Subscriptions Are a Tool, Not a Model

Phillip: [00:00:02] Hello and welcome to Future Commerce, the podcast about cutting edge and next generation commerce. I'm Phillip.

Brian: [00:00:07] And I'm Brian.

Phillip: [00:00:10] And wow. I've never had a guest on the show as fun as Mike Lachman of Trade Coffee and...

Brian: [00:00:16] So sharp. He's so sharp.

Phillip: [00:00:18] Not only... I mean, if this whole CEO thing doesn't work out for him, I think he has a future in public office.

Brian: [00:00:26] Oh. Yeah.

Phillip: [00:00:26] He's a very sharp guy, and I'm excited that he came on the show. I'm actually really impressed because they are reaching some sort of like cultural zeitgeist significance right now. I was watching a YouTube series from Corridor Crew who have some viral videos recently. You know, the Boston Dynamics robots? They spoofed that of like one that turns on its makers.

Brian: [00:00:53] Yeah. Yeah. {laughter}

Phillip: [00:00:54] So they have this series that they do called VFX Artists React to Bad VFX. And it was sponsored by Trade Coffee this last week. And there was like a whole thing where they reviewed coffees, and they had a coupon code. Anyway, we have...

Brian: [00:01:10] That is a phenomenal customer acquisition move right there.

Phillip: [00:01:15] It really is actually. It is. And so somehow we're now part of the cultural significance that is Trade Coffee. We're going to interview Mike Lackman here in just a few minutes and stick around... Go check out our show notes actually on FutureCommerce.fm when the episode goes live because we should have a coupon code.

Brian: [00:01:35] Yes.

Phillip: [00:01:36] To get some trade coffee. We get nothing out of it other than to participate in something that I think is pretty cool, which is you discovering fun and interesting, exciting micro roasters and independent roasters and growers. So I'm a big fan of the Trade Coffee mission. Can't wait to hear more from him. In the meantime, you had a really good Insider's essay that you wrote this past week.

Brian: [00:02:02] Yeah, this past week was on the overkill economy.

Phillip: [00:02:04] What is that all about?

Brian: [00:02:06] Yeah, it is the idea that we're all overbuying, and we're being oversold to. Marketers have to keep up with other marketers. Product development teams have to keep up with other product development teams. And so there's a whole set of box checking features that are required these days or quote/unquote required to keep up with the competition and stay in front of them. And oh, if you don't include that feature, you might not get included in filtered results on the Web. And so you might miss out on a potential purchaser. And so we've just got this escalation happening right now in our economy and our product purchasing to the point where people are buying high end stoves...restaurant grade stoves...

Phillip: [00:02:54] Yeah. These massive ranges.

Brian: [00:02:56] Yeah. Massive ranges with these beautiful tops and finishes, and they're heating up a pot of soup on them. It's like canned soup. It's like mac and cheese.

Phillip: [00:03:07] Yeah. I've got ninety nine burners and a pot of soup's on one.

Brian: [00:03:12] {laughter} Exactly.

Phillip: [00:03:14] Yeah. So the overkill economy... And I love the sort of diversity of the essays that we have and some of the content we're creating in written form over on our newsletter. So if you're not subscribed, go subscribe right now. You can get it at FutureCommerce.fm. And any last thoughts before we get into our interview with...

Brian: [00:03:33] Oh, you're missing out on the most important news of the day.

Phillip: [00:03:36] What?

Brian: [00:03:37] We just changed over...

Phillip: [00:03:40] Oh, yeah.

Brian: [00:03:41] Our social accounts. So, yes, everyone pay attention. We're no longer @CommerceFuture on Twitter and on Instagram. We are now @FutureCommerce on both platforms.

Phillip: [00:03:53] Hey, we're growing up. We're in the big time. Actually, I wish I had mentioned this at the beginning of the show because I feel like we've not done her justice. We have an industry veteran and very smart person at the end of the show for our segment about current and recent events. Hitha Herzog, who is the author of "Black Market Billions." She's actually going to join us at the end of the show. And so if our social handle's being Future Commerce now isn't enough credibility for you, we have a real life journalist and Fox News, Fox Business commentator and contributor who is a retail analyst who has so much credibility that she deserves to be on a better show than Future Commerce. {laughter} She is on our podcast at the end of the show talking about the holiday buying season.

Brian: [00:04:41] And how much she hates Jerry Seinfeld. {laughter}

Phillip: [00:04:43] Exactly. And the Coty acquisition of Kylie Cosmetics. And so this could not be a more jam packed episode. Let's you know, without any further ado, let's get into our interview with Mike Lackmann, who is the CEO of Trade Coffee.

Phillip: [00:05:15] Hello and welcome to Future Commerce, the podcast about cutting edge in next generation commerce. I'm Phillip.

Brian: [00:05:19] And I'm Brian. And today we are joined by another absolutely exciting guest, Mike Lackman, CEO at Trade Coffee. Welcome, Mike.

Mike: [00:05:29] Great to be here.

Phillip: [00:05:31] Glad to have you. And it's funny you keep coming up in the zeitgeist. I was at a, of all places, I was at a hipster songwriting round circle in Nashville.

Brian: [00:05:42] Of all places... That's where you live. Right?

Phillip: [00:05:45] That's... It's like my world. And I go to the songwriting retreat like once a year. And in the round, when we're sort of talking about ideas like "What are the things that are inspiring you right now?" And four people of ten, were talking about Trade Coffee and how like discovery and subscription have sort of changed the way that they think of the world. And I was like trying not to get on my retail soapbox, but I was like, "That guy's gonna be on my show." But for those who aren't as familiar as Nashville hipsters might be with Trade Coffee, could you give me a little bit of a download on what Trade Coffee Co is, and who you are, Mike?

Mike: [00:06:24] So Trade does two things really well. First, it connects consumers to the country's very best roasters of craft coffee in a way that's never been done before. And second, it helps roasters who run these outstanding small businesses to reach consumers all over the country with a model that utilizes e-commerce and also is creative, incremental, and profitable for the way that they're growing their businesses.

Phillip: [00:06:50] That's awesome. And so when you say it introduces folks, are you saying that there's sort of a secret sauce or some sort of like a curation or some sort of a concierge service that is matching people up to their individual tastes or psychographics? Give us a little bit of an insight into how you determine the sort of discovery part of what makes Trade Coffee work?

