Interview: Building the Moat around Middle Market Manufacturers, with Eric Roth, Managing Director at MidOcean Partners

Peter (00:00):

Welcome to unpacking the digital shelf where we explore brand manufacturing in the digital age.

Speaker 2 (00:16):

[inaudible]

Peter (00:19):

Hey everyone, Peter Crosby here from the digital shelf Institute building and growing a middle market manufacturing retail company, as a challenge, not for the faint of heart, but entrepreneurial passion and grit matched with operational expertise can lead to outstanding differentiation and growth. That's the investment thesis of mid-ocean partners, a private equity firm focused on transformative growth opportunities in middle market, consumer and business services companies. Eric Roth, who's the managing director at mid-ocean partners. Joined Robin, made a talk through private equity, investing in a time of disruption and the fascinating investment opportunities in the Davids versus Goliath battle.

Peter (01:02):

So, Eric, thank you so much for joining us on the podcast, Rob and I have really been looking forward to this conversation. Good to be with you guys, appreciate the opportunity to be a part of a podcast. So, so it's been, uh, interesting days in the consumer sector. And so we were looking forward to getting your point of view as we emerge. Well, I dunno, are we emerging from COVID? I'm not even sure anymore. We may, we may, we may be taking a step back. Yeah. Which is, uh, my gosh, that's a whole different podcast, but uh, yes. So, uh, but nonetheless things are going to continue to be interesting. Right. So we wanted to start maybe with a little background on mid-ocean partners, your portfolio sort of where your point of view and what's your overall investment thesis is. Sure. So mid-ocean is a New York based private equity firm also with an office in west Palm beach, Florida.

Eric (01:55):

I've been around since 2003 and ultimately it was a spin out of Deutsche bank back in oh three. We're currently on fund five. Uh, that fund is about, uh, 85 90% invested and, um, really exciting to have the opportunity to continue to look for business within the consumer space. We typically think about the world in two places. There's, uh, on the equity side, there's the consumer guys and I'm a managing director on that part of the house. And then there's the business services side. Our current fund, uh, is about 1,000,000,002 and change. And you know, our investment strategy is relatively straightforward, which is we are very operationally focused. And what I mean by that, Peter is, you know, we, we look to always leverage networks to end up with, uh, folks who can help us think through investment opportunities from an operational perspective or deal guys. And, you know, a lot of us came out of companies or investment banking or consulting for one of that guys who's whose goal and knowledge set is really around operations, as much as it is around trying to help think through, uh, if you will like GM

Eric (02:59):

Of a sports team, how can we put the right people in the right positions on the field and kind of get the heck out of the way. And so when we think about our various Maddix or investments in the portfolio opportunities, really, we often start with, with the operating team around that theme and do we have the right folks and are there others that we can add to it? That's very, very critical. I think it's a little bit of a differentiator from some of our competitive set who may be less operationally focused, but at the end of the day, the folks that we bring on as mid-ocean operating partners are not there to run the business. They're really there to be resources and partners to the CEO and the senior team at the board level, a sounding board, if you will. We often say that in our board meetings, the mid-ocean deal partners speak the least by a lot because we're trying to facilitate good conversations, strategic conversation with the C team and our outside directors, our operators around what's going well and what is it and how we can do better. So we're, we, we really it's, it's, it's a little bit differentiated. We have a lot of great competitors as you guys know, it's a tough MNA market. And we'll talk about that in a little bit. It's a lot of froth out there. Um, but we're, we're, we're really excited to be here and talk a little bit more about how we think about investing and what we say in.

Speaker 4 (04:14):

So just to give folks a sense of the types of investments that you currently have, you invest in a whole bunch of different consumer categories. I'm just going to read off some logos from a website, a hunter fan kid craft neutral, um, travel pro. And then, and then some, some companies that are in the consumer space, but aren't exactly manufacturers like Sobero which high school Rob ate at all the time from the shopping mall. And so I appreciate you, you running that one for now.

