Solo Brands CEO John Merris on what it takes to be a successful DTC brand

0:03Hello, everyone, and welcome to the Modern Retail Podcast.

0:30It's something that I've been aware of for years now. I want to go into a lot because it's a really fascinating company. But one, just going from a single brand to being a portfolio company and then how that works. I know that Solo as a brand has been going beyond just DTC online to wholesale. I want to go into the nuts and bolts of all of that. And then lastly, the other thing I'm really interested in is you guys are a public company, which you went public during a really hot time. And now it's a really interesting time to be a public company. I want to talk about all of that. But John, how are you doing?

1:00Doing great, Kel. I'm glad to be on the show with you today and super excited about all of these topics. It's going to be a lot of fun. Absolutely. So first, for those who don't know, can you just give a little bit of background about Solo? Because you began, from what I understand, maybe I'm wrong, you were just the stove and the idea was to just be the stove, right? Yeah, absolutely. So all of our brands now inside the portfolio obviously have their own founding stories, you know, as we've acquired other brands. But it all started with Solo Stove, which was founded in 2011 by two brothers in a garage.

1:34So this is a bootstrap business,$15 ,000, ultimately, primarily and exclusively direct-to-consumer, digital direct-to-consumer up until the late teens of the 2000s, where we started exploring some, you know, omni-channel retail distributor type partnerships. the business just kind of took on a life of its own. And 2016, we launched the Solos of Bonfire, which is our bond, our first fire pit, smokeless fire pit. And then I launched in 2019, two additional sizes in that fire pit. That fire pit line really exploded. Think like Yeti coolers, but for fire pits, it just, it just really took off. And in 2021, we started seeing opportunities to partner with other direct to consumer digitally native brands like Oru Kayak, Isle Paddleboards, Chubbies, you mentioned, and bring them into a platform where we were completely focused on putting smiles on people's faces, having them, you know, connect with friends and families, spend more time outdoors.

2:40We hit that pandemic era right before that. So there's this big renaissance happening in the outdoors. And we just figured out that we had this platform or family of brands that could really go out and drive those types of behaviors and lean into those types of behaviors at a time where people were really, you know, doing those things. Can you give a little background about yourself? What were you doing before solo? How did you end up joining? What's, what's the backstory there? Yeah. So I was, my background has been in a variety of different sales roles. Ultimately, I, um, I met the founders of, of solo stove on LinkedIn, uh, believe it or not.

3:16So that's where the founders of Solosto wanting to meet up. And ultimately, they were looking for somebody to come in and run the show at the business. So it was pretty small when I joined. I was the seventh employee. So it was a pretty small team. There were just a handful of us in the business. And then it took off from there. But it's been a pretty wild ride since 2018 when I joined. I think it was 2021 when you made the first acquisition. Is that correct? That's right. Yep. Was it a strategic pivot or was it an opportunity that then led to a business plan? Yeah, that is a good question. Probably a little bit of both.

3:57But I would say that it probably was more of a strategic opportunity that ended up leading into a business plan. I don't think with the first acquisition even, it was like, oh, let's go create solo brands. I think at first it was we were crushing it in direct to consumer and we were getting a lot of inbound calls from other direct to consumer businesses. And they were just wanting to pick our brain. Like, what are you guys doing? How are you doing this? How are you scaling the way that you are? And ultimately, that first one was just we think we could be better together. It was almost a one plus one equals three.

4:33And let's share best practices. We were generating a lot of cash as a business at the time. And so the opportunity, instead of giving free advice to maybe partner with the people we are giving the advice to and be beneficiaries of the growth was pretty appealing to us. And that's that's ultimately how it started. I think what we found is that there were more founder, entrepreneurs, CEOs of businesses that were interested in partnering with solo than what we originally maybe expected. And that's ultimately what then kind of created this momentum behind the creation of Solo Brands and ultimately our IPO in October of 21.

5:10Would you say that there is a playbook for your acquisitions? Or is it just if there's a company that works, you'll bring it in and they do their own thing and it works as a part of the overall machine? Do you understand what I'm saying? I feel like there are a lot of portfolio companies that their ideas rinse and repeat. and they find a company that has the right financials, the right this, and then they'll be able to scale it because they have those things in place. Is that how you're doing it or is it a different type of project? Yeah, there's some things that are very consistent across the platform for us.

