Episode 6

Navigating Market Downturns as a CFO in Retail and SaaS: Bryan Wolff, CFO, AllVoices

Bryan Wolff
CFO, AllVoices

Episode Summary

If you’ve visited any retail or SaaS industry website in the past year, you’ve seen these headlines:

‘X Company lays off 20% of staff’

‘Y Retailer files for bankruptcy’

‘Z Company reports 80% drop in profitability in Q2’

Retail and SaaS are going through financial headwinds in a major market downturn. What can CFOs of these companies do to navigate the current market environment? We brought on a veteran CFO who’s had experience in both industries to share his perspective: Bryan Wolff.

Bryan Wolff is the CFO of AllVoices, an employee communications platform. He was also CFO of apparel retailer Bonobos and grocery retailer Thrive Market. He’s led finance teams of all sizes across a variety of business models, and we were lucky to get him on the show. 

In this conversation, Bryan and Chris discuss a range of finance-related topics, including:

  • The financial tools retailers should leverage in a downturn
  • Retail vs. SaaS financial models
  • Why retailers should be constantly scenario planning
  • Bryan’s concept of “exhaust” in retail businesses
  • One killer strategy for retailers to lower their customer acquisition cost (CAC)

Bryan goes incredibly deep into the financial mechanics businesses need to survive right now. We hope you enjoy this episode.


Connect with Bryan on Linkedin

Connect with Chris on Twitter and Linkedin

Check out AllVoices

Bryan Wolff

About The Guest

Bryan has worked as a technology investor and executive for over 15 years; having held senior positions at numerous Venture Capital-backed start-ups and other Institutional Investment firms. He is currently the CFO at AllVoices, a Los Angeles-based employee communications platform. Recently Bryan was a Managing Director at Anthos Capital Management, a Santa Monica-based private equity firm, where he had worked from 2017 to 2020. Prior to that, Bryan was the CFO of Bonobos, Inc. (acquired by Wal-Mart), DogVacay (acquired by Rover, Inc.) and Thrive Market, all privately held companies. Bryan has sat on numerous boards over his career, both public and private. Bryan holds an MBA from Stanford’s Graduate School of Business and a BSE in Computer Science from Princeton University. He and his wife, Melanie, live in Santa Monica and have 3 young children.

Episode Transcript

Chris Grouchy (00:05):

Hey everyone. Welcome to season two of the Legends of Retail Podcast, brought to you by Convictional. We talk to leaders in retail and e-commerce so you can learn from them about retail strategy, leadership, management and take their insights back to your company. I'm your host, Chris Grouchy, co-founder and president of Convictional.


What is Convictional? In short, retailers use Convictional to connect to vendors for drop-ship and curated marketplace. My guest today is a finance legend in the world of SaaS and retail, Bryan Wolff. Bryan Wolff is the CFO of AllVoices, an employee feedback management platform, and he was the former CFO of Bonobos, DogVacay and Thrive Market. I brought Bryan on the show to provide guidance and perspective to retail CFOs who are navigating the current market environment with inflation, excess inventory, supply chain issues. Bryan really delivered. We talked about the responsibilities of a CFO in retail versus SaaS.


We talked about their respective financial models, the financial tools retailers need to use in order to navigate financial downturns and how inventory turns can change depending on the business. Bryan shared the inside story of how Bonobos launched its guide shops. Towards the end of the episode Bryan also shares the perfect strategy to reduce your customer acquisition costs as a retailer. So make sure you stick around for that. Here's my conversation with Bryan Wolff, CFO of AllVoices and former CFO of Bonobos and Thrive Market.


Bryan, welcome to Legends of Retail. It's great to have you here.

Bryan Wolff (01:50):

Thanks, Chris. It is great to be here.

Chris Grouchy (01:52):

Awesome. Well, we were introduced by our mutual friends at Zig Capital. Shout out to Dave and Ryan over at Zig. Very grateful for the introduction and we've been really interested in having the CFO perspective on the Legends of Retail Podcast. This is because many retailers are struggling right now with excess inventory, with finding ways to reallocate resources to make cash commitments. And I think that you're the perfect person to have on the podcast to talk about this topic and that's because you have been the CFO of a D to C brand, Bonobos, of a retailer, Thrive Market, a marketplace, DogVacay and SaaS companies. So I think that you have such a well-rounded perspective that I'm just looking forward to digging into all things finance with you today.

Bryan Wolff (02:55):

Awesome. I'm excited to dig in as well. Let's do it.

Chris Grouchy (02:58):

Cool. Well maybe compare how you operate as a CFO between maybe a SaaS startup and a retailer. So starting with your top mandates and priorities as a CFO of a high growth startup and very curious about that and how it changes as you scale the startup?

Bryan Wolff (03:21):

Sure. Yeah. So as a CFO of a startup, or really of any company, I think of the role as a strategic allocator and former of capital. So you are in charge of capital formation and capital allocation at a strategic vantage point to make sure that that capital is being deployed wisely in productivity and is creating economic value for the company. That's the broad overall thesis. That's a little bit pedantic, but that's actually my North Star and I think the North Star of any really good, truly valuable CFO. How that actually plays out for a startup, a Series A or Series B, C or D company in a different industry, retail versus SaaS, versus marketplace, versus consumer internet, differs. But really the focus has to be on value creation and on the capital formation and getting the right capital and the right capital partners to help support that value creation.