Mike: [00:07:17] That's exactly right. You know, when this business started, we saw a world that was demanding very granular specificity out of the way people put things in their bodies. And that was true in foods. It was true in craft beer and craft spirits and wine. And then coffee was still this commodity outside of the places where you're going to espressos and having professionals make things on big fancy machines. And so what we started with was understanding who are the best makers of coffee in the country, what do consumers want out of coffee, and how can we close that gap? And what we found was that consumers are completely lacking in the basic vocabulary to be able to decide, "Here's the way I want my coffee to taste." When we ask consumers to articulate that they use three words dark, strong and robust. Dark just means that there's no milk in it. Strong means it's not decaf. And robust is literally meaningless. And so when you ask people... Like Walmart will tell you that coffee sells twice as well when it says Arabica. No one knows what Arabica means. It's actually a different family of varietals. So basically there's a lot of opportunity there, if we can make people more discerning and in control of their choices, that they're going to be in a position to demand specific things, and that we're going to be able to curate this on behalf of roasters who are trying to go to market with these consumers.

Brian: [00:08:37] Wow.

Mike: [00:08:37] What we didn't realize that's really interesting is that all the CPG pros who kind of looked at our business early on said, "OK, this is going to be a tasting journey. You're going to find your one perfect coffee, and then put it on repeat." And more than 95% of our consumers have expressed appetite for continual discovery of new coffees rather than the ability to repeat a single SKU. That's really the key to this business, which is it's a lot more like Spotify than it is like Chewy.com or something along those lines in that you want to be able to hit play and hear exactly what you want. But unless you're in some crazy study binge, you're not gonna listen to the same song 50 times in a row.

Brian: [00:09:17] That's really, really interesting. I think that's true for the millennial generation and maybe Gen Z, as well. Spotify has trained us to go find new things all the time. And so I like that analogy. How did you get involved in the business, Mike? You're the CEO. What pulled you in here?

Mike: [00:09:39] Yeah. When I saw the business, it was a small founding team that was working on this problem. I was really excited by it. I am sort of a failed Latin teacher by training. But when none of the ancient Greek companies were hiring, I sort of became an industrial engineer. And and, you know, the early, mid 2000s I was working on Pick Pack & Ship centers, and call centers, and inventory management mathematics and those things. And, you know, who would've thought that it actually became a useful skill? And so I spent, you know, 10 or 15 years working on these hard operational e-commerce problems. And this business really needed somebody who understood both the digital marketing side of the business, but also, you know, when you're trying to sell one bag of coffee at a time and every nickel matters, somebody who understood the hard ops side of the business. And so I was excited at being able to tackle both of those challenges and really impressed by the problem that the team was trying to solve. But like many of our customers, I was also a super frequent drinker of coffee who knew nothing about it. And this sort of heuristic process of getting to know the team really had me sold that this is a huge problem that needs to be solved.

Brian: [00:10:45] That makes sense. Yeah. Yeah, back at Groceryshop when we first met, which was a fantastic show, by the way. I think I plugged it once or twice before, but I was really, really impressed with with Groceryshop and how well the Shoptalk vendors have applied their wisdom they've gained to the grocery industry. But we talked a little bit about marketplaces and how this was sort of a marketplace play also. And the role of a niche marketplace right now... You talked about a little bit about the history of marketplaces and where the founders from Trade came from. Maybe tell us a little bit about the history of the company, as well.

Mike: [00:11:35] Yeah. I mean, I think it's a little bit of a fraught term, in my opinion, in that I think that the lines between what makes a retailer and what makes a marketplace are getting pretty blurry. I mean, I think of ourselves as being a bit more like a retailer, although given that all of our product is manufactured on demand. There's actually no brown inventory in our supply chain whatsoever. Everything is made on demand and shipped to the consumer. There are certainly some dropship marketplace-like dynamics. But when I start thinking about marketplaces, the first question I ask is like, "Does N number of suppliers or gross amount of supply directly spin the flywheel?" And like with something like Uber, it's a perfect example of where that is the case. And one provider can only provide one ride at one time or maybe two or three individuals with a pool product. For us, when one of our roasters starts making one of the coffees that we've QCed, that we have metadata on, that we know exactly how to match to consumer preferences based on what consumers have told us about themselves, they can add another 20, 50, 100, 150 pounds to those same runs in a way that's relatively scalable. And so in that regard, we're actually a lot more like a retailer. And so I think which one it is almost doesn't matter until you get into like GAAP accounting or something.

Brian: [00:12:50] Sure.

Mike: [00:12:50] But I think by and large, we see ourselves as sort of treading the middle. And what's interesting about it is that the smartest thing I've seen that we've drawn from his is something that came out not so long ago from _____ where they talk about network effects and marketplaces. My whole team really locked onto this when we read it. It was about having differentiated inventory, which with non-commodity coffee differentiated inventories is critical, with reasonable substitutability. So these are craft businesses. If someone's head roaster didn't show up for work that day, there's a dozen other folks making a comparable product that we can substitute in to maintain their service level with the customer. But that is really unlocked by curation and matching. So there're three components. You know, it was it's differentiated inventory, reasonable substitutability, unlocked by curation and matching. But when we think about the academics of it outside of those three things that's really what we lock onto as the key for us being successful when we kind of... I guess to use like product jargon, like go back to first principles and decide what thing we're going to build next. That's kind of a north star for us.

Phillip: [00:13:59] If you're thinking about that, you're probably thinking about the customer experience or the customer journey. My sense is, and I don't know if this is true, maybe you can correct me... The coffee drinker who's making coffee at home likely is a grocery shopper or acquires their coffee from some sort of brick and mortar place where they're doing other shopping. They're probably not seeking it out directly. Could you give us a little bit of an overview of what it's like to try to convince that customer to buy online? How do you convince them that discovery and finding something new all the time is an evolutionary path for them as a coffee drinker? Maybe you could tie that into your own story of learning more about the product.