5:43So for instance, we built a world-class in-sourced warehousing and fulfillment operation. So ultimately, if we acquire you, we are going to take on all your fulfillment. So you're not going to use a 3PL anymore to ship your products out. Um, that's a best practice for us. But when it comes to the brand itself, so product, think product development, think brand marketing, those things are best executed by great brands. And we don't buy fixer uppers. We're not buying brands that need our help. We're buying great brands that we just believe we can help grow faster and more profitably than they currently are.

6:21So just imagine if you're going to get there in 10 years, uh, we believe with solo brands, you're going to get there in five. And if you were going to operate at 10 % EBITDA margin, we believe with us, you're going to operate at 15 % EBITDA margin. So it's more about scale and speed and profitability and ultimately anything we can do to help that. But we're not going to get in the way of your product innovation. We're not going to get in the way of your brand marketing and execution because those are the things we believe made your brand great in the first place and made us attracted to you. Is it important that consumers know that these brands are owned by solo brands or do they need to fit within a certain type of category.

6:58With the exception of chubbies, which I can almost make, I can sort of understand how it is, but it would take a few connecting the dots. But the other ones, they sort of, they work in a general outdoorsy way. Is that the idea here? Or might you get something in, for example, skincare or wellness or something like that? It could be, but we're pretty concentrated around the idea of home. Home is where the heart is, but you can take, you know, when you think of home, it immediately kind of brings about these nostalgic, emotional feelings of a safe place. The reality is, especially, and we were just talking about this, like, you know, work and home and, you know, all these things kind of blend together, especially in a post-COVID world.

7:41And I think what we've recognized is that home is wherever you take it. You know, it can be outdoors. It can be indoors. It can be remote at a remote location. Shoot, home for some people during the workday is at a Starbucks, you know, or in a coffee shop somewhere, you know, where you're doing your work and getting your stuff done. And what we have built is a family of brands that try to make it feel like you're at home anywhere you go. And I think that that's the common thread. And so, you know, could we just kind of take and pluck out a random brand of some random product? If there was a tie there, potentially, but our focus is really around good moments and lasting memories, helping people put smiles on their faces with friends and family and people they love.

8:32And if we can do that well, whether it's around a fire on a paddleboard in a kayak or by wearing some really cool eccentric men's men's apparel, you know, polo polo shirts or five and a half inch and seam shorts, you know, then we'll do it. And so it's just really for us more about those good moments and lasting memories and this feeling of home than it is about anything else. Got it. Got it. Makes sense. You kind of mentioned this before, but I love talking with people in your position about this, specifically in the current economic state we're in. But when you are looking at potential acquisitions, what are the main rubrics?

9:09You mentioned EBITDA is a big one, which makes a lot of sense. But does sales velocity and customer acquisition matter anymore? Is it all just about profitability? Does every brand you acquire have to be profitable? Yeah, these are good questions. I think first and foremost is, you know, we have this really strong tie to the customer and we're just we're really passionate about the customer and our ability to deliver a good customer experience and to have a strong connection to our customers. So brands that haven't figured out how to create that aren't very interesting to us. We're not looking to buy a brand to teach them how to do that.

9:42We're looking for brands that are already doing that. but all that aside in terms of metrics, right. Overall financial metrics, we look for businesses that are majority direct to consumer. So, you know, half of their business or more is coming from, you know, online business versus, you know, in, in store or, you know, other, other means, other channels you know, in terms of growth and even the we, we do not buy businesses that aren't profitable. So, you know, we're looking for businesses that are profitable for sure. and that have a good growth rate. So they don't have to be growing 100 % a year every year, but we do need to see positive growth rate.

10:23We do need to see positive profitability and that strong connection to the customer. And again, this ability as a brand or as a product to connect with your customers and help them create good moments and lasting memories. So it's kind of a combination of all those things put together, but those are like the must haves. Like we can't really sacrifice on those four points. And then there's a lot of intangibles. You know, does it culturally fit with the business? Is there some tie into one of our existing brands? Like Terraflame is a great example you mentioned. But Terraflame, we for a long time at Solo Stuff have wanted to be able to bring the small bring s'mores indoors.

