, in my experience with these buy now, pay later companies, they have like a secret sauce of how they try to figure out what to loan out to and to whom. And, you know, they will sort of measure your borrowing power based on how good of a customer you've been to them in the past. And it's kind of interesting the way it works out. But we are starting to see some players, specifically a firm, report transactions to their credit bureaus. And financial analysts, I think, are going to see that as a good sign because there will be more information that's getting handed out to the companies before they're making the loans.
9:53And then that means it's more data for other lenders too, right? So basically the payments that people are making can be better reflected. Earlier this year, there was a Consumer Financial Protection Bureau report that put out a lot more information about this. That showed that 61 % of buy now, pay later users have subprime or deep subprime credit scores. And, you know, while on one hand that's like, oh, gosh, these are people with not a lot of credit that we shouldn't be loaning money to, from the buy now, pay later and the lender's perspective, they're saying, well, we're giving these folks an opportunity, right?
10:25You know, they have credit source, so they can't get credit, but we're going to give them an opportunity to get into financing and lending in a new way. You know, Cash App put out a study this week that showed how Cash App borrow actives have repayment rates of over 97%. And that's even though about 70 % of the user base has a credit score below 580. So, you know, I think it's one of those things where you need to have many product types for many types of customers, and it's still going to be evolving how these companies regulate themselves and how they assess who's ready to borrow and who's ready to pay back.
10:58Yeah. And I think that also plays into the fact that buy now, pay later is just so ubiquitous now. You know, people aren't just using it to buy that, you know, clothing purchase or beauty. They are using it for everything from, as we mentioned, you know, concert tickets to groceries, right? Or DoorDash. I mean, I think that became a little bit of a meme when Klarna recently announced its deal with DoorDash. People kind of, you know, joking about financing your burritos. It's like a$12 purchase broken down in four payments. So I guess, yeah, it can kind of have this ripple effect across a lot of different use cases.
11:41Yeah, well, and we did do a little bit of myth busting on our part there. Modern Retail's Mitchell Parton spoke with Klarna after that deal when we were out at Shop Talk in Las Vegas in March. And there is a minimum payment or a minimum purchase before you can use Klarna to finance your DoorDash. But yeah, I mean, you know, I think it was over 60 percent of Coachella tickets were using an installment plan offered by the festival this year. I believe festivals like Lollapalooza also offer payment plans. A firm actually did a survey this week that said out of people who've used longer term pay overtime options in the last year, around 79 % of them have opted for payment plans of six months or more, even if you could afford to pay up front.
12:27So what that tells you is people are starting to use this as a budgeting tool and a financing tool, not just something that they can't arguably afford. Yeah, for sure. I think it tends to kind of ease the blow of a big purchase. So yeah, it is useful, like you said, for a lot of different transactions. I guess, yeah, the experts being worried are just mostly worried about the default because I do think there's some confusion over how it could impact you in the long run, you know, because people don't see it as a credit card, even though it is technically a loan. But yeah, I think we are seeing also, you know, just the players themselves trying to do a little bit more education around that.
13:12I know anytime we've spoken to them, they've spoken about that. So yeah, I think it'll just continue to evolve probably. But this big number that dropped, I guess, did worry a lot of people. Yeah, it's a really interesting time for the space. Over the next couple of weeks, I'm going to be working on a piece about some of the regulation changes we've seen in this area. So stay tuned for more from that. But Gabby, what else have you been looking at this week or what other news topics have been jumping out at you? Yeah, so we're also going to be talking about a couple of sales that happened, I thought, relatively quickly.
13:48We had Dockers and the Vitamin Shop being sold this week. We've been talking about M &A, I feel like, the last few weeks, so it does seem on theme for us here. But yeah, I think first up, talking about Dockers, which was owned by Levi Strauss, is being sold to authentic brands for$311 million. dollars. Levi basically saying that they're going to just be focusing on their core brands, which is, of course, like the denim name brand and Beyond Yoga, which was also a big acquisition from the last few years. But yeah, I don't know what your thoughts are. But Dockers is an interesting brand because it has gone through this evolution for decades and decades.
14:32But it just didn't. I guess it seemed that the parent company just couldn't seem to crack the code because it just remains such a small part of Levi's overall business. Yeah, I mean, it definitely makes sense for Levi's given Docker's underperformance, its products account for about 5 % of its net revenue in each of the fiscal years from 2022 through 2024. And this really gives Levi's the opportunity to just focus on its core brand, as well as Beyond Yoga. And I think it makes sense for them to narrow their focus this way. But it is kind of weird how we got here. I feel like, you know, as a kid growing up in the 90s, Dockers was in a conversation that I would hear adults speak about with brands, you know, among like maybe the Gloria Vanderbilt, Bill Blass, I don't know, the things you'd buy at Sears back in the day.