So what does that actually mean from a more tangible standpoint? To answer your specific question for a growth company, Series A company, call it a venture-backed company, the top mandate is usually to get to the next phase of a company's evolution. So if you're a Series C and you need to raise your Series A, if you're a Series A, you need to raise your Series B, et cetera, et cetera. At the same time knowing when it's potentially time to exit, because if you see your business slowing down in six months, it's too late to exit effectively. You need to be exiting while you still have good future business performance for the next, call it three to nine months, but waters beyond that are choppier. That's the perfect time to exit.


But assuming you're not ready to exit, most startups aren't because you have a big vision that you're going after, it's how do you get to that next round? What metrics do you need? What story do you need behind those metrics? What team do you need to have in place to be able to have a successful fundraise? And that varies. That varies based upon the industry that you're in. It varies based upon what point you're going to, like from A to B, B to C, and it varies based on market conditions as a lot of people have learned, a pretty difficult way over the last six to nine months. And a good CFO understands that and can help see around corners in a way that helps prepare the company so that when it's time to raise capital or when it's time to exit, when it's time to get to that next level, you're ready. And the next level could also be by the way of self-sufficiency, right? Where your company is break even or cash flow positive and isn't reliant on outside capital for continued growth.


And we could spend a whole podcast on capital formation and strategies around fundraising. And I don't think we want go too deep down that rabbit hole because that is, again, a whole podcast and if you want to have you back, I'm happy to do it. But that's how I think about capital formation. With respect to capital allocation in terms of how to use those funds. CFO, the way I think about my job is, one, don't run out of cash. Managing day to day liquidity and for retail companies that in particular is a challenge versus some other companies that have more predictable cash flows. And then two, having a sound financial plan that has multiple scenarios. So you are again seeing around corners, planning for exogenous shocks, thinking about what happens if things go wrong, also what happens if things go right and being able to really plan for those and rapidly adjust the means by which you're deploying capital within the company. That is a really sound financial plan.


And then lastly, orienting the company and the company leaders to achieve that outcome. My first job as CFO was over a decade ago, but I came from an investment background and I was very good at building a model, but I wasn't very good at actually getting the team to implement and execute, to hit that model. So you have to be able to do that. You have to be able to lead the broader leadership team so that if everyone hits the goals and objectives ahead of them, you achieve the outcome that you're looking to versus just building a beautiful model that has a nice outcome.

Chris Grouchy (07:49):

Sounds like you've got to either optimize for the next funding milestone or you optimize for an exit if maybe things aren't going to plan or you're trying to be opportunistic or lastly profitability. Those are maybe the three optimization decisions one could make as CFO of a high growth startup. I'm actually very curious about the exit option because I was expecting number one and number three, so next milestone, profitability. When is it time to exit? What are some signals, positive and negative, that come to mind?

Bryan Wolff (08:24):

Yeah, it's a great question. Part of it has to do with the founder, the CEO and the team. So what most CEOs don't realize of growth companies, of venture-backed companies, is that when they sell a company, they're not out. They need to be in for the next three to five years because someone is going to buy you based upon your potential, if you want to get the sort of multiple in valuation that's going to lead to an outcome that your investors and really you and your team are happy with, you are in the company building phase post acquisition. So the question is what time to exit is the different trade offs you have of being independent and the risk and control that's associated with that versus finding a partner, and by partner I mean someone to acquire you, where you can help fulfill the mission of the company in a more productive way.


And I hate answering fundraising questions, with respect like, "What's your exit?" Because when I think about joining a company or when I think about fundraising, it's always about creating value. The goal is to grow in an accretive way that makes the enterprise more valuable. But if markets conditions are in a way where someone's offering you a multiple valuation for the company, you have to seriously, as a fiduciary, look at it. And two, there are times when industry forces and dynamics make the future a lot less attractive and finding a bigger partner is a better means to achieve the company's mission. And those are the times when you want to start thinking about an exit. But again, people are going to buy you based upon your future. So you need to be able to project a compelling future outcome and then during the sale process you need to be able to hit your milestones.


So to effectively sell a company, you need to be, I'd say, at least six to nine, but really 12 months ahead of the process to give you a few months to prepare all your materials, to talk to potential acquiring partners, hopefully many of whom you've talked to before. To the extent you want to use an advisor or banker, you need to find that banker. And then you have the numbers in place and the story and the model in place and the process is going to take best case three months, but maybe six to nine months to actually run. All that needs to happen. And if you're not set up for that, you're not going to have a success outcome.


And the old adage of, good companies are bought and not sold, really applies here. If you want to get the multiple that you got on your last fundraising valuation and your investors and your board and your team expects, those things have to be in place where the acquiring company is willing to pay a premium. Because most of the acquiring companies, they're trading off an EBITDA multiple or they're trading off a bottom line multiple. And if they're a financial buyer, they have to have a really good return, unless they're using leverage, that means growth for them to make a return. So if the person's going to pay a high value to buy you, they need to make money on that transaction. So they need your enterprise to increase in value post transaction. And I think a lot of founders, and certainly our first time founders, don't really think about that when thinking about how to approach when to exit or when to be thinking about preparing for an exit.

Chris Grouchy (11:55):

And you mentioned something that's particularly key there, which is during this exit process you still need to operate the business. You can't get tunnel vision on the exit or the fundraise for the next milestone. You're growing and operating through that process. Very interesting. And based on the level of depth, I can already tell that we're going to have a great conversation. But let's contrast the experience of being a CFO of a high growth company to that of being a CFO at a retail or brand company like Bonobos for example. So how does it actually compare the experience of being a CFO from say a brand like Bonobos to a SaaS company like AllVoices?