Mike: [00:14:52] Yeah. I think you're hitting the nail on the head, which is if we're going to make this industry bigger... And our mission is to turn coffee drinkers into coffee lovers, not to be the coolest hip store for people who already know a lot about hip coffee. Right? There're already a lot of those places. I think if we're going to achieve our mission, then we've got to be able to win the trust of the consumer. In our first year or so our experience on the site is very much geared around establishing credibility and our ability to match effectively, de-risking that by offering people that guarantee the different match is not perfect that we will send them another bag on the house to make that match perfect. And then being able to show with some pretty specific granularity the way we interpreted the answers to the questions that we ask in order to be able to make a credible recommendation. To be a little bit used car salesmany.. Like, that's cake. And that's like the base of it. And then icing is the story of the roasters, and the art on the bag, and all the testimonials, and all the things that come along with it. And I think it is sort of a combination of cake and icing that sell the product. In particular, when you have a product like craft coffee where, you know, it feels a lot like flipping through album covers or like being in a great bar with lots of beer taps where just the art and all the aesthetics of these different creators is part of what sells it. I think what consumers are deprived of is the ability to... They can already go to a Whole Foods and pick from dozens of products that look really cool. But it's like flipping through album covers and having no idea what the music's gonna sound like. It can look really neat. It's just are you going to like it? And being able to solve that core fundamental taste problem is something that we feel no one's doing well enough and that we work extremely hard at solving for the consumer. We know when we don't succeed, and we have learned a lot from that. But when we're able to do it super well, we create really durable lifetime value.

Brian: [00:16:47] Well, when I think about sort of, you know, you come to the drinktrade.com and one of the most important biggest call outs... That's like your first two call outs on the site are "Get matched." Right? And one of the big trends that we called out at the beginning of this year as the key to 2019 that I think you've just absolutely nailed is this idea of guided selling, and education, and getting to know your customer, and introducing what would maybe traditionally have been considered friction into the purchasing process to make sure that you're providing your customers with a good fit for them and a product they're actually going to love as opposed to just making a sale. How do you see your relationship with your customer going forward? Is customer relationship the most in part of your business? And how does the rest of your business sort of revolve around that if that's the case?

Mike: [00:17:51] Yeah, I think, frankly, we could even add a bit more friction than we do. I think if you look at the site today, we're learning about the places where we know we could benefit from additional customer information if we ask questions a bit more dynamically. And so those are some places where, you know, this business was a bit like that scene in "Independence Day" when they show up, and all the little lights start turning on to the machine and they can finally start using it. Like we started hitting data sufficiency about 6-10 months ago, somewhere in that range. And all of a sudden all these insights start to become much more actionable really quickly. So we've just been working really hard to catch up to that. I think we've found some places where we'd like to even add a bit more friction to make sure each relationship we do create is as valuable as possible. But from there, I think it is one of these cases where if you're not really putting your merchant hat on and figuring out how you can partner with great, in our case, craft roasters to make each one of those experiences actionable, then you really lose control of that pretty quickly. The algorithm is not particularly complex. I think we're an example... I heard a joke that everybody a couple of times, but that big data is a lot like teenage sex... Like everyone's talking about it. Not too many people are actually doing it. The ones who are doing it aren't doing it that well, yet. We might be there. What I can we do really well is we test the hell out of our coffee. And so we ascribe real metadata to each product that we sell in a way that passes a pretty scrupulous test for us, and it gives us the ability to make credible recommendations. So it's not that there's some sort of quantum math happening in the background. It's more that we just spent a lot of energy figuring out exactly what questions we have to ask about a coffee when we taste it so that the questions we ask customers are relevant when we try to make a recommendation. And that's part of where you hear me talking about us being more of a retailer. That is our merchandising expertise as a unique differentiator as opposed anything else.

Phillip: [00:19:51] Do you think that it is sort of demeaning to then characterize you... You said Spotify. Spotify is sort of algorithmically generated and very sort of automated. And you kind of can slip a little bit of serendipity in there from time to time without frustrating someone. But, you know, it's up to them to sort of tell you what they like and what they don't like and it kind of works itself over time. I think maybe you're a little more of a Stitch Fix in that there's like human intervention involved in trying to pair up the personas. Does that sound... Is that like mischaracterizing you in your mind?

Mike: [00:20:30] You know, I'm not quite as negative on Spotify as that. I mean, I think there is that challenge of like, you know, 10 million people all think they're the only one listening to Sturgill Simpson. {laughter} And so they have this sort of perceived authenticity thing that comes out of it. But no, but that aside, from a supply chain perspective, it's important that we don't become too 80/20 just because they are craft producers, and we don't want to outstrip anyone's capacity. But I think both have interesting merits. What Spotify does really well, and I actually think about them as an analog a lot for us, is that they sort of let you go as deep as you want to go. I heard someone talking about some of these consumer experiences being like the beach where like everyone can just like either hang out in the sand or tip toe into the water. There's one guy out there with scuba gear on. You can sort of choose how deep you want to go with it based on what you want out of the tool. And for the people who really want to get a lot more out of Spotify, like you can go into the integration with Rap Genius, and you can start to understand the biographies that are written in ways that I actually find very entertaining. You can go six levels deep, buy concert tickets, or you can just hit play and count on the music being good. And I think we do have customers of each stripe in our base. And so it's important for us to remember that. And definitely as a small team, when you're thinking about what product to build, you really have to decide which user and which behaviors you want to build products for. And so to that degree, I think it is very, very similar to Spotify in that regard. To your point about Stitch Fix, I mean, we don't have nearly the investment that I think that they've made famous to date in terms of, you know, we don't have like shifts of data scientists high fiving each other in and out of the office. But I think we do add a lot of human intervention. But it's much more on just making sure, because there's so little syntax out there for classifying coffee in ways that allow you to make relevant decisions. There's even like I signed a measure called Agtron, which is a microwave means of measuring darkness of the way it's roasted. And that still tells you relatively little about the way it actually tastes. The hardest thing we've done really has been coming up with a proprietary system for describing metadata to each particular product, and from there being able to relate that to the personalization experiences we have on site.

Brian: [00:22:56] I think this is really interesting, so to just kind of sum up the actual process...

Mike: [00:23:03] Yeah.

Brian: [00:23:04] You have a relatively simple set of potential matches, right? Like the profile... It's not like you have a million profiles out there. You have a simple set of profiles, and you're really focused on finding product that those profiles are going to love. So like you spend more time focused on product curation than you do on data science.

Mike: [00:23:32] Uh... And I apologize for dancing around with you here. But I mean, that's not necessarily true.

Brian: [00:23:39] Ok.

Mike: [00:23:39] With six questions and the number of responses that we have on each question, 450 different coffees, each of which fit into 14 mutually exclusive taste types, consumers are usually a good fit for one of two to three taste types. And then the thing we're learning the most about actually is how much variation you want within your center.

Brian: [00:23:58] Ah ha. That's neat.