15:26just it just has this like air of 80s and 90s nostalgia to me you know I think of a cheers in a Seinfeld aesthetic um and you know I guess that didn't carry over into uh the millennial and Gen Z shopper wow bill blast uh talk about a blast from the past I feel like probably the first time someone's mentioned that brand in in a few years um yeah no it's it's definitely it feels like a relic, I guess, from a different time. But that gets us into what they have been trying to do. You know, Dockers, to their credit, has been trying to modernize like a lot of brands that were, you know, were sort of these big mall mainstays from past decades that have tried to bring their businesses into the modern era.
16:12But yeah, I think, like you said, it's so I feel like it's so associated with like workwear, right, that they try to kind of go back. to basics. And as we know, like, I guess when we say workwear, we're talking about sort of like the Carhartt aesthetic that Gen Z seems to love. So they did try to tap into that the last couple of years. Just about a year ago, I talked to them about it for a story where they said that they're trying to attract younger customers by positioning the brand in that way, you know, where how Carhartt kind of basically is now considered a fashion brand more so than a workwear brand.
16:51That's a whole different topic. But yeah, it's interesting to me because it's weird that Docker somehow remained really big overseas. Like, did you know that over half of their business comes from international sales, for example? I did not know that. That's wild to me. Yeah, they have 100 stores and only five are in the US. Apparently, yeah, apparently they're really big in like Southern Europe, like Italy, for example. I just thought that was interesting because, yeah, as far as Americans go, I guess it probably seems like maybe a struggling brand. But I do wonder what it's going to look like under Authentic Brands because this is a whole new direction for both companies.
17:37Yeah, I do think this is going to be interesting. I mean, Authentic Brands has a lot of really cool companies under its umbrella and it also has a lot of resources at its disposal, right? And, you know, that's one of those companies where they can sort of test and learn in one area with technology or marketing or different operations setups and then apply it to other brands, right? So I think it'll be interesting to see what learnings from the attempt to revive Dockers bleeds over into their existing brands and vice versa. You'd have to do some homework to look into who Authentic Brands has acquired in the last few years and how they're faring.
18:12But chances are they have a plan in place on how they're going to try to take this brand to a new level. Yeah, I think a couple of them, people have probably heard of Brooks Brothers was probably the biggest one from the last couple of years that was sort of a joint venture with Spark Group. I feel like I remember talking about that on the show a couple of years ago. So yeah, they have that. They have Lucky Brand. They have Reebok. So it's a lot of brands to manage, but, you know, it's quite a portfolio. So I guess Dockers doesn't feel out of place when you think about it. Yeah, I think it'll be a good fit.
18:48You know, over in the world of wellness, though, we also had this really interesting deal happen. The Vitamin Shop was acquired by Kingswood Capital Management and Performance Investment Partners. The terms of this deal were undisclosed, but But from my perspective, you know, with private equity to the rescue after the private holding company that had owned the vitamin shop had filed for bankruptcy late last year. Gabby, do you have any fond memories of the vitamin shop? Was this a cultural touchstone for you at all? Not quite. I feel like I picked up some, you know, supplements here and there when I would go through my phases of like, I guess I'll get magnesium this month and then not keep up with it, which, you know, to this day.
19:30Still trying, yes. But actually, that kind of does play into what we're going to be talking about, funny enough, which is that the vitamin shop, it's this mainstay. It's been around since 1977. It's the supplement destination. But as we've talked about a lot in the last few years, wellness trends have really taken off, especially on social media. And we saw a lot of like these hip, younger, emerging brands that have benefited from it. So the vitamin shop, again, did try to modernize. They brought on these really cool young brands. Last year, they launched this holistic telehealth platform with the GLP-1 craze that we continuously talk about.
20:15This just in the last year, they also have capitalized on weight loss, drugs usage by launching a supplement brand that quote unquote supports GLP-1 use. You know, I guess probably helps with muscle mass building. But even with all that, yes, in 2024, they did end up filing for Chapter 11. It just was not enough. Yeah, yeah. I mean, the vitamin shop at that point was under the Franchise Group. It's a company that also owned Pet Supplies Plus, Buddy's Home furnishings and American Freight. It had made the decision to wind down American Freight, and then that brand was just bought out in January.
20:54And it's interesting because it's like these are companies that maybe had been around but hadn't done anything really relevant in a while. And so it's going to be interesting to see whether the new private equity owners of the vitamin shop can really find a way for the brand to speak to today's wellness and health-focused customer. And there are so many of those customers, right? You know, we talk about that all the time and we write about this a lot. And there are so many DTC brands that are making the leap into mainstream retail because they can and because there's demand for this kind of stuff.