Speaker 3 (04:50):

Yeah. You know, I, I think we, we, we traditionally, and one of the reasons I joined the ocean three years ago and traditionally mid ocean's consumer business has been more CPG through retail. Uh, historically that's evolved a lot over the last, really before I joined called four or five years where there's notion of omni-channel and digital have become so critical. And we've worked very hard, you know, Robin in United cotton to know each other over the last two years, plus we've worked really hard to become much more connected and smarter within that digital realm. We actually just hired a new, uh, digital operating partner and he, Bob Myers, uh, Bob's on the board of NRF. And he came out of JC penny originally, but his big claim to fame was QVC online.com where you scaled up business from 20, 30 million or revenue to over a billion.

Speaker 3 (05:37):

Um, and the reason I bring all this up is because of our thematic focus. And I'll give you, I'll give you two examples, travel pro and kid craft. These are businesses that historically didn't really do much online and we've been able to with the help of the operators and frankly, our senior team shift, a lot of that business, both of those businesses to be more DTC, whether it's their own DTC or Amazon or retailer.com, which is a much better inventory model, certainly for us to be able to have a central fulfillment center, uh, hunter fans, another great example of one that 35% of their business now is DTC. Now that doesn't mean it's all off of hunter.com. It's a lot of Lowe's and home Depot and things like that, but it's there retail.com and we've got a great control over pricing and what's offered and how it's featured on their sites because of the brand and what we bring to the party.

Speaker 3 (06:30):

I think the way to think about it, Robin, some of the names you read off is we are very brand focused. We certainly would like to partner with folks who have a brand that people know one of the big things we always do going into any investment is we do some consumer work typically around how does the consumer shop in the category? What's the purchase consideration funnel? What does it look like? And then ultimately, why do they buy X versus Y? And how do they think about that price quality trade off. And that's where, you know, a lot of things I know we're going to talk about in the course of our conversation today, around technology and it, and how does that integrate into some of those businesses? You know, the answer is it's hard. I mean, we just hired another, another guy on is an operating partner named Eric Gordon who joined us two weeks ago as really a technology expert in helping us think through the integration of a lot of the systems that frankly, these businesses didn't necessarily have inherent in their DNA.

Speaker 3 (07:26):

And so the existing portfolio in many respects, other than BH cosmetics, which is a, uh, inherently or innately digital business, other than that business, these other businesses have really been shifted to be more Omni channel, more digital, which means in some respects, you know, you're, you're, you're grafting limbs onto the tree that may not have been part of the tree originally, as it relates to that digital strategy. And that that's as much about people as it is about systems or, or, or numbers or, or logic, right? Because you guys know, companies are living, breathing ecosystems that are comprised of human beings who have experiences. They have biases, they have, uh, points of view and they're all great. And none of them are necessarily better or worse or right or wrong. They may be different. And so being able to create a culture where those folks want to come along, because they're intellectually curious and, and, and, you know, guys like Rob and his business are able to be effective, you know, within organizations, by helping them see how some of these information technology systems are win-wins for them in the longer term.

Speaker 3 (08:35):

That's a big piece of our business. Once we own some of these businesses that are currently in the portfolio, like I said, kid craft, you notice a large format, outdoor place that, so think things like swing sets and tree houses, very high price point, very big AOV, you know, during COVID that business did phenomenally well because people you around the home wanted, wanted to make it more fun for their kids while they were trying to be on zoom calls. We did the same thing. The trick has been trying to create a thicker tail for that business coming out of COVID. And as you alluded to Peter, are we out of it? I mean, I thought we were, you know, and in early June, and in reality is, you know, in the home goods space where I personally spent a lot of time, we've really started to see, uh, the comps pick back up actually in the home space.

Speaker 3 (09:25):

And you could see it with Amazon. They reported, uh, you know, earnings recently significant slowdown in growth because they're competing against other worldly sales data from 2020 in the summer when they couldn't keep stuff in stock. So what we're seeing here really though in the last, and it's a small sample set in the last three weeks as Delta started to spike, you've seen some of the home goods folks that were a little bit more challenged on some of these huge comps and August is still a bit common. You're seeing them actually kind of rev back up, which is, which is an interesting dynamic it's still early. And I don't know that there's any conclusions guys, but I'll tell you it, th the, the trend has shifted, we think in the last three weeks and some of those categories back to the sort of COVID dynamic, if you will, now maybe that dissipates in September, I don't know, but it really does make you wonder, you know, how people are thinking about their, their wallet spend, if you will, right. You've got a dollar and you can spend a dollar any way you want during the week. And I think during the months from, you know, March of 2020, all the way into, you know, may of 2021, um, a lot of that was being spent on home goods and hard goods and improving. And then as things opened up that shifted, and you saw a lot of restaurants and services, hotels, airlines, cruises kind of jumped back up where that settles out is, is something we think a lot about

