Good Investing Talks - Marc Appelhoff (Home24 CEO): How do you build furniture e-commerce's future?

Episode Date: February 7, 2022

Marc Appelhoff is the CEO of Home24 - a leading European e-commerce retailer for the mass markets. In this interview, we discussed the future of this business that is currently heavily shorted.

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And now enjoy the video. It's great to have you here, Mark. I'm very much looking forward to doing a deep dive interview on Home 24 and we had a huge interest by a lot of questions I could gather and I hope I could answer many of them in our conversation. But for the beginning I have brought you a bit of a, let's say, challenging chart. It's a chart with the most shorter stocks in Germany and here with home 24 you are the leader with close to 10% of short positions in the stock let's invert us this perception a bit and maybe you can help me find three key reasons why you are bullish on the future of home 24 instead of being short yes thanks to everyone for having me um three key reasons why I'm bullish if we zoom out then

the internet is there to stay. We are already the leader in home and living in our markets. Online penetration is only 15% nowadays, but it will certainly reach 20% to 30% like in the US and in the UK. So if we just sit back and do nothing else, we will grow from the more than 700 million pro forma, including butlers, to a multi-billion euro company. And today, I think our equity value is if we deduct cash is like 150 million.

two we have the best team and we have delivered constantly for the last two years since breaking even on an adjusted EBDA basis end of 2019 we've delivered 80% of growth in the last two years at adjusted EBDA break even just as planned and we are taking massive market share because the offline market was down by 7% for example in the german retail market and three because we offer great value to our customers, which is the most important element if you are a consumer business, and that can be measured both by MPS and also by return rates, where we offer free delivery and free returns. And our return rates have reached record lows of only 7% throughout the last year, which is a great testimony that the moment of truth, the

unpacking of consumers actually works even better over time, which is something that we had to learn over more than 10 years because it's a very complex home and living customer journey. What is the MPS score you mentioned? You have. The NPS score varies depending on when you measure it. If you want to compare it to other companies, it's nearly impossible to do a fair comparison. If we measure NPS directly after the order of the customers or after the delivery of delivery, it fluctuates by more than 20 points. Therefore, we don't publish one NPS data.

But what we have shared, I think, in the H2 earnings update last year, is that we have improved our NPS ratings by more than 20 points over the last two years, gradually working on improving efficiency of all pain points in the long customer journey of a home and living customer. You've mentioned you have this 10 years of experience, what have you learned to do right in this 10 years? Many things.

We also learned from our mistakes obviously on the way. When we started to sell home and living products online 12 years ago in 2009, we had no idea that home and living is probably the most complex e-commerce space there is because one in the mass market that we tackle, there is no consumer brands. So there's a high risk. hurdle you have to overcome if consumers in the mass market spend a lot of money in their perception with you without knowing you and without knowing the product. Two, home and living products are bulky and not uniform in packaging. Of our 130,000 skews at the moment, each has

different packaging. It's not like pick and pack in parcel service. And many of them have multi-collies, which means a bedroom, a wardrobe, comes with 12 collies. And if you just lose one or break one. It's a mess and you really need to get this process end to end from factory to the customer right. Otherwise, you can't operate that profitably. And lastly, it's a combination of a tech play where we use vast amounts of data of what consumers search for and what they like from our third party offering, then translating

that into our private label offering. And to get the assortment right, to get the stock taking right. is tricky and was a very long learning journey but we feel we've created also significant barriers to entry and economies of intelligence and scale there so we are very much looking forward to monetizing them also in the in the coming years so let us play a game we said we make a different future and you decide to stop growing tomorrow or investing into growth and you say okay we just like in this future we want to show how profitable our business is at steady state if we stop investing into growth how would home 24 look then most of our investments go into

assortment in tech and these teams are also the most important ones so next to reducing our marketing ratio from you know high teens to mid single digits gaining 10 percentage points in profit. We would probably also gain another single digit percentage points in overhead, which you know from mathematically then plus 1% I think we had in Europe last year, or 1 million in total. Yeah, if you if you do 15% on 600 million, I think that would be that would be the starting point from which we would then optimize. And again, we would then still grow with the market rising, the market share, right? So if online penetration rises from 15 to 20%,

even if we don't invest and just keep our market share, and we would still grow. You've decided to grow. So what does growth bring you as a company? We consider ourselves still at the early stages of the industry in general for Home and Living Online. There's not a clear winner yet like Amazon and Electroft. or Zalando in fashion, for example, and we believe the long-term value of gaining market share