Bryan Wolff (12:46):

Sure, yeah. And AllVoices is the current company I work for. We're a feedback management platform selling HR software to help companies learn about how their employees are actually feeling and it's the best way to get really honest feedback by your employees. It's a Series A company. But to get your question, a retail company versus SaaS company. Bonobos was a high growth company. We were for a long period of time growing our revenues at 50 to a 100% a year and we took money from venture capitalists and from growth equity investors who were looking for a multiple on that return who weren't IRR investors and appropriately so. So it was a high growth situation.


But retail and SaaS are very different. The challenge with retail is inventory mostly, in that your income statement is an inaccurate tool for cash forecasting because your income statement is based on when you sell stuff, but your cash forecasting is based on when you buy stuff. And those are different. And you need a whole new set of tools to forecast cash because you need to focus on the buying and not the selling, which is done with your accounting software and during a typical close process. And that is a real challenge. And if you don't get that right, over the long term, you can structurally set the business up to fail, over the short term, you can miss payroll or have your suppliers tell you they're not shipping products, which is typically what happens first. You can run out of cash.


So that is a real challenge on a retail company where you have physical goods, you have inventory. For a SaaS company, the challenges is a little bit different. The nice part about SaaS is you have a recurring high margin revenue stream. That's really valuable. That's why investors pay eight, 10 or more times for that revenue stream. So that's really nice. That's comforting. Every month you're getting a check, that's easy. The challenge is, that I think a lot of companies got away from when capital was really cheap, was ensuring that you are accretively growing revenue, so that your go-to-market with respect to how much you're spending on sales and marketing delivered a return where you weren't consuming too much cash to grow.


And when capital is cheap, and like the old Buffett adage, "When the tide comes in, you see who's swimming naked." As money has become more dear, you can't just grow at all costs. You actually need to have built a good accretive growth engine. And that's the challenge for SaaS, which is less of a near term liquidity. I can pretty accurately forecast my cash balance for next month. That's not hard. Whereas a retail company, it's much harder because we have a big shipment and you have to be really thoughtful about how you buy. I could be off by a meaningful amount from a cash perspective.

Chris Grouchy (15:44):

And one thing that you mentioned is inventory. It seems like this is sort of the plight of retailers today, especially in the current macro context. So curious Bryan, we've got COVID, we've got global supply chain problems, we've got rising interest rates and all of a sudden inventory is piling up. Retailers have too much of the wrong stuff. What are some of the tools that you as CFO would use to help a retailer get through these challenging times?

Bryan Wolff (16:24):

Yeah, it's a good question. And I'll give a couple answers and it's based on the different timing of your outlook. Because there's certain things you can change tomorrow, there's certain things you can change next quarter and then there are certain things you can change next year. Things you can change tomorrow is putting in a good control around buying stuff effectively. And this will vary industry to industry. As you mentioned, I worked at Bonobos, that's the apparel industry. We had an open-to-buy process because we were a merchant driven organization, so there had to be effectively approval to buy stuff and that was based on certain inventory sell downs. So that's like near term just being really cognizant of the cash that's going out the door being like, "Oh nuts, we just put a buy order for a $100,000 because it was replenishing something I didn't realize that was going out." I all of a sudden have payable that I'm going to have to fulfill. It's preventing that. That's near term.


Medium term is better reporting. So putting in place metrics around gross profit return on investment, so that the inventory costs get taken into account to the people whose jobs it is to buy and sell. Now this will vary again by industry and industry. I think a lot of error that occurs, and has occurred over the last of 10 plus years in high growth retail startups, is that there isn't that sort of discipline put in place early on. The really good companies who have done successfully well and who are big companies now, they have that. And that's like second nature. They understand how costly inventory is and they account for inventory with respect to the merchants or the planning team, whoever is primarily responsible of running inventory, it varies industry to industry.


And they get graded on that and that's how their bonuses get apprised and that's how people get promoted and whatnot. Early startups don't do that often. The other challenge for early startups over the medium term is, again, this gets back to financial tools being sometimes misleading. The PNL is based upon when you sell stuff, not when you buy stuff. This creates what I call exhaust within a retail industry, where there is stuff that you buy that you don't sell or you don't sell at full price or you don't sell in a timely manner. And again, mature companies have means to deal and account for this and plan for this in a way that takes that into account. Growth companies, when you're in growth mode, don't even think about that. They're like, "Oh, you know..." Whether it's, again, if it's a fashion business where it's a seasonal buy, you sort of forget the last month's buy.


If it's something where you have spoilage, you don't even think about that, you just think about the stuff you sold. So that's sort of a medium term fixing, the reporting. And then long term it's thinking about being in different businesses and fulfilling in a way that requires less working capital and that often means less inventory. So whether that's drop-shipping or whether that's co-listing or entering into other means by which you can still leverage the company's assets, still create value by delivering a great experience for your customers, selling a nickel for a dime, or buying for a nickel, selling for a dime, but doing so in a way that is less dependent on working capital. And that's a longer term one because you can't really change that overnight. But it's one that as we are entering a higher rate environment, I think a lot more CFOs and companies are going to look at. 'Cause ultimately the cost of carrying capital is based on the cost capital and with the cost of capital going up, the cost of higher capital usage areas of the business has increased.

