Acquired - Arena Show Part II- Brooks Running (with CEO Jim Weber)

0:00So have you gone running yet and your custom acquired ghost 14's dude the ghosts are amazing. They are the best sneaker I have ever known Bar none hands down. I used to have adrenaline's adrenaline's are also great, but I literally wear them like all day every day But David those shoes are only for active runners. You're you're misusing the point of the ghosts. Well, with a baby, I mean, I'm literally wearing a baby walking the hills of San Francisco. I'm burning more calories than I did when I was running every day. It's true. It's just a slow run at the end of the day. That's all. That's all you're doing.

1:00presented by pitch book of acquired the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle based Pioneer Square Labs and our venture fund PSL ventures. And I'm David Rosenthal and I'm an angel investor today back home in San Francisco but man what a special day that was in Seattle. That was and we are your hosts.

1:28We're gonna go right here into the onstage introduction of Jim and the Brooks story so I don't want to give too much exposition here except to say that if you've been sort of thinking Brooks is this like shoe brand and what can tech people possibly learn from a hundred-year-old shoe company prepared to have your mind blown. Jim's one of the most dynamic guests that we've ever had on acquired. And I just got so many comments leaving the arena just absolutely floored with all the great takeaways and lessons and quotes that people wrote down from Jim. So make sure you enjoy that. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired LaGora, the agentic operating system that is redefining how the world's best legal teams work.

2:16Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. LaGora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

2:43for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

3:12And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries. And crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers. And that is the real test.

4:04Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. All right, listeners, please note that this is not investment advice. Definitely was an investment advice last episode.

4:34without further ado, on to our conversation with Jim Weber, the CEO of Brooks Running. All right. Now for our final act of the evening, we have a very fun local story that we've been dying to tell. Brooks Running. I mean, woo.

5:00So I think a lot of people are probably familiar with this brand, especially in Seattle, especially if you are a runner. But the story of this business is absolutely unbelievable and extremely undertold until now. So when the CEO, Jim Weber, took the helm in 2002, the company was losing $5 million a year. It was $30 million in debt. It was a week away from missing payroll, and the board was like having weekly meetings to figure out how to make payroll.

5:30It was a business of pretty modest size. It was a $60 million revenue business. And when we talk about this revenue number, you know, it's not SaaS numbers. Like there's extremely real costs in making shoes. So you can imagine not making a ton of money while actually losing $5 million a year. So that business had been around for like 90 years.

5:52and it's all sorts of products at every price point to frankly a pretty random set of consumers in every category, not just running, so enter Jim. Jim came in and bet the company exclusively on serving active runners as a segment, and he cut all other business lines. Over the last 20 years, he's grown the business to over a billion dollars in revenue, billion with a B, and well over a billion, and is thriving and thrived even through the pandemic. So along the way, Brooks was acquired by Berkshire Hathaway and Warren Buffett personally elevated Brooks and Jim to make the company a direct report to him. Jim is a leader, a visionary, and a fighter, not only growing the business over the last 20 years, but personally fighting and beating cancer. Please welcome Jim Weber. Thank you so much. Here we go. This is great. What a show.

6:52Jim we figure you have a lot of footwear already And this morning, thank you for hosting the run. It's fun. So we have an acquired hat for you and Required bag with some more goodies in it from the acquired family. Best gym bag at the company. We hope to see this in the Trailhead store starting in 2023. I love the goal. That's the first gold trim we've got on an accessories bag. It's great to be here. Well, my first question in the way that I want to just tee this off. I mentioned it's an untold story until now. I heard you just launched a book. So congratulations on that. Thank you.

7:37Thank you. Could you just tell us a little bit about that? What is the book? So the book is running with purpose. And Brooks has been a fabulous journey. And I'm a person that believes in life, the journey is to be, you know, just cherished and enjoyed because the finish lines are fleeting. And we all want goals, we all want finish lines. But you got to enjoy the journey along the way. And I think we're all creatures of our journey. So Brooks has been through a lot.

8:07And it's a David and Goliath story. It's a turnaround story. It's a purpose driven, culture driven brand story. It's a focus niche, challenger brand story in an industry like so many that's dominated by platforms, one really, really fabulous platform. And so we've navigated that. We're building a really cool brand with lots of runway yet for growth.

8:34And it's a great business too. And so I wanted to tell that story because if you're not a runner, we haven't marketed to you. I mean, we are so focused. Every nickel has gone to people that are putting one foot in front of another. But the story continues and I wanted to tell it. That's great.

8:53David and I got to read an advanced copy of it, and then I actually just re-listen to the audio book when it dropped earlier this week. Actually, that you narrated, which is very fun to hear your voice while I was running on the Burke by your office listening to your voice. It was a very surreal experience. I want to go all the way back. I'm going to play David's role in this one. Let's go all the way back to when you first encountered Brooks in 1998. Talk to us about how you came to the company.

9:23And where the company was at at that point? Yeah, so I had a really fun career. I became a consumer products person after some banking, Pillsbury, M&A, corporate development, strategy, got to run a brand. I've always wanted to run a business. And I ended up following an exact to the Coleman company, so I started becoming an outdoor sporting goods guy. This is Coleman like camping. Coleman camping, but they owned a whole bunch of different businesses.

9:48And I so badly wanted to run a business, a little division they had down in Phoenix, hit the wall, you know, just almost fraud in the counting and everything else. And I came back from a SWAT team and I told my boss, I want to go run that. Put me in coach. And ran that, turned it around, sold it. Went up here to another Coleman division, O'Brien Water Sports. It's in our backyard here in Redmond, Washington, a brand. And I ran that for several years, turned it around, got profitable.

10:17They sold it. There's a pattern here. And then, you know, I went on to Sim Sports, a snowboard company. And, you know, we turned that around and it ended up changing hands. And so there I was. And I joined the board at Brooks. I joined the board at Nautilus, which was formerly Beau Flex. And I did some banking work, middle market, M&A, marketing companies, two investors. But on the board at Brooks, I had an inside view of what was happening there. And good friend of mine, Helen Rocky had run it.