and relevant scale, both for purchasing economies, for economies of the platform in logistics and in tech, will pay back, you know, with a very big return in many years to come. And therefore, we rather want to be the leader in our space and therefore we invest. And when we started the year 2021, we said we want to grow 20 to 40% in highly volatile circumstances. We've come out at 27% on a group level, 29% in Europe, even though the market declined. And therefore, I think that we already see that our strategy of profitably investing into growth pays off because we've taken massive market share. so then let's jump 10 years ahead and say home 24 in 2032 how would you look like and how would the competitive landscape around you look like yeah me personally i think it would be more more gray than today yeah i would

have less hair too well i mean we've we've we've laid out that the pro forma group post the acquisition would already today have beyond 700 million of revenue and already also certain profit in 10 years, I would be disappointed if we wouldn't be somewhere, you know, between 3 to 5 billion in revenue at profit margins beyond 10% on an adjusted debater level. The potential in 110 billion addressable market of the geographies today, not even speaking, about further geographies in southern europe or eastern europe is definitely there and i also see ourselves in a very good position to compete over the coming years what are you optimizing for for this 10 years period out many shareholders say or i heard to critique twice or three times

home 24 your management is only aligned to grow revenues and not grow ebita and be focused on profitability what are you optimizing for we're optimizing for for long-term market share and therefore also company value in our view. The Home 24 management is not incentivized by revenue. Our bonus is not linked to revenue. We are incentivized with participation in value creation. And therefore, our conviction is that we will create long-term value by taking share and becoming a multi-billion euro company and not by being a highly profitable small company.

and therefore we focus on continuously taking share. We acknowledge that especially in continental Europe, the sentiment at the moment is that profitability is a prerequisite to even invest in small companies. And therefore also we are conscious of that and will continue to demonstrate that we have not only that profitable call, but we can also realize profits. At the same time, as long as the opportunity is out,

there we want to become one of the winners in our market we we haven't you know worked so long and so hard for just remaining a small player we want to actually be one of the dominating player in all space which other players do you think will be around in five to ten year next to you in the in the pure play online space auto already is the largest incumbent um still living of the customers that were used to the catalogue and obviously also making most of their money with a bank attached to the e-commerce business. But they do a decent job. And then there is two, three consolidators of the highly fragmented home and living space

also in continental European markets, most importantly, Hefner and Lutz. And there's still so much to consolidate in the highly fragmented offline space that I'm sure the two at least will also play a role because they operate online shops as well and in Brazil it's Madera Madera who is a very significant player

and lastly as the largest pure play wayfair who's only overlapping with us at the moment in Germany but it looks like they also want to remain trying Europe for longer

they've been in Germany since 2009 and they've not really made it as successful as Northern Europe, North America, but I also see them as a relevant player in the marketplace space, just like Amazon. I think there's no e-commerce play in this world where you should forget to name Amazon, just because they are always relevant for price-focused and convenience-focused e-commerce. which kind of category of competition do you think will be less around or not around at all in five to ten years I think especially smaller offline players will continue to disappear the home and living space is still in early stages if you compare it for example with the fashion space smaller boutiques

and independent players in the fashion space disappeared 15 years ago or so and then chains emerged and then online took over next to the chains, the vertically integrated ones. In Home and Living, the market is still highly fragmented. The top three players don't own more than 40% of the market. However, historically, Home and Living was a very profitable space. These local oligopolis of local furniture stores connected to central buying groups with good buying conditions, generated mess.

of profits and therefore those mostly family owned businesses have kept on operating also because often their name is on the on the big box in the village and everyone knows them and they've got profits buried in property and other topics so there needs to be a catalyst for them to actually stop operating usually that is when the next generation doesn't want to continue the business and then either one of the consolidators takes over or they go out of business i also believe that the the post-covid phase will be a catalyst for our industry because we will only see who's now emerging out of that phase you know less in a lesser state in a in a weaker state once we get out of the pandemic with all the government aids etc yeah so i think

85% of our industry still being offline prone, the bottom 20 to 25% of that 85% is the competition we will not see again or anymore in 5 to 10 years, and that will be distributed partly to the consolidators, but obviously also partly to online, because those businesses will primarily discontinue in remote areas where no one else will reopen, And those are typically then markets where we as online players can play an important role.