Peter (10:49):

Without necessarily a lot of answers. I was talking with, um, an author and a professor, uh, Gerald cane, the other day, writing a new book with some coauthors from Deloitte around the transformation meth, sort of, they were doing this, um, transformation research with hundreds of, of executives around, um, how it just, because it turned out, it was in the midst of COVID. It ended up being about how do you, um, how do leaders drive transformation during times of acute or chronic disruption? And I think we're in the middle of right now, moving from that state of acute disruption, like, holy crap, everything just shut down. And we need to figure something out to really a stage of chronic disruption where this is just gonna, and not even just about the, uh, the, the COVID resurgence is back and forth. Who knows Varian. We'll probably be at Zeta variant by the, you know, a year from now or something, but, but also just this digital transformation, the consumer being in charge of their own journey, like those kinds of, sort of fundamental things that just going to continue to force companies to build in the agility, to respond to trends, disruption that can happen at any time.

Peter (12:04):

Does that resonate with you? Does that feel like what everyone's going through?

Speaker 3 (12:07):

It certainly does in the early days of, of COVID and I'm going back now to, you know, really early April, mid April, I think in, in the beginning, it'd been March. I certainly was one who thought, well, you know, okay, this doesn't look so great. And maybe it's, maybe it's four or five weeks, maybe it's 10 weeks, you know, but I think we should be in a good place by, by, you know, July 4th and how wrong I was. And so as, as, as what looked like a longer-term slog started to really emerge, you know, in, in the early days of April, the first couple of weeks, you know, we had no idea where the world was going to go. And I would, I would think, you know, the first thing we did was really pull back and say, geez, you know, how, how do we, how do we make sure that, that we survive?

Speaker 3 (12:51):

How do we make sure that our companies, where in certain cases, you know, travel pros are good example, that's a, that's a luggage business and there was no travel. And then how do you, and luckily for us, Blake Lipin who's, the CEO was a senior CEO, CFO, and CEO. Um, Buschnell for us a long time ago, uh, moved over to travel from when we bought that business. You know, he's a finance guy by training, but he's really a sales guy by kind of innate capability. He was the right guy in the right place to help us think through that first initial kind of two months of all my gosh, you know, how do we keep people in the building and keep them employed? How do we conserve our cash? How do we deal with our vendors? And so that, and that one across the portfolio, that was the same thing for, you know, kid craft and, and even Florida food products, which is a, essentially an ingredient business for processed foods.

Speaker 3 (13:41):

And then I think once you started to get into later may and early June, when a lot of the stimulants was kind of flowing through the system and you could see, okay, you know, there, it feels like demand for certain things are rebounding pretty quickly. That's when you kind of come to that transformational question of, geez, this didn't work so well. So I'll give you an example on travel pro you know, we had not done a lot with overnight bags. We hadn't done a lot with car travel centric type designs. We had them and they existed, but it wasn't the bread and butter of the business. And we spent a lot more time coming out of that, call it March, April period, coming into June and July when people were getting on the road and doing an overnight trip to their bodies or gone somewhere else. That was fantastic. And I think we did a good job of thinking about our product side in a smarter way.

Speaker 4 (14:29):

So taking a step step back here. So the, the companies that you typically invest in are in the what, what size

Speaker 3 (14:38):

In terms of great question, Robin, typically the total value of the deal, meaning including the debt and the equity, typically where the equity. So when we invest in a deal, we'll write an equity check and oftentimes there's going to be a certain amount of financial leverage. We're not high leverage guys. We're definitely not guys that want to lever a business as high as we can to, to pay the highest price we typically under lever and over equitize a business. So, you know, what I tell you is in our current fund, the smallest, the smallest business, uh, evaluation was right around a hundred million dollars a little bit more. And the largest ended up with a couple of big ad-ons being close to the 700 million, which is a very, very large range, you know, and typically given the size of our fund. Um, we want to hold, you know, maybe as little as 50 million of the equity, maybe as much as 120, but we've got some very large limited partners who love to co-invest and can write very large checks.