10:46successfully in the 90s, but she left. It was owned by Jaich Whitney Capital, really a top notch for my money, middle market, M&A firm, private equity firm, and they bought it, but the partners that left, Helen, the CEO, had left Brooks, and it started to go sideways. New partners at Whitney, all new management, they went through three CEOs, and so... And you were on the board the whole time? I was on the board, so I had a look inside, and it was a crisis.

11:16Weekly, you guys have experienced this. Weekly board calls on Fridays. The bank is not gonna fund. They want more capital. It was exciting, as they say. So, after a couple of months, we did a lot of work. I saw an opportunity, and I jumped in. And I love running businesses. I love solving the puzzles. But by that time, and I sort of tell it in the book, I really wanted to play the long game. I wanted to build a brand.

11:45And, you know, the TAM, I love your industry. The market and running, it's the biggest category in all sporting goods. It's the biggest category in athletic footwear. It always has been. It's about a $30 billion category globally, apparel and footwear. So all we had to do is get a, you know, and we could survive and we've just kept at it by design because I just decided I want to play the long game and build a brand.

12:12build value. And so that's why I'm still there. I'm a weird duck. But I've got, I've had four owners and I've played through each one. And kept that opportunity out there for the next owner. So at that moment though, I mean, Ben mentioned you did a little this, a little that. It's like that line in Wayne's World of Valley. Oh, I've got a collection of hair nets and name tags. Like, when you were making football cleats, like what was Brooks at that point?

12:40Every brand in Athletic Footwear and Apparel plays the whole, you know, athletic director's purview, right? You're in every sport. And what no one understood that I found out later is that the mindset in our industry literally came from owning a factory. When you had a shoe factory, you had to keep it busy all year long and keep the people in play. So you went from baseball clates to wrestling shoes to bowling shoes to running shoes to put, you know, you had to make everything.

13:10And the business developed that way. And you had to view it as like the product you made was like a factory that made shoes. And so most of it, we were losing money on. And that was the secret, right? So we had good, better best, $30 shoes, $80 shoes, and then performance running shoes that really started at that point, about $100.

13:29And then we had court shoes and family footwear. We called them barbecue shoes and lawnmores shoes because that's what you did in them. And all of it was very low margin. All of it was tying up inventory and cash. And the retailers were ambivalent about it because we were number eight or nine at everything. Our brand was not strong. And so, but when we made the decision to burn the boats on everything but performance running, The industry had never seen that before, and most people thought we were crazy that we wouldn't survive. And so you came in as CEO, I think in 2002, maybe late 2001, but- April 2001. Okay. Was Whitney looking for you to do the thing that you had done several times in your career before, which was just get the business to profitability? Or did they have a notion that you had an inkling that you could build a big powerful brand here, and actually-

14:23build a tremendous growth business. By this time, you know, I understood what they needed, and I'd talk about a little bit in my book. I'd run three, and I was a little bit smarter, fortunately. They had to liquefy. There was no question about it. They were going to sell. And the employees knew that I was just coming in there to sell this thing. They had a pool on how long I'd last.

14:44But I wrote on my board one of my favorite quotes from Benjamin Disraeli. The secret to discuss is constantly a purpose. I wanted to create value. I want to build a brand. So I decided when I walked in, I was going to play through Whitney. I was going to get them a good outcome, but I was going to stay.

15:02and play through it. And I thought we'd get another private equity player, we didn't. But so the Whitney partners, Peter Castleman, Paul Vagano, I'll never figure out the meetings. They said, this thing is, it's kind of a mess. We didn't know what we bought. You have to pick a path and go. Might take you five years. We got to do it. And in Brooks' darkest hour, they wrote a check and recapitalized it. Seven million dollars. Seven million dollars. But they wrote a check. And that's when I came in. And so they were fantastic partners for Brooks.

15:31We got them liquid. The pitch I made to our team, and it's what I believed is that companies with issues get sold, companies with the opportunity to track investors. And I said, we're going to have to park cars in the parking lot. We're going to attract some of you. But that's the mindset we had. We were going to sell the future, not just sell the current, right? Yeah. And so, if I'm remembering right, Whitney put in $7 million to recapitalize it.

15:59I think that's the last time Brooks has taken outside capital. Absolutely. So we saw a higher margin business. And we benchmark against all the public companies. We're asset light. It's really an inventory and receivables business. And there's a reason we only have one store at our headquarters. And we think it's an advantage for us right now in the development of our brand. But if you have high margins and good flow through operating profits in the teens, and your incremental, obviously capital, you can flow cash growing 20, 30, 40 percent. We haven't needed a dollar of capital since 2001. Wow. That's incredible. That's why Warren Buffett likes this. Right, you said cash to Omaha, not the other way around. My return on tangible net assets has been over 50 percent for the last 15 years. Wow.

16:58Wow, 50% annually. Wow. On average, net tangible assets. I'd say that's a good business. Can you just walk us through? How did the economics of Brooks work? Here was the insight that we saw. Man, monopolies are great, network effects are great. All those things are great. And what I saw in Brooks, there was a book that was Meaningful to me when I was at Pillsbury the PIMS principles and one of the highest ROI businesses were lower price point consumable items if you're buying a Boeing jet or a six hundred dollar wakeboard that never wears out or an eight hundred dollar golf driver You're that's a discerning purchase and the margins on equipment tend to be lower

17:47but the title is golf ball is a consumable for me anyway. And running shoes. You've made that up before. A frequent runner will put 20 to 30 miles a week. They'll go through 2.6 pairs of shoes a year. So there's the stickiness, right? If you can earn a frequent runner that the shoe is really important, it's a piece of equipment for them, you don't have to resell them every time. You've got some stickiness there, and you start to build customer loyalty. And you're your average selling price for a pair of shoes today is $150, 130 times 2.6 per year. And a loyal Brooks customer stays with you for maybe you know we had to earn them you know there's no guarantee they're curious there's lots of new innovation and they'll try some different things but when you're training for a marathon one of my favorite stats for our brand is shoe count at marathons because it's a piece of equipment.