Chris Grouchy (20:32):

So many gems there. What is the role of scenario planning? You have oversight, reporting and metrics and then upstream from those practices that you mentioned, you have discipline. So just rigor around it. Talk to me a little bit about scenario planning. How often should we be doing scenario planning and around what?

Bryan Wolff (20:55):

Yeah, it's a great question. So I'll say, and I do it currently and over the years, I've done a lot of advising for finance departments, for CEOs. I also, you read my bio, there was a four year period where I ran growth, I was the growth partner for a growth equity fund. So I was spending time with 15, 20 different companies in this type of role. Helping them with their capital deployment plans, that kind of stuff. The two biggest tactical mistakes I see CFOs or companies make is, one, keeping your financial plan only within a calendar year. And then two, having only one plan with no scenario plan. So people put so much time into your annual budget and your annual budget lasts within your fiscal year, for most people it's a calendar year. But some people it's not. And then they'll maybe spend 5% of their time or less doing out year projections and then another 5% or less doing some scenario planning.


And it's just crazy to me because now we're in October, you know will get people where I'm like, "Hey, what's the next quarter look like?" They're like, "I don't know, I haven't done it yet. We're doing our financial plan in a couple weeks." It's like, well, but it's next quarter. It's like 90 days away. You have put no thought into what hires you're going to need, what's going to happen. Like, "No, no, 'cause this is 2022, that's 2023." You should always be forecasting eight quarters ahead.


And then the other thing is models are uncertain. I can make a model say anything. Anyone who's spent time as an investment banker, as a management consultant, has built a model, knows that every model has errors in it and every model can be made to say whatever you want. It's like what use is it? The use is scenario planning. The use is to see, "Hey, if this moves up and this moves down, what does that mean?" If this contract that I think is going to hit, doesn't hit, what does that actually mean? If this supplier cuts me off, if my CPA in my course of a new customer acquisition all of a sudden gets thrown offline, what does that actually mean for my ability to grow, for the capital required to grow?


And there's just not nearly enough of that. Not because you're going to have an answer that you're going to present to the board in terms of, "Here's our scenario plan," but just being nimble with your thinking and being able to be proactive and being able to really address potential risks and potential pitfalls.

Chris Grouchy (23:22):

One of the challenges that retailers struggle with when they think about planning or financial modeling is how frequently they should forecast their inventory buys. And this depends on the supply model, whether you're buying inventory or you're doing drop-ship. You have Costco who is the preeminent example that I can think of where they actually turn inventory, I believe, 12.1 times per year, which is among the fastest or the most frequent of any of the most valuable retailers in the world. Curious how you thought about forecasting inventory buys at Bonobos or Thrive. Talk to me a little bit about that.

Bryan Wolff (24:08):

So buys is a little bit different than turns. Your inventory turns and the inventory turns you should model to are going to be based on your business model. For a retail company, so let's take a Bonobos for a sec. We're a clothing company and we're a seasonal clothing company. So we had four buys. We had spring, summer, fall and holiday, but we weren't that seasonal because we were buying menswear and we were selling to guys who are not oftentimes so fashion forward. So a lot of what we sold was 52 week products, khaki pants, that kind of stuff. So the structure of the inventory turns with respect to what is possible is going to just vary based upon the industry you're in. Like Bonobos, we can never turn 12 times because we're making four buys. It's just like it's impossible. The math just doesn't work out.


That being said, for Bonobos, which is a higher margin product, we could afford to have fewer turns, right? Because again, the margin, the dollars you make on a product versus the capital cost, the turns, the amount you hold that product at, that should be an inverse correlation. Tiffany has inventory turns of two times a year, but that's okay because they have very high margins. So it really depends on your business that you're in, for what is possible. And then there's just good execution. So there's what's possible, a range of outcomes based upon whether you're selling groceries. At Thrive, we had a much higher turn because we only were selling a similar set of SKUs in the replenishment in those times was much higher and our margin was much lower. So we had to. But we had a good year, we were turning at six times, we had a bad year, we're turning at five. There are tactical things you can do to increase your inventory turns.


But when it comes to buying, it depends. And it really, there's trade offs between margin and inventory. There were certain products for Thrive Market for example, you make money. I used to tell the merchant teams, we make money on the buy or the sell. Sometimes you make money on the buy. So there are certain products, and not to get into too many details, but like canned tuna, there are certain times a year where there are catches where lots of canned tuna come in and where the people who can those tuna want to unload large quantities of it. So if you set yourself up to buy tuna once a week with a replenishment, you'll be paying a much higher price and we'll have times when you're stocked out. So that's one option.


The other option is like, "Hey, we're going to buy six months' tuna and store it because the spoilage on it is very low, it's canned, it lasts for years and we're going to buy it at a cheap enough cost that we can absorb that inventory cost and that capital cost with the margin that we make on that product." And for your entire inventory you to can't have all tunas. 'Cause if you have all tunas, you're going to turn too slowly and you're going to bankrupt to business, but you can't have all high turners replenish in real time either, because you know can't stock out.