10:59That's kind of like been this internal tagline. We found Terraflame. They have this cool bio flame product that allows you to basically do s'mores. not basically to it allows you to do s'mores in your kitchen. You can, you know, burn it inside anytime you want summer, winter, whatever. And that was a big one for us huge synergies with the solo stove business. So if we can find those, those become kind of gravy or the cherry on top for us as we're looking at acquisitions. Can you actually go a little bit deeper into the Terraflame thing? Because I always think it's nice to have a little tick tock of how those work.

11:31Did they reach out to you? Was it you guys were joking around and said, we want to do s'mores indoors? Or is, oh, here's this company that does it and it just worked? It both makes sense but is kind of random at the same time? So this is going to almost feel like I'm a spokesperson for LinkedIn. But I actually did get a LinkedIn message. It's pretty sad to say. I think all good things have happened to me through LinkedIn. But anyway, I got a LinkedIn message from the CEO over there. And they were actually looking to basically manufacture a product, a concrete product. So what TerraFlame is really known for from a material standpoint is concrete and stone products.

12:15And they had this idea to build a cylindrical surround product, almost like a built-in fire pit, like you would see with stone in the backyard. But that you would intentionally drop your solo stove into so that the outsides of it wouldn't get hot. So you have kind of a heat barrier, but you still get that smokeless flame that you love out of the solo stove. So he actually reached out about them white labeling, manufacturing for us this surround product. And I was like, oh, what's your website? And he told me and I was like, do you guys have an indoor s'more product? It was like right on their homepage.

12:49He's like, yeah. And I'm like, dude, we should not be talking about this surround product. We should be talking about partnering and the rest is history. So it was a pretty cool way we met. Got it. Got it. Yeah, that is pretty funny. I know Solo as an entire company has been focusing a lot on wholesale, which makes a lot of sense because DTC is a difficult business. But you mentioned that all of the businesses that you focus on are predominantly digitally native. Can you just talk about how you're thinking about wholesale, how that fits into the overall structure for your brands? It's shifted, to be completely honest.

13:22I think a couple of years ago, you know, our focus was being as direct to consumer, digital direct to consumer as possible. And I mean, our ticker is DTC on the New York Stock Exchange. Right. So like we are all in on direct to consumer. but I think what's what shifted for us is this mindset or mind shift between digital direct-to-consumer and direct-to-consumer and recognizing that those are not the same thing I think when you hear direct-to-consumer unfortunately a lot of people have in the last five years equated DTC to e-commerce and those two things from our perspective even though the world generally still still believes that, we believe that direct-to-consumer is focused on the relationship.

14:12It is, are you building direct relationships with your customers? That is that direct nature, right? And it could be owned retail, but it can also be third-party retail. It can also be marketplace. It can also be through your own website. Digital direct-to-consumer is the online approach to that. Offline direct-to-consumer is obviously the offline version of that. But all direct-to-consumer is actually talking about is brand's ability to connect with its consumers. Today, as we think about it, we believe that balance is the key. And finding the right balance between your digital business and your offline business is extremely important, particularly because if you think about direct-to-consumer through the lens of relationship, you recognize that some people love shopping online.

15:01Some people love shopping in person. Most of us are some hybrid of that. There's some things that are like our go-to online. We don't mind going to marketplace or going to direct website and shopping. But then there's those certain things that no matter what, we tend to always go to the store for, whether it's certain clothing items you want to try on or a certain electronic that you want to touch and feel or whatever it might be. And in this world, we believe that you're just going to have to be as a brand where consumers need you to be. I think that what was the big unlock for us was last year, as we started exploring wholesale and third-party retail more rigorously, we found that because of where customer acquisition costs have gone online and because of the free shipping component that at least we have as part of our brands, that we were actually, even though gross margin is lower when we sell through retail, brick and mortar retail, our overall contribution margin was exactly the same or very close to the same as it was in our digital direct to consumer business.