That's a huge shift. And I also want to take you now on a huge shift because I want to focus on the customer perspective. And I also want to test if you qualify as my CSO, which is my chief sofa officer. Because right behind me, here is my sofa. And it's 10 years old. And I'm thinking I have to get something new. and now I'm a customer starting to search for a new sofa beginning my customer journey as it would be helpful for an online business to start searching for sofa offers

how do you as Home 24 get ahead of me and like be present as a offerer of sofas that might be interesting for me as a customer yes if Tillman if you are also one of our everyday people as we call internally our mass market audience, then typically you would not know sofa brands because the purchase frequency is not that often. Brands are known in the higher end, but not in the mass market. And most of our customers then go online

and start a search engine and start searching for sofas. Ideally, they qualify that with three-seater or a color or a sleeping sofa. And then we bid against other competitors for these keywords. Unless you know us from television, we spend up to 20% of our revenues on television, and therefore we have an aided brand awareness in Germany of up to 60%, which is by far the highest of our pure players.

So also already nowadays, many people just go directly to Home 24. But if you haven't seen us on television, and you're probably rather Netflix than a television guy, then you would probably go to Google and type 3.3, seat a sofa or sofa bed if it's the guest room and you want to optimize the sofa also with functionality. And then there is nowadays the Google shopping space that is more relevant than the text search, the paid text search. And therefore then we optimize to get anyone in the market also on Home 24. And looking at the current Google analytics data, we also are successful in getting pretty

much everyone who's in the market for financial also onto our page in the in the time span that they are searching so far's so maybe then let's talk about let's talk later about your friend google and facebook and all the big tech but let's talk about your new friend uh it's a retail friend it's called butler or butlers you've just acquired them maybe let's start with the customer journey we are coming from what sense does butlers make in my customer journey or in the general customer journey and maybe also explain what butlers is because some of the years are from the u.s and i think they don't know butlers yes so butlers is a factory of ideas they create more than 3,000 private label accessories and seasonal decorational items and sell them

through 130 offline outlets and their own online store and through digital platforms 25% of the reviews are already online and it's basically a direct-to-consumer brand for home accessories and impulse purchase items. So the sofa journey we just spoke about is very technical and difficult because the sofa has a high order value and is only purchased every 10 years if you have a decent value for money so far. For the Butler's assortment, consumers go there a few times. a year to discover something new for their home and therefore it's a huge opportunity to become less dependent on online channels for sofas in most of the butler stores there won't be that much space yeah so today already we operate today we already operate home 24 showrooms in 10 metropolitan

areas so you could today already visit a home 24 showroom we are currently in the process of evaluating the stores of butlers and we have identified more than 15 where there is sufficient space to operate a home 24 showroom next to the butler's location without paying extra rent and therefore in more than 15 locations already in a few months there will also be sofas and interior decorators to help you if you don't want to start your journey online so you could go there and ask for help you could bring your floor plan and say this is my style you could show pictures and then our interior decorators help you find the right style and in those showrooms you can then also sit and have a tactile experience of the fabrics

i think what always has to be clear is that with more than 100 000 skews on offer the showrooms only always show a small excerpt of what we offer in general but they give a very good impression of our value for money proposition. And even though we offer free delivery and free returns, not only for CO2 purposes, many people actually want to see what they order before they then place the order with us. And therefore, we are very convinced that next to being a great assortment addition, next to being a great sales channel, also the combination of coming closer to the customer in a market where 85% of consumer decisions still are taken offline,

we will have much broader access to that offline space and don't need to wait until all those people also gradually move online. Maybe let me do a bit of a mean follow-up question. Like, isn't Butler diluting your brand? You're an online business and now you're selling, we Germans say, but nippers in local stores. How does this make sense? Is it really like fitting that much the Butler acquisition?

position? In the Home 24 roof, we already offer many brands. So we have third party brands like Hulster or Tempour as a few known brands that also do TV or advertising. There's many other brands that exist but no one knows. And there's also private label brands that we have created at Home 24, like Studio Copenhagen, which does similar revenues than Butler's already today under the roof of Home 24. Butler will just be one additional private label brand for the home accessories. And to just counter your example, why does IKEA discourage online purchase by asking prohibitive delivery prices online and bring everyone into their stores? Because they make a quarter of their profits with those, as you call nipus items that you don't plan to buy

and that you still take home with you in that home and living journey. And it is a fact that people love decorating their home for Christmas, for Easter, that they love, you know, wrapping up Christmas presents or presents throughout the year and that they like, that some of them like to decorate their home because they are a homemaker. They love to make their home nice and hospitable. And therefore, we truly believe it's a combination that will help both, you know, give more access to the cool butlers assortment, you know, all our more than 2 million active customers will get access to that, but also tapping into that offline potential of people that care about their home, yeah, and offering those also the home 24 furniture