Mike: [00:23:58] So like the first mistakes we made were when we had a strictly proximity driven algorithm. We just tried to pepper the bull's eye. Okay, great. I know what Brian wants. I'm going to nail it right where he is. And our best customers will come back to us quickly and be like, "How come I got three coffees in a row Burundi?" Our data scientist is sitting there like, dude, we figured this one out. We got him exactly what he wants. And what exactly what he wants is actually to cover as much ground as possible within a tight enough circle.

Brian: [00:24:26] Got it.

Mike: [00:24:26] And so that becomes an element not just of where they start with their experience, but then what feedback we get either through them thumbs upping or thumbs downing a coffee, or just what people like them do when they cancel coffee or continue their subscriptions. So I think putting all those together, there're actually rather many profiles that are out there. And what's cool about that is it gives us a chance to go back to the industry, show them the data for where supply and demand really lie, from our perspective, and empower roasters to make coffees that are a good fit for consumer needs, not just on flavor, but also on the price value spectrum.

Brian: [00:24:58] Interesting. It's kind of a little bit of a Glossier bit there where you're kind of collaborating with your customers simply based on the fact that they're providing you feedback. How much feedback do you get from your customers? Like how big of an open conversation is it?

Mike: [00:25:12] Again, it depends. I think there's a very, very vocal third to half of the base that will just tell us anything that pops into their head. And that happens through Twitter. It happens through surveys that look like most of the consumer brands you'll find out there. Although admittedly, one of the most important indicators is whether they keep buying. They vote with their wallets. Consumers have never worked as hard as they have to make a dollar. And so when they vote with their wallet, it's something we take super seriously. And one of the cool parts about this business is that, you know, with an average recurring frequency between 15 and 20 days, you can get extremely rapid feedback on a cohort by cohort and customer by customer basis compared to other quote/unquote high repeat businesses. I was in the pet food industry before this, and really rapid was six weeks. You know, here we're less than a third of that. And so you can get really rapid validation as to whether consumers are buying what you're selling.

Phillip: [00:26:12] Yeah, it is probably hard, too, to have a conversation with your dog to see if they're liking the flavors and the taste. It's not impossible. Just harder. {laughter}

Brian: [00:26:20] Cats will tell you.

Mike: [00:26:24] Cats will tell you. Yes. {laughter}

Phillip: [00:26:27] What do you think that the role of a consumable kind of plays into the subscription nature of the business? Like you have to build subscription first, right? And that's the key to what you're doing. And that sort of makes you interesting in the world of developing, you know, like you said, that gray area between marketplace and retail. So you're also, at the same time, while operating a subscription business, trying to grow your own brand as a reputable brand while elevating other brands, as well, or sitting alongside other brands that you might sell through. Or maybe you're actually creating brands for a small roasters themselves, maybe you could talk a little bit about that world of balancing your brand, and the growth of your brand, and the trust of your brand in the subscription space.

Mike: [00:27:18] There's two questions there. So first is the question about subscription, and then the next is sort of like how can you both be a service and a brand? And they're both pretty relevant to what we do. With subscriptions, I think subscriptions are a tool. They're not a model. And I think that when you look at the way we interpret our role in supporting subscriptions as a part of our business, the word we use all the time is nondiscretionary. We can never allow ourselves to become discretionary. So a good example of that is that like the word monthly, it's almost like the 13th floor of a building. It's this very spooky... We don't let it... Because coffee doesn't happen monthly. And so if you get random stuff in the mail once a month, I just don't think you have an enterprise. Or you could have a fine two friends and a garage running a Shopify site kind of a business, but you don't have a real business if it's just random stuff in the mail once a month. I feel very strongly about that. Consumers are just too hard working, and they're too discerning about where they spend their money. And so we want to get people coffee exactly when they need it. It should be two to three days old when they get it. It should be really perfect. And for the consumers, they get the best out of that on subscription. We use subscription products to do that at exactly the frequency they need. We also have about one in five of our consumers who buy on an ala carte basis, often assisted by SMS reorder immigration. That kind of stuff. And so I almost think about it like, you know, the metro card in New York City is actually one of the best subscription products out there. And it keeps topping up your card and you have it on demand exactly when you need it. And so that's more the lens through which you look at subscription, whereas like the ability to take someone's money once a month is not new. And I think that consumers are more discerning about that than they've ever been. On the brand side, I think it's interesting. It's really hard to both support your partner's brand and also explain what Trade is and have both of those kind of semantic units remain with the customer with high fidelity. But when we think about our job, and when we do it well, we think about trying to make sure that they understand our role as a matchmaker and the role of the craft coffee producer as doing what they're great at. And that's where you talked earlier about "Get matched" being so prominent. That role of matching, I think, does make it through the consumer in a way that is pretty loyal to what we're trying to do. At the same time, though, you have to recognize the limitations of that model. So a good example of that would be, you know, we can't use Instagram in the way a lot of brands do. We're the opposite of a picture says a thousand words. A picture of our box and a bag of coffee does not really explain what we do. And so we rely much more on narrative forms of advertising where an influencer on video or on audio can really explain the process of getting matched and create that sense of longing for similarly situated customers to be able to have a similar experience. Whereas I think a picture of an Away suitcase in an airport, or just seeing one of someone carrying an Away suitcase through an airport, does a very good job of explaining that. That's a case where a picture really does say a thousand words. And that's one of those places where if you think about product market channel model fit, like the guys at Reforge talk about, like if you look at it through that lens, recognizing what you are as a third party and then how you have to advertise given the constraints of the business model is something that we probably have learned the hard way a couple times along the way and that we are now very cognizant of.

Brian: [00:30:43] So as we think about cost of acquiring customers, you know, you've got a whole set of brands that are buying into Trade Coffee, and you've built out partnerships with them, and so to Phillip's point about brand building through Trade Coffee, for some of these newer or lesser known brands there's an opportunity for them to build brand awareness through Trade Coffee and potentially acquire customers through Trade Coffee. But you said something really interesting at the beginning of the show, which was that you're finding that your customers actually aren't sticking with a single coffee that, you know, everyone told you that's what would happen. But you're finding that they actually want a lot of variety. Are you finding... This is really interesting question right now, because I feel like whether you call yourself a marketplace or a retailer right now it doesn't really matter. I think there's a lot of brands out there that are that are finding niche marketplaces as a more cost effective way to acquire new customers.