21:28I'm really curious to see what their strategy is going to be. It sounds like they're bringing on some new folks to help lead the vitamin shop into its new era. Its new board members include Beth Kaplan, who is the former Rent the Runway COO and former president at GNC. Alex Smith, the former executive chairman at Vitamin Shop and the former Pier One CEO is also back on the board. So yeah, I think they have some fresh eyes in there and some folks who are going to do what they can to turn the business around. But also personally, I would love to hear memories of the Vitamin Shop. I'd love to hear from former workers about what it was like because this was an independently run company for like a really long time, you know, from 77 to 2019, right?
22:14And that's to me is just like that late 20th century retail era. There's probably a lot we could learn about customer service that applied to today's environment that are just some really tried and true things about how to grow your business. So I'm very curious if any listeners out there have memories of working at or with the vitamin shop from the late 20th century, feel free to indulge me. Yes, please reach out to Melissa. But no, there are a lot of customers. You're right, there's potential to capture a lot of people. I mean, so many people are looking for creatine, I feel like. Everywhere I look, they're looking into amino acids.
22:49So I'm sure the vitamin shop can find a way to capture those people. So yeah, now you're going to be hearing from Melissa, who spoke to Liren Golan, who's the chief supply chain officer at Bansk Beauty. But yeah, Melissa, you want to give us a little bit of a preview? What did you guys talk about? This was such a fun conversation. I really enjoyed talking to Liren. He has so much expertise. He's a former logistics guy from Rekit, who moved over to Bansk Beauty and then became their chief supply chain officer earlier this year. basically we broke down all the different ways that the tariff policy changes are affecting the business of supply chain so that's from how goods are moving to what inventory shipments look like to some of the things brands are considering as they change suppliers from china to other countries so yeah we get into a lot of nitty-gritty about the behind the scenes of how products are made and moved throughout the world and it was a really interesting conversation all right Looking forward to it after the break.
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25:10Well, today, here we are with Liren Golan, the Chief Supply Officer of Banks Beauty. Liren, how are you today? I am fantastic. Good afternoon. Thanks for having me. Of course. Well, for our listeners who maybe aren't familiar with a Chief Supply Officer, you know, that might be a term some people aren't familiar with. Tell us a little bit about what your role entails. Absolutely. Well, you know, up until 2020, nobody knew what even supply chain was, right? And so we have COVID to thank for that. Now people know what supply chain is. So I have the privilege of working in supply chain with amazing, amazing supply chain individuals.
25:44So the way I would think about this is supply chain is responsible for everything about from make, manage, and move, right? So we make product, we manage orders, we manage customers, and we move product around the country, right? So what I'm responsible for are the functions of procurement. So finding vendors, sourcing vendors, where are we buying our components from, who's making our products, that kind of stuff, as well as all the commercial relationship with our suppliers, right? Like, so what are the terms of business? How are we doing things? So we're responsible for all those pieces. Second, we're responsible for customer service from an order management perspective.
26:20So sales is responsible for the commercial relationship with a customer. We're responsible for order management. So once that relationship is established, let's say a Target or a Walmart or a retailer is placing orders, our team is responsible for taking those orders, processing them through the system, and then shipping them out. So that's the customer service function. We're then also responsible for planning. So planning's got two arms. One is demand planning. Second arm is supply planning. In demand planning, we're responsible for coming up with the forecast, right? How much are we going to sell?
26:53So we developed that SKU level forecast and then we hand it off to our supply planning team, which does all the planning of actually getting the product, right? Getting the product into our warehouses. And then lastly, we have our logistics team. So logistics are responsible for both freight and warehousing, which means on the freight side, it's moving product to our warehouses and moving product from our warehouses to our customers. and on the warehousing side, all that happens in that box, right, of getting the product on the racks and picking products and shipping products out. It's really so all-encompassing from A to Z as far as the life of that product and where it starts and where it finally ends up.
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27:33You know, tell us a little bit about the company that you work for now and the brands that you all have in your umbrella. Absolutely. So I'm part of the Bonks Beauty Group. So we are the beauty arm of our private equity firm, Bonk's Group. So today we've got three brands underneath us. Our first brand is Amica, which is a hair care brand that plays in the prestige market. And so it's like a lot to salons, to stylists, you know, as we sell in premium retail like Sephora. And then our second brand is Eva NYC, which is more of a mastige brand. So higher end, but in the mass channels. So we're in Walmart, in Target, in Ulta, those types of places.
28:14And then our third brand is Etique, which is a shampoo conditioner, so hair care brand, but in solid bar format, right? So no liquids, no plastic. Very, very interesting. Yeah. And it sounds like your companies are sort of coming from all over a little bit on the supply chain side. What are sort of your countries of origin for your products? Yeah, we're fairly global, right? So our Atique brand is actually based out of New Zealand. So it was founded in New Zealand and it's based in New Zealand and our manufacturing happens in New Zealand and our part of our distribution happens in New Zealand.