assortment makes a lot of sense. And if we also look at the industry endgame the next years, as you've always zoomed out, one of the key reasons that we will succeed is that we need to get CRM and loyalty right. So we need to convince customers that, home 24 is the destination, they should visit on a regular basis and not only every 10 years when you need a CSO, the chief sofa officer, and buy a sofa again, because then you might start your journey at Google again. But if you come to Home 24 and find accessories on a regular basis, we remain top of mind, we remain in touch, our app is not deleted, and therefore we see the impasse purchase and seasonal decoration assortment as a key pillar to achieve this

loyalty as well over the companies. To turn this maybe a bit around, and I'm challenging you a bit today, but you're not really satisfied with your cohorts and their behavior then if you do this change? We are always looking for ways to optimize our business. And the last time we published our LTV to CAC cohorts was in the IPO process. And we published that we were quite happy with the profitability of our lifetime value to customer acquisition costs at roughly 1.5. So for every euro invested in January,

we would have earned a euro 50 back by December. And obviously, if we can earn more than the euro 50, by bringing back the customer more often or selling more decorational items and not just the big furniture item, so not only selling the table, but selling everything on top of the table as well, then we are even more happy,

which doesn't mean that we have reached quite significant scale and profitability with our core business. So I think, yeah, it's unfair to say we are unhappy with our core business if we add something that makes our business better. But it will definitely be a more profitable LTV to KAC that we see coming out of the combination if we get our loyalty program right. And if we aim and if we achieve the aim that customers interact with Home 24 more frequently. Many investors would love if you start publishing this LTV to KEC and more metrics soon again. When will they are coming back? Yeah, it's always a trade of sharing those KPIs because all competition is also looking at that. and especially in a market where we are considered innovator

by many, especially bricks and mortar companies. Some elements that we do differently are our trade secrets, if you want to say so. In a customer journey, we're valuated from the first click on our website to the checkout in the basket, valuated for a large item. Please guess how long valuated is that journey? say it please it's two months yeah so we pay for google and then two months later on average value waited the customer converts obviously they buy the small stuff early but the large stuff

takes months or if you furnish an apartment it takes even many many months until you plan and finally decide therefore we have optimized or proprietary marketing knowledge in-house including attribution models etc so it's it's part of what makes us unique and therefore sharing cohort data on a two regular basis would dilute that. We are very much aware that repeat ratios and proving that the hypothesis of increasing purchase frequency will improve profitability also through the buttress acquisition, but also through adding the right assortment, will be something we will need to prove to the market, not only in financial figures, but also in KPI.

So at the right time, we will start publishing the right information without trying to inform our competitors too much. I'm awaiting the change in reporting. Maybe if we talk about numbers, then let's do a final point on Butler, maybe run us a bit through the numbers. How will the acquisition pay back? And maybe with a longer time horizon, Was it a really cheap acquisition for you if you look out and what's your plan there?

Yes. Let's start with the acquisition metrics because we've also received comments that is quite complex and it is. So three quarters of the acquisition was done through a mechanism with a fixed purchase price and a variable purchase price that will only be determined with the last 12 month profit ending June 22. And one quarter was done in shares with a home 24 share price of 18 euro. So Wilhelm Josten, the founder of Butler, accepted for more than half of his shareholding to convert into home 24 shares at 18 euro. And we said he has to also make that commitment to show that he's convinced that this is a value

creating long-term addition to the home 24 story. And he's committed to also stay at least for the next four years. to make that happen. For the three quarters, that is cash paid. We have structured the deal in a way that there's an initial purchase price of around about 30 million that will be due at closing and a remainder that will be then paid after Q1 of next year depending on the earn-out phase.

And both for this year and for next year, a portion of the purchase price can be held in vendor-law. loans for a period of three years because two selling shareholders of Butler's helped us optimize the cash flow. The Butler's business today in 2021 realized 93 million revenue at 5 to 6 million Ibeda and the stores were closed up to three months in that year. So it's not a full run rate. butler's revenue and profit that we look at when we look at 2021.

So I think it's fair to assume that the revenues will be significantly beyond 100 million and the profit will also be higher than 5 to 6. And therefore, if we get the economics right also of the synergy potential, our ambition is that next to the 30 million cash out at closing, and there is a good realistic chance that the deal pays out of cash flow for itself in the coming three years. That's an interesting take. I hope it helps people to understand the Butler acquisition. Otherwise, your IR department will help on this, I think.