18:46And if you don't want to be injured, you want to have a good experience. So we sponsor Boston just to happen. Incredible race. We're always the number one or two on shoe on course. And do you have people at the big marathons counting? It's so good. They have high-speed cameras. High-speed cameras. AI, they link it to the bib. They know exactly what shoe 20,000 people are running on. The model. It's so cool. So Houston Marathon, 6,000 marathoners.

19:1512,000 halves, number one shoe in the half, Brooks, number two shoe in the full. There's a little brand down in Portland, Oregon. They were number one. We are on their heel, but that shoe count is a true test because that's the frequent runner and it's a piece of gear in that. So that's the leading edge for us is to earn that.

19:40customer and and have their confidence. All right, David's doing the thing that I normally do and jump ahead and try and like unpack the business as it is today. Let's go back to the story. So it's 2002 through 6. Let's talk about this era. You've made this bet where you're going to shed every other product that you sell and you're kind of going to piss off a lot of your channel because you know, what sells really well at these big box stores. Those are your barbecue shoes. So can you take us to like one or two of the key moments of the hard part of the decision to drop product lines that weren't about frequent runners? Yeah, I think the key to Brooks is that we knew we are going to have to build the brand at the runner level, literally a pair of feet of the time. And the retailers, so many retailers told me, Jim, we are not going to build your brand.

20:36We'll try it, we'll test it. We were tested at Dick's Boarding Goods, and I'm not kidding, for 10 years. 20 stores, 80 stores, 20 stores, 80 stores, 20. So you have to build the flywheel in these franchise products. That's how running works. The best-selling running shoes continue to be the best-selling running shoes year after year, as long as they sustain it all around the world. We have two of the best-selling shoes now in the United States, the Ghost and the Adrenaline.

21:04There are the two top shoes in the performance running category. So, when we go to retail, biggest customer is Big Five. It's a fine, you know, sort of mid-price sporting its retailer on the West Coast. We were doing 10 million of 60 million of revenue with them at $30 shoes. My first meeting with them is we love Brooks. We see a great future for you. So, one sixth of all your revenue is coming from their stores. Yeah, they saw our opportunity at $19.99. I was losing money at $30.

21:32I couldn't run fast enough from that meeting because we left and we generated 5 million of cash by getting the inventory out of it. So those were easy decisions to leave those retailers. And then we had to build it in the specialty run community, pre-internet, pre-e-commerce, huge part of our business now. And then we're sporting goods. They didn't want to sell your $100 shoes. They wanted to sell $2.30. They didn't have the runner. I see.

21:58They had family athletic for work. At this moment in time, where was this in the running as a sport? Marathon's bequeath, were they what they are today? Were they on that journey? They were on that journey and this was what we did at Brooks. I think we were the first one to identify.

22:18that the real business was in trainers. It wasn't in racing shoes. It wasn't in spikes. It wasn't in marathon racing shoes. The businesses and the trainers, we don't sponsor college programs. They're kind of owned and wrapped up. A lot of the college athletes that race in the big brands train in Brooks every day. The business is trainers. So when we came in, I think Brooks had, we were humble.

22:45And we were getting the business that we could. And we had shoes that were really more back-of-the-pack people. They weren't the fast people. They were support shoes and motion control shoes. People that needed functional footwear. And we've moved ourselves to the middle and the front. We're trying to serve every runner. The insight was this, the sport is the soul of running, right? Track and field, cross country, road racing, the Olympics, now trail and ultra.

23:09But the business is people that are investing in themselves, fitness and health and wellness. There's no other sport that has that dynamic, where it goes from a sport to a pursuit of investing in yourself. And we always positioned right in the middle of that. We're basically about you and your run. We're not about the podium. We're not about the tape. In our sport, unlike basketball, everybody knows all the kids, especially know what Steph Curry plays in.

23:38Most people don't remember who won the Olympic marathon and even more over what shoe they were wearing. And the truth of matter is, you know, everybody's unique. The shoe really matters and you all know if it's comfortable, if it's working or it's not, the frequent runners really do. So that's the insight. I think we're the only brand that is consistently executed against that. Every product we make starts with your biomechanics and your habitual joint motion and what your needs are and we're all essentially different.

24:07where the only brand that begins there. And we've done that for 20 years now. I mean, you mentioned that other company in Oregon. I try not to say computer's names, right? It just ends badly if you say it. Which is an amazing company down there. It's a great company. But literally, their name is the Greek word for victory. And what you're talking about here is incredibly counter-position to that in a way that victory really can't mean Just investing in yourself regardless of where you finish. One person breaks the tape. Yeah. 40,000 people run New York Marathon. We'll take the 39,999. That want to have their best day. They're, you know, they're investing in themselves. They want to have their, we are celebrating every one of those people. First 5K, runner on the block. Man, that's your run, right? That's what we do.

25:03It was really clarifying reading your book and understanding that Brooks's brand is about performance, but it is not serious. And I think that was an interesting clarification for me because I run, and I take my performance seriously, and I've selected a very specific motion-controlled Brooks shoe to do that. But I don't need it to be a very serious sort of like Victory oriented brand because I've never once thought oh maybe I will win the Seattle rock and roll marathon like that has never occurred You know I think I think it really what it relates to and this is I think what Brooks got before any other brand is You we have we are sweating product. I think we invest more

25:58in R&D in a focused, running metrics manner than any other company. And we don't have as much money as many of them still, but it's so focused in the clinical work we do and the materials work we do. We engineer materials just for the motion of running and all the engineering that it what has to do and respond in between gates and all of that. So that's the key. But I think our brand positioning, I didn't create it. It was sort of there when I came in.