Speaker 3 (15:34):

And so, and some of those larger deals, you know, we've got limited partners of year who, you know, um, are able to help us incrementally go up market in terms of the size of deal. So it's a pretty wide range, but what I tell you is 25 75 percentile, you know, 150 to 350 million is really the kind of sweet spot for us. And by the way, that, that usually means, especially when it's an entrepreneurial founder owned business, it's a solidly middle market company. What that means is, and this is, Rob will appreciate this, you know, given what you will, you guys bring to the table, you have a lot of people that are playing across and scrambling constantly. These are not necessarily push button reporting type companies, which we like, because we think we've got an opportunity to help professionalize to some extent, you know, some of the systems and some of the ways they go about their strategic planning, that's an opportunity, but that door swings both ways.

Speaker 3 (16:30):

And so oftentimes, you know, you've got the CFO is acting as, you know, controller accounts, receivable collection guy, you know, you've got the marketing person, that's kind of handling everything from, you know, handling the agencies and the CEO to literally writing copy, um, and everything in between. Meaning, you know, it's a scrappy, it's a scrappy end of the world, which again, we love because we want to put operators around them that can help them be strategic, that can help them grow as managers. And ultimately it's a, it's a place where we have a lot of good third party, uh, agencies and providers that we work with to bring in, to help us think through some of those things. So this is not, you know, we are not Blackstone. We are not doing $5 million deals with enormous companies with, you know, 20 different senior VPs and tens of millions of dollars invested in infrastructure that you can get any report you want in 30 seconds. Oftentimes it's really an 80 20 rule about what kind of data can you get at, and then how do you use it? And that's where the operating guys are. That's where the robs come in to help us think through making good educated decisions with the limited data set, if that makes sense, guys. Yeah.

Speaker 4 (17:40):

And what's interesting about that, the size of business that you're talking about, you know, you get to businesses that are five, six, 700 million top line they're, they're big enough to global. Um, so they can have a lot of the problems that Coca-Cola, or Johnson and Johnson would have. Um, and, and small enough that they don't have all the infrastructure in place. And actually might, might struggle a little bit more in some ways, compared to the large part folks just in, in terms of what they can invest in, in transformation and rebuild. And, uh, but if they do, there's a lot of upside, you can get a lot more growth out of those businesses as a, as a percentage base. So it's, it's really, really interesting.

Speaker 3 (18:19):

Yeah. Look, it's, it's um, there's no doubt that there's, it's a more opaque market in a way. Meaning there are a lot of targets out there that no one's ever heard of. Um, and that look that's to me, that's what makes the middle market great. And more importantly, that's what makes America and our economic system for it, which is to say at the size of businesses where KKR and Bain and Blackstone play, it's, it's all known there's. There are no, there are no surprises out there where someone wakes up and goes, holy cow, I didn't realize there was this, you know, $4 billion revenue business. Like everyone knows about it right there. There's no mystery, but in the end of the market where we play, which is again, that, you know, hundreds of four or $500 million business, which typically means their profitability could be eight or 10 million on the low end, and maybe it's 40 or 50 on the high end.

Speaker 3 (19:11):

I'm constantly shocked when I, when I spend time with friends of mine, lawyers, accountants, bankers, you know, agencies. And have you ever heard of these guys? No. Never heard of those guys, where are they doing well, how are they doing, you know, home goods? And they do, you know, lighting. And I say, oh, we know every lighting company. I don't know if you know these guys. Okay, try me. How big are they? Well, they're about $30 million in EBITDA and I'd fall out of my chair. And I go, I can't believe I've never heard of these guys. And, and so there's, there's, there's a lot of that where on RN, you know, if you've got the right network and you've been thematically focused, you're able to find some of these great gems and look, the reality is some founders want to own the business forever. Some, some want to de-risk, you know, their personal profile because they've been in the business for 10, 20 years plus, and everything they have is tied up in it, and they've never been able to monetize it.