16:06So it wasn't like it was more profitable necessarily for us to sell on our own website. It was just that we had a direct relationship with the customer. So we started exploring more ways to get creative with our retail partners to where we could build a direct relationship with our customers, even if they were shopping at Ace Hardware or shopping at Dick's Sporting Goods or even shopping at Costco? And how could we drive that consumer back to us after the fact and still have that relationship? So rather than deciding between are we going to be a digital direct-to-consumer business or being an omni-channel business or a retail-first business, our focus has been can we build strong relationships with the customer through any of these channels?

16:47And if we can, let's lean in. And ultimately, we've been doing that. And it's pretty apparent in the way that our business has shifted at IPO in October of 2021. We were 92 % digital direct-to-consumer, so online direct-to-consumer. Today, we're about 80 % online direct-to-consumer. So we've become more balanced. And we've indicated that there's a good chance this year we'll be 75 % digital online versus our offline business or our wholesale business. So again, as we think about that balance, we're finding that we're reaching consumers where they want us to be and where they're shopping. And ultimately, that's driving a better relationship with the customer.

17:28Few questions I want to follow up with. One, you're at 80 now. Do you have a target? Are you trying to go 50-50? How are you thinking about that? We haven't indicated. I think 75-25 is a comfortable place that we've indicated we're kind of moving towards. For the line of sight we have today, we believe that that's a healthy plays for our business. Again, remember, we were primarily exclusively online business up until the late teens. And so we have a really strong base there, obviously really good execution. And right now we're feeling really good about this kind of 75 % to 80 % digital direct to consumer.

18:05And you mentioned earlier, and I would love as many details as you can possibly give, You said DTC is a state of mind. It's about your connection to the customer and how you've been working with your wholesale partners to foster that so that they have a connection to the brand and maybe go to the website. How does that manifest? What are you doing with Dick's Sporting Goods such that it's not that they're buying POs, you're shipping them product, and that's the end of that? Yeah. Every relationship looks a little bit different, but the main focus has been around intentionality with SKUMIX. You know, the thing about brick and mortar is there's only there's a limited amount of physical space.

18:41Online is different, right? You can list unlimited SKUs. And for the most part, it doesn't cost you anything from at least a merchandising standpoint. But for Dick's Sporting Goods, they have to be selective with the products that they put in store. They have to know that those products are going to move, that they can make the margin. They're looking at four wall, you know, square footage, dollar per square foot, all those types of things. And so our focus has been around being really intentional and selective with SKUs by retailer, depending on what their needs are, making sure that they have the SKUs that are going to move this off the shelf in their stores and that they're going to make the margin that they're looking to make on those products.

19:17But recognizing that there are additional column accessories or ancillary products that consumers would benefit by in shopping. And so it might look like just in a practical sense, an insert inside of the box that gives a coupon to a customer to come back to our website to add the accessory that they didn't pick up when they shopped at Dick's Sporting Goods that day. So there's little things like that that we're doing to drive that customer back to us and having them engage with the brand directly so that now we've built that direct relationship in addition to, obviously, the relationship with the retailer.

19:52And have you been able, like, what metrics have you gotten? Like, have you seen that there has been a lift in Dick's Sporting Goods, for example, or Ace Hardware, whoever, that buy from the store and then go to your website and do buy an accessory? Or sort of how do you make sure that those little things are working? Yeah, so I think two things have been helpful for us. So I'll talk briefly about Costco. It's been a relationship that we've leaned into over the last year with SoloStove. You know, one of the things that was really interesting to me is a statistic that they shared with me. And again, I don't know if this is just in a specific category, if this was just one specific brand that they were working with or if this is holistically.

20:31So I want to be careful that I'm not overstating. But they threw out a number that I believe it was it was like roughly 70 or 80 percent of people that shop at Costco that are when a new brand is introduced at Costco are new visibility for that brand. It's a big number. It was it was well over half. And I think that was the first one that was really interesting to us. Because again, when we think about online, it's like, oh, you can reach anyone online. But the reality is, is not everyone is online and you aren't reaching everyone when you're online. And Costco does a really good job at driving traffic to their clubs and ultimately their warehouses.