26:27But it's brilliant for this reason. It's approachable. You know, the unseriousness is basically trying to take the pretension and the, you know, I'm not worthy. I'm not a runner out of our sport. And so many of our retail running shops have done a fantastic job of that. First of all, I'm old enough to remember Title IX in the 70s, equalized college sport funding for men and women.

26:51If you weren't addressing women in the last 40 years in sporting goods, you're gone. I mean, we doubled the business. And women have driven this sport since the mid-90s. So approachability, I think, was super key. And Brooks is a very inclusive brand. It's you and your run, and all are worthy. But the product, here's the other thing that's so interesting about our sport, is maybe in some sports, The pinnacle equipment absolutely needs to be available to the pinnacle athlete. You know, maybe that's in golf, and certainly for a two-hour marathon, everything has to be clicking. But what's interesting at our sport, the person that really needs the best footwear and the best run bra and all of that are the people that are just beginning.

27:39because the injury potential for those people is really high and that's where the right to so there's that's another element of our our category that's pretty unique so I would I would say that the unsteriousness of our brand is all about in welcoming and including everyone no matter if you're just starting or your 20th marathon. All right listeners now is a great time to tell you about a longtime friend of the show Vanta.

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29:47Okay, so going back to our story again, you just lost the big five business intentionally, so you walk away from 160 revenue. I think you walk away from more than that. It's not like it went from 60 to 50. It went like significantly lower. Footlocker, we are doing $60 SMUs. They'd order 80,000. They changed the product twice. They'd get it down to 60,000 and then they cancel it and we'd end 20,000 inventory. That was a quick decision too. We just quit doing all that, that makeup business that was retailer driven.

30:17So, revenue is going like this, intentionally. You're the fourth CEO, so at this point is the team, how do you get the team on board? These crazy decisions you're making when they're like, three other people came in here and tried to turn this thing around and didn't. You know, I think from a leadership standpoint, the real puzzle in that first year was gaining trust from everybody that mattered. B of A was our bank.

30:46kind of a lost cause, we had to replace them. They just weren't gonna buy it. But Whitney invested, that was key, and we kept them with us all the way through. The leadership team took time, you know, and it was, you had to deliver sort of on outcomes, but here's what we did. Six weeks in, we redid the plan, took profits down, the plan was millions of dollars, they didn't have a prayer to hit that. We took profit down, but it was a profit plan. They had made a bonus in four years, and we went after cash flow.

31:16And that was shrinking the mix. We hit our plan that year, and people got a bonus. And we hit the plan that we'd sent nine months earlier. I spent really eight weeks intensively looking at it. But I think we knew what we were seeing. And we generated 10 million of cash that first nine months. That's how much we shrunk the balance sheet with focus. And here was the key, though. You have to do horizon one, horizon two, horizon three. You've got to solve it all. So I had 10 things to do. The board said, oh my god, you're crazy. Pick four. No, you don't understand.

31:46We had to get the adrenaline right, because that shoe was critical for us, and we had to refine that shoe in 2001 for 2002, and we got it right. The fourth adrenaline was incredibly balanced shoe, had a multi-density stability technology in it, super balanced, and ASIC started to not deliver, and we ran, man. We air-frated one color, 18-month cycles, save the company.

32:14But we had to finish that shoe in 01 to deliver on 02, which you guys are like a semiconductor company. You got to design this. I think some of these, everything's complicated, everything's competitive, but it's like moving a wall of bricks forward. And you got to get, I think as a CEO, you got to move it all forward. So when some things are falling behind, you got to get those up. And you have to deliver the whole business model.

32:41And you have to do it sequentially over seasons in our business. Because if you come to market with a Ho-Hum product line, you're going to shrink that year. And so you've got the lead times in footwear. It's not the car business, but it's more like the car business than the T-shirt business. There's tooling on everything, 12 sizes man, 12 sizes of women's, wids colors. It's scaling these things in the fact there's a lot of tooling.

33:08There's a lot of, takes a half a million to a million bucks to bring one style to market. It's a lot of tooling and inventory. It's a lot different than the software business. Don't ask me about my tech stack at my website. It's hard to do that every now and then, and it doesn't go well. The website is actually pretty great. We're competing with digital engagement in our industry, and we're doing really well with it.

33:39We've taught ourselves that in runner-focused, but we, I think we're executing on the digital side with runners as well as anybody is, right? You're also in a pretty good town to be able to recruit digital talent. There's a lot of talent here, and they have a lot of opportunities now, too. Okay, so, let's fast forward a couple of years. So, you nail it with the adrenaline for. You're starting, you're profitable now. The business is looking better.

34:07you get the liquidity event that you're looking for, and you're sold to Russell Athletic. What was it like communicating to the team were joining Russell? So you guys are in this business, and I've been bought and sold a few time, bought things too. We knew we were gonna have to sell so we were prepared, and we thought for sure it was gonna be another private equity firm, we're gonna get another kick at the can, and that's what I was absolutely mentally prepared for.

34:35So the bankers come in, we do the management presentation. We're going to practice on a strategic. There weren't many there. We're going to practice on the Russell Athletic. Everyone does a form of fundraising. Oh my god, and they completely fell in love with it. If only you had though, you know, YC's growth program that you could then go practice. They ended up, we negotiated our independence. I pitched us where the crazy uncle out in Seattle were really different. Just leave us alone, which they did.

35:02But yeah, so for them, we had negotiated our independence because we knew where we were going. We saw the opportunity. We had great, we had a flywheel going. We really did. And at that point, we were continuing to pursue growth. So they would have been crazy not to just let us keep going. And I would do that then with the next owner as well. So two more years pass.