Speaker 3 (20:00):

And frankly, in those cases, oftentimes there's a very good argument that they will actually be better managers with a de-risked personal balance sheet, because they'll, they'll take more risks. Now. We don't want swashbuckling pirates of the Caribbean risk. We're, we're looking for more like, you know, we've got the data dataset, let us help you analyze it. And let's be smart about how we spend the money, because a typical fonder may say, geez, I hear you on the marketing spend. I hear you. I know, I know we're, we're playing to a seven times row as, and I know it's a fixed monthly budget. We hit it. We're done. And I know that doesn't make sense, right. But it's my money and what if it doesn't work? And what if we do another 400, 500 grand? And it turns out that, that, that we were right at the precipice of a row as cliff.

Speaker 3 (20:46):

And that six goes to two and it's not a profitable customer. And I could have had that in my bank. Right. And which, and we say, we understand we hear that, but we think there are opportunities. And so when we're, when we're talking to a lot of founders and entrepreneurs, you know, to us, th th the right mentality is when someone says, listen, I want to be honest. I do want a deep rest. And, and I, and I do want to take some chips off the table, but I also believe in the upside, I also believe there's an opportunity to build more value. And I'm not sure where the next step is. And that comes up loops back to the operating partner thesis of if we can put the right team around that business, around that founder, around that CFO, to help them strategically think through, you know, if you had more markets marketing spend, if you had a better product innovation engine, what would you do? Right? And these are, these are questions. They often have never asked themselves because they had very tight, fixed budgets. They were scrappy, and they were able to build to a great scale without spending a lot of money, which by the way, is a feather in their cap. And to me, proof of concept is that if that makes sense,

Speaker 4 (21:55):

Uh, w what's so interesting about this too, is that if you get back to the selection criteria, we did a market sizing a few years ago, and there's not an infinite number of companies that are between 50 million and a billion in revenue in the United States. But there are thousands of, I mean, it's just, it's a crazy high number of men of manufacturers, like you're saying across every single category. And I gotta imagine though, is you, you're sitting here and you're making these investments. Um, and you've got a billion in capital in each fund, plus that to pay to play with. Then, you know, there's a, there's enough targets out there that you can, you've gotta be a little choosy about who you go after. So I've got, imagine there's an investment hypothesis about these founder led and run businesses that have gotten to a hundred million or 200 million in revenue. What makes, what makes a good investment in the digital age? Like when you look at a business and say, this business has tons of upside today in a world of Amazon,

Speaker 3 (22:57):

Well, I'll give you an example. And I think there are many examples. And in, in, in the interest of, of, of hopefully being efficient with the conversation, one place, look number, number one, I think it starts with themes. And, and when I say theme, it's an optimization question, meaning you can be so focused on sematic and on a narrowness of mathematics that you may miss a lot of good things that are somewhat adjacent to it. On the other hand, if you're too broad, you're never really going to be able to have enough conviction to say, I know more than the other guidance, or I've got the right operators and they're better than the other guys. So that's so, so step one is trying to dial in, you know, the, the, the, the, the telescope or the microscope or whatever, the right refractive, refracting devices for the analogy of that optimization question.

Speaker 3 (23:42):

Once you've done that, then, then you spend a lot time trying to find the right operators. And then once you've done that, you're thinking about, okay, and I'll give you a specific example. I spend a lot of time in home goods and in what I'll call customized, whether it's gifting, or it could be labels, kind of promo product. And, and I'll tell you why these are two areas. I like thematically within a digital, everyone on my investment committee, anytime there's a product of any consumer kindness discuss, we'll always ask smartly, what about Amazon? Why wouldn't they sell X, Y, and Z? Why wouldn't they attack it? And look, it's a great, it is the right question. And so when it comes to home goods, look, we're always looking for a moat. And so, as it relates to home goods, to me, there are, you know, a thousands, Rob, I agree with this notion, there are hundreds of great home goods found around businesses that have found a way to disintermediate multi-step distribution, typical multi-step distribution.