And there's a business that, diapers.com, which this is Marc Lore, the guy, he now owns the Timberwolves, but he started diapers.com and then he is called Quidsi's, name of the company. And then he started Jet, which got bought by Walmart, Quidsi got bought Amazon, this was back in 2007. He was selling to new moms and they were selling diapers and stuff for babies, diapers.com. And his strategic thing was, one, we're going to deliver next day. So he put a warehouse right outside of Manhattan, or in close proximity, in a way that people at that time were like, "That's crazy, it's too expensive." You had to pay to have sales tax. Amazon wasn't doing that. And then two, he's like, "There are certain SKUs where we will not be out of stock." So diapers, wipes, certain baby formula, we will not be out of stock. And for all the new parents, you run out of diapers at six o'clock at night, you place an order and it comes 6:00 AM the next morning, you have a customer for life.


And this is, again, now it's a little bit commonplace and there are all sorts of apps where you could get, Gopuff and whatever, where you can get it delivered in 30 minutes. But this is 15 years ago, that was using inventory for strategic means. And there where, I don't know how many SKUs there were, but we will not go out of stock at that. And that wasn't, from a CFO standpoint, you weren't optimizing your gross margin return and investment from your inventory by oversupplying and running at 50 weeks of inventory for certain SKUs. But it was part of the strategic value proposition. It was part of your ability to extend customer lifetime value.

Chris Grouchy (28:40):

It seems like you have to know your business and the context of it and there's no one size fits all advice when it comes to inventory here. But I'm curious if high inventory levels can mask true business performance, is that possible?

Bryan Wolff (28:58):

Oh yeah, for sure. This goes back to my point about exhaust. Your PNL is when you sell stuff, not when you buy stuff. If you buy the wrong stuff and you have unlimited capital, no capital's really unlimited, but let's say you have a lot of cash, which this mimic a lot of companies over the last 10 years, you can show what looks like great performance because you're only showing the stuff you sell. And if you ignore your balance sheet. And a lot of, I think, investors got tripped up because they weren't balance sheet investors. You're investing in technology, you're investing in a SaaS company, you're looking at technology and maybe you're looking at revenue, maybe you're looking at an income statement, you're definitely not getting the balance sheet. 'Cause balance sheet doesn't mean anything for those companies. If you don't look at the balance sheet for a retail company, absolutely, you can buy everything and then only sell a little bit and be like, look how great we are. The stuff we sold, we made all this money on.

Chris Grouchy (29:48):

Yeah, it's interesting I think about that in our own fundraising processes and how the income statement, or I'm sorry, the balance sheet just really didn't tell much story at all, right? So much more about net dollar retention, average contract value, customer lifetime value and customer acquisition cost. Whereas in a retail environment it's a totally different game. But as a retail CFO, we talked a little bit about pricing in gross margin, but how would you approach that as a retail CFO? We can throw a third one in there, which is cashflow.

Bryan Wolff (30:28):

Yeah, this is a complicated one. And to your point, it starts with knowing your business. And as you mentioned, I've been the CFO for two different retail companies, very different businesses, fashion, high margin, grocery, low margin, high turns. And so there's no blanket answer. The blanket answer is it varies upon your business. But let's just start with a retailer, because most people sort of understand fashion retailer like clothing, apparel. For apparel, the way I always thought about pricing was partially top down and partially bottoms up. So top down we needed to get a general margin structure across our entire apparel line to generate enough gross profits to absorb our costs and fund the business. That was a requirement. So we have this gross profit bogie, but how do you get to that and what is the margin required to be able to get to that?


And that really varies based upon effectively how much economic value you're providing to your customer. So if you think about, again, apparel's a good one for this because clothes oftentimes aren't that different save for the label and the brand. Your strength in a particularly category dictated your pricing power and the strength of your brand effectively dictated how much over a comparable product you could charge because customers were willing to pay that incremental amount because the strength of your brand. And even within a company or a brand, it varies dramatically by category to category. And then even within a category it varies by SKU, you make a good buy, you make a bad buy. And this is the challenge with apparel, you pick the right colors, you can charge a premium for them and they're going to sell out. You pick the wrong colors and you're going to discount it and you may still have a hard time selling through it.


So the short answer, I guess, is you need to build it in a bottoms up way. And the same thing, by the way, was within grocery. There are certain categories of which we had private label for example, and private label, we obviously could charge a premium, whereas other categories could have been lost leaders as a means to get people to try out the service. And so you build up your overall company margin structure bottoms up, piece by piece, but it needs to hit an overall top down structure that makes sense within the confines of your company and how big the company is and how much overhead you have that needs to be supported by the gross profit. And really, again, the gross profit return on investment. 'Cause I encourage you to think about your inventory cost that is generated from that buy.

Chris Grouchy (33:23):

Talk about the role of supplier relationships as it pertains to some of these metrics. Thinking about, you mentioned pricing, but even cash flow, is there a connection between supplier relationship and something like cash flow?

Bryan Wolff (33:39):

Yeah. Your suppliers are your lenders typically, right? When retail companies have problems, it's because their suppliers cut them off. Like JC Penney you had to file. Why? Because its suppliers we're like, "Hey, we're not advancing you money anymore." Those are your lenders, your suppliers. And obviously, again, the varies industry to industry, but typically there's someone who is making the product for you, who you are buying from, whether it's either a finished product or it's raw materials. And if your suppliers cut you off, you're debt, that's typically, payroll's every two weeks. You typically don't miss payroll, you typically get suppliers cut you off and you don't have anything to sell.