28:46For Amica and for Eva, most of the manufacturing or all the manufacturing pretty much happens here in the US. Some of the components, though, are sourced globally, right? So some of the bottles or pumps or triggers or things like that are sourced from other markets. All right. Well, and we will get into that in just a moment. But first, I just want to return to the role that you're in. You became the chief supply officer in about February of this year. You know, what a time to take the reins. You know, talk to me a little bit about, you know, as you were getting used to your new role, some of the challenges that you had in front of you.
29:24I think the challenges are similar, right? Challenges in supply chain have been around forever, right? The role I was in prior to this was I was the senior vice president for supply chain. So similar type role. Now we've elevated this role because now there's more brands underneath it and we're playing in this global scape, right? And it's also with the site of future acquisitions that the PE firm is going to be making, right? So that's where the elevation has come from. From a challenging time, I mean, the last five years in supply chain have been very, very different. I've been in supply chain for almost 20 years.
29:59I think the first 15 years were very, very different from the last five years ever since COVID. The world is a different place today. But it's a fun time. I mean, I enjoy it, right? Supply chain is about problem solving, and it's very tangible in terms of the results that you're getting, right? So it's very fun to be in this time now. Yeah. Yeah. So taking me to, you know, February, when we were starting to hear from the administration about new tariffs and coming from different places, what were some of the things that you and your team were doing to figure out what your exposure was? Yeah, great question.
30:34So I think we're somewhat fortunate because we already had plans in place to nearshore a lot of our production. So I'll start with that piece of it. So one, when the news came out in February, there was a part of me that was saying, wow, we made a great decision a year and a half ago. And I was saying, wow, that's amazing. And then I think the second part for me was starting to think about the global implications, right? So with all of this, it could change the landscape of the global supply chain. And supply chain is very linked. Even though we're talking about a US market right here, it's still very much impacted about what's happening in Europe or what's happening in Asia.
31:15So I start to think about, okay, what are those implications? And I'll come back a little bit on kind of what that can mean. And then quickly pivoted to what's my exposure, right? So then I said, okay, based on what I know now and what I'm hearing about things, what's my exposure, right? How much impact do I have on the P &L so that I could start to understand what do I need to start thinking about in terms of mitigation? Like how much do I need to come to mitigate to come back to our budget numbers? And then I think lastly was making sure we had the right framework for listening to what was going on.
31:50Because I also, it was very clear that things were changing by the minute in some cases, right? And so I wanted to make sure that there wasn't noise in the team, right? And that we were getting the facts and then we were dealing with the facts correctly, right? And we weren't getting whiplash all over the place. Right. I'm wondering if you can help me understand a little bit, this connection between increased tariffs and increased costs for companies on their imports and supply chain disruption. Because what I've heard from a lot of brands is the supply chain disruption and challenges we're seeing now are very different than the supply chain disruptions we saw, say, five years ago during COVID.
32:28What is it about right now that these tariffs are really wrinkling in supply chains? Okay. So the cost element, I think you're clear on that, right? So there's a tariff, so it's going to cost more to bring product into the card tree. Okay. Now, from a disruption perspective, a couple of examples. So we knew tariffs were coming. So what did some people do based on that? So they said, oh, tariffs are coming. I'm going to buy ahead. I'm going to bring in product that I would have naturally, let's say, been trying to bring in in Q2 and Q3. I'm going to try to cram as much of that as I can into Q1.
33:01Guess what? The capacity in freight isn't built to support that. So now you've taken a bunch of volume that should have been shipping in, let's say, Q2, Q3, and you're trying to fit it into Q1 shipments on top of, right? And so now your capacity is constrained, right? And so now what that drives is now there's not an availability of containers. When supply and demand goes off, costs go up, right? So that's one form of disruption. I think another form of disruption is it's also causing people to now to make other decisions and to move production, right? So I may have been, let's say, producing in Asia, and now I'm going to try to produce here.
33:36And again, capacity doesn't turn on overnight. It's not like all of a sudden, all this capacity has been idle and sitting available, and now I'm going to start using it. You're going to take capacity and you're going to shift it into already constrained production, which is going to create issues. Right. You know, one thing that jumped out at me there that you were explaining was this idea that we don't have, you know, unlimited storage and freight capacity, right? And I've heard from some brands that they're trying to figure out different places that they can kind of store their product or just make sure that they have inventory on hand, but they're also not tying up capital in that.