35:27business continues to grow, Russell gets bought by Fruit of the Loom, and Fruit was already owned by Berkshire, right? So what's it like now being a subsidiary of a subsidiary of Berkshire Hathaway, but two levels down? Yeah, I mean, it was really interesting. In one sense, you know, I'd gone to school on Warren through his letters and I had an internship in the 80s that he had put a business out of its misery In a competitive battle in a two newspaper town it went to one Buffalo even there was a yeah the Buffalo evening news and there was a black hole in Cole's media's balance sheet and I what happened there and Warren oh my gosh plays to win Signals he will never ever ever ever quit five million dollars of losses investing in the newsroom investing in quality goes to the morning fight to the death

36:26Don't do that with Warren Buffett because he never quits So they made a rational decision. They closed it down his profits went from negative five to ten million every year since and I was just wow Who is this guy, right? That was that was before Solomon brothers, right? That was like a prelier disillusion. Yeah, that was in his early days and he was just the way he talked about brands and And the moat around a brand I hadn't I hadn't seen that before competitive strategy, right? I loved it. So I'd gone to school on him, so once we got part of fruit, I thought, okay, this is good because Charlie and Warren are gonna understand what we're doing at Brooks, we're small. And so we started to get some letters and your numbers are good and we got notes from the board, but fruit of the loom and Brooks, we're just completely different companies, six packs of men's briefs that Walmart.

37:17Yeah, that's not the performance a little bit different than like a local running store distribution strategy innovation was mighty morphine power Rangers Anyway, but they're you know the longtime company they bought it for Russell athletic apparel they bought it for you know the Walmart business and and they're good at that so again, they left us alone. We hadn't negotiate that It wasn't given. They actually, on paper, they were going to move us to bowling green and it would have killed Brooks. And I was panging, you know, because we were possibly going to get sold. So I actually talked to some super smart people, some in this town, and Warren basically said, I'm not going to get involved. It's up to fruit. And I thought there was a good chance they'd sell it, because I would have loved to have led.

38:10an independent play there, but we waited it out. We took them, you know, sort of right to the edge of saying, you got to commit to Brooks. We've got to commit, you got to commit. And they did. And then two years later, Warren plucked us out. So, but we had a negotiator independence from them. And I, again, you know, I could have laughed at opportunities to leave. I didn't want to leave. We saw a great opportunity. 0809, just as that was going on.

38:36Obviously, a great recession. We tripled the business from 2009 to 2014. And I knew we had some good things going. But that was a really critical moment, because they might have moved it to Bowling Green, which they did to everything else, and many of those brands wilted. And I would have lost a lot of talent, and I wouldn't have run it in their business model. It would have worked. You get to retain your independence there, but you're not.

39:05really independent. You're still within Russell with this and within fruit. At some point you get the phone call from Warren. Can you talk us through that? Yeah, so we had put in, you know, we had good incentive programs and we tried to keep people there and put some stickiness in with some long-term programs to just get people focused on building that triple. So fruit was, you know, sort of consolidating all their stuff, and they had bought Russell for about a billion dollars with internal capital. And they were about to go and restructure that. So Warren had, we had started to sell shoes at the annual meeting, Omaha. This is like Charlie and Warren, you know, 50 years ago. I love this event. Now, their arena was full, but that'll be the case for you guys in another year. 50 years to compound. It's gonna be huge.

40:02We were selling shoes there, and I sent more in a note, and great. Next year we'll sell more, good job. You know, hearing great things, you guys are doing well. And by the way, if you're ever in Omaha, come by, we'll go have a steak. Well, son of a gun. You don't say no to that. I just happen to be in Omaha about two weeks later. Imagine that. And I knew he would love what we're building. It's unique. It's distinctive. We're not trying to be that brand, that brand. We're really developing something with focus. He couldn't figure out why the big guys weren't squashing us.

40:31And we spent three hours, not one phone call, a door was closed, we had a meal. But you just get his undivided attention. His brain is just so focused, he loves business. And I did most of the talking because he's going to fall in love with this business. And six months later, he...

40:50So here's the start of the story is it was the December when Mark Zuckerberg was preparing to take Facebook public. And there was a Wall Street Journal article for the new, I don't know if he was 22 or 23, a young CEO of a public company. And one of the lines in there was going to trade in his Adidas slides for a pair of Brooks adrenaline. I don't know why it was in there, but Warren saw it circled and said, Jim, this is great. We just need a couple million more.

41:16So, two weeks later, did you send Zuck a pair? Oh, yes. And he was in, he was in Brooks for a while. So, but two weeks later, I'm with my family down in the desert and, you know, I think I was not a blackberry, but it's 2011. I didn't have my, my voicemails coming into my phone. So I was checking email every day, but I wasn't, I didn't check voicemail. Yeah.

41:42So I get back at my office January 2nd. I'm in early. I like to start the new year, especially early. It's 7 a.m. and the red light on the phone is blinking. Pick it up, answer it. Jim, this is Warren. I got an idea. Give me a call. It was five days old. Oh my gosh. This is like, you know, you know, the story of Warren during the financial crisis of a Lehman that he could he missed the voice. He missed the voice. He found it like a year or two later. So anyway, pick up the phone, dial the number.

42:11Hello, he answers his own phone. It's incredible. This is Jim Sorey Warren. I was like blah, blah, blah, blah. He said, well, here's the idea. You guys are doing well. Your folks don't choose. Your premium fruit really has to focus on a peril. I'm thinking about spinning you out and setting you up as a standalone subsidiary. And you guys will just keep doing what you're doing. And I just think that makes sense. And I said, you know what, Warren? I think that's a good idea. I didn't really do that.

42:39And I gave him an update on our previous year. We had a great year, and he said, that's great, because from here on out, I'm going to take all the credit for your success. But as a platform to do what we want to do and build our brand, they so know that revenue growth and profitability, selling at-margin double-digit growth, is all about building brand. And that's really what we've been doing and really wanted to do.

43:06We just have a sink on the opportunity that we have with this brand, and now it's been 12 years. That's the true reason I'm still there. Because, you know, we're competing in a really, really big competitive category. And the margins, I think, on success are not fat, they're thin. And so executing against that with confidence and support, being able to work through, you know, a lot of the uncontrolled was in a category to huge advantage for us.