I already mentioned the two big friends, Google and Facebook, but they sometimes can be tricky fans because they, know how to raise prices um how dependent on are you still on them for customer acquisition and further growth yeah so so google and when you speak of facebook is primarily instagram for us um are important performance marketing partners um in any given month we spend up to 80% of our marketing spend on performance marketing and 20% roughly on above the line marketing for example TV but also digital out of home and I'm not including the showrooms or retail now in the marketing spend so I'm only looking at the marketing dollars spent and Google by far is our

biggest partner and therefore yes we are dependent on being very efficient in Google marketing but also we're not afraid because I also mentioned that it's one of our core competencies that we have learned over 12 years how to best do performance marketing. And many companies that just started performance marketing now, for example, in the pandemic, many offline players opened a Google AdWords account and started doing marketing. It's really an art and science. Is Google constantly looking to optimize their revenue and profits? Yes.

Will we always be in a position to our business? outbid competitors if they behave rationally, we're very confident because of, one, that marketing competence I've already mentioned, and two, the fact that we have a higher contribution margin than marketplaces and by offering third-party items and private label items and therefore blended higher contribution margins. And at the same time, sufficient selection that makes conversion rates work. And I don't want to overcomplicate things, but let's go back to your example.

If you're in the market for a sofa, if you type in buy sofa or gray sofa, ideally, then you have to have a minimum assortment of sofas. Otherwise, the one or two euro you pay per click will be prohibitively expensive. So if you're just in IKEA or someone, IKEA made.com or others who only offer 10,000, articles and only a certain limited range of sofas, it's not possible to really bit efficiently on short tail generic keywords. And that's really where the power of our model comes together, combining a long tail with a curated short tail and for the short tail, great value for money and short delivery times

because it's our private label. And therefore, even though the frenemies will continue to raise prices, we feel that it's a field that we are very well prepared to compete on and will also be continual to compete on. Maybe let's make another experiment. If a competitor is able to just like rebuild this overnight and compared to the systems you see at your competitors, how much bump in profitability in your eyes this competitor could get?

If the competitor could rebuild what we have, Yeah, your system, your assets in online advertising. Then they would still need the assortment and the margins and the 7% return rates, which are realized through our fulfillment platform, through our own two-man-handing delivery. And then if they get everything right, it's up to branding in the end, where we still have upside potential. So that would be something that would be. surprising, but let's also be realistic that it took us 12 years. And we had so many learning

economies. We had so many downs where we had to learn from our mistakes. It's very difficult to do that overnight, especially with a complex supply chain, the difficult logistics and also non-branded assortment. If you would want to replicate that for branded assortment, it would be easy or easier. You go to Zalandu and you look at which sneakers or brands they sell. You contact all those brands. You list those brands. But for Home 24, more than 50% of our revenues are private label revenues.

And you can't just find those products anywhere. So to replicate that, it would take years of investment. And that's where we feel we have built also some barriers of entry. Now I need you again as my CSO, my chief sofa officer. I'm gone through the rabbit hole and found the Home 24 galaxy. And how do you build this place in the online and offline world that I like it to stay there, that I don't get lost as a customer, that you keep focus. And in the end, it transforms in a certain wish or love to buy in your galaxy.

Yeah, so there is different consumer types, and we look at different personas when we think about the user experience with Home 24. For some, it should be an efficient shopping experience, so it needs to work very well to filter by price and by delivery time and by color, and then they want to look only at a subset and want to make their own opinion. for those it's important that we have state-of-the-art web shop capabilities for many customers in home and living because the purchase frequency is not that often they want consultation they want inspiration and for those we offer an inspiration section and a consultation section where you get a rat giber where you get one-on-ones basically you can either read them or what we also offer is a free online consultation with a video consultation. You can book an appointment with someone who consults you,

or you can book an appointment in our showrooms, as you've already explained. So we really try to be there for the various consumer types and don't want to tell them how to do their customer journey, but depending on which appetite, very efficient works, if you want consultation either offline or through self-education in our inspiration section or if you need consultation personally you can call us and we have a so-called pre-sales team within our customer service operations or you book an appointment with some of our interior decorators let us take a look at the home 24 galaxy on a map i think you know this map

very well because i've taken it from your presentation it's the countries you're active in and with these countries um my question is related how you're fitting the taste of the customers also like you have southern italy where you have a very warm climate and compared to north germany where people have maybe a different taste in furniture or you also sell in brazil where it's maybe not the best idea i'm not sure if it works to sell some nordic furniture in to the tropics, like how you're making sure that you're fitting the taste of the customer and keep all this complicated regional aspects, right?