34:11How have you approached the inventory question lately? Where possible, what we've done is paused our shipments. And so we've parked that inventory in that market, right? And either in a bonded warehouse or in the supplier's warehouse, trying to find some space for it so it can sit. And then we can evaluate how the situation is changing and say, okay, now does it make sense to bring those shipments in and turn back on production? You know, you threw out a term there that I never heard until a week ago, and now I've heard it every day, and that's bonded warehouse. What is a bonded warehouse, and why is it such a hot commodity right now?
34:47It's a warehouse where you can use it in different ways, right? So one way, for example, that I could use it is let's say I'm importing something into a market, but I'm not releasing it in that market yet or for whatever. So I can bring it in and it stays insured. It stays all in one place, but it isn't released to that market yet. Similarly, on the export side, I could put it in that warehouse and it's insured. It's all kept there financially, but it's not sitting on my books. And the reason that that's important to the tariff conversation is because if something goes from a container to a bonded warehouse, I don't have to pay the tariff on it yet until I take it out of the warehouse.
35:21Correct, because it's not in my market. It hasn't come into the US yet. It's staying on the other side. Yeah, exactly. So I imagine it's a great time to be in the bonded warehouse business. Probably, yes. You know, you had mentioned a little bit about exposure and really from a components piece. And this is something I've heard from a lot of brands in the last couple of months talking through tariffs, where even if you have a really, you know, strong U.S. supply chain for the bulk of your product, there might be packaging, bottles, or, you know, other components that come from overseas. So with what you're looking at, what are you sort of getting from overseas that you've had to change your supply on?
36:01So I think I hinted on earlier on this conversation that a year and a half ago, we took a decision to nearshore a lot of our production. So prior to this role, I was actually at a different company. I was in a company called Reckitt, where we managed brands like Lysol, Mucinex, Airwix, so big CPG brands. And I had the pleasure of being part of that supply chain during COVID. And so Lysol during COVID was a lot of fun. A lot of fun. That's great framing. I love it. Yeah. Yeah. That was a huge learning. And you really felt like you were making a difference. But one of the things that I came out of that, out of COVID, was the importance of making my supply chain smaller, which isn't intuitive.
36:44Like, that's kind of the opposite we've been working towards in supply chain and global supply chains prior to COVID, right? It was low cost, center of excellence is like really like the world is all available to you. Now, during COVID, what I found was it was becoming very complex. It was becoming very difficult. Your capacity was tight. My reaction time, my agility was very, very low. And so I said, as I came out of it on a personal, I said, man, I would much prefer to work with a smaller supply chain, a tighter supply chain. One, I'm closer to the consumer. I'm closer to the customer, which gives me more agility.
37:25So just even from a lead time perspective, right? If I'm sourcing something that's in my backyard and I can get it in a couple of days versus sourcing something, let's say from Asia, which has to sit on a boat for four weeks, right? So demand spikes. My agility is much faster if I'm nearshored, right? If I'm closer to the consumer. And so that was one. And then the second piece for me was around complexity. it's a lot easier to just plant a truck to move it from from my supplier to my warehouse it's a lot more difficult to plant it to move it from a warehouse or a factory in china for example all the way to my factory in the u.s right the amount of touches it's got to get on a truck from the factory to the port from the port it's got to get on to a different place to get on the container blah blah right so so many steps so much more involvement there and so much more cost there and then i saw the tariffs too right and i was looking at the this is the old tariffs right this was the 2016 tariffs, they were already adding a lot of money, right?
38:20And I was starting to question to say, can I nearshore my supply chain with three primary objectives? One, reduce complexity, two, improve agility, and three, improve cost. So we did that, right? And so a year and a half ago, we took that decision and we nearshored a lot of our components. Now, not everything though, So there's still a part of my portfolio which is coming from Asia. Now, historically, components which require more assembly, more touches, things like a trigger, if you think about a pump trigger or a pump, where you've got components within components, they're assemblies. Those have historically been much more cost-effective to come from Asia.
39:01right and so that i'd still had a part of my supply chain coming from asia now what that's forcing me to do now is to look at it right because the cost equation is now changing and now what used to be more expensive near short is now either favorable or comparable to buying it from asia which then helps me with priority one and two of complexity and agility that's a really great explanation and and i'm happy to sort of have that backstory too of what you sort of thought about as you incorporated the lessons learned from COVID, right? Because none of this is like happening in a vacuum, right? And we're all sort of building based on lessons we've learned before.
39:39And I think that's really important when we're talking about how to efficiently run businesses. You mentioned triggers and pumps too, and this sort of idea of components being harder to find in the US. Do you have a sense if this tariff conversation is going to sort of jumpstart a bit of more activity in component manufacturing in the U.S.? Are you seeing a little bit more of that? I think it will absolutely. I think in general, right, it's going to bring the question around manufacturing in the U.S., right? It's going to drive that. And I think that's a lot of the objectives around what tariffs are, right?