43:36So I'm going to keep us going through the story, and like I've done on many previous episodes, I like you're marking sort of a number along the way to track. So I think around this point, you're doing 160, 170 million in revenue. Businesses grow nicely, you're profitable. There's a fun story from 2012 that I'd like you to tell. You've always been somewhat of a scrappy company, doing more with less than anyone else. Can you share those story of when you personally got kicked out of the US track and field Olympic trials?

44:07So, I think in real life, digital is digital, but in real life marketing, we activate, right? A lot of the running shops do runs out of their stores, and they're involved with the 5Ks, and we're bringing energy and positivity to that, really trying to make it fun for other people, many of them are running for the first time. And then there's the sport, which is so fun to be at, whether it's the Olympic trials for the marathon, or the Olympic trials, which is often at Hayward Field down in Eugene. And the challenge there for all the brands is we rent a house, we bring in all of our partners and VIPs, we run group runs out of the house every morning, we bring in a chef, and we watch these incredibly athletes compete for Team USA. It always happens in June, Olympics are July, August.

44:57And it's just a fabulous event. And then the backdrop is, well, largest brand in our space, Nike, signs a 27-year marketing agreement with the governing body of our sport, USA Track and Field. Who does a 27-year deal? I mean, come on. It's a 27-year deal. And then, of course, you know, University of Oregon is a Nike university in more ways than one.

45:27And so they wrap it up, right? The whole thing has got swoosh wrap around everything. I think the yellow lines on the highway are swooshes. So we wanted to celebrate the athletes. We have athletes in there. We invest in the sport, and we don't invest like they do, but we invest in athletes. And they're inspiring and so on and so forth. All the brands do. So what can you do? You can't do a lot.

45:52But we decided we did we checked with the FAA the air rights are open Nobody said you can't fly a plane and we put a run-happy banner on an airplane and we just flew it around that stadium All day on Friday They got mad and we did it again on Saturday and they started to tell us you got to take that plane down Why well because you can't do guerrilla marketing? Yeah, but we checked it's all you know the FAA is fine. It's all good That's a sky. And we're cheering on the athletes. You can't. You got to take that thing down. Get that thing out of the sky. And so overnight coming into Sunday, the final day, we had, we checked with some of the track and fuel officials and they basically said, screw him. You should just fly it. And we checked again with the FAA. And so we flew it. And they came up. We bought tickets for all of our guests. We had about 80 people there. We didn't get them free and comped. We had some of those. But we bought all these.

46:50And they said, all right, you guys all have to leave. And we, why? No, you all have to leave. So we left our guests, and three of us went down to talk about it, and they, why are you asking us to leave? You didn't do the, you didn't take it out. We asked you to take it down, and Nike was all sitting right behind him. So well, there's nothing against doing that. We don't, we checked with everyone. Well, read the back of your ticket. This ticket is a license that can be revoked at any time. So you're just kicking us out. Yeah, we're just kicking you out.

47:20Get out. And it was all, it was a huge mistake for them. Because this story is lived on in the industry forever. And we had some of the best running shop people in the country there with us. They were our guests. And so everybody knew about it. They kicked me out, our head of marketing, and our head of sports marketing. It was interesting. Anyway. That's awesome.

47:49We're at the bar. We had beers and we watched on TV Well if we were if David and I were on zoom with you We would be getting ready to enter like hour number two and try and talk about every year all the way through Tonight I want to focus on How you came through the pandemic and some of the unique ways that You early realized running actually was going to be something that people started focusing more time on and you were able to kind of lean into this new behavior. Talk to us about March 2020 and how you paid attention to what was changing. Yeah, a couple of big advantages. First was literally an obsession on runners. Participation links to unit sales and volume, right?

48:43No other brand has that clarity because most of the products in the athletic footwear industry don't ever go for a run or play basketball or really even go to the gym. It's casual, family, lifestyle, footwear. There's nothing wrong with that. Some of those businesses are great, but we had an advantage because 90% of our products went through a retailer. That's a problem. Europe retail shut down in one week and then all of retail rolled through North American and by the end of March, not a store was really open.

49:12And that's a problem. Cash cycle froze. Oh my God, nobody knew what was happening, right? We didn't know how lethal this virus was, how transmissible, and so on and so forth. And so it was white knuckle time, and we were there with everybody else. Everybody could write a book on that. But here's what we did is we saw phases, because we'd seen during the recession, running as a bit recession resistant. We saw that. I was thinking about that. It's kind of late. Because it's cheap and it's convenient. All you need is right. It's like the healthy alcohol during recession. In the great recession.

49:43Thank you, but we were not an essential business in marijuana and alcohol worse. So figure that out. But during the Great Recession, 50% unemployment in Italy and Spain under the age of 30, running took off double digit growth after the Great Recession. So we've seen that before.

50:04And it turned out to be COVID friendly, right? You now know the story. It was social distancing friendly, outdoors, walking, hiking, running, all made the cut. But nobody knew that. We had a hypothesis. We created this frame on how we thought running would recover. And so here's what we did. First of all, Strava data, magic, right? Every day after the quarantine shutdowns, Strava activity was growing. And they were sharing that.

50:31Then, you know, what we did, we have 40 in the US alone, 45 field marketing people. We put them in parks, high traffic, running parks at 4 p.m., every afternoon, and they counted runners. And guess what? It was growing every day. And then we watched digital sales, and we have visibility on 85% of our retail sell through. And so, digital went from 30% of all of our products going through a website of somebody's ours or another partners.

50:59It went to 80% by the end of April. And in May, we sold more in May 2020, almost all through digital than we did in May 19. So running made the cut. We grew 27% in 2020.