So making sure you maintain healthy supplier relationships is paramount. And if suppliers don't think you are a viable entity, you're probably not. Perception can become reality very, very quickly. So how this relates to cash flow, you just need to make sure, and this varies dramatically based upon whether you are a large public company with let's say public debt or a startup where he is completely private. But either way you need to make sure that you recognize that your first financier, probably before your bank even, is the people who are extending you credit and ensuring that they have trust and faith in you is a very, very important responsibility. And ultimately it's not the CFO's primary job typically, but if that goes wrong, it's something that will cause tremendous, tremendous damage.

Chris Grouchy (35:17):

We have this saying within Convictional, which is that Amazon cares about the consumer experience, the customer experience, they're customer centric. Shopify cares about the merchant experience, they're merchant centric. Convictional cares about the supplier experience, we are supplier centric. And our second saying is that the supplier in retail is the first customer, without them retailers have nothing. And I think that dovetails very well into what you just said about the supplier is the primary lender in a retail business. Fascinating parallels there that I don't think is totally aligned with how retailers run and operate their companies.


I want to take maybe a second to dive into a specific example of how this might play out with Bonobos. One of their innovations was guide shops. And for people who may not know, guide shops was this really interesting concept where customers could try a product, make the purchase and walk out without taking the product with them. So effectively the retailer getting cash up front, customer doesn't actually leave with the product, but they've made the order. Talk about the financial decision making around that type of retail model. And why do you think that more retailers haven't experimented with it, given how attractive it could be from a finance perspective?

Bryan Wolff (36:51):

Yeah, great question. Okay, funny story about guide shops, is that they were totally developed by accident. Back in 2010, 2011, first three years of its existence Bonobos was pants only. So we were only making pants, that's what we're known for. In 2010, we did a big study and our customers cared about fit and style, so they trusted us for other categories. So we went into shirts as our first forage, dress shirts. We actually did bathing suits first, but that doesn't matter. Anyway, at that point in time we hadn't really raised the institutional round yet, so it was short on funds. We didn't really have a proper design team and technical design. Technical design are the people in an apparel company who make the clothing fit you properly. Very important position. We didn't have those. So instead we had an MBA who's doing it. Needless to say, the shirts did not fit very well and our return rate, which typically on that category should be like 25 to 30% was well over 50%.


So more than almost double or more actually of the return rate. And we were based in New York and we're still small and we're selling to our friends and our friends' friends. So a lot of them, our customers, were still in New York and they'd call us and be like, "These shirts don't fit. What do you want me to do?" And we were so embarrassed and one of the tenants of the company was, "Be customer centric." We're like, "Come in, we'll fix it." So we hired a tailor who would come in and just fix the shirts. What we found is that people came in, they liked meeting us and it was like, "Hey, this place is, you guys are cool, can I try on the pants?" We were like, "No, no, no, we're an internet company, we sell online." And I was like, "Well, maybe we should actually have the pants here."


It was like, "Oh, okay, so we'll have the pants." And then they were like, "Oh, maybe we should have someone who actually knows a lot about apparel and is a friendly, smiley person who answering the door, interacting with the customers versus an engineer or me or someone who happened to be by the door. And so we sort of invented this, not invented, but we let backed into this retail concept and iterated it, and as a startup we had a mentality about fast iteration cycles and we were quick to change things. So it evolved from there.


Let me just say why we did it first of all, and then I can talk about some of the broader industry. We did it because it fit with our model and fit with our customers' needs and wants. A lot of our customers were guys who wanted to look good but weren't really into clothes. We had plenty of customers who loved clothes and would be buying from us multiple times a year, but a lot wanted to look good, professional, men who weren't really into clothing shopping, didn't love going, didn't love the traditional clothing shopping experience. So around now it's October, sweater, it gets cold, it's like, "Oh, I need to buy some sweaters and some pants."


In April, May, it's like, "Oh, it's getting warm, I need to buy some T-shirts and some shorts." Guys will buy twice a year. And if you're buying twice a year and you're going to make a larger buy and you don't need the stuff the next day, you're not buying because you have a date that night that you want to look good for, or you're not a tourist who's out of town who's wanting to take stuff home with them, or you're not shopping with your friend in a social way. That's not how our customer was buying. So for us, the experience as we kept evolving and kept iterating was meant to fit our customers' needs and our customers' wants and the way he wanted to buy.


The other reason why it worked for us was our brand promise was around fit and around personalization for you. So that means we had to carry more SKUs, more sizes, we carried half size, that kind of stuff and more colors than the average retailer and we couldn't fit all that inventory in a store. So we had two options. Either we build mega stores where we have massive amounts of inventory and maybe we could have a chance of fitting or we build smaller stores, leverage our technology and be able to satisfy that customer's needs in a way that made sense. So for us, obviously the latter one was the way we went because it just sort fit in with where we were at the business and the customer were trying to satisfy.


So it gets back to your question of why retailers don't do it. Well, some do. If you're going to buy a car, you oftentimes don't drive out with the car that day, similar with an appliance, or something where a fixed asset where you're buying over a longer period of time, or if it's in the apparel space, you're buying a tuxedo or you're buying formal wear, you're very happy to have it be something you go in buy a few suits, they come a few weeks later, wonderful. So some retailers do sell this way, but for others it doesn't make sense. For others, if you're going back to the grocery, the other industry I've worked privately in, most of the time you go to the grocery store, you're cooking that night, you eat every day. You go to the grocery store because you need something. Not having that in stock and telling, "Hey, we'll send it to you a day or two," is not a satisfactory answer.