Mike: [00:31:54] Right.

Brian: [00:31:54] But maybe this is not the category for that. Or maybe that's actually not a good strategy. Like maybe, you know, customers are actually more loyal to your brand and what you're doing. And that's why they're coming to you. Maybe they are not necessarily looking to find a brand and then go to that brand's site and go buy directly from them. What what are you seeing here?

Mike: [00:32:13] I just think you're never going to make consumers shop a certain channel. Right? And so I think if you're not upsetting things for a channel conflict perspective a little bit, you're probably not trying hard enough. I listened to the podcast you guys did with the CMO of our RX Bar, and I think grocery stores are really happy to have their product on the shelves. I think it's a really great way for our RX Bar to reach and introduce the product to customers. I think customers who want to buy by the case are really happy to buy it directly from our RX Bar. I don't think either side feels like they're getting mistreated in that relationship. Similarly with us, I think for the consumer who wants different stuff every time, we are a really, really good solution for them for that. And given how quickly we're growing and given how much trust is put in us as matchers our roasters do really well by us when they're able to sell into that market. Conversely, I've even had customers say, you know, I really just want to get coffee from this one roaster all the time. And I have no problem telling them to go buy it in the roaster's Shopify site because us as a third party with our model telling someone to set it and forget it and leave it on auto repeat, hoping they never come back to the site.... That's not our lane. That's not our core competency. And so I think there's a really healthy relationship between both of those things. I don't see that as an overly territorial exercise.

Brian: [00:33:33] I think it's a really wise approach. As we look ahead in marketplaces, I think this is really sage advice. I feel like, you know, a lot of the up and coming niche marketplaces could take a very different approach where they want to hold the customer at all costs. And I think that your approach is the right one, where the right channel for the right type of purchase is the way to go. So good advice for our listeners that are...

Mike: [00:34:02] Well I think it depends on the marketplace.

Brian: [00:34:03] Interesting.

Mike: [00:34:04] I think it just depends. I think if you're Dog Vacay, I don't think that you want to introduce people to a dog walker in their neighborhood and then have the person disintermediate you and just start taking cash. I think it's probably bad for the model. For us if the matching is the product, and they want something different next time, and we always nail it, then we're really pretty happy to be a vulnerable about here's what we can do, the limits of what we can do, and go ahead and make your own decision. And so I think it is really dependent on... And that's where I would say Dog Vacay is a really true marketplace where when you look at the retailers who are differentiating themselves, it's not entirely on exclusive product. One of our employees used to work at Rent the Runway. I don't think that they're a place where they only do well when they are the only place that garment has ever been sold. You know, it's quite the contrary. The ability to execute an experience for the way people dress themselves, the way they want to dress themselves, with all the great things that company done, that's what differentiates that business. And so in some ways, that's a really strong analog to what we're trying to do.

Phillip: [00:35:07] And I think, too, that the word marketplace is being thrown around a whole lot now by folks hoping to get some VC money. So it's like a business model in search of an investment strategy, in some regards, in that traditional retail businesses are being labeled as marketplaces just by sheer virtue of trying to find a means to scale in market by because they're... Let's just face it, it's really hard to acquire a customer right now. And, you know, that's just the fact of the matter. I'm wondering what's your take, Mike? Are you finding it difficult to... What's your approach to acquiring a customer, and do you find it more expensive now to acquire a customer than it was 18 months ago? And what does that journey look like for you and how are you sort of dealing with this rising CAC world that everybody else seems to be complaining about?

Mike: [00:36:07] I think we definitely go LTV first. It's not to say that we don't really pull our hair out over channel strategy and ad performance, but I think... It's funny, there was like a twenty five year period of daytrading outperforming value investing. And then all of a sudden, in e-commerce, that all got compressed into like six years.

Phillip: [00:36:28] Yeah.

Mike: [00:36:29] But there was this like really tight timeframe when you could really daytrade your way through it. And we're pretty conscious of the fact that slamming your head against the wall on bid strategy and creative iteration is not by itself going to make you a company. And so we work really hard at that stuff, but it's sort of necessary, but not sufficient. We think there's more leverage to be found on the LTV side than there is on the raw CAC side. And when we look at that, I think it's definitely a bold ambition on our part to say that across all the items in a grocery store, you're going to have a direct relationship with a vendor just for this one part of the basket. At the same time, it's a really integral part of people's lives. And so if we can understand what motivates people, understand their relationship with the coffee category and really solve their problems, every time we just take it back to that question, we find these opportunities to create greater value for consumers, recognize greater lifetime value, and it tends to rationalize what we're doing on the CAC side because it's faster than, "Is that next big ad going to make Facebook better by 25%?" or something like that. So I'd say LTV is the biggest solve is the short answer. But then from there, we're always exploring new channels. And definitely I think that what we're finding on the channel side, on the raw acquisition side, is that stuff that's a bit more durable with more predictable long tails and particular narrative forms of influence are specifically...YouTube's been a good channel for us...have these really long lives that when you stack those placements up against each other and you have a number of wins, they sort of just keep paying off over time. People get into the back catalog. People just remember the placement because it's a trusted source of information for them in a category they're passionate about. And also those things tend to index on some of these sort of behavioral determiners of what makes someone a good customer for us, that you can't sort of pull out of demographics.

Phillip: [00:38:29] Well, you've nailed at least one influencer category, which is songwriters in Nashville. {laughter} I can tell you.

Mike: [00:38:38] It was great to hear that. You know, I think a lot of people assume that most of our customers are in Brooklyn or something like that. And definitely we do great in Brooklyn. We do great in the Mission in San Francisco. But honestly, we sell into the middle of the country really, really well, as well. Coffee is a pretty universal product.

Brian: [00:38:53] Nashville is sort of the new Brooklyn anyway. So.

Phillip: [00:38:59] There's a whole thing... This is a total non-sequitur, and I apologize for it, but I've been trying to work it into conversation, and it's as close as I'll ever come. I just found out that, you know, there's Silicon Valley, which is you know, which is known... Apparently there's something called the Silicon Prairie, which is coming up in Kansas City. They're saying that, you know, that's a new tech hub with a lot of investments happening there. But when I had never heard of is in Chattanooga apparently there's a growing a tech community and they call it Silicontucky, which... I just wanted to say it. And I apologize.

Brian: [00:39:35] And Utah is what? Silicon Slopes, I think. Gosh.