40:12And it's not that you can't find pumps and triggers in the U.S. It's just from a cost equation, especially in certain volumes, where the U.S. has historically been better is when you get to very high volume manufacturing, right? Because then you can throw a lot of automation onto that manufacturing. And so now the labor equation isn't there anymore, right? That's really the biggest difference, right? Labor in Asia versus labor in the US. So you can find those components in the US. If you're buying at very high volumes, it becomes smarter. It becomes more feasible, palatable to source from the US.
40:47At the volumes that we're buying from my brands, we're not hitting those minimum order quantities, right? Which is why China or Asia become more feasible for us. But I absolutely think it's going to start to force that, like demand will shift here. And it's a question of what these suppliers do. Do they figure out a way how to run lower volumes more cost effectively, which will then drive even more business towards the U.S.? Or what's going to happen there? Staying on suppliers for a second, because I think this is something that maybe the general public doesn't necessarily understand as much.
41:22And I'm just still learning a lot about the more I talk to brands about their supply chain. And that's that it is way harder than you think to find a new supplier. It is not simply, oh, I've been doing this in China. I don't want to anymore from tariffs. Let me see what's happening in Vietnam or Cambodia. It's not necessarily that simple, right? I mean, what are some of the factors that companies look at or some of the top priorities or things that you keep in mind if you are trying to, you know, find a new supplier? Oh, yeah, that's a great question. And there's a lot that goes into supplier selection.
41:53That's why I remember when I was saying kind of what I'm responsible for, I started with procurement, right? And sourcing. It's such a critical because you get that wrong. The rest of your supply chain is going to suffer, right? Because if you don't have the right supply base, then your customer service team is constantly explained to customers why you're out of stock and why you don't have products or you have issues with the products, right? Your planning team is constantly fighting for supply, right? So it just, it ripples through the supply chain. The basis for me, right, when I come to supplier selection, right, or supplier valuation is I think about it as quality service cost.
42:25So you have to, above everything, you have to have quality. If you're not making quality product, no thank you, right? Second, service. If you're not able to, and for me, service means are you able to service? So, okay, now we've got business. Are you able to service my business? Meaning I place POs with you. Are you able to fulfill those POs on time in full? Because if you're not, it's going to disrupt my supply chain, right? And then, of course, cost. You have to be cost competitive. And so it's not just about your opening price, but it's your ability to also manage costs throughout time, right?
42:56Are you able to then constantly improve your costs, right? So that we can continue to fund the P &L and to drive more towards other parts of the sales and marketing, for example. That's one from a criteria basis, quality service cost. I think the other piece, the more intangible piece is the partnership piece. Because whether we like it or not, there are bigger suppliers and there are smaller suppliers. And equally, there are bigger customers and there are smaller customers. So use my two companies that I've just been a part of, right? The company I'm a part of now versus my old company at Rekit, right?
43:26Rekit is a much, much, much, much larger organization, right? They buy much more than we do. They're much bigger volume, much bigger spend. So if they're sitting across the table from a supplier versus me sitting across the table supplier now, it's a very different dynamic. They're going to treat them very differently than how they treat me. So, and that's what I talk about partnership is, yes, you have to think about quality service and costs, but you also have to think about the supplier that's right for your business. Do you want to be a big fish in a little pond or do you want to be a little fish in a big pond type of thing, right?
43:57So sometimes it's going to matter to me, right? I want to be able to pick up the phone sometimes and have direct access to senior management of my supplier. right, and be able to talk about things and be able to drive things and make sure I'm getting innovation first and make sure we're getting the service or the prioritization I need, right? But if I'm going to some massive supplier that's dealing with P &G and with Unilever and with Rep, I'm never going to have a voice with them. Now, if I'm buying some commodity that's very basic and maybe that's fine, I can just buy it from them. But if it's a more strategic type of purchase, I might want to think about a smaller supplier that I have a bigger voice with.
44:31Absolutely. I think that's really good insights for brands as they grow too, because are you building a relationship here that can grow with you? You know, is this someone who's going to roll with you if you say, hey, all of a sudden I'm going to do a target launch. Are we able to scale up? And what's that going to look like? Absolutely. You know, are they going to work with you on that? Are they willing to invest in their manufacturing lines to, you know, incorporate your new innovations? It's relationships, right? Like so much of business. And then that also falls to me in that service element, right?
45:01So like capacity. If you don't have the capacity, you're not going to be able to service my business. And what's your willingness to continue to invest, right? Because as we grow, are you going to invest in more capacity, right? So that all falls into those equations I was talking about. Yeah. Well, we've talked a lot about how tariff policy changes are affecting some of the more kind of behind the scenes, early stage product supply chain. But I'm really kind of curious to hear a little bit more about what's happening with the finished product once it's in the U.S. and how you're sort of relating that conversation right now.