And then the last thing comes down to cost. So the inventory cost is potentially better if you pool inventory, you don't have to split inventories at the store, but there's a last mile cost, like getting a box to you from the depot at the last mile. Having a driver, we all have probably drivers who come multiple times a week, that costs money, that is expensive and that adds to the cost of the item. A more efficient means is call a grocery store where a lot of stuff gets shipped to one depot and you have a person going to a depot and buying multiple things. So you need to overcome that cost.


So even in the apparel space, let's say you're UNIQLO or a brand that sells a lot of white T-shirts. You're selling a lot of white T-shirts, just ship them to the store, there's only five sizes, maybe there's three cuts, so you got 50 SKUs of which most people are going to buy six to eight of those SKUs, just have the white shirts in the store, ship all the shirts to the store and have people come and buy those white shirts with three of their items. And that is a much more efficient model with respect to unit economics and the cost to actually deliver those garments to that person's house.

Chris Grouchy (43:20):

It all begins with a deep understanding around your customer and hypothesizing what they might want and testing and learning. I think in so many organizations, this is not specific to retail by the way, but in a lot of organizations they are very pedantic around thinking about how things might impact their brand or whether their customers will actually want something and they have decisions that are made by committee, and so eventually they just say, "Ah, we'll just keep doing the same thing that everyone else is doing that we've always been doing." It's up to the leaders of the company to set a culture that reflects these types of ideals that allow us to innovate and iterate faster. I think that's a segue to culture. So CFO, you're in a very interesting position because you get to interact with all of the company leaders in addition to reporting to the CEO. How do CFOs participate in setting the company culture? And is it different than how your CEO or COO might set tone and culture?

Bryan Wolff (44:30):

Yeah, I do think it's different. And this gets into the partnership between the CEO and the CFO, to be perfectly honest. And it is a very, very important partnership. Call it all companies or most companies. And they have different roles, those two individuals. There's an overlap where they are aligned, but a good CFO gives the CEO ability to do certain things and a good CEO allows the CFO the ability to do other things. So that tandem really needs to work in process. And from a CFO standpoint, we started out this conversation where you're like, "Hey, so what does CFO do?" And one of the things I said was capital allocation and capital allocation is like budgeting, i.e. where you spend your money. And to me there's no bigger indication of a company's values of where you spend your money. Who gets promoted, who gets raises, who has the ability to hire teams to go after certain company initiatives?


Those are typically things the CFO under his or her control. 'Cause the CFO is the capital allocator, but there's no bigger culture setter than that. So that's really to me how the CFO really impacts culture. There are other, I would say, micro ways and whether we care about being frugal and therefore we're going to make sure employees are thoughtful about how they spend money or whether we are going to be really customer focused. So we're going to make sure that all customer communications have the right tone. There's certain things that a CFO can do as well, but those are much smaller. The bigger one to me starts with capital allocation and that, again, you have to be aligned with your partner, the CEO.

Chris Grouchy (46:24):

It seems like CFOs underrate the behaviors that culture ultimately enables. And so I think that's an interesting way to put it, that the culture is enabled by the principal set on what the company has determined is important and what's important is what they spend money on. And if you're spending money on stuff that's not important, maybe you want to think about that a little bit more critically. The other day we were chatting about Convictional and you said something that struck me, which is that retailers need to buy what they acquire. Can you unpack that statement for me?

Bryan Wolff (47:04):

Yeah. This is sort of an interesting one that I learned from a company, in fact I'm on the board of, that did an amazing job at this. But traditional retailers are merchants. They buy something and sell something, buy for a nickel, sell for a dime. It's sort of an easy business. And with e-commerce that really, really got turned on its head because when there is ubiquity to be able to go from one store to the next and almost infinite choice, the challenge has been going through the aggregators, your meta properties and Google and Amazon who are the three primary ones at scale. They are the determinants of what the customer sees. And guess what? They have a very high value. Look even at these depressed prices, their market caps are good because they're good at extracting value there, they're really, really good at it. And as a result, the scarcity is not the thing that is bought, but the scarcity is the customer's eyeballs and the customer's attention.


And if you are able to buy some, to acquire customers buying intent, that is valuable. Now you have to be able to deliver that product in a way where you still make money at a cost that's less than that value, but that concept of customer intent that you've acquired is not, I think, really internalized by a lot of companies. Let me talk a little bit more detail. I think it was John Wanamaker, one of the early department store guys, he had this famous saying that you've probably heard is, "Half my ad budget is wasted. I just don't know which half." I would say that today we have very targeted marketing, even with the Apple rules that have made it a little bit harder one-to-one, you still have a pretty good idea of, "Oh, I served that person an ad, she bought something from me." Okay, that was an effective ad.


And retailers absolutely think like that. What they don't think about is what about all the people who came to me wanting to buy something that I don't sell? Or wanting to buy something that is a little bit different from my core value proposition. That is a massive, massive, massive opportunity. And I just don't think companies are set up to, especially companies who are merchant driven, we buy then we sell, are driven to think like that. And the beauty is for so many customers, especially for growth companies, your marketing expense is one of your biggest expenses. You live and die by your CPA, your cost per acquisition or your CAC, your customer acquisition cost. One of the best ways to lower that is take all the demand for stuff that you don't currently sell and find a way to monetize it. Whether it's a lead that you pass on to someone else and you sell a lead, or whether you decide to drop-ship someone else's product because you're never going to sell that product, but you are able to acquire that demand with the demand for your product that you actually want.