Phillip: [00:39:40] Well, and I trust you if you have a lot of influence in those places. Like you said, Mike, in the preshow, that coffee is not just a drink. There's a medicinal component to it. That's part of the allure and part of the like acquisition is that for better or worse, it's a drug. Right? {laughter}

Mike: [00:40:00] You know what we lose when we try to sell coffee as a drug. And I think when we sell coffee as food, we do really well. There's definitely a cultural currency around food, especially for this generation, the younger generation, than for the Boomers that act like Millennials, which is the other segment everybody talks about. Food is really a currency. And I think putting people in control of how they want it to taste, not because of what machine made it or what professional made it for them, but because of what it tastes like. Ultimately, all of the ethics around our industry, which are such an important part of why we do what we do, are around moving value back up the chain to both growers and roasters efficiently. And the problem is that consumers don't really have a way to differentiate other than artwork and buzz words, which coffees are good or not. If we can empower them to decide what's good for them based on the way it tastes, then growers and roasters are in a position to sell their product that is differentiated based on its quality in the eyes of the consumer at a fair price the consumer is willing to pay. And that, in our view, is the best way to move value back up to those people at the earliest parts of the supply chain. And that's a lot of if you ask people what motivates them here in our office or what we're most excited about being able to crack that nut. We're early on still, but that's the sort of brass ring for us as we think about it.

Brian: [00:41:19] You mentioned something that really caught my ears, and we talked a little about this at Groceryshop, as well, but the idea of Boomers that act like millennials... We've talked about this on the show, as well. We see sort of this interesting swing back around now where Baby Boomers are sort of Baby Millennials now where a lot of the trends and a lot of the ways of thinking that Millennials sort of introduced that maybe got pooh-poohed a little bit upfront, you see Boomers sort of coming around and saying, "Oh, wow, actually, you know, maybe my Starbucks dark roast that I've only been drinking for the past 20 years that I thought was super hip when I first got it actually isn't everything, the end all to be all of coffee. There's a whole world out there that I can explore." And so you see sort of like these Boomer trends towards traditionally Millennial experiences and thought processes. Talk to me a little bit more about how you're addressing this.

Mike: [00:42:24] Well, that's where it all comes back to being more behavioral than it is demographic. When Boomers act like Millennials, they show that in their behavior. So when we can be part of a conversation that they're choosing to participate in, that's a great chance for us to succeed on the merits of the product. And so, like, absolutely, my dad is retired and, you know, he used to sign as text messages like letters two or three years ago. And now I mean, he overmaxed the family data plan by using Instagram too much. {laughter} Like you're seeing some of this teenage-like behaviors from that generation. But like everyone has Instagram. It's true. I mean, I flew a lot a year or two ago. And, you know, I think the average age the person I saw wearing Allbirds was a lot younger than the people I see wearing Allbirds here in New York City. I think when they choose to act like Milennials, they make it really clear that they're doing so. And so for brands, you then need to listen and be part of a conversation that sympathetic to them and not to be too crass... Don't make your fonts too small. {laughter} You wanna sell well to Boomers who act like Millennials, don't make them with their glasses on. Keep the fonts big enough to read.

Phillip: [00:43:32] It's funny, but it's actually really true in that the world that we're coming into is really a world that Millennial aesthetic, the Millennial design aesthetic, really became sort of like a stamp of approval of quality in that these smaller companies who are able to deliver on experience and quality product at the same time, sort of set the tone. This sort of Gin Lane Red Antler design aesthetic, that sort of became pervasive has found its way into everything. I mean, for crying out loud, Target has Good & Gather now, which just screams Millennial brand. And I think it's become more broadly acceptable and sort of that stamp of approval of, you know, that aesthetic is now what people are seeking out. And it's pervasive and it's everywhere from CPG to electronics. It's sort of a fascinating thing to watch. I'm curious, Mike, what is your outlook on the next five years to ten years in retail? And how can you take advantage of it? How can you capitalize to make Trade Coffee more successful?

Mike: [00:44:38] I mean, for Trade Coffee specifically, we're going to see grocery encounter some of the same forms of disruption that retail and electronics and some of these other categories have seen. You know, I think depending on which category at the grocery you're looking at, it as low as 2 or 3% on e-commerce today, which is really scary when you think about how high it can go. There's going to be a lot more click and collect than there was other categories in grocery. But specifically, I think that the grocery playbook that we think we're in very good position to disrupt is to just keep putting more product on shelves and let consumers sort it out, measure, pull through, and sell through, and then restock accordingly. And we know that our experience is better than that. We know that if people pull a random bag that looks good off the shelf, if it doesn't taste or if it's not the right bean for the way they want it to taste, it's not going to be a satisfactory experience. And so as long as that's the case and that's the way that the battle is going to be fought on the grocery shelf, we're going to keep investing in quality control and keep investing in our matching technology so that our experiences are just more consistently delightful. We earn more word of mouth from people who want to get around the song circle in Nashville or whatever form they're in and try to win the battle along those lines. But I think it is going to be really different for every category. I don't think mayonnaise is going to be sold that way. So I think there's there's going to be things that are sold in bigger baskets. And that's sort of a larger conversation.

Brian: [00:46:03] Man, are you sure? Mayonnaise is getting pretty...

Phillip: [00:46:03] I mean, they're trying with olive oil.

Brian: [00:46:06] Craft Mayo. I'm all in.

Phillip: [00:46:08] There's a category.

Mike: [00:46:10] I just got in front myself there. Because you can go to grocery store to Italy and there is an entire isle of olive oil. So, I mean, it really does depend on the market and what consumers want. But what I can tell you is if you if you bundle it all under grocery, you're probably on the wrong path. I think you have to look at one category at a time.

Brian: [00:46:28] That's good. I like that. Well, thank you so much, Mike, for coming on the show and providing us with all of your insight and wisdom here. And to our listeners, thank you so much for listening. We want you to lend your voice to our conversation that we're having today. Where's grocery headed? What category do you see being disrupted like Trade Coffee is doing to coffee? And so you can reach out to us anywhere on social or that you can find us or head over to FutureCommerce.fm and leave your thoughts there. And of course, as always, please subscribe and like on iTunes or wherever you listen to podcasts, and also go sign up for our newsletter because we've got some really cool stuff coming out every week. So we love to hear your voice. And thank you so much for listening. Mike, thank you so much for coming on the show, again. And we will talk to you soon.