So consumer tastes globally are quite uniform, it's surprising with some local differences, but that's why IKEA is the global market leader selling Scandinavian financial. At the same time, we don't have any assortment overlaps or significant assortment overlaps, overlaps between Europe and Brazil. The Brazilian mass market is much lower in price power, purchasing power,

and therefore the substance of the products is rather on the level of what we in Europe would consider discount, which is not something that you can sell online in Europe because return rates would be prohibitively high. In Europe, for now, we have primarily focused on the so-called Dach area. with Home 24. We are very realistic that to win France, Italy, also to a certain extent, Benelux, we need to much more localize our assortment.

And in the last year, we've started reinitiating our non-DARF efforts. COVID, at the same time, a localization of assortment, for example, bad sizes that differ across Europe or power plant. drugs is important and is something that we are actively working on. Then another question on focus. How much energy goes for you into the Brazil business that has a different characteristic as you already explained? And if you have so much to do in Europe, is it really worth fighting on the other half

of the planet also for market share? That's a very fair question. And I think also one has to acknowledge that Mobley, our daughter company in Brazil, is still managed by the three very independent managing directors. I act as the president of the supervisory board. Philip, our CFO, is also part of the board, and then we have two independents. And also the fact that we IPOed the business in February 2021 is a clear sign of independence and that at the right time, well, we could also think of fully divesting of Mobley,

but at IPO, we decided that we want to continue the journey in a very attractive, more than 200 million addressable consumer market in one of the possibly highest-growing markets over the next 10 years. And that's the situation at the moment. So we are a sparing partner. I'm having weekly joe fixes. In fact, just after this call, I will be having my joe fix with Victor, the CEO. and it's time well invested also because we learn from each other.

So also consumer trends or consumer experience trends that they experiment with are then relevant learnings for us in Europe. So you're connecting with your Brazilian daughter through exchanges of ideas. Are you also connected on the business and the IT side? So is it that you provide services for, Brazil from Berlin with your tech teams or in the advertising site, are you intertwined? The only direct synergy we have in operations is through our sourcing office in Asia. And we operate our own import office in Shenzhen with employees that organize the shipping,

the quality control and also supplier audits. we don't actively exchange code or services from Berlin to Brazil but we do sparing so for example if one of them mentioned friend in me is Google or also AWS or some other innovator launches a new service then it's obviously helpful that two companies that are very close to each other and share everything with each other share learning economies very fast as well So our performance marketing teams are learning from each other. Our tech teams are learning from each other.

So it's rather learning economies, but nothing that could be disconnected should one day we decide to divest. There's also another German player in the e-commerce space about you. They have this idea of not only being a seller, e-commerce seller, but also a tech company. Is there anything in your business you could think in the future? where this model becomes attractive, or you think about Amazon and AVS, it's also a model where other parts of the business became monetized in a different way? For sure, we have relevant solutions for the home and living space that many, especially offline retailers that are not digitally advanced yet, would like to tap into.

For now, we keep that as a competitive advantage and haven't decided to monetize it yet, but there will be opportunities later down the road in terms of, of marketing services, but possibly also logistics or technology services. I admire about you a lot and the fact that they have been born out of the auto context and then serviced many auto companies led to that, you know, servicing sister companies. So for us, for now we focus on our own strategic path, for example, servicing the Butler's colleagues and the Butler's team now with the best solution. then bringing them on the state of the art level.

And that will be a good example, right? Because we will onboard more than 100 million revenue run rates, business and team onto our services, onto our digital solutions, onto our performance marketing solutions. And if that is then a big success, we could obviously at the right time also offer that to third parties. Do you already have a rough estimate what this upgrade of the Butler system will bring you? over the long term? I think if we consider systems in general about the digital strategy,

we are very confident that we can create significantly more online revenues with the Butler's assortment, given that Butler's has never really done performance marketing actively. Their main marketing channel was always the stores itself. So our solutions will help broaden, yeah customer acquisition opportunities and yes we have an idea in our synergy potential how much that should that could be and we will measure ourselves against that and at the right time when we give guidance for this year and then track progress we will also share that with the market now coming

back to my sofa journey i'm coming closer to a pie decision after being in the home 24 unit worse, but I don't want to wait 20 weeks for the sofa and I also want to have a great experience in the delivery. How are you making sure to offer great delivery experiences and great delivery times? Yes, so in a non-COVID world, that would be easier to answer. How we operate is that we have a forecast algorithm that takes our marketing spend, our historic data, the data of the consumers on the website, and then forecast demand. And I already mentioned that we have a long-tail third-party assortment, well, we can't

influence delivery times, just like any marketplace. But for the short-tail private label assortment, we deliberately decide delivery times by stocking, by taking stock. And therefore, on our most popular sofa models, for example, the Hudson three-seater, you would typically have the gray, the antrocyte, and the dark blue available from stock, and you can get that delivered very quickly. So if you order now within five to seven days in Germany, and we bring already more than 20% of our German two-man-handing delivery ourselves with own services.

So, yeah, own employees, Home 24 branded, bring it into your apartment. So it's a great experience. For the rest, we work with two-man-handing partners that we also measure by NPS. So that really is how we make sure that the end-to-end experience works well for someone who wants it quick. In COVID times, the typical delivery times that are made-to-order so for usually five to seven weeks at the moment up to three, four months. And therefore, consumers are faced with much longer waiting times across the industry. this is nothing linked to home 24 this is an industry phenomenon even if it like if this this this delivery time normalizes and you're still working on this behind the scenes on making the delivery experience is better what can be expect from you over the next five years we have we have many ideas of optimizing our our services i think um the most important elements would be that we increase our service offerings and not just do two-man

handling but with the same teams that are then present in most metropolitan areas we can offer additional services and we could then at the right time also be faster so should the market truly turn to a position where people say I desperately want my sofa same day or next day with a regional presence we could then have local buffer stocks for now i don't foresee this to happen anytime soon at least not for large and bulky items that typically are also seeing a longer decision period and because if the customer takes two months to decide they can count into their purchase decision the fact that it takes a week to deliver and they just place the order one week earlier.

So getting delivery reliability up is really what drives our business most because people need to trust us and they come back if they have a very good and reliable experience with us also on the service side. Another frenemy at the moment of you is our logistics and logistic costs. What is your longer term take on this? Will it be a short-term woe? Will it then the logistics chain settle again? Will you have structural changes?

What does your take? Yes, I think short-term inflation hits, and the markets already see that. And we are faced by that like anyone else. So it's, I think, a situation where scale helps. So I think we're glad to be able to digest that with 700 million of revenues and not 60 or 100 because it would fast eat up our purchasing power. And at the same time, we are shifting supply to where we now, in a new normal, see the best manufacturing location. So, for example, if container rates have exploded for certain furniture items that can also be procured in other parts of the world, then some of those might shift to Europe.

typically the Asian sourcing at the moment is only left to garden and lighting and office chairs so typical Asian procurement and there eventually markets will return to normal once the extra effects are gone but it will take time it will take another six to 12 months for that to normalize and in the meantime the purchase price and the logistics prices will drive consumer prices. One topic that's also often discussed with online businesses, the idea of returning to sender to bring goods back, and you have a nice graphic in your presentation

that shows the return rates that are going down. And honestly, with my sofa, I have bought here 10 years, years ago, I would have loved to return it, but that's not a thing you like as a business owner. So like, what is your plan to keep return, make this return rates even lower, like go maybe to 5%? And how do you think about the idea of the ability to return goods generally with your business? It's something you need to have in this way you offer it? I think at the moment, it is part of our strength. Because if you have a value for money offering, you also need to put your money where your mouth is.

And if you then charge for return, like many of our competitors, if you buy at Mait.com, for example, and you don't like the sofa, you pay for the return cost. That also signals something to the consumer that has not the ability to come and visit your showroom or if they would like to return it and then have to pay for it. It's probably the last time they've bought with you. so we it's the same for me i don't think i buy there so so um with the so so what it really comes down to is saying if we truly believe we have the best value for money then the

unpacking experience is great and then we have we can offer a fair delivery policy with free return as one of the key strengths of the brand and obviously as we will add smaller items that are easier to return. Also, our return rate might increase again, but it might not become more expensive because if you send back three pillows, it's much cheaper than returning a sofa. So what we will definitely continue to do is curate our assortment, both on the third-party assortment and in the private labor assortment for value for money, and we kick out offenders of high return rates or high claim rates because they cost too much money. And I think that's the main difference of the Home 24 offering versus a Wayfair and Otto and Amazon where more is

always better because then it's very difficult or even impossible to control claim rates and return rates. And this is really where we say we want to differentiate by offering best value for money and therefore we also need to offer free returns. In the context of sustainability, we might well start charging for delivery costs at least for a little bit. to make people conscious that they are consuming also CO2 and resources when they order something and can return for free. But I think we will not see the introduction of return charges unless there's some extra event that we are facing that I couldn't foresee at the moment. How sustainable are your operations already and how do you want to be back? with this because there's still a lot of challenges we have to get more sustainable yes i mean

we are at the forefront of the industry we are already c o two neutral as an organization including the entire logistics so we're not just claiming that we will get there like otto or others who launch lobby actions and then speak about it for a long time in 2019 we have measured our footprint and we have and committed to reducing the scope one and and two footprint by 75%. Scope 1 and 2 is the easy footprint. This is easy. It's locations, warehouses, commuting of the team.

So it's the directly influence of the footprint. So this one, we already are actively pursuing. And for the logistics, we are measuring and compensating. But obviously, as we grow, our logistics footprint will grow. So it's impossible to bring this down to zero unless there will be solar container ships and trucks also for the very broad supply base and not just for our last mile. But having said that, the online customer journey, the online end-to-end fulfillment chain is already much more sustainable than the offline one. Because where as offline is often a push into decentralal warehouses, then a push to the customer through. paper printed advertising, our model is rather a pull.

We look at demand patterns, we then stock what is in high demand and turns fast. And the rest, we deliver and manufacture made to order. And therefore it goes from factory to customer made to order without any large warehousing in between. So we consider our model already quite sustainable and we see our responsibility as human beings and parents as very high and therefore we have high ambitions to becoming even more and more sustainable just like other big industry players for example ikea has a very admirable environmental strategy as well so yeah i think the industry is heading a good way at least for the

10b i have to now come back to my sofa germany and congratulate you and thank you because you helped me also through the information about sustainability to find a nice sofa at home 24 purchase it and get it in two weeks but as a customer for you then I might be gone for a while because like if I'm only a sofa buyer I'm buying the sofa every 10 years every 15 years and what incentives are you building to bring me back and bring me and like other cohorts of customers back get you again into buying because that's important for you as a business to be a good and sustainable business and a profitable business. Yes, I think this is the Achilles heel of home furniture because if you do a good job,

then the purchase frequency is not high because the goods last long. And therefore, it's about branding, it's about reputation, and it's also about staying top of mind. And that's why we don't only spend in the so-called lower funnel in Google marketing. we also spend in TV and other channels to be one of the key brands in the relevant set. But it's also why we work on apps and on newsletter marketing and CRM. And it's no secret that we have still massive potential to improve our CRM. For example, we don't have a Home 24 club model yet.

We take part in payback and other models, but together with Butler, we will look into introducing a home 24 club model where you will get benefits to interact with us on a regular basis and benefits to give us your email address or to keep our app on your phone. So for example, we could offer home 24 app users a voucher and a discount in Butler stores because we know that you go there more often because gifts and decorative items are consumed more often than the large furniture items. And it's definitely something that we will focus on in the coming years. But also, we think that in the home and living industry, we have a huge advantage against most of the offline players because we know our customers. Well, we have their addresses. We have their email addresses very often.

And we can remain in touch if we do it right. And so if we offer relevant inspiration and relevant curation and not just sales campaigns that are not relevant to you in the short term, then we will be able to leverage this channel much better in the future. So it sounds a bit like you're trying to become more kind of a West Wing in this sense? We're not trying to become a shopping club. We're also not planning to sell everything that the premium market housewife loves on a regular basis from items that are not relevant for the household,

but they're rather consumed. What we definitely admire at West Wing is how well they tell stories. And the Butler's acquisition will help us to tell better stories. At the same time, we won't lose our strengths out of sight. And our key strengths in mass market, home and living, is to offer great value for money products and do a very efficient e-commerce journey for those as well

and be able to monetize the mass market coming online, which is not something that a shopping club can do on their own. Let me close with a final question that came from many investors because your share price is, I think, down 60, 68% from the top. And many investors see you have some cash at hand and ask themselves, why aren't you buying back shares as a company or sending a signal by buying back shares as management? Hey, Tillman here.

I'm sure you're curious about the answer to this question, but this answer is exclusive to the members of my community Good Investing Plus. Good Investing Plus is a place where we help each other to get better as investor day by day. If you are an ambitious, long-term-oriented investor that likes to share, please apply for Good Investing Plus. Just go to good minusinvesting.net slash. Plus. You can also find this link in the show notes. I'm waiting for your application. And without further ado, let's go back to the conversation.

Thank you very much for this great insight in the way you think about your business and how your business runs. Thank you very much. Also to the viewers for staying that long, I hope you enjoyed the conversation. I did. Thank you very much, Mark. Thank you very much, Tim. Have a great day. Bye-bye to the U.S. as well. Thank you. As in every video, also here is the disclaimer. You can find a link to the disclaimer below in the show notes. The disclaimer says, always do your own work.

What we're doing here is no recommendation and no advice. So please always do your own work. Thank you very much.