51:16in that COVID year, but we saw it. This was the key because of our customer obsession and our ability to, you know, work multi-channel was a big advantage in that time because we could move inventory around and make it happen. Inventory, if it isn't there, you can't sell it. So, but multi-channel was a big advantage. The other was our focus on the runner. We turned our supply chain on at least six to 12 weeks before anybody else did because if you were a broad-based retailer, There was no clarity on when the customer was coming back and for lifestyle product, nobody went outside for a year. So it was the fact that you exclusively made performance running gear that gave you the confidence to flip it back on. Because if you're making all kinds of stuff in your factory and you're pushing all kinds of stuff through retail channels, most of it is not going to sell so you can't actually open.

52:08That's right. In apparel and footwear, inventory is life and death. You've got to manage inventory well. Because if you have too much, you ruin the next cycle of inline product. So, inventory is really critical. But we managed and played that cycle really well. We grew 27% in 2020. We grew 31% in 21. And we would have been up 40 if not for supply chain.

52:34Wow. So what did you do in revenue last year? Sorry. What did you end up doing in revenue last year? 1.13 billion. Oh. 1.13 billion. Wow. Right here. We cracked a billion. Our industry, the billion dollar club is actually a rarefied club. There's probably maybe two dozen global Chinese brands are there now. But it's a great club to be in. And what makes us unique is it's all premium, full price, full margin product. Most of the other brands have good, better, best, and those are retail driven merchandising strategies. They're not really consumer driven strategies. So normally we talk about seven powers as we drift into analysis here. You're a Berkshire business, so we're going to talk about modes. What is Brooks's mode, and how do you think about defending the castle, now that you have what you've built?

53:32You know, we think a lot about it. And I think there's also something I'd add to that. Part of the mode can be business model, right? Business models can be really powerful. And one of the things you can do as a company to create defensive, you know, mode structures is business model execution at scale. So we now are executing Retail partnerships with the best retailers for running gear to runners at Super Jack and Jill and Seattle Fleet feet running down in I think Menlo Park Obviously, you know some of the better sporting goods players and outdoor from REI to Dick sporting goods were their number one brand We've earned that over 20 years and we have deep broad partnership programs with them digital marketing consumer journey

54:25You know, runners are digitally savvy. They're obviously all over the web. They start their shopping experience there. We reach them in active evaluation mode. Once you start looking at shoes, if you don't see our ad, you know, I don't know how we missed you. We're spending a lot of money at runners now and maybe more money at people who run in active evaluation for running shoes than in the other brand. Very focused.

54:51That's not easy to do in our industry at scale. And then, but I would say this is our mode, you know, I think, I think, run ability, fit, feel, and ride. There's a lot of good shoes out there. It's actually not easy to make a great shoe. And Anthony Fauci made a joke about shoes. Vaccines are tough, they're complicated. It's not like making shoes. We get a lot of that. But, you know, the refinement that goes into mild and making mild 26, you know, acceptable, you know, these are, is really big. So, you know, I think great product is not as common as you might think. And the people on the inside, the frequent owners know. So I think product, you've always got to lead with product. That's the first brand experience, product experience. So, I think we do some hard things. We build great product consistently yearning you're out. It fits and it rides well.

55:46And then what we do on the retail side and partnering and activating in real life, running and selling shoes in real life, events and all the like, we do that better than anybody else. Service them, deliver on time complete. And then the digital piece, we're excited about it. I mean, we're still just getting started there, but we're really focused on it. Yeah, I mean, I'm curious if you mentioned, I didn't even thought about Strava. Yeah. And the amount of data that you're able to see from that, what is...

56:14What does the digital side of running in the future look like for the growth and for the industry? I think it's interesting because quantified self in those tools have been ubiquitous and they're out there and the Apple Watch is a damn great product, right? So, you know, what's interesting about that is both underarmour and ASICs have spent hundreds of millions of dollars on digital apps. And I think they've really struggled a lot.

56:43I keep her and met my run, but exactly so I wanted to buy every one of those and Warren wanted me to do the multiple on EBITDA. And there was no EBITDA. So let's just say it's hard to do acquisitions. At least one of them was a completely free product, I think, right? Oh, man, they don't make money. Yeah, so and underarmers trying to sort through that now, right? They they're starting to shrink so as Adidas. So those tools are really powerful for data.

57:10But how do you monetize it? And so we haven't gone there yet, but we're building a Brooks Run Club. Finally, we've launched. It's not a loyalty program, but it's a zealot. We want to engage our zealots. We want to engage our true believers. And the data piece of that is going to be key. We want to come up the kinetic chain and find a sensor system and a data capture system that can get to your biomechanics as you're running. Because what happens is, If you run a marathon, your gate in the last five to ten miles really degrades and that's where injuries happen. So we're doing a lot of partnerships and we're really trying to figure out how we get good runner data in real life, not just in the lab. In the lab, we can test everything but we want to get out in the wild. Do you think you need to do what the other folks in Oregon have done and build the whole consumer experience yourself or is it a partnership?

58:05We're gonna build it, and we're gonna partner too, so we're, you know, look Nike Plus is a fantastic ecosystem. It just is. I'd love to have an ecosystem like that, but we're still, you know, we're still selling more runners than they are. We became the number one running shoe brand in the United States in the last 12 months, last month, 21.5% share. We performed this run. So, we know where the battles are, I think one of those powers is we make money on that. So the digital space, there's a lot of carcasses there. But we'd love to have it, and we're going to work on it. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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1:00:23So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. I have two more areas I want to ask you about. The first is grading and then the last is a personal topic.

1:00:42Can you paint for me what the A-plus case looks like for Brooke five years from now? And I'm sure you do lots of three in your five you know planning so think about this and then I want to know rather than just saying what's the failure case I think a more interesting question is What is the riskiest part of your business right now where if that thing goes wrong everything else can crumble? Two questions. So the first one the A-case we just created a you know a North Star 10-year vision for Brooks, it's global for sure. People are running all around the world. As the middle class grows, people invest in their fitness. And running is always making the cut there. So it's booming in Asia. You know, we're growing now really rapidly in Europe. So we want to build a global brand. And that's work to do in the next 10 years. So we see an opportunity for 60 million customers, 60 million uniques up from maybe 15 million today, four bagger, and four billion in revenue.