Mike: [00:47:20] Great. Thanks, guys.

Phillip: [00:47:22] All right. Welcome back in. We have someone very special joining us here on the closing segment... Hitha Herzog, retail analyst and author of Black Market Billions. Welcome to Future Commerce.

Hitha: [00:47:31] Thanks for having me, you guys. This is so fun.

Brian: [00:47:34] Yeah.

Phillip: [00:47:35] Yeah, I've never met somebody who openly would admit that they don't like Jerry Seinfeld on the show before. It must be... I'm sorry that... I didn't prepare you that I was going to drop that bomb, but I figured for people that need to center who you are in the world, that's a great place to start.

Hitha: [00:47:53] Oh my gosh. I told him not to "at" me on that. I think I said...

Phillip: [00:47:56] I'm sorry.

Hitha: [00:47:57] I invited people to respond to me. I think I did. You know, replace him with Larry David any day. Please.

Phillip: [00:48:04] I love it. I love it.

Brian: [00:48:06] Ok. I get that. I get that.

Phillip: [00:48:07] Yeah. I love your take on things because you have unabashedly opinionated opinions. That's a terrible way of using the English language.

Brian: [00:48:18] Outspoken. She's outspoken.

Phillip: [00:48:20] Yeah. So give us your take on some of the things that are happening right now. There's a lot of news and especially around the world of Kylie Jenner. The six hundered million dollar sale...

Brian: [00:48:32] Nike...

Phillip: [00:48:32] There's a lot happening in the world... Coty acquisition...

Hitha: [00:48:36] Clearly, guys, I need to do like a right pivot and start creating a makeup brand because a six hundred million dollar acquisition, or they acquired a 51% stake in her business, but at six hundred million dollars, and a 1.5 billion dollar valuation... Yes. She is the most followed person on Instagram. I think she has one hundred and fifty million followers. And the revenue that was coming in from the makeup company was estimated at around a hundred and seventeen million dollars. This is just for the lip plumpers and those very neutral matte colors. I know you guys may not be so well versed in the oeuvre of the lip color palettes of Kylie Jenner makeup, but me, who spends a lot of time in hair and makeup knows all about this. And it's clearly resonating with her fan base and beyond. You know, when you have a Gen Xer over here that's focused on those lip colors.... I mean, it's certainly... She's going outside of her core demographic, that's for sure. So, yeah.

Phillip: [00:49:47] You mentioned something that I think is really important. You said she has quite the following on Instagram. There's been some discussion online about whether that following was, you know, her core audience. So do you sort of take the position that, you know, she had an audience first sort of mechanism to delivering a retail product and how does that sort of fare in a world where, you know, now they're sort of being introduced to a larger retail brand owner like Coty?

Hitha: [00:50:19] They really did something very unique that I am so trying to study and acquire the secret sauce so we can all apply it to our lives. But, you know, it's her team. It's her mom, Kris Jenner. I'm sure it's a massive team of 50 plus that are orchestrating this sense of scarcity with the product. So if you remember when the products first launched, and this was a couple of years ago, and I was aware of it because I was teaching a class on social commerce at Parsons, and we studied this because in my class we discussed how brands made money by using vehicles like Twitter and Facebook and Instagram to promote whatever, you know, said product. And so we used Kylie Jenner as a case study, mostly because it was new. But when her product launched, I mean these lip kits that she had, which were three different colors, very neutral... I mean, you could go to Sephora and probably get something very similar. But they created this sense of scarcity. Only a couple were being let out into the world. And when I say a couple, I meant, you know, a million or so, and they just drove this sense of, "Well if you don't get this right now, then FOMO." I mean they really tapped into this FOMO sense, and they are able to reproduce it over and over and over again. So do I think it's really her core base is buying this stuff? Maybe. But what I do think is if it goes past her core base, it's really the sense of fear of missing out. Here's a really great product that we must have. I mean, with me, who is you know, like I said, I'm a jaded Gen X-er, you know, I'm looking at this stuff and I'm like, "Why would I even need this stuff?" And I'm looking at the colors like, "Well, this could work for me. I need to have this." To the point where I'm asking hair and makeup. So if your listeners don't know, I do a lot of television stuff. I'm in the hair and makeup chair at least four times a week. And so when I'm there, and I ask about the lip kits, clearly, there's something going on there.

Phillip: [00:52:38] Yeah.

Brian: [00:52:41] Well, speaking of scarcity, Nike's about to be pretty scarce on Amazon. Would love to hear your thoughts on that move and what's ahead for Nike and how this is going to affect Amazon.

Hitha: [00:52:56] Right. Well, Nike is eliminating the "middleman," which is Amazon. They're moving to a more direct to consumer model, very similar to Kylie Jenner and very similar to...we were having this discussion...with Glossier, but they want to... The idea is they have the ability to directly market to and reach that consumer base that's buying their products. So going through Amazon, they not only have to use them as a middle man in order to get to that consumer base, but also I think they're doing this to kind of eliminate the risk of counterfeits. So I wrote my book, "Black Market Billions," and I talk about not only the product that is getting lifted from stores that's real products that people go in and boost the stores and take the product out and sell it on the black market, but also the counterfeit stuff that's being reproduced and sold as real stuff and what that funds. So Nike wants to try and kind of mitigate that. Amazon's really had a problem. Whether or not Jeff Bezos wants to admit that. They cannot seem to get a handle on the fake product that is being sold on that site, and they don't really address it, it's the elephant in the room. But Nike is finally taking a stance and saying, "Hey, you know what? We're confident in our consumer base. We can go ahead and reach out to them. And they believe in a brand so much that they can come directly to us online. And it's gonna be fine." Huge risk. But if you look at Nike's earnings, they just reported their earnings a couple of days ago. You know, they paid out a dividend. The in-store sales were up. The revenue was up. So I think if they were going to do it, now is the time to do it.

Phillip: [00:55:01] You mentioned in the pre-show that I think it was Kohls also had earnings recently. I know Nike is in retail partnership with Kohls. And there's sort of an interesting evolution of like a demographic of a customer who is shopping and acquiring those brands at, you know, stores that are a little bit different, that maybe not necessarily off price, but maybe price conscious. Maybe you could talk a little bit about that changing customer and sort of the way that they're going about buying, especially around holiday season and the way they're spending money.