You don't really need to make money off of those leads because it's a dead weight loss, it's a sunk cost. You've already paid that money to Facebook to get the eyeballs, you can't get it back. So even if you paid on average a $100 to get those eyeballs to you, you can still sell something at 50 and make money because it's the other eyeballs of the people buying the stuff you actually make and your actual customers of where you drive value. And I've seen a few companies do this really, really, really well where they've created businesses, and they're not the core business, but it's a fine little thing to satisfy demand that they get that's like a natural byproduct of a demand that they get, that's actually good demand. And I think more retailers need to think like that and I just don't think they're set up to do it.

Chris Grouchy (51:18):

That is an epic point. So how do retailers, brands, companies monetize the stuff, the excess demand that consumers have or customers have that they do not have supply to fulfill today? And if you are able to do that, it completely changes how you operate your business and its growth trajectory. That is a wonderful way to frame it. And tactically speaking, how we've seen retailers do this is very simple. They just basically take search queries that their customers have placed on their site and they basically just take that as a CSV or a spreadsheet and they're like, "Okay, let's go find suppliers who can fulfill these products because customers want them and they're searching for it." Very simple way to get visibility into that excess demand and then plug in product opportunities that can meet that demand and ultimately drive more margin dollars into the business.

Bryan Wolff (52:16):

A 100%. Your search bar is where you start. If you have one of those businesses, start at your search bar because that is what customers are looking for. That is the highest consumer intent. If you are not fulfilling that demand, you're missing an opportunity. And it may be a product you'd never sell because you can't fulfill it profitably or because it's outside of your customer value proposition, but if you can't find a way to monetize that demand, like that's gold. A customer's saying, "I want to buy this product." What more do you want as a retailer?

Chris Grouchy (52:44):

Exactly. They're banging down your door to buy it, you just don't have it. That is a wonderful wrap up to the interview. I would love to move to a rapid fire round. I've got four quick questions. Just give me the top thing that comes to mind. I'm going to give you the question and just give me your answer in about 30 seconds or less. How does that sound?

Bryan Wolff (53:09):

Good. Judging by this interview, I've been bad at keeping answers to 30 seconds, but I'll do my best there.

Chris Grouchy (53:14):

All right. I'll let you go if you run on, no problem.

Bryan Wolff (53:18):

No, no, don't cut me off.

Chris Grouchy (53:21):

Let's start with number one. What is the most exciting opportunity in retail and e-commerce today?

Bryan Wolff (53:28):

Let's see. I think the most exciting opportunity is still on ways to create customer demand. If you can find a way to do that... I know some of the Chinese companies have done group shopping and if there is a way in which you can create demand, there is still massive, massive value in that. I just don't think, because of the dominance of the platforms who may be starting to erode, that there have been enough shots on goal on that one.

Chris Grouchy (54:01):

Love it. What is a brand you love and why?

Bryan Wolff (54:07):

I love Patagonia, probably like a lot of people do. It fulfills its promise really well, and it's something that I've never regretted buying a Patagonia product and I've never been let down by the customer experience when something happens to that product.

Chris Grouchy (54:26):

What has been your most important lesson as a parent?

Bryan Wolff (54:31):

As a parent, you have to let them fail. I have three kids, they're nine, six, and four, and I think the hardest thing is you see your kids struggle and you just want to help. I think that's any doting parents' initial response and that's the wrong reaction in both cases, in my experience. You just got to let them fail, you got to let them do it and you got to let them fail.

Chris Grouchy (54:55):

Like a retail CFO, there's no playbook for being a parent.

Bryan Wolff (55:00):

That is true. I learned that after my third kid. I was like, "Okay, somebody would give you the manual at this point?" And nope, no manual. It's frustrating.

Chris Grouchy (55:08):

We'll end with our final question here, which is the kindest thing someone has done for you, or kindness in recent memory? Whatever comes to mind first.

Bryan Wolff (55:19):

That's a really hard question. The thing that comes to mind is totally such a small, little, nothing act of kindness that I feel bad answers, so I'm going to actually think of something a little bit deeper. Honestly, receiving feedback to me is... And I was given some really good feedback the other day. Feedback's a gift. It's something that I really, as I've gotten older and more senior professionally, you get less and less feedback and you appreciate it more. And I was given a really useful piece of feedback the other day, and I am incredibly appreciative of that.

Chris Grouchy (55:58):

The best feedback is always the most cutting to the stuff that just is the most painful to hear. So it's incredibly kind when people have the courage to deliver that, especially someone in your position. Bryan, you truly are a legend of retail, but a true legend of business strategy, of finance, of operations and so it's been an absolute joy to get to know you over the past few weeks and to have this conversation. I'm so grateful for it and for Zig Capital for making the introduction. So thank you so much, Bryan. This has been an absolute pleasure.

Bryan Wolff (56:29):

Chris, the pleasure's all mine. Really great to meet you. I love what you guys are doing at Convictional. Appreciate your time. Wish y'all the best.

Chris Grouchy (56:37):

Thank you, appreciate it.


Thanks again to Bryan for coming on the show and thank you for listening. To catch the latest episodes of Legends of Retail, please subscribe now to the show on Spotify, Apple Podcasts or wherever you get your podcasts. You can also stay updated by following Convictional on LinkedIn and Twitter. Finally, if you want to share feedback with me on the show, DM me on Twitter, @ChrisGrouchy, or you can shoot me an email, I'm chris@convictional.com. Thanks again for listening.

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