Speaker 3 (24:46):

So things that go through showrooms as an example, and those are typically going to be higher, higher average order value, potentially larger products, more considered purchases. You know, things that someone really thinks about well, when those things happen, those are typically not great Amazon categories for Amazon to come after. Ultimately you could evolve your model to sell through Amazon. And I think most of these guys need to be their home goods, particularly more on the heavy side. Now I'm not talking about linens or towels or batting, right? Those are high penetration categories, for sure. But, you know, things like lighting, things like furniture, you know, things like that, being a flooring or other, other places are very, um, underpenetrated online. And, you know, you're talking about less than 10%, less than 12%. It's, it's, um, it's an opportunity, but yet we think the long-term trend for where these categories are going to go is going to be online. So one love the under penetration pieces to love having a motor on multi-step distribution, that you can disintermediate a party by being more direct to the consumer. So a lot of these businesses that I'm referring to where their competitive set it's a showroom type guy, you know, where there's a lot of pro channels. These guys are, have a great product. So they're able to go direct to the consumer with marketing and be more effective to go around the distribution channel.

Speaker 4 (26:11):

Yeah, that makes a ton of sense. I mean, we we've been following the quick commerce trend is, is, uh, what some folks have been calling it where the door dashes of the world are evolving from restaurant delivery to we'll deliver any things here to your doorstep in, in 15 minutes. And I think that's going to have a massive impact on, uh, w like, what is traditional B2B pro ordering? So in the middle of the day, you've got a, instead of having to go to the home Depot or sending somebody to home Depot, if you could have whatever delivered to the job site on demand as you, as you need it, that, you know, we're just missing the infrastructure network to do that. And, and I think some of these quick commerce players are going to bring that. So if you're betting on, you know, decking and under other under-penetrated categories, that makes, that makes a tremendous amount of sense. It just, it seems like that's skating to where the puck is.

Speaker 3 (27:10):

Well, Rob, the other, the way we think about exactly what you're describing. And again, I'm a lawyer by training, but 10 million years ago, but that was my first career. So I, I, I really like to keep things simple. I think about friction. And I think about how do you remove the friction? And so what you're talking about is a huge friction point without a question, and, and it's, and in some respects, it's a service, which is another place we've gone into to kind of get away from Amazon, where you've got a services based business, where there is digital, uh, generation of acquisition and retention of a customer, whether it's, you know, carwash is with subscriptions as an example, right. That Amazon just obviously can't do that. They're never going to do that. That's a good thing. You know, some of the home goods products where there's some product complexity, particularly on things like Whiting or pool that makes it difficult for Amazon, because they're not a content generator.

Speaker 3 (28:00):

They're not great at really digging that. They're very, very good at the surface, right? And there's no doubt they are there. They're an amazing platform. And if you've got high purchase intent, it's a heck of a place to go. If you've got moderate purchase intent or below it, I don't think it's as great a place to go as trying to find someone that can really go deep on the content. So that notion of the pros and the last mile, and how do you ease the friction is pretty amazing to me. I think leaf filter, which is the gutter guard business is probably one of the best examples of having their own. And that look that's as many ways a direct selling business, frankly, as it is an e-commerce business, but they've been able to fuse the notion of digital acquisition and retention of customers with sort of a, you know, home grown or own set of salespeople and installers who can shop and explain to you why you need leaf guards, even though you've never thought of them.

Speaker 3 (28:55):

And so what they've done is they've changed the demand from being a demand order taker to being a demand generator, right? And they're doing that with education, they're doing it with a product that's complex to doing with a product that works well, and they're doing a product that has a good price, quality quotient, and these are all things that Amazon can't do. So when we think about, and then customization is a whole another vector. So when we think about consumer products, the way I try to think about them, of these various modes around is their approach in right, is there a way to disintermediate the installer or actually co-op the installer to help him be your friend to sell your product? Is there a way to create demand generation through paid social or other places where you can demonstrate the big audiences? You know what you've never thought of this product.