21:18And when they're in there, you're getting new eyeballs. So I think that that was number one. we did a small test at solo stove and roughly 10 % of the customers that we were driving purchases with in Costco's were coming back to our site and buying an accessory. So it was bigger than we initially thought. You know, I think, I think initially, especially right out of the gate, we're brand new at this. We were kind of like, you know, if we hit a percent, you know, that'll be, that'll be awesome to be able to see, you know, 10 % plus of customers coming back to our site and buying an accessory or interacting with us on our site, who had initially made their purchase at Costco was a good number for us and one that we want to use as kind of a benchmark to grow from.

22:01Got it. Got it. Makes sense. I know that you guys have been testing the waters internationally. Has that been just DTC? Has that been with retailers? How has that been going? Yeah. So we've had distributors internationally for years, probably five or six years. We've had international distributors coming to us and wanting to carry our products. And we have leaned into some of those. When we launched international in an intentional way about a year and a half ago in Europe and Canada, it was in a localized direct to consumer fashion. So in other words, standing up localized sites with translated pages, the whole nine yards.

22:35So if you're in Germany, you can shop solo stove in German. And we actually opened up a warehousing and fulfillment operation in Rotterdam in the Netherlands. So you can now receive the same kind of two days shipping anywhere in Europe, free shipping, just like you do in the U.S. Similar. So the whole plan was to have it feel no different than it did here domestically in the U.S. and Canada and Europe. We since also launched Australia. And so in those markets, you're actually able to shop as a local and have delivery to your house almost in a localized fashion like you would be used to if you lived in Kansas and went online and shopped our products and had them delivered to you in a couple of days.

23:15How have you approached marketing and customer acquisition with those international, like if you're focusing on a DTC presence, people respond differently. There are different laws specifically with, with how to market. How do you, how do you go about that? And has it worked? Has it, have you been able to port us to Germany in a, in a like fashion or not? Yeah, I'd say in a like fashion, it's not the same. We, we learned a lot. We probably fell on our face, um, uh, Plenty of times in the process. Today, we have a VP of Europe and specifically for the European markets, a little bit different. Canada is much more like, you know, the U.S.

23:49But in Europe, we actually ended up hiring a VP of Europe who lives there. He lives in Germany. He understands the EU much better than we do. Spicks six languages, you know, much more culturally. Yeah, it's super helpful. And so, again, with the localized presence from a fulfillment standpoint, plus our local leadership there, we have found that it is scalable and it's repeatable. It looks a little bit different, but in terms of overall margins, profitability, and things like that, we found that we did have the ability to execute that business and continue to do so in a very similar fashion to the US.

24:29Obviously, it's a smaller scale version of what we have in the US at this point. Let's switch gears a little bit because I want to talk about you being a public company. So 2021 is when you IPO, is that correct? That's right. Yep. What made you decide then to do it? Was it just that it was an advantageous time in the market? And then let's talk about today, because today's a pretty interesting time for a lot of companies. And so how are how are you weathering the current economic tumult? Yeah, you know, I think 2021, there's a lot of noise around that, you know, it was that I believe still, because 22 was was really quiet.

25:03It was the most retail IPOs ever in a given year happened in 2021 than like the history of the stock market. And so there was definitely, you know, something that was attractive in that regard. Valuations were really solid. So that was really, I mean, that's really what drove, you know, most of the timing. We just felt like we had gotten to a size and scale as a business. We did not do a SPAC. We did a standalone IPO. Um, I think SPACs had also become quite popular in 21 and, um, we, we were able to just go public on our own. I can't remember exactly our size, but I believe that we finished, we finished 2021 at like just over 400 million of revenue or something like that.

25:52Um, maybe, maybe a little bit more than that. And then, uh, and then we finished 2022 at like, you know, 500, 500 and change. Um, and so we were just on a tear growth was really solid. We were very profitable. We generated free cashflow. Um, and so even as we looked out at the retail IPOs that year, there was a pretty mixed bag, but there were quite a few brands that probably had no business going public. And we felt like there was going to be an opportunity to stand out there too. Like our business was pretty sound. It still is. And I think that you see that now in this environment, you know, there are very few businesses, especially that would consider themselves direct to consumer businesses that are still growing and doing so profitably.