45:33You have some great retail partners here in the U.S. and elsewhere. So how are you planning for inventory right now? You had mentioned just sort of different levers you can pull there. I'd love to hear what your thinking is. We're in a very unique situation. And I remember I was talking to our group CEO saying, we've got an opportunity here, right, for our brands because of decisions we've taken a year and a half ago, right, where the impact that we're going to feel is going to be less than a lot of our competitors. And I'm not just talking about cost impact, right? I'm also talking about disruption, right?
46:08We're going to be able to continuously supply product to customers and supply them effectively, right? And so to externally to customers, what we're saying is, hey, we're here, we're okay, we're very healthy, we can not only deliver on the commitments we've made and the plans we've made together, we can also go and fill other holes that maybe some of your other customers have created for you. Yeah, this is an opportunity to get some shelf space in some ways then. I look at it as it's an opportunity to partner with our customers, right, and to help them, right? It's not, I'm not, my perspective, I'm not looking to just robbed from somebody else, but it's how do you partner with your customers, right?
46:50Like, hey, if there's a need that you have, we could potentially help you fill those needs. Yeah. And customers in this context is the retail partners put in orders. Yeah. I think it's important too, to remember that there will be some companies that maybe really run into some difficulties, right? Where they can't make their core product anymore because of some of these prohibitive fallacies. Absolutely. And look, and I'm staying very much on the beauty industry, right? So much of the beauty industry has a supply chain from Asia. It's just, it's so much of it, whether it's full production happening in Asia or whether it's component supply chain coming from Asia, a lot of it comes from there, right?
47:32And companies are having to make choices. I mean, I've been on several calls where people have just stopped their supply. They can't afford it. So they're not bringing product into market and it's going to create voids and it's going to create gaps. And that's where I think we're uniquely positioned where we can fill those voids. I've got capacity. I've got inventory. I've got the supply chain set up. We are ready to go. Right. Well, something that we talked a little bit about, and I'm just kind of curious if you have any other sort of final thoughts on it, and that's how this moment of supply chain challenge and disruption is different than what we saw during those early days of COVID.
48:10You know, from your perspective, someone who walked that walk and lived through that roller coaster, you know, what are some of the different challenges now that folks in your shoes are encountering? Yeah, I think COVID was very different from a couple of standpoints. I think, first of all, if you remember the early days of COVID, do you remember those pictures of empty shelves? Oh, yeah. Right? So that's not happening today, right? We don't have empty shelves today, right? So I think, first of all, it was demand became infinite, right? And so as suppliers to those products, that was challenge number one.
48:44Now, all of a sudden, what I had wasn't enough. And they needed more and they needed more and they needed more. So one, we don't have that problem today. I think the second part was the global scale of it. Right? Every country, every market was being impacted by COVID. What we're talking about here is a very U.S.-centric type of issue. And it's kind of the inputs into the U.S. It's not like all the markets. And then number three, you had a health issue. People stopped going to work. People were scared to leave the house, right? And so, you know, factories that could run were now 60 % of the staff was coming in.
49:23And so they were having to make choices every day about what product to run. Truckers weren't going to work, right? And so product couldn't move in the country, right? So supply chain almost, it lowered and came to some sort of a standstill. Again, so that's very different from what we're seeing here. What we're seeing today is more around cost decisions, right? It's about how can I afford it? Can I not afford it? Can I mitigate it? What can I do? How do I manage from a cost perspective? Not the kind of impacts that we had during COVID. Mm-hmm, mm-hmm. That makes a lot of sense. Well, looking ahead a little bit, you know, what does the best case scenario look like, you know, three, four quarters ahead?
50:04What does the worst case scenario look like? As you start to think about some of these factors, what means things are going according to plan? Or what are some of the pitfalls that you're going to try to avoid? For me, what success looks like is we continue with our strategy to build agility in our supply chain. And one component of that is where we're nearshoring our production. So if we're able to continue to do that and continue to manage the cost on the P &L effectively, I think we come out winners from this. Because what that means is I have a supply chain that is less complex. It's just easier to manage.
50:44I'm working with vendors all in the same time zone. I mean, it might sound foolish, but it's a small thing like that. But not having to be on calls at midnight when you know your team or waking up at four in the morning, it matters. Right. So less complexity. Right. I would. So that's just easier, which then means I can have teams focus on what matters on real value added activities and not non-value added activities. Right. So that's what lower complexity means to me. Higher agility. Right. So agility to me is I can respond. Demand goes up. Demand goes down. I can maneuver and I can respond to that very quickly and not leave shelves empty.