Speaker 3 (29:42):

You should, you should think of this product. Right? And, and, and, and this is where I think some of the COVID things we talked about Peter earlier, you know, what will stick and what won't, you know, when we're all sitting at home a year ago, right. 10 to 10 to 13 months ago, you know, I mean, we did replace a fan. We did replace the flooring. We did re we did, you know, redo a bedroom. All of it is because, you know, you're sitting around looking at the stuff gone. I hate that stuff. You know, can't live this way anymore. It's exactly, it's been like that five years, you know, it's still, you know, I'm fed up and I'm not going to take it anymore. And then, and then you could get outside and go to restaurants. And it was a holy cop. This is great.

Speaker 3 (30:20):

I mean, you could picture me and my wife on the upper east side of New York in February and full down jackets and gloves, drinking wine at a year outside with a small heater. Cause we hadn't eaten out, you know, and fricking six months a year. Right. And so then, so what happens to those home goods categories where the direct intent is now less than it was a year ago? The answer is you've got to find product categories where you can help generate that demand for products they shouldn't want. And don't know about, you know, if that, if that kind of makes sense, I would tell you that things like landscape lighting, which are very, you know, DIY category textiles, EnPro, they're not that expensive. There are some great, great players out there. And a lot of those guys did very, very well during COVID because everyone wanted to improve the curb appeal of their house.

Speaker 3 (31:08):

And it was pretty easy to do. Now that that's subsided a little bit, I would argue it's the same argument with things like, you know, gutter guards, these are practical, they look good. They help you. They actually serve a real purpose. You may not know you want them or should want them, how do you create that demand generation? And I think a lot of businesses that we spend time with our are organic driven businesses. In many ways, it's, by the way, is outstanding. It's a huge proof point when you able to be that great with sort of free traffic. But you know, when you're doing 50% plus free traffic, the first thing that always occurs to us is, geez, that seems too high. And you know, what is your paid search regime look like, particularly around places that are newer emerging channels, right? Tik, TOK, or otherwise where people go, oh, no one will ever pay for it or button that isn't necessarily true.

Speaker 3 (31:59):

And so being able to help them think through a strong testing regime with good sort of fluid holdout testing, and some of these different channels can start to show them, you know, what we're generating demand for the first time that that didn't necessarily exist. That to me, those combination of modes, if you will, Peter around the things like home goods and then customization is another one, right? Whether it's customized B2B promo product or customized gifting, you know, those are, those are, those are, those are businesses where the consumers, whether it's a business, small business guy, or, you know, you look at for over the last minute gift for your wife, they have time pressure. And so what we love about those sorts of businesses, so like web to print, you go online, you need a gift for your daughter for graduation. You need it literally in five days, you were on the road in Asia, you didn't get to it.

Speaker 3 (32:48):

And you're going to be in big trouble. If you don't have something that looks cool. There are a lot of really interesting customized platforms where what they do is they basically have pallets of blanks sitting on the floor in their manufacturing facility, which is a great inventory model, by the way, because there's no, there's no skew corporation. It's a, it's a blank cutting board, or it's a blank glass and they can print on their floor in 15 or 18 different substrates within 20 minutes and have it out the door the next day and have it in your hand the day later. And you're willing to pay a premium for that. Cause you have to have it. That's not an Amazon business. And frankly, you could argue that's a manufacturing business. And I would say, you're not wrong, but, but, but the demand generation is digital.

Speaker 3 (33:28):

How you acquire that customer, how you retain that customer. That's interesting. And in those sorts of models, what you'll find like anything in life is everyone comes from somewhere. What I mean by that is, you know, if you're, if you're the guy that was the great product guy and you knew how to manufacture it quickly, that's your expertise. And it's not necessarily that digital front end piece where you're talking about, how do you use the tactics better to generate acquisition and retention of a customer. On the flip side, you could have that first piece right. Of, of, I know the front end, but not know the product of the backend. We typically as investors in my strong biases because I'm really a product brand guy. I'd rather find the entrepreneur who has a great product really understands the end market, got a great supply chain.

Speaker 3 (34:11):

And maybe the front end of it is just, this is not where he comes from. Isn't as optimized as it could be. And we can help deliver those resources to really inflect the business op from a demand generation as well as, as well as a, a lifetime value retention, right? It's, you know, not everyone's wants to sell diamond rings and not everyone can sell dog food. And where in between that continuum of hopefully one-time purchase right versus every week. And there are no perfect paradigms companies sