This Week in Startups - Facebook’s Q3 earnings breakdown: revenue, user growth, rumored rebrand + Italic’s Jeremy Cai | E1312

Episode Date: October 26, 2021

First, Jason breaks down Facebook's Q3 earnings, including: growing revenue and profits, slowing user growth, AR investment and its new reporting structure (2:00). He also covers Facebook's potential rebrand as a metaverse-focused company and its declining usage amongst US teens and young adults. (11:35) Then, Italic's Jeremy Cai joins the show to discuss his innovative new e-commerce concept, ruffling feathers with incumbents, supply chain insights, and more! (25:58)

Hey, we have a great show for you today. Jeremy Pai from Italic.com joins the show to talk about his incredibly disruptive e-commerce model. He's basically taking factories in China, having them build amazing, no brand, no label products, basically like Amazon Basics or Uniclo, if you know that brand, and then he's having those factories sell directly to US consumers. It's a super interesting model, and they've just raised a ton of money, and the products are absolutely addicting and brilliant. first, we're going to talk about Facebook's Q3 earnings. Revenue is up massively, 35% year over year, which is on a big number, so that's pretty impressive. But user growth is slowing. They've only grown 6% in daily active users year over year. That's down 50% in terms of their growth

rate. And they might be rebranding this week as the Metaverse company and all these papers are being dropped. And they're losing a ton of young teenage users. That spells a lot of headwinds for Zuckerberg and Facebook. We're going to break it all down and talk about it right after the break. Stick with us. This weekend's startups is brought to you by Our Crowd helps you invest early in pre-IPO companies alongside professional VCs. If you're interested in investing, you can join Our Crowd for free at OUR-C-O-W-D.com slash twist. Ladder for fast, easy-term coverage, life insurance, choose Ladder. Check out Ladder today to see if you're instantly approved. Go to LadderLife.com slash Twist. That's L-A-D-D-E-R-L-L-A-R-L-E-R-L-E-R-L-C-T-R-T-T-R-T-E.

And Disruptive Advertising. Sign up for a free digital marketing audit at disruptiveadvertising.com slash twist. Plus, if you go into business with Disruptive, you'll receive a $250 gift card and a free Friday to Sunday ski trip in Utah. Facebook reported their Q3 earnings and disclosed that Facebook Reality Labs, aka Oculus, is spending $10 billion in 2021. Let's break it down because there's a lot of important things going on at Facebook.

They're changing the reporting structure dramatically starting in Q4. So they let us know about that today. And they'll be reporting metrics for two different segments. This is very reminiscent of what Google did with, hey, here's Google the business. here's YouTube and here's other bets like self-driving, Waymo, Nest, etc. So in Facebook's world, currently, F-O-A and FRL are the two segments. FOA stands for family of apps. That's Facebook, Instagram, Messenger, and WhatsApp, all the apps you hate, to love.

And then FRL is a fancy acronym for Facebook Reality Labs. It's kind of dumb that they call it this. They should just call it Oculus, in my mind. That's the brand. So that includes Oculus. And if they ever do some sort of AR product, And so that's going to be very interesting because I think Oculus has some limitations to it. But man, augmented reality, I would not be surprised if Facebook drops a surprise at some point in the next year or two,

given the amount of money they're investing and goes head to head with Apple and Microsoft HoloLens and does AR. That's really for me, the holy grail, not VR. So here is the Facebook press release, quote, we expect our investment in Facebook reality labs to reduce our overall operating profit in 2021 by approximately $10 billion. This is extraordinary. Let's get into their revenue. Facebook revenue for Q3 was $29 billion. That's a 35% increase year over year. That's extraordinary. If you're above 10, 20% growth year over year at this scale, that's serious growth. So, congratulations to the team there. Income for 2021 is on pace to be around $36 billion. In other words, they would make one third more in profits if they weren't doing Oculus.

And that's what a lot of people on Wall Street are going to be wondering, just like when Amazon invested heavily in AWS or with Google investing heavily in Waymo or fiber and other projects. Now, here's where it gets interesting. Facebook gave a wide range for Q4 estimates. This is the next quarter of $31.5 to $34 billion. That's a big swing, right? We're talking about $2.5 billion here.

And they're citing, quote, the significant uncertainty we face in the same. in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes and macroeconomic and COVID-related factors. Now, this is super notable because Apple disclosing the app tracking stuff and the transparency features as a risk factor means it's a risk factor. Like they wouldn't be putting it front and center. They're trying to prepare people for bad news. And I bet that bad news continues.

So why is that happening? Apple is trying to protect our privacy. So they're not letting information about your phone be shared. with these ad networks, Facebooks and Googles like they used to. What this means is Apple is getting to make more money selling ads in the app store, and their percentage of revenue for app installs is going to go up. For Facebook and Google, this means they're not going to be able to target app installations. If app installations are a huge part of the ad ecosystem, why certain apps make a lot of money.

We all know that. There are certain games that have whales in them, certain games that have subscriptions in them. There's a really great vibrant ecosystem. And so people will pay $1, $10, $50 to get an app installed, depending on how much money they can make from it in the future. That's why you see app ads everywhere. Well, Facebook has been making money hand over fist doing app ads. They don't own the app store. And now Apple is basically really kneecapping Nancy Kerrigan style of Facebook. And it's really notable, I think. So, but survivable, let's put it that way.

Like, even if they lost 10% or 5% of their revenue, it's not going to kill the company. It's really an annoyance, I think, more than anything. So let's break down some more of the metrics. 97.5% of Facebook's revenue came from advertising. 2.5% was classified as other, though they don't say what that means. My guess is Oculus is hardware, you know, Beat Sabre and other apps that they sell. And, of course, the portal, the failed, horrible, you know, put a, a, a, a, a, a, a, picture frame from Facebook in your house with a camera and a microphone, something you would

never do it a million years. One thing to note, although advertising makes the majority of their revenue obviously, it did triple year over year, the increase in other revenue. So we could see in the future app revenue of app installs on Oculus become a bigger piece of their revenue. And that would be pretty interesting, right? So let's look at the users. Dow's were $1.93 billion for September 2021, that's an increase of 6% year over year. This is where it gets interesting. So they're

growing very modestly year over year in terms of daily active users. That's DAWS, right? There's DAWS, there's Mao's, there's Wows, daily, weekly, monthly active users. But their revenue is growing 35% in year over year. So what that means is they're getting more money out of every

user, but there's not as many customers here. That's a red flag, not a major red flag, but so it's not a minor one either. Getting more revenue out of each customer is a good thing that you like to see that, but seeing just really modest growth in the user base is a major red flag.

So you do want to see people extract more value from each user, but you don't want to see anemic year-over-year growth in the user base. So that's, I think, a pretty big headwind. Monthly active users were 2.9 billion during Q3. That's an increase of a 6% year-of-a-year, and monthly active users grew 12% previously from 2019 to 2020. So we're seeing the growth of users got cut in half, both in dailies and monthlies. There's two ways to look at this.

One way to view it is, hey, maybe they're getting everybody. They've reached their natural audience. The other way is they might be losing users. And this doesn't say exactly how many minutes they're spending online. That would be another interesting vector. Obviously, they don't want to release that, but you can be sure they're studying that internally. because that relates to all the addictive nature of social media and their revenue. So that's another metric that we'd love to get out of them and understand.

But of course, they're only going to give you the metrics they feel they need to. Daily active people is another metric they use. And that was $2.8 billion on average for September 2021. That's an increase of 11% year over year. And that's the total amount of users across all the Facebook properties. And they define that as registered and logged in users of Facebook, Instagram, Messenger, and WhatsApp. And the mouse and Dow, as I mentioned previously, were only for Facebook, right? So they do have other users.

The WhatsApp users are probably monetized very lightly. I don't think they have advertising in there yet. Somebody can fact check me email producers at Thisweekand Startups.com if I got that wrong. But I don't think they're monetizing WhatsApp all that much. Employee headcount is at 68,000. That's extraordinary at the end of September. And it's an increase of 20% year over a year. They've got lots of people working on the Metaverse, augmented reality.

virtual reality, virtual reality, you don't see the world at all. Your headset covers your eyes. You only see the virtual world. Augmented reality, you see the virtual world laid upon the real world. That's the difference between augmenting reality and a virtual reality. I think you all know that. Revenue per employee, just back in the envelope, but they're making about $120 billion a year on a run rate. You can divide that by 68,000 people and you get $1.7 million per employee. That's pretty staggering when you think about it. So Facebook's revenue, profits, growing significantly, user base slowing, how they're going to respond to this? Could it be natural audience?

And the way you would grow here is to either launch a new platform like Oculus or you could acquire things. They're not going to be allowed to acquire things given, you know, all of the papers that have been released, the Facebook papers and how poorly the companies looked at by governments around the world who have concerns about how Facebook is impacting society and impacting elections, right? So the days of them being able to buy a WhatsApp or Instagram are way over. Or Oculus.

I don't think they would be allowed to make any of those three critical purchases they made. Okay, it's time for another R Crowd Deal of the Week. Right now, you can join Our Crowd's investment in Symptom. According to the deal memo, Symptom helps companies identify and address their biggest cybersecurity vulnerabilities. They use a simple solution that can be up and running in minutes. At this year's Global Infosec Awards, they won best. cybersecurity product. Speaking of great products, all around the world,

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news, according to a report in The Verge that was kind of lightly sourced, Zuckerberg might announce a Facebook rebranding during their Connect conference this Thursday. The verge quoted a source with direct knowledge of the matter. So you can take this with a grain of salt. I'm not saying that the verge is lying, but who knows? You know, when you only have one person talking about it, not 304, it's thinly sourced. And so this may not be true at all. Some people are speculating that it could be Metaverse or Meta.

He seems to be obsessed with the Metaverse. If you haven't heard of the Metaverse, that's just the virtual reality space where users can interact with digital, you know, avatars and places. is Roblox and Fortnite would be considered metaverses. It's just kind of like a science fiction term. Oculus would certainly be considered one. I don't consider Roblox, Minecraft, and first-person shooters like Fortnite, the metaverse. I think the metaverse should be reserved for virtual reality, not 2D,

and maybe augmented reality in some way. But it's something that has never gotten big. If you put aside Fortnite, which is obviously huge, it's basically still a pipe dream. We had second life for a period of time. We now have Oculus, and I talked about this on the pod last week. You have a very small base of users on those devices. I find that real gamers want to play Fortnite on a PC or on a console,

and then casual users want to play casual games on their iPad. So who exactly is the Oculus for? It's not for hardcore gamers. It's not for casual gamers. The best we could come up with was people who wanted to play the golf simulators and stuff that maybe was hard to do in the real world or expensive to do in the real world. Skiing, golf, scuba diving, rec room seems to be pretty good,

things that make you feel like you're experiencing some real world activity. A beat saber comes into mine as well. So if you go to the Connect conference website at FacebookConnect.com, it does have a very metaversey feel. And the conference is branded as a front row seat to the future. Great. AR presence and push VR boundaries are listed as two of the topic sessions. So they don't have an AR product, but they do want to push the VR boundaries.

This says to me that there is something new going on here in terms of focus. My inside information is there's a couple of buildings here in the peninsula over by Coyote Point in the airport here in San Francisco, just south of SFO. Facebook has leased a bunch of buildings and that's supposedly where they're working on this. And I think Zuckerberg's had enough of dealing with Facebook and the things and I think he wants to go wallet on this. And he knows he's going to get disrupted possibly and that's the next big platform. So he is skating where the puck is going, whether that takes another five or 10 years or 10 to 20. But he is very concerned about being disrupted in the way Microsoft was. Remember, he was always enamored with Bill Gates as a role model.

and he saw Gates not get the mobile phone or the mobile phone operating system right and he believes that could happen to Facebook. What's really happening here though is I think he's going to rename the company, break it into units, then if you have to take action against the company, you're going to take it against a specific unit,

and he could, I think, pull a Larry and Sergey, make himself executive chair, put a CEO in charge of Oculus and put a CEO in charge of the Facebook collection of apps. So Cheryl Sandberg could run one group and then somebody else could run the other, He could be executive chair. He could obviously make all the decisions. He's got voting control. But then when they say, hey, come to Congress, come to the EU, come to this country, we're going to pull your plane out of the air with fire pilots. Remember all that drama? Like, he's going to set foot on the soil of the UK and he's going to get dragged to parliament. Well, you can just say, I don't work there. I'm not the CEO anymore. I don't have a day-to-day role. I am the chairman. That's exactly what's happened with Sundar is going. And he will testify. And Larry and Sergey, they do, they

actually don't work at Google anymore. They work on the big bets, which is what they want to work on anyway. And so they can basically avoid any scrutiny. So we'll see if Congress, senators, and parliament, you know, fall for this trick eventually. I think what they should do is look at who has voting control of the shares, and that's the person. So if you're a senator or a Congress person, you're listening, here's how you do it. You can say bring the CEO, but we want to know who's in control of the board. So who controls the board?

Who has the most shares and the most voting pass? power. That's the person we want. And in that case, sorry Larry and Sergey, sorry, Zach, you would have to go and, you know, have these tough conversations about society and the impact these technology companies have, which is a totally legitimate thing for us to have conversations about. And so, you know, the article also notes that the new name is a closely guarded secret and even seeing your leadership at Facebook is unaware. If you were going to do a rebranding like this and you were CEO, what you would do is you would come up with 10 names, you would have 10 logos designed and you would narrow it down and you would have your press team write up all 10

press releases, a landing page, and then nobody would know, and then you would print it. Just like when they, I understand when they did the Luke Skywalker cameo in the second season of Mandalorian, spoiler alert, if you didn't see it by now, it's your fault. They actually filmed some other Jedi in that position so that even if people got on set or somebody had figured it out, they wouldn't be able to leak it because they were different. different endings that were filmed. And they've done that before with other TV shows, where they filmed multiple endings. I think they did it with that show lost as well, this way people couldn't guess or couldn't leak more accurately. And then finally in the Facebook world,

internal Facebook documents obtained by the verge. It seems like today was document dump day. I think all the journalists got all of these documents at the same time and were all agreed to make their stories come out today. That US teenage users have declined by 13% since 2019 on Facebook. This is a big story, I think. and it would match maybe what their growth issues are. Maybe they're keeping everybody who's above, you know, 25 years old, but they're just not getting young people. That would vibe with what we see in the real world, with people who are younger liking TikTok or maybe Snapchat. The internal documents were part of those disclosures made to the SEC in Congress by Facebook whistleblower, Francis Howgan.

The verge obtained, the redacted versions of these documents that were received by Congress. The specific document in question was an internal memo sent by a Facebook research earlier this year. Some more stats from that memo. U.S. teenage users were also projected to drop 45% over the next two years. Young adults between the ages of 20 and 30 were expected to climb by 4% during the same time period. This all aligns. And on average, the younger a user was, the less likely they engaged on Facebook. This makes sense.

The way these are going to work, social networks, that is, the way social networks will work is they will be generational, maybe multi-generational, and every generation or two you'll see them turn over as younger people don't want to hang out with their grandparents. Like if you're on Facebook and you're 19 or 20 years old, you're kind of hanging out with your grandparents and your parents. It's bad enough if you're hanging out with your parents, but you don't want to hang out with your grandparents.

That's crazy. And so you'll see multiple arcs of the life of a social network like we saw for AOL, MySpace, etc. The only ones that may cross over would be something like LinkedIn for business, because, you know, business is still being done there and how could you not have one? So, quote, from the verge, the researcher predicted that if, quote, increasingly fewer teens are choosing Facebook as they grow older, the company would face a more severe decline in young users than it already projected.

Now, this isn't as bad as it seems. As we saw on the revenue, older people have more money to spend, they have more disposable income. they make more decisions about money. So Facebook would benefit as people get older because they have more discretionary spending and people want to reach those people. That being said, for certain categories of advertising, you want young people, the avant-garde, and although they may not spend that money, a lot of people know that if you become a BMW driver or a Mini Cooper driver and they get you for your first car in one of those cars,

you might keep going and buy two or three of those, right? Anybody out there ever buy two or three of the same brand, Tesla, Beamer, Mercedes, Honda's. Like some people just get locked into a brand and so there's a lot

of spending a disproportionate amount of spending compared to the outcome, the output being how much you spend. So you may want to get somebody in that BMW

that costs $40,000 they have some of those entry level models in order to eventually get them up to a BMW 7 or whatever the more expensive ones are as they move up

socioeconomically with discretionary spending. Remember, Facebook was planning on releasing a kid-specific app back in 2017, Messenger for Kids. Actually, they did launch a Messenger for Kids,

and they were going to launch Instagram for kids, and Mossari put that on the shelf. So this jives with what we saw. They wanted to create kids stuff because they're not getting teens, but if I get you early as a kid when you're 10 to 15 years old, maybe I'll keep you when you're 15 to 21 and in high school and college, sounds like that's what they were trying to do. I don't know if it worked anyway.

It is a really interesting time, I think, for Facebook. I don't know if I would buy the stock at this point in time. I do think that they will still continue to grow their revenue at a great pace. I don't think Oculus will necessarily pay off. It's a 50-50. It's a jump ball. Apple could win that. Microsoft could win it.

Google could win it. Maybe somebody who we don't even know who is a startup could win augmented reality is really, although it's an expensive game to play because you have to create hardware, it might not be the hardware that becomes the, that matters. There might be some software that you can use across all of these platforms that then wins the day. In other words, what Facebook did or what Google did. There could be some new business model here like the metaverse, like cryptocurrency, like people making coins and having a distributed metaverse. Maybe that's what wins. So nobody knows, but we do know,

users are slowing and revenue is growing. I give Facebook, obviously, an A-plus on the revenue growth. They got a serious problem with acquisitions and their PR. That's F-minus. And so this is the type of stock I would stay away from. And, you know, I sold all my shares in Facebook when they were at like 110 or 120, like five years, like four or five years ago because I just didn't want to be profiting from investing in this company. And there's plenty of other opportunities to make money in high-growth tech stocks.

Why choose this one until they change your behavior? I don't think that they have been good actors. I'm not sure how much of the current stuff being released is as bad as the stuff they've done previously, to be totally honest. I just think it's one of those companies where privacy and users don't matter as much as the bottom line in the stock price. If they really cared about users, they would offer a $10 a month, no tracking, no advertising version like Netflix does, but they haven't offered that. Just charge us $10. If you really want us to embrace the service, charge us $10, delete all of our data, protect all of our data by deleting it all. I pay you $10. You get rid of all my data. You never sell it to any. anybody, I'll pay you $120 a year. Maybe you let me buy the whole package for $79 a year. I get Instagram, Facebook, WhatsApp, Oculus, every service messenger with no advertising and no tracking. Just do it. See if you can get 10 million people to pay you $10 a month. I know it's only $100 million.

I know it's only $1.2 billion, but it's pure profit. And it would take the heat off because then every time you get dragged into Congress, you can just say, look, we surveyed 3 billion people. Of the 3 billion, 1% said they wanted to pay. 30 million people are paying us 10 bucks a month or 5 bucks a month for the service. We're making $2 billion a year free cash flow from that pure profit. Seems like a good idea, right? So we've got slowing user growth, declining usage with teens, advertising revenues being into by Apple, they're rebranding to maybe make themselves less dependent on the Facebook declining franchise. Sounds to me like a little bit of chaos over there. And from what I'm hearing, people don't want to work there as much anymore.

If you're a young person, do you really want to be associated with this train wreck? Probably not. And that's probably why they pay such high salaries because they have to. But again, I think the chickens have come home to roost. I think all that bad behavior means every time they do something new, people expect the worst from Facebook because Facebook has behaved the worst. If you behave the worst of any other company for 15 years and then people actually give you credit for that, you kind of earned it. I think Zuck earned it. Move fast, break things.

Don't care about people's privacy. Don't care about elections. You know, just move fast, raise the stock price, and be not be thoughtful. And I think that's what people are responding to here. Okay. Stick around for my interview with Jeremy from italic.com. It's a really interesting, groundbreaking and disruptive e-commerce model that I think Amazon's going to have to copy. Stick with us.

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Latterlife.com. Soshwist to see if you'll get approved. Do it now. All right. Next up on the program is Jeremy Kai. He is the CEO and founder of an interesting e-commerce company called Italic. I've been looking at all these incredible marketplaces. You have Amazon on one side. And then you have these house brands like Amazon basics. There's a company I became kind of obsessed with Uniclo. It's a little too low end for me, but I love the concept of just here's the basics, right? Like Amazon basics. And Italic seems to be in a little bit of a high-end space with a little bit of the same DNA. Welcome to the program. Jeremy, I'm really interested to hear about how you came up with this idea

and what the secret sauce is. Yeah, Jason, thanks so much for having me. And it's so cool to hear your voice live after all these years of listening to the pod and you. So thanks for having me. Oh, wow. You're a fan of the pod. You started listening, I understand, back when ship CEO, Kevin, was on episode 431. Did you work there or something? Or are you just a fan of that? That was my first job out of college, actually. So big fan of ship and still keep in touch with Kevin. I love the idea for ship. It was a little bit of like a crazy high valuation.

He got caught up in the Uber, Airbnb on demand type. And I passed on investing. I saved some money, I guess, there. But there's no like victory for an angel investor to say, ha ha, you failed because 80% of startups don't work out. But I was in love with the startup. I actually used it. What was really unique and special about shape?

before we get to Italic? And what did you learn there? Well, you know, I think it really was like in the heyday of Uber for X, you know, everything from food delivery, which obviously made it to, you know, cookies and cash delivery and all this stuff. So I think we were kind of right in the right time at the right place and we were to build a really incredible team and kind of go to market. I think the difficulty is, you know,

I think it was going after what was inherently a B2B play. with a B to C one. And we made that change arguably a little bit too late. And Kevin's still at it. You know, he's working on a really cool startup called Airhouse, which does pretty much the same thing, but for businesses now and it's been growing. But yeah, it's, I think it's just a really great team.

And the really interesting thing about the fulfillment that ship was doing is you could just take a picture of something where you wanted to send it. You would call somebody would come, a courier, pick it up, pack it. take a picture of it and send it. So if you were like, you know what, I want to give this iPad to, you know, my mom or I want to get rid of this giant screen TV, you know, usually have to think about, oh, we're going to be a box, I got to bring it somewhere. It just, it just abstracted all of that out of there.

And I actually, when I was doing my move and I was moving my office and I moved up to Silicon Valley from Los Angeles, I used ship for a lot of boxes because I was like, I can get a moving truck with, you know, that truck's full. I'll just take pictures of stuff and have them do it. And it was so much easier because they just. didn't want to packet myself either. But it was part of that group of companies, I think, that maybe unit economics weren't studied as heavily.

And people just sort of had a leap of faith that it would all work out. It didn't. But tell me about your company, Italic, and how did you come up with the idea? And how's it going so far? Yeah, sure. So Italic is, what I like to say is it's a marketplace that connects high-end manufacturers behind some of the world's top brands directly to end. consumers who can purchase those same quality products for anywhere from, let's say, 50 to 80%

lower than, let's say, if they bought that from a brand or retailer. We've been around for about three years. It's been pretty good. I think we've stayed under the radar for a while. We now have about 70 or so manufacturers, a couple hundred products ranging from cookware, from the same factories as Alclad and Staub to, let's say, sweaters from the same manufacturers as, you know, same And Vetting from the same factories, it's like four seasons, St. Bredas, you know, so on and so forth. And we've been able to, I think, amassed a pretty loyal customer base. And in terms of the idea, the short of it is I, my family's been in manufacturing for 40, 50 years.

It's a. In China. Yeah, mostly China, but we've had some stuff in Europe and South America. And the way I like to say it is, if you. If you know anything about manufacturing, it is literally the worst business in the world. It is super low margin, super competitive. You're selling what is essentially a commoditized service for the lowest possible cost. And your clients, you know, are really the ones who make the most, in terms of the margin,

you simply provide a value added service. You take your margin and then you kind of give it to someone else who takes them into your risk and sells it for five, ten times what they paid you for. So I think in the past couple years before I started kind of thinking about, hey, what can we do for the manufacturing side and the supply side of the world, especially in the whole heyday of a lot of these direct consumer brands that had popped up over the past decade. And I think that's actually kind of a misnomer because originally they did cut out the retailer. So they were able to kind of pass on some of the savings to the brand. and now that, or to the conceit group, but now that Facebook and Google are so competitive and so expensive, you know, it's effectively the same product as,

as let's say, a legacy brand. It's the same cost structure you're saying. Exactly. You know, somebody who is selling, you know, a sunglass hut has to do a retail store, but then, you know, Warby Parker has to have, you know, an online presence and they have to pay for traffic. So one's paying for it and giving the money to Facebook and Google for customers,

The other one is giving the money to a landlord for traffic. Exactly. So when I look at the site and I see sunglasses and I say, oh, wow, these sunglasses, these Hancock round acetate sunglasses, they look great, by the way. I always wanted to own a pair of these, but they're really expensive, so I don't like to buy expensive sunglasses. And these are only 30 bucks. And it told me, hey, these are like Lacoste.

Am I pronouncing LaCost correctly? And then super dry in Chanel. channel, I don't know what this channel is, no, Chanel. So what they're saying is, the past clients of the people who made these glasses, that factory has, you're not saying these are the same glasses as Chanel are super dry, to be clear, you're saying that factory previously had customers including Chanel and Super Dry, correct? Exactly. Yep, that's right. And the whole value prop is, that's kind of how we build the quality association is like,

hey, this is a legit product. It's not just like your average consumer brand that buys low, sells high. But this manufacturer who used to produce for these kind of clients, you should expect the high quality similar to those brands. And it says here that there's Zeiss lenses, I'm assuming Carl Zeiss lenses, which are very high in, I think German lenses. I'm not sure if they're actually made there or not.

So let me just be frank here. In another world before you existed, sometimes these factories, I'm not saying the ones you work with, might run off an extra 1,000 pair of Chanel glasses, and they might sell them on a marketplace like eBay or Alibaba as knockoffs or on Canal Street in New York, and there were counterfeits. In a way, is what you've done said to those same factories,

listen, you don't need to counterfeit, that's wrong, that's illegal. You're infringing on people's IP, but you are a sunglasses manufacturer and you have this factory. you're entitled to make your own brand. We will enable you to sell directly to the same customers. All you need to do is make a great product that we approve of. Am I correct that that's what's happening here ecosystem-wise? Yeah, I think that's kind of a good gist of it.

And really, the incentive here for the manufacturer, if you think about it, is like, why are they doing that in the first place? Really, it's the only channel that a manufacturer has to generate revenue is to go get another client. It's the same model as always like you start with an order. The manufacturer maybe makes 25% on top of cost of goods. So if it's like a $10 product, they're making two to, they're going to add $2.50 on top of that $10 cost per unit.

And then they'll sell to a brand who's ultimately going to sell that for, let's see, 60, 70, 80, sometimes like 100 bucks. and the brand actually keeps the majority of the margin and whether they sell to the retailer or to, you know, directly to a consumer, it's still the same kind of playbook there. So as a manufacturer, like the only way you can grow your business is by adding more and more clients

or by increasing the volume of production that these guys are running. Yeah, they're in a trap. It's a race to the bottom. There's no way for them ever to make margin. So what you've done is said, hey, listen, make a high quality product. you don't have to worry about doing the ad campaign of Chanel. You don't have to worry about building a presence in the United States will be that

presence for you. And you've essentially created a house brand like Amazon or Whole Foods is 365 or Amazon basics. But these are anything but basics. I'm looking at like the sway jackets and the hoodies. They're not cheap. They do seem to fit into what I would call value. Am I correct in how you're positioning this?

It's value. So you save 50. But it's not like buying whatever that like $10 Amazon, really junkie thing that falls apart. Yeah, we want to provide essentially the highest quality product possible for the lowest possible price point. And that doesn't necessarily mean it's going to be the cheapest. It also doesn't mean it's going to be like the most lux kind of artisan made product. But at the same time, I think for the majority of the people who are shopping online, like that's actually a value proposition that people can get behind. I think really it speaks to the alignment of incentives.

Our customers, historically, they're always told, like, hey, to buy something nice, you have to pay a lot of money for it. Or if you want something cheap, it's going to break after two to three wears if it's apparel. And I think that the notion with Italic is like, actually, if you remove the biggest middle of all, which is the brand, you're actually able to deliver that high quality product but for a mass market price point. Which reminds me of Uniclaw. That seems to be the closest to what you're doing. Okay, everybody, let's take a moment to talk about growth marketing and all the tactics and hacks that are out there with me today, Jake Badsgaard. He is the CEO and founder of Disruptive Advertising, which you can visit at disruptiveadvertising.com slash twist. So some questions for you, Jake, what are some of the tips you have for marketers who are planning to take advantage of Black Friday and Cyber Monday this year? Yeah, Jason, 2020 was a phenomenal.

year for Black Friday and Cyber Monday. And 2021 is shaping up to be as good if not better. We actually have a benchmark report where we're monitoring $250 million in media budgets. And we're seeing that CPMs are starting to rise in the 20 to 40 percent range in a lot of industries. And so I'm just worried that a lot of companies are going to get surprised that there's a lot of demand, but the competition is up as well. And if they don't have a good strategy for that, They're going to spend the same amount and get less performance, or they're going to have to spend a lot more to get the same performance. And so they've got to get on top of that. So if you want to sign up for a free digital marketing audit with Jake and his company, Disruptive Advertising, just visit Disruptiveadvertising.com slash twist.

And if you go into business with disruptive, you will receive a $250 gift card and a free Friday to Sunday ski trip in Utah. We'll see you on the slope. It's going to be a great season. But Uniclo, as I said in my little opening there, I find, You know, like, I have some Uniclo. I, you know, I spent like, you know, 500 bucks there one time. I couldn't believe how many bags it was. And I tried it on and I was like not high enough quality for JCal.

I'm not like, you know, Chimoth level. But I'm also, I'm not looking for something that's itchy or maybe too tight or whatever. We're just not as good. So I kind of like the idea that this exists. You started with a membership, I guess, like an Amazon Prime or a Costco model. I don't know what you were charging, maybe 120 bucks or something to be a member to get access. to these. You've recently pivoted out of that. You still have a $60 membership that gives you $120 a year. Explain to me what happened with your loyalty program slash Amazon Prime and how you decided

to change that up. Yeah, I think at the end of the day, what we really care about the most is two things with the membership. One is, you know, are we able to set the competitive pricing in the market that we want to? Our target is to always be at least 50%, lower than a comparable kind of brand would be selling if they sold this type of product. And then secondly, it's just, you know, we're a venture back company as many of the guests here. And we need to grow. So I think on the, on the first part, which is probably the main reason why we made this change, manufacturing enjoys the purest form of economies of scale. I know a lot of kind of founders will preach, hey, we get better as we get bigger. But in manufacturing, it's very literal. The more volume you put through a production line,

the cheaper each cost, each unit cost to make. And in the beginning, our volumes weren't huge. So, you know, we'd be ordering, let's say, a couple hundred per time, per style, and our cost per unit was X. As those volumes have grown with the larger customer base, we were able to kind of really lower those unit costs. And the manufacturers are the ones, it's a marketplace. So the manufacturers are the ones who really were intentionally setting these prices to be very competitive, but they're the ones who are enjoying the majority of that margin. So as that cost per unit kind of drop, we were able to basically start taking margin, or the manufacturers were able to start taking margin as those volumes grew. So we actually didn't have to.

This is a long way of saying, like, we still lose money on every single product we sold. So we needed to make money from the membership. And that's similar to, you know, let's say a prime or Costco membership, whereas now those volumes have grown to a point where we can sustain these prices while still having margin for the manufacturer. You're not on the hook for the inventory. The manufacturer is. So that person making the factory says, I'm going to make this, you know, puffer jacket, which, man, I can't believe these puffer jackets go for $1,000. I'm like these things look like they're worth, you know, 50 bucks.

And somebody's buying them for $1,000. I'm like, it makes no sense to me. And I see here, you got this like short puffer jacket for $70, same as Max Mara or MacA, MacAge. I don't know those two brands, but Canadian brand. And I was like, okay, I might actually. buy a, I was just offended that somebody wanted to sell me a puffer jacket for 700 because I frankly don't think they look that good. Um, but I would certainly buy one for 70 and, uh, but you're saying

they had to take on that inventory costs. They send it to you. You sell it. You give them the margin. So you seem to have figured out how to get them to do this. Basically, they're taking the risk, not you, correct? On the inventory. I mean, I think it sounds like very simple in practice, but, um, if you think about it like these manufacturers, many of them, first of all, we have like, um, And we work with, let's say, one of my favorite things is to say we work with maybe like five to ten publicly listed manufacturers. And of those like five to, none of them have websites. They're entirely offline. These guys have been around for like, you know, generations.

A lot of these are family businesses. So they've been around for 50 to 100 years. And the interesting thing about it is they've never really had a client come to them. If you think about it, like they always get paid for the work they do. So, you know, 100,000 piece run. You pay a million bucks for it. And that's how they make money. Whereas in Italic, we're actually saying, we're going to them and saying, like,

hey, actually, we're not going to pay for you for the product that you make. You're going to pay for it. And then we're going to pay you when we sell through it. So it was a pretty big ask for a lot of these guys. And, you know, I think for what it's worth it, that's one of the reasons why we really wanted to open the floodgates was the more customers we have, the more volume we can drive. Yeah, you were basically acting against your own interest by throttling the number. How quickly these things move to is you want to sell it out as well.

So I guess the question everybody's asking themselves is, have these big brands just absolutely gotten infuriated by this? Or are you too small to, you know, come up on their radar? Or they just think it's a different customer base. But do you have the, you know, Chanel's of the world sending you a cease and desist saying, hey, you can't say the factory does this? Or are they going to the factories conversely saying, hey, we're not going to give you our patronage. We're not going to use you because you're selling us out to Italic. I mean, that's the, I guess that would be the tension, I think, eventually would happen with this business, but maybe I'm overthinking it. You know, it almost looks like you have a look behind the scenes because, you know, all of that and above is true.

I think, you know, as a business model, we're not here to be friends with the brands. We very literally are kind of saying to the customer, hey, like, this is the same quality product. You don't have to pay this really expensive price for a label on, on, let's be a little. say that puffer jacket, which really is what inflates that price so high, but instead you can get that same quality product for a much, much lower price point. So obviously as a brand, like that's directly counter to the value proposition. And brands have to sell the story that expensive means kind of premium. On the flip side, though, you also said it's a different customer base. And I think that's fundamentally true. In my mind, at least, like, we're not here to displace brands.

Brands will always be around and they're super powerful more today than never before. But at the same time, over the past 10 years, that's the fastest private labels I've ever grown in the U.S. and the West alone in literally every single department or a retailer store that you can think of including Amazon. So I think in my mind, like the emotional kind of purchases you make in your life, you're going to pay a premium and you're going to go buy the branded version of it and the rational, you know, I guess a good way to put it, but it is like if you want to buy a Chanel bag, there is no world in which like you're going to buy the italic or like unbranded version of that. But if you care about a value, you know, purchasing decision in a specific product or category,

an Italic actually does really well to fit that. And you're totally right. You know, brands certainly have the ability to go to the manufacturers and say, hey, guys, don't do that or don't work them in Italic. There's a lot of ways that they can kind of bite the hand that, I guess, feeds them. They can put some pressure on them. Yeah, for sure. But on the flip side, there's only so many great manufacturers in, let's say,

sunglasses, right? There's a handful in the world that meet those quality bars that these premium brands want to hit. And if they go back and say, hey, we're going to drop our business and move to somewhere else, it's actually a very high switching cost. So I think for us, like, obviously, we're at the, you know, best of whatever our manufacturers want and we're here to serve our customers and our manufacturers. So if they're like, hey, you can't put this brand name on, like, by all means, we'll do that. But generally, it helps them, their business. And You're also right in the sense that we're so small right now that doesn't really matter to the bigger guys. What impacted the early days of COVID and everybody being at home shopping and stocking up and having stimmy checks and their NFT and their Bitcoin going up and everybody just being flush with cash?

Did you see like, you know, 2019 to 2020? What a revenue jump? 2x, 3x, 10x? Yeah, that was exactly a 3x. And then 2020 into this year has been kind of about the same thing. And we're not, you know, we haven't really been actively marketing yet. Hopefully, you know, now that we've kind of unlocked the floodgates, like we actually can start doing that a lot more. But yeah, COVID wasn't accelerated for us, but also probably 90% of the brands up there.

And people on PCOM and marketplaces in general. So we saw a spike in home goods, depression, and kind of, let's say small leather goods or accessories. But things have normalized a little bit recently. Yeah. And I read here in my notes that some folks have talked a little bit about this. I guess legal people have opined on your use of brand names. It's very minor. The fashion law, in fact, said, should I talloc be faced with a lawsuit, such a lawsuit, italic, a claim that's use of the brand name is nominative fair use because it's only using it to describe the output of the factory, yada, yada, yada. And that makes sense to me. It doesn't feel unfair what you're doing. It feels like just very upfront. I'm curious, we've seen all

these pictures of, you know, 80, 90 tankers outside of the LA port, the Long Beach port. Is this, how worried should we be about this as an issue? Is this just temporary indigestion? Or is this a sign that people are buying too much stuff and there's a systematic problem in the supply chain that is going to take some long amount of time to get through? I think both are true, honestly. I think right now there's an imbalance between there is a huge depression and demand at the start of COVID for about three, four, five months. And that rippled especially from the European and Asian manufacturing.

Basically, we saw material costs like really, really drop. And then as people started really buying a ton online, I think that one of the things that people who don't work in physical goods don't really think about a lot, because like in software, you know, you commit a PR, it goes live, you know, it's done in a day. Changes in the supply chain, they really go into effect six, 12, 18 months from when the problem originated. So I think to your point, on the first side, you know, there is a very, big displacement right now between where supply is and where demand is right now. And a lot of

the congestion is basically catching up to where demand was, let's say, six to 12 months ago. And you see that on literally every single industry, including gas. And then I think on the flip side. Seeing it with cars. Yeah. Yep. Yeah. Exactly. Cars are great example. I mean, previous was like tens of thousands of jobs. I mean, it's crazy. I mean, people are paying above sticker for some cars. Cars are just not available. People are paying really prices for use cars. Yeah. So what we're experiencing now could have been from the spring of last year in the peak of

the pandemic. People are ordering a bunch of wipes and whatever and all the container ships are getting filled. I'm curious, what is the, because I was talking to another startup and they were explaining to me that they were just going to bite the bullet and fly stuff in instead of, you know, and do air to bring stuff in. Have you had to resort to that? Because I know that in 2019, it was maybe $2,500 for a container. One of those big containers to come from China to the U.S.

Yeah. And now it's, yeah, somebody told me it was 15,000 now. Is that accurate to move a container from China? It started, yeah, that's accurate. It started starting, it is starting to come back down. I think we restarted, I think we've seen the peak about a month ago. But I think generally speaking, you know, we as a, it's a marketplace business. So really we don't, we have control of inventory, but it's to a degree where we need

merchants to kind of decide on their own, like, oh, I should stock higher or stock lower, depending on like how business is doing. And as a marketplace in any early stage company, it's like there's a pendulum swing between, hey, we're either overindexing on supply or overindexing on demand. And 2020, we basically stocked very heavily. And going into 2021, I think we are starting to kind of rebalance on the opposite side. So we actually kind of got lucky in many ways. No way we could have predicted, like where, you know, the congestion would have gotten to the severity, but we did get a lot of our inventory, you know, over to North America.

On the flip side, what we also do is a lot of cross-border fulfillment. So we actually, you know, you already mentioned this earlier, but we operate a number of value at it. We call it merchant services for our manufacturers, creative services, you know, payment orchestration, so on and so forth. But the biggest of which is. So help them develop products basically and say, hey, here's what Americans want. This is what's really popular, make more of these.

One thing that's interesting. So I guess just to round out that last point, it's, it's, we operate what we call the fulfilled by Italic Network, which very literally is just like a network of warehouse partners. And many of those actually are in Asia and in Europe now. So we're able to kind of fulfill directly from a point of origin to the U.S. as opposed to having to wait for a freight to hit. Those have all gone up as well. But that's a very, I think that's still not commonplace in e-com. What does that mean?

That means if I buy the puffer jacket, it comes directly from China to me? Or it comes from a warehouse somewhere to me? It's always from a warehouse. We operate what we call the FBI US network, the FBI-C network, and then the drop-ship network, which to your point is from the manufacturer to the customer. And all three of those are just intended to support different types of products. So in the case of a puffer jacket, it's actually pretty bulky. So that's something we would import and have fulfilled from North America.

but Apple, for example, a lot of their inventory actually ships straight out of Hong Kong. If you order a MacBook, it... I notice that, like, the return address is like Shenzhen or Hong Kong or whatever, and you're like... But it seems to me, you know, like, if they're doing so many iPhones and they have a big 13 or 12 release, they take all those pre-orders, they give all the labels to the manufacturer,

they put it on there, and that's why Apple's so good at what they do. How long does a container take to get from China? to Long Beach, uh, on average. Is that 20 days, 15 days? Um,

yeah, I would say, uh, yeah, it typically ranges from 20 to 30. Um, and then you have to wait for port clearance, um,

and the drain it, drainage and that I can take another week of two. Um, right now, you know, uh, because of the congestion that, that,

um, kind of receiving period can be double. So it's not a week. It could be two, three weeks. Sometimes he's in four or six. But, but,

but, uh, but, but, typically it's, it's 20 and that's just because they don't run these ports 24 hours and they're union controlled. And so from what I understand, you know, getting your stuff off the ship, you're basically, you know, if the union wants to work

that many hours are going to work it, but they don't have an overknife ship there. And they've got all these breaks. They could be running twice as many people for twice as long and they could clear this holding up. But there's some sort of negotiation going on right now between the unions and the president of the United States and a bunch of other players. What can you tell us about that, if anything. I can't say anything specific because we just don't know. But I think the one thing that's interesting is, you know, this

one, this holiday season is going to be, like, you should start buying gifts now. You're saying it's going to be a shit show? Everyone. It's going to be a shit show. You wanted to say it outside. So, if you're going to, do not wait until December, buy everything in October, November, early November.

I would shop sooner than later. Yeah. Just assume that things won't want to get here in time. And then I think the second one is, You brought this up earlier as well, which is things in the supply chain that are more systemic than, let's say, this temporary COVID acceleration of what's happening. And I think there's two things that are like, one is the fragility of the current reliance on an international supply chain. And there's a whole kind of conversation that we can on domestic manufacturing. But then the second one is just like the kind of complexity of the current supply chain is very, very offline to this day. And there's companies like Flexport or FreightOS that have done things to help on the,

kind of the freight side. There's companies that have done things on like the 3PL kind of e-commerce fulfillment side. But to the large degree, it's still like a very small chunk of the overall global supply chain. So I think there's a lot of work that can be done to hopefully improve. But yeah, it's basically 100 years old at this point. So there's a lot of... 3PL, just so people know is third-party logistics, the people who will do the drayage, which is storage, temporary storage, get things from the port to your warehouse or the warehouse to the eventual destination. And we had Ryan Peterson on episode 1169, for those of you who want to go check on his episode.

I was in Austin, and I was south of Congress, and I got all these hipster stores there. I needed to buy some underwear and some socks. I was at a wedding and I was wearing like a nice linen suit and I realized, I've got all black underwear. It's not going to work. I need a pair of light color underwear. So I go around the corner and I was like, you know, I should have bought this like online, such an idiot. And I kid you not, the first story I see is Adams. The next one I see is Everlane. And the third one is Warby Parker. And then I saw another one. And all of the, on that south of Congress like hipster area, I think at least half the stores that were selling clothes or items were online stores that now had retail presents.

Are you thinking about a retail presence for this? Because I would love to go to your store and actually try stuff on. And my new concept is, like, I went to Vince, which is a kind of a cool store. And I bought some stuff. I sized it out there, but now I do all my ordering online. I sized out at the Nike store. I figured out there sizing at the Nike store. And now I've ordered five times. So, and producer Rachel, who is a super fan of yours. says, oh, please. Yes, I hope. She is really into it.

And how do you deal with sizing? Because you're a collection in a marketplace, a very curated one, but is a large, a large, a large on yours, like at Uniclo? Or do you have to deal with the fact that manufacturers might have different ideas about this? Yeah, that's a great question. Well, I guess there were two things to unpack. There are one on the offline side.

I think you mentioned South of Congress, but I literally think every single city in the U.S. has this version of it, like in SF, it could be Mission or his belly, you know, in New York could be West Village and, you know, every single city has that pocket. L.A. could be, you know, Venice. And it's always the same stores, right? Yeah, DTLA, there's an awkward. Warby Parker, Everlane. Glossier.

Glossier, yeah. Used to be nasty gal was the pioneer. Rest in peace. And I don't know if that's their operating. Yeah. Yeah. So are you, have you thought about Omni Channel? Yeah, somebody bought Nessiggo.

You've thought about it, but is that going to be part of this recent mega funding? I certainly wouldn't call it mega funding these days. I think we're dropping the ocean right now. But I think the, I would never say never, but I do think as a business, our specialty is online. And what we really kind of have built competency around is providing a great e-commerce experience. I think eventually, you know, there can be cases. where we'll do pop-ups or things like that to do brand awareness, and we'll bucket that under the brand and marketing budgets.

And it may or may not be permanent, but I think for the time being, we can build a really big business without having any stores. There's a lot of examples of that like Etsy and Wayfair and nowadays Sheehan and plenty of examples over there as well. So I think my personal preference is to avoid brick and mortar, and not to say that that's a great customer experience, I do think, like, you know, there's ways that we can do a better job there.

But there's a lot of business, you know, for example, the Uniclo in New York, I know your big Unicle plan. That store alone. I was very intrigued by it, but it's not where I shop. That store in New York alone does $100 million a year. What? Yeah, I kid you. A hundred million a year.

Three million a day. Marong. Yeah, it's just pure volume and convenience, right? You don't have to wait for something to get that. you in five to ten days. And that's something that's for, you know, a company like Amazon or Italic or anyone is a really difficult to compete again. So I think there's, you know,

merits to doing so, but I think there's also merit to figuring out and getting really, really good at what you're good at. And right now, I think our preference is to focus on digital. And then in terms of sizing, that's a challenge for any company. You know,

anyone who works in apparel knows return rates are north of 20, 30, 40 percent sometimes, including for companies like Shoppop, which is owned by Amazon. So it's kind of the cost of doing business. You can have to bake it into your variable contribution margins for the products that you develop and the prices that you set. But I think there's things that can help a lot. So standardization on the size guide, providing those size. I mean, a company like Nike, for example,

hundreds of factories they work with to produce, let's say, a shirt. But it's typically pretty consistent because they've gotten really good about quality control. and providing very accurate dimensions and patterns and specs for the manufacturers to produce against. So we're getting better. You know, we certainly are not perfect at it, but I think there's ways to control it. So when you're manufacturing in China, there's been some, or, you know, in any emerging country, there could be issues around child labor, there could be issues around slave labor, or, inhumane conditions. Apple has had to deal with this a whole bunch. I think net net,

they've probably had a good impact of steering the emerging world. I can't say third world anymore, I think it's emerging economies. And so emerging economies now are being steered by the people buying the stuff to, hey, let's treat the workers better, which is noble and awesome that you have that global impact happening. I notice on your site you're putting the certifications on there. How much can we trust those certifications? How much do you, how much, how much, how much, work do you put into making sure that this stuff is, you know, ethically sourced, I guess. Yeah. How important is it to customers? Do customers even care in your experience?

That's a great point. So do we care? Yeah. I mean, 100%. This is something that I think like anyone who works in manufacturing should and ought to care very deeply about. We have boots on the ground full time. It's a pretty bespisable operation now. And we don't just work with manufacturers in China, to be clear. We have a lot in Europe, a lot in the States. And, you know, we We try to diversify from just a risk perspective. But generally speaking, I think what we care about most is finding the right partner for the category to work with. And that includes a number of audits.

And also it requires them to buy into the kind of trusting us as a distribution channel, really. We kind of think of ourselves as like a private label as a service and for a lot of these manufacturers. And so we go into every single one. We audit every single one, 50 points, ranging from labor quality, cleanliness, you know, sustainability, craftsmanship, so on and so forth. We review the certifications, like you said. Certifications are kind of interesting because they can be viewed in one way in a vacuum, which is just like, hey, it's company certified by, you know,

UL or, you know, ISO or SGS or whatever it is. And that means like they did a good job. But also you have to realize like certifications can be bought and they can also, you know, you have to pay a fee to apply. And you can prepare like your entire factory to look at, good that day when that agent comes and does the audit. So it's not always, you know, it's helpful. I think people who, the manufacturers who care about it do get those ISOs and, you know,

AcoTechs and so on and so forth. But it's not the end-all be all. And organic is a great example of like how that can go wrong in many ways. But I think in the most part, you know, we care a lot about it. But the broader point that you brought up is do the customers care? you know, in reality, I think they care, they want to know that they are shopping from a good place. And I think, you know, if we look at our own kind of supply chain and we put a lot of money behind our words, but at the same time, like, there's a lot of company, there's a reason why the biggest fashion

companies in the world are fast fashion brands. People want it, a decent quality product at a really, really low price. And do they care about the manufacturing standards or ethics? Probably not. And you can make that argument pretty much in any single category. So I really think it's, I think comes down to the companies to diligence, the manufacturing supply chain more so than the consumer, because ultimately we know by now, like, customers don't actually, you know,

purchase directly against, you know, those boundaries. So it's a really tricky one because I can tell you with really a high degree of confidence, It's like most customers do not care where a Nike product was made or where an Apple product was made. They care that they're getting a Nike logo on the brand or they're getting an iPhone, right? So it's tricky. So right now I'm looking at my cart. I have the site up while we're talking. And I was like, you know what?

I just bought ski gloves and goggles. But, you know, I'm always losing them or forgetting them. And I was like, wow, $50. for really good goggles and like 50 bucks for or 30 bucks for men ski gloves. I was like for 80 bucks. I mean, I spent 400 on those two things, those two items, like 200 each for the best ones you could get. And I'm like, for 80 bucks, I can have a backup to these.

And then I'm reading the reviews and they're literally people saying, like, I just spent 200 bucks on these things and these are better or as good. That's got to be a great feeling when people are basically saying, hey, these are as good as the ones that I paid $200 for. Yeah, I mean, that's kind of why we're in business. It's really, you know, I like to say we're not here to build like a sexy consumer brand that like is hot for a moment and kind of people forget about in five years. We want to build something lasting and oftentimes it's just like all about value.

It's what's the quality you can deliver and what's the lowest price you can offer that at while still building a business around it. So, you know, we've had a lot of cases where we haven't hit that and that's on us. But I think we're improving. improving kind of the product selection every single day. Right now we have about 650 skews or so. We should be adding another 50% in the next, I'd say like three months or so, really trying to capitalize on holiday.

But next year is really when we step on the gas pedal. The whole intention is like this model doesn't just have to be about apparel. It can be pretty much like any type of consumer good that you purchase, pinching from things like steak to like, you know, beauty. So, um, I noticed the beauty category just getting started with six products in it. And I see that, that facial roller. I don't know what that's for. But I have seen that before. I'm not a woman. And I just, I don't know what a rose quartz facial roller. I don't know how you use that or why you would use that or what that does. But you know, we, we actually had Tina Sharkey from Brandliss on.

And they were doing it for grocery. And I remember. And that was, I think, you know, soft bank just threw too much money into it. And maybe that got them off track. But I've always been enamored by for grocery, if you could just abstract for me, you know, just all the brands and just say, this is the highest quality pasta, source the best for your family, this is the highest quality. And I could just say, fill the cabinets with stuff for my family that is clean, organized, and the highest quality, that would be amazing. But I get a little worried about some of the quality from China in terms of food product. Oh, for sure. Yeah. I would only do that here in the year. Yeah, that would have to be domestic.

But listen, congratulations, continued success. Have you thought about buying one of these factories? Like, I know Amazon was thinking about buying factories. I don't think they did, but I do think they bought out the rights to some factories

for Amazon basics, is what I heard through the grapevine. What is Amazon doing with factories in China? Is it true? Or have you heard that rumor as well that they bought out factories? And, I mean, Americans have a hard time owning stuff in China.

It had to be a joint venture, obviously, but. Yeah, I mean, it's interesting. On the luxury side, a lot of what has happened over the past like 30 years specifically is obviously consolidation on the brand name. So you have companies like LVMAG carrying Rishman, so on and so forth, consolidating those premium labels. But on the flip side, you also have consolidation around the supply chain. So Rishman or LVH can actually go and buy out the factories that they historically have had to share with other clients.

for prioritization, for cost optimization, so on and so forth. But it's still, like, relatively speaking, a very small percentage of their overall supply chain. Factories are incredibly expensive to operate, and also a very low margin business that truly rely on volume to make money. So I'm not surprised that Amazon did not buy anything on the factory side. It's a really expensive kind of operation, and you have to really know what you're doing to operate. They've also been, you know, speaking to Amazon specifically and their kind of work in China, they've started to shut down a lot of their best merchants actually on the Amazon marketplace. They did a recent audit where they pulled like literally hundreds, if not thousands of,

some of their top stores that were cross-border kind of China-based sellers. So I think there's, you know, I can't speak to why specifically or the strategy around it. Maybe it's just for the sake of, you know, being compliant with everything. state side and data protection and so on and so forth. But it does seem like I think right now there's a, you know, an increased, I guess, lens by which people are kind of looking at their supply chain and where products come from. That's always been the case.

I mean, there's an obvious reason. There's some disruptions here. And we have geopolitical issues that are, you know, beyond the scope of this interview. But, you know, what happened in Hong Kong and what could happen in Taiwan, certainly have people thinking, hey, you know, and what happened with Jack? Ma or some other companies just thinking, hey, what's the redundancy here? What's the number one place to manufacture products like the ones you're featuring outside of China?

Or maybe the number one, two, and three places outside of China? You know, there's something interesting that had happened, you know, 20 years ago or so, like, that's when over the past 20 to 25 years specifically, that's when China essentially became the world's manufacturer. during that process, what not a lot of people know is the factories that were set up by those manufacturing groups. Manufacturing groups were oftentimes Korean based in Singapore, Hong Kong. It just happened to open factories in mainland China. It's always for cost.

And you can read like Shudog where this is exactly what happened. Yep. The Japanese were known for opening factories there. Now they're known for subsidizing, moving them to Vietnam or to other locations. I mean, same thing right now. Chinese manufacturing groups going to Vietnam to. to Indonesia, to Sri Lanka. Are those the big three if you had to name a big three?

I'd say. So there's operations that we see happening in pretty much all of Southeast Asia. So Cambodia is popular. Malaysia is starting to come up. But Vietnam is probably number one. Yeah, for sure as well. Although India's a whole other story, but it's not the easiest place to kind of set up a large-scale manufacturing. People forget Vietnam.

is, you know, 100 million people live in Vietnam. People think it's this tiny little country and, you know, it's a third the size of the U.S. It's not as de minimis as, it's not like some Scandinavian country or something with 10, 20 million people. This is a big country. And obviously, India's giant. What's the issue with India? Is it just that they are moving towards a knowledge-based economy or is it the quality of products or is it the geopolitical stuff and, you know, getting stuff out of India? You know, the biggest thing really is, like, it takes a really long time to train a generation of skill labor to go into a factor and actually produce work.

And you, I think a good example of this is like before China was like known for bad quality products, it was Japan. And Japan was known like 20 years prior for really bad quality products before there was a Sony and so on and so forth where it became premium. People made fun of the cars and then they, the cars kick their asses. Yeah, beat everybody in the room. The Germans were rated behind the Japanese for quality for a period of time. I mean, I think the same thing is happening in China right now where the cost, you know, there's three things that happen. The cost of labor has gone up a lot.

The cost of real estate has gone up a lot. So the cost of like operating a factory versus just like selling the land on it. Oftentimes doesn't make sense. Sometimes people just sell a factory itself. In China. In China. In China. So basically, I built this huge.

factory and now somebody wants to buy it for me, I'll make more money selling my factory for housing or retail or whatever. Literally. Literally, then running this thing and being in a dog fight with other folks to win clients. Wow, that's fascinating. I think the other thing is just like materials have gone up. So across those three vectors, like now it actually, now the Chinese manufacturing groups are going to, you know, Southeast Asia and less so, but because Indie's more homegrown in terms

of the manufacturing groups over there. And there's great quality on both sides. So it's not so much like a, there's, um, they're just. happens to be a lot of skilled labor that has built up generationally in China over the past 20, 30 years that doesn't exist in India quite yet. And they have brought that over the past 15 to 20 years to Southeast Asia and Vietnam most prominently. That I think is starting to be developed and fostered in India and Sri Lanka and so forth. But I think it takes time to kind of lose that bad quality association. I mean, the most complex product in the world, you know, the iPhone

is made in China. And it's going to be moved over to India more and more. But there's a reason why that's the case. Oh, handsets are being made there? Yeah. Yeah, some of the new iPhones are made in India, which I think is great. But it'll take time.

Well, I mean, clearly Apple has, I would think Apple has the biggest geopolitical risk of anybody given they make them there, they sell them there. And they have built the most sophisticated supply. I think their supply chain is probably, who else has really done something sophisticated? Apple and Amazon, I guess, are the most sophisticated in the world?

Apple, Nike, Amazon. I mean, Walmart's amazing as well. Walmart gets a lot of crap for losing the e-com race, but it's an amazing. Before Amazon in the 70s, Walmart was the most technically competent business in the world. These, like satellites, yeah, it's an amazing business.

But yeah. Well, I mean, and I think with this last mile delivery, we're going to see things really become interesting, like getting stuff the same day in two hours. I mean, I think that would be the next thing for you is maybe even, I think, you know, if I was on your board, the question I would ask you is, should we just skip having a store and just figure out a way to do delivery from our factory, like have a warehouse in the middle of San Francisco and New York and say, whatever you order, we're sending somebody on a moped. like to bring it to you in under an hour and then just create a totally differentiated product where it just says in San Francisco, we can get this to you in 62 minutes, 74 minutes. Imagine if the website,

as you pick things, told you how many minutes to get it to your house. Oh my God, that would be like an incredible member's product. Holy Trinity in retail is always, and this is what Amazon was built off of, which was fast, cheap, and better. And I think Amazon frankly chose fast and, and, um,

and, uh, and better because it's actually not cheap. Nowadays, like there's a lot of places to shop cheaper. Sheehan's a great example of what has happened where you can, you don't care about fast. You know, it can come to five to six days, which is still pretty good. It's much better than, let's say, like, a place.

Sheen? Sheen? What is that? Oh, my gosh. S-H-E-I-N? S-H-E-I-N. Yep. It's recently took over as number one shopping up in the U.S.

over Amazon. Oh, I have heard about this. This is the fast fashion where everything costs 10 bucks and you wear it twice? They did 10 billion in revenue this year. Fastest growing in a fashion company in the world. Wow. And they've just been on the radar and stop burning. China.

But they operate in the U.S.? Yep. I think U.S. is their number one market. And you bought them. I did hear about this, but people were like, yeah, you buy a shirt, you wear it to the club, and then you just leave it at the club. Like, I couldn't believe it when I saw it. It was like, yeah, this is.

This men's tie-dye tropical top and short set, $26. They're not a retail business. There are data companies. It's pretty phenomenal what they've built. But to your point, it is not, it is for a different demographic than let's say, I think, what you're shopping for. I'm not, listen, I'm not saying I'm Chama, I don't want to waste money at Prada, but I don't mind buying a t-shirt that costs 50 bucks, let's say. If it's like a super high quality one that would substitute for a dress shirt, because my dress shares cost 200 or 150 or whatever.

Like for me, you know, proper, really nice Vince Mc Weldon, you know, that kind of, you know, Tommy John. Like those. You'll have to send them over to you. I'm literally on your site, like, while we're talking, because I'm looking at the site and I literally was like clicking on stuff and I was like, I'm just going to buy like a thousand dollars worth of stuff. It looks great. Listen, continued success.

Thanks for coming on the pod. Thanks for listening for so long. Congratulations on your entrepreneurial journey. and maybe I'll see you on the slopes out there someday. Yeah, sounds like a plan. Thanks so much for having me. You're a ride a passage. I think you're a boarder.

I ski. I like skiing. Oh, you like skiing. Yeah, it's a big reason why we have those gloves and goggles is just being based on. Because of you. Yeah. Well, I mean, you know, based, I wouldn't say where you are, but based on where you are, that is the place that people love to board because of the big wide trails, right?

You have those nice wide trails. Oh, I love where. I wouldn't say where you are, but when I go to that city. that's where I like to go because the other two resorts, the one really high end, one is nice, and the other one that's really popular is nice. And I know it's connected now, but man, the one that you're at has those big wide trails where you can just really take time, crunch it out. Yeah, that's a good time.

You live in the life, man. Remote from work is pretty great. All right, we'll see you all next time on this weekend startups. Bye bye. Thanks so much.