51:19and then obviously from a cost, I come out with a healthy P &L. For me, being in supply chain, we're not a profit center. We're a cost. We're a cost. And it's very different when people look at you as a cost versus looking at you as a profit center. When you make money, people love you. When you spend money, it's not the same book. But you have to spend money to make money too. So it's a necessary cost, right? But what I want to come out of this is healthy cost, right? Because what I want is that we have a healthy P &L, which we can continue to take dollars and invest in marketing and continue to grow our brands.
51:57That's what success looks like for me. What are some of the biggest challenges or pitfalls? What would sort of the worst case scenarios start to look like? The biggest challenges, I think, is just closing the gaps on the remaining parts that we need to implement our strategy. I think that it's like, can we find the right partner? So I think that's number one. Number two, one thing I've learned in supply chain, I'm not saying change is bad, but change brings variability. And with variability, there is unknowns and there could be issues, right? So every time you start up new production, anytime you start up new supply, there's going to be issues, there's going to be unknowns.
52:34So that's the part that always makes me a little nervous, right? You know, if you've been making that bottle for 20 years versus I've been making that bottle for one week, guess what? I've got 20 years of know-how versus one week of know-how, right? So that's the kind of parts that as you make changes, there's a learning curve. And that's a big watch out for me, right? Because we're also going to try to change a lot very quickly, right? Because time, I don't have a lot of time to do this. Right. And so doing a lot in a short amount of time, I'm asking for a lot to happen correctly. Right. So that's a watch out for me.
53:07I don't see a doom and gloom for us. And I hope I'm not saying that incorrectly, but I don't see a doom and gloom for us because because of the actions we've already taken and how we're positioned, you know, this could be very different. Like if I was a company that was sourcing everything from Asia, like let's say, you know, think about like appliances. You know, moving appliances to produce in the U.S., that's not going to happen overnight. The amount of investment, the amount of time, the amount of know-how that needs to be built, it's going to take years, right? Versus, you know, how we're set up, right?
53:39So I don't see a doom and gloom. I think it's very clear where we need to go. It's just about not tripping too much along the way as we get to the finish line. Great. Well, those are some excellent insights to close out on. But anything I didn't ask, anything else that, you know, is on your mind as you start to navigate this time? I get a lot of questions about, you know, what are you seeing for holiday? What are you seeing for, you know, these critical, like, you know, we've got, you know, the back end of the year, such a big spend promotional time. I think it's going to be very different, right?
54:12I was even talking to my wife about it, right? I just, I think it's going to be very, I don't think it's going to be a question of there isn't going to be options and products available. I think there will be product on shelves. I just think the mix of it will be very different. And maybe the timing of when it will all be available and when it will all be there is going to be a little bit different. And I think the demand and the sentiment of the shopper is going to be so different. I think we're going to see, even last year, we saw some of that really kind of like pull ahead and people buying Christmas gifts that they might've spotted in October.
54:45I think that's going to happen again because people are going to be, you know, just metering out their budget differently. I think there's that. I think, you know, what we've seen for the last couple of years is that empty shelf scare, right? I mean, remember, like, you couldn't buy bikes, and you couldn't buy this, and you couldn't buy that, right? And so everyone's like, I'm just gonna buy it early while I know it's there, right? And so, yeah, I think that whole behavior is going to change. But I think it's going to change. Yes, there's the consumer side, but I think there's gonna be the product availability side, like when will products be available?
55:13Right, right. Well, this has been an excellent conversation. Thank you so much for coming by the Modern Retail Podcast. And I look forward to continuing to chat through these issues and having you explain things like bonded warehouses to me. Absolutely. Thanks for your time.
55:34Thank you for listening to this episode of the Modern Retail Podcast, a show by Digiday Media. If you haven't already, please subscribe and head to Apple Podcasts to leave us a review and a rating. If you want more from Modern Retail, you can find us at modernretail.co. You can find me, senior reporter Melissa Daniels, on LinkedIn and Blue Sky. And you can also subscribe to our LinkedIn newsletter at the Modern Retail profile. We'll see you next week.
From the publisher
This week's podcast kicks off with senior reporters Gabriela Barkho and Melissa Daniels discussing Klarna's latest earnings, which showed that a growing number of the BNPL service's users defaulting on their loans.
In other news, Dockers and The Vitamin Shoppe were both acquired by respective companies. Levi Strauss announced the sale of khakis maker Dockers to Authentic Brands Group for $311 million. The Vitamin Shoppe was bought out by Kingswood Capital Management and Performance Investment Partners for an undisclosed amount. Both sales are examples of struggling retailers trying to find their footing with modern customers.
Later in the episode (22:18), Daniels speaks with Liran Golan, the chief supply chain officer at Bansk Beauty that holds hair care brands Amika, Eva NYC and Ethique. They discuss how tariff policy changes can impact brands beyond the duties themselves, with a ripple effect on how brands make, manage and move their product.