1:01:41That's the big opportunity we see right now, and it's still a premium brand, positioned to the enthusiast, really uniquely positioned against all the big platforms. The A-plus case in five years is 20% to 30% growth every year annually, and that's what we've been doing the last two, three years. A lot of that's going to have to come internationally, but if we get a B and grow 15%, we're actually fine with that too, because we're not...

1:02:07Russian for the exit so we're excited. We think we see it We're gonna have to compete for it, but we have a we have a complete playbook right now in our view so what keeps us What keeps us from being successful? I've experienced it single points of failure, right? We launched a DC which we had to do to get in the middle of the country distribution center distribution center And, you know, just by the X-16. Sorry, 2016. 2019. 2019. And it didn't work. And so we just, we just disappointed customers for three to six months. It was awful. And we never have done that. We execute well. And now in Vietnam, the whole industry on performance is really focused there, principally. I think the big guy has 60% of their footwork coming out of Vietnam. The South was shut down last Q3.

1:03:01July, August, September, 45% of my factories didn't make a shoe for three months. So we grew 31% last year. We have 43% coming into that, that, you know, product issue. And now we're experiencing it now. Now we believe we're getting back on the curve. But what we've learned is, you know, what does resilience and agility look like in supply chain? You got to diversify risk. You know, now we're seeing at our size that we're at, operationally, There's real risks there, so we're thinking long and hard about that, we're working hard at it. But those are the things that are disrupting us right now. COVID's still alive. One closing topic. You battled and survived and beat cancer while building this incredible business. How has that changed your perspective on leading on the way you spend your days and on life broadly?

1:03:59Let's close it on a light Let's talk about cancer That's the takeaway for these wonderful people so You know it I didn't expect it came out of nowhere Unlucky no, you know, how did this happen? It's off of your cancer. I just felt awful and I my running, worst running experiences I've ever had, and I got the diagnosis, chemo radiation surgery, complications in the surgery, another surgery, but the good news is I'm cancer-free, I think it's gone, I think it's out of my body. The bad news is I'm even slower, and I'm kind of a Frankenstein in my systems, but it works, everything works. So I think what I learned from that, though, is that

1:04:50You know, you go to the web. Every time I have a friend or a family where it gets cancer, I go to the web. And you look at it, understand it, and what the treatments are, and they always give you a five-year survival rate. My five-year survival rate was 20 percent, one in five. And my five-years is this November, someone is kicking its butt. But I think what I quickly figured out, and I talked it through with my family, and obviously with Warren, frankly, is that I decided that I was doing exactly what I wanted to be doing. I love what I'm doing. I've got family, I've got active lifestyle, I've got this fabulous brand and company that I'm a part of and a team. I just love it. I don't know what else I do, which is a problem. So I decided I didn't want to live in fear. I didn't want to live every day thinking about what I had to lose. I had a lot to lose.

1:05:47And I didn't want to be bitter about why me. I want to soak in everything I can on an evening of a day. I want to be a CEO. I want to be a dad. I want to be a husband. I want to be a papa. I've had four grandkids. So that was it. And I think for me, that was really powerful because I don't want to be that cancer guy and they brought it up. They brought it up. But it's just not my thing. I want to, I want to, I'm glad to talk about it. I don't hide it.

1:06:17And I've learned a lot, but I want to enjoy the things in life I really enjoy. So that's what I learned, but I think it's, you know, everybody's different. And you do find out companies when you hit challenges, you learn what you're really all about. And I think it's the same for people, of course. And so I feel really lucky because I'm doing what I want to do. And cancer's in the rear-view mirror. So, it's good. It's so great.

1:06:47Well, I know Jim did not want us to end on that note, but I think that's really perfect. Let's go for a run. Thank you so much. It's been so wonderful. Thank you for making this whole day a great experience and special for us. Thanks for all of you came on the run this morning. That was super fun. Yeah. All right, Jim. All right. Thank you so much, guys.

1:07:15Appreciate it. Thank you. Thank you. Oh, you can't forget the choir bag. Oh. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the...

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1:08:24go to statsig.com slash acquired to get started. Well, listeners, that was our arena show. We're so pumped to get to share it with you for all those of you who can't travel to Seattle. And that was unreasonably short notice. I think it was a month or so. But boy, did the folks at pitch book and everyone else who helped us make this happen, Brooks running with the run the morning before the show. Packie, Mario, Anu, Shu, White Combinator.

1:08:51I just, there was got so much love. So many of our past guests just came in to come to the show. It was so, so cool. Yeah, that was great. Hang it with Chengy and John Bathgate and so listeners, hopefully we'll be able to do something like this in the future and have you there. I think we got to do the chase center next. You got to bring this to San Francisco. That's really the only option. Where do we go from here? Right? That's the only logical place. It felt like Berkshire.

1:09:17weekend for acquired podcast nerds, and we would never, you know, the profess that we were at the same scale, but it definitely felt like it had an energy of, uh, to quote crypto of we're all going to make it. I don't know. I got all the warm and fuzzies from getting to hang out with everyone. You all are just the best. I also think David of the like thousand people in that arena, I think you and I personally got to talk with about 500. Like we were on a mission to make sure to meet as many people as possible before the show.

1:09:46After the show at the after party, that was so cool. Man, that's so much fun. And everybody who came is getting an NFT, a custom acquired proof of attendance NFT, thanks to acquired head of special projects, Sandy Kim and the Solana Foundation. So for those of you who came, show it off when you get your cool animating. Well, I won't give away too much, but yes, your proof of attendance NFT. Yes, so fun. Well, with that, We would love if you want to come and chat with us acquired.fm slash slack. You can find your next job at acquired.fm slash jobs. I think that's all we have to say. Listeners, we'll see you next time. We'll see you next time.