Hitha: [00:55:35] So the customer now... You know, 20 years ago, the way we would see shopping is that there was a destination. Shopping was a destination. And what I mean by destination... We'd get in our cars, fill our takes up with gas, we would... I grew up in Albuquerque, New Mexico, so the mall was 15 miles away from my mom's house. So, you know that was effort. You know, it would be a three hour event or an afternoon event. Now, fast-forward 20 years, that's not the case. The mall is as close to me as my phone is. So my phone is at my ear right now. If I took it down and started going on online, I could access five or six different brands that I buy and have those brands immediately at my house within, you know, sometimes within the day, depending on how fast the turnaround could be. So the model is changing. We no longer have to go to an edifice to buy our stuff, a freestanding edifice that houses the brands, I guess I should say. If we want to go to an edifice and have that experience, you certainly can go. But even those stores, these brick and mortar stores are not just about you buy your product and then leave. They're all about experience now. So I'm not sure if you guys went to the Nordstrom opening. But, you know, here in New York City, there's the flagship Nordstrom just opened in Columbus Circle and opened up with lots of fanfare. And it's so crazy. And people were in there. And what they really pushed was the whole experience part of it. You could be trying on a pair of shoes and get lunch of a burger and a martini delivered you right while you're trying on those shoes. And you could go get a facial. They have everything apart from a swimming pool and a gym that you could just go hang out in while you shop. And I'm sure it's coming. But now the way the shopper is shopping, it's all done by their smartphones and online. And even the way they're paying for things is different. You know, we're talking about is a little bit as we're going into Black Friday. Before people would just pay for things with cash, credit cards, go into debt. And I think the conversation as I'm getting more into the retail coverage for Black Friday is more about how do we prevent ourselves from not going into debt. So you have companies like Rakuten who's offering cash back. You're having you know, you have another company called Afterpay that is doing this... It's really interesting... The system, the way that it's set up, it's almost like a layaway of like 30 years ago. So remember, back in the day, you know, you would hear people, they would put their gifts or whatever on layaway and then they would come back and make little payments. And then by Christmas, they would have it all paid off. The way that Afterpay works is that you just pay a couple of certain installments for your product and then you get it. This is a thing now. People are really OK with this. There's actually people who are discussing this on social media. It's like a new way of paying for things because it's smarter. People don't want to go into debt. So I think there's two things that we're seeing this holiday season. People are certainly not leaving their sofas or their beds in order to shop, and they're being more cautious about the way they shop. They don't want to go into debt. Because why? What's the point?

Brian: [00:59:03] Given that we're seeing tools for improving the customer experience online as well as in the store, do you think that the move of Nike off of Amazon is actually a good indication of where other brands are going to head, as well, so they can control their experience more?

Hitha: [00:59:21] Definitely. I think that Amazon existed on the shopping side. For those people, they made the experience very easy for people. And no doubt that half of online sales are coming from Amazon. I mean, the experience is second to none. So many big box retailers have tried to recreate it. If you think about Walmart and how much CapEx they have spent trying to get the online infrastructure that just even rivals Amazon. I mean, it is mind blowing and seeing these big box retailers trying to imitate it, but at some point they're just gonna throw their hands up in the air, especially brands like Nike, and say, "You know what? Why are we even dealing with this? Let's just go directly to our customers. We have all of their information." Any time go on the Nike site, you see this. "We'll give you a 15% discount if you just put your email in here." That's just a way to get your information. You know... So people are really you know... We're a society that, you guys know this, we love a discount. We like to shop. We'll do whatever it takes to get that discount. So if it means giving away our email, so we can get marketed to more effectively, then so be it.

Phillip: [01:00:37] Lord knows this is the time of year where my inbox reflects all of those decisions I made all year long.

Hitha: [01:00:42] Isn't it insane? I think I have like a hundred new emails.

Phillip: [01:00:45] Yeah. It really is.

Hitha: [01:00:46] I'm like, "Oh, wow, what is this? Something is like blowing up." It's just deals. It's just deals from retailers.

Phillip: [01:00:55] It really is. It'll be interesting to sort of watch it all unfold. I'm interested to learn a little bit more about sort of the evolution of the way that we're spending. There was a news story that we didn't get time to touch on, but maybe we can unpack some other time. But Under Armour was recently criticized for putting pressure on its retail partners to buy ahead to help them make quarters a few years ago. And that's sort of been a rolling problem. I think consumers have been in that mindset for a long time to borrow from themselves and put things on credit cards and rack up debt in order to make their holiday seasons. It sounds like from what you're telling us, that that's something that's coming to an end and hey, maybe that's healthy. That's good for us. We should practice sound fiscal policy as people. I think that's a good idea.

Brian: [01:01:44] Put limits on ourselves.

Hitha: [01:01:45] I mean, obviously, you guys know this, too... When you look at the economy, consumer spending is in the pillars of what drives the economy. Consumer spending is like one of the five pillars. So we certainly need people to spend. But I think as we look at these younger generations, you know, we're seeing the Gen-Zs going up against the Boomers and it's just, "Okay Boomer, I'm glad that I am not a part of this." But you are seeing these younger generations and these younger shoppers saying, "You know what. Why? What is the point of this?" Holidays have taken on a different meaning because we've seen so much happen in the economy and so much has kind of gone down politically and economically within our lifetimes. So that's a reflection of how they shop. I mean, Oracle came out with a study that said that 82% of shoppers now buy according to how they feel with the brands. So brands now are really trying to court the way they interact with their shoppers. So one false move and one sort of negative comment made online or, you know, any Yelp review, and that's it. So you're seeing a lot of brands now really paying attention to how they interact with their customer and making sure that experience is top notch, because like I said, they don't answer an email, they say the wrong thing in a tweet, they say they don't like Jerry Seinfeld, well that is it for holiday sales for them. {laughter} And maybe the rest of the year.

Phillip: [01:03:29] Don't worry. Nobody listens to this show. You're totally safe. Your secret's safe with us. And I love that you brought it full circle. Thank you so much, Hitha Herzog, for joining us. And thank you for listening to Future Commerce. Remember, you can get this podcast anywhere where podcasts are found. And we want your voice in this conversation.

Brian: [01:03:46] Please.

Phillip: [01:03:47] You can do that at FutureCommerce.fm. And yeah. Leave us a five star review on Apple podcast, Google podcast, Stitcher Premium or Spotify or wherever else you consume podcasts. And that's it. Thank you for listening. And remember, the future is what you make of it. We exist to give you insights to help you shape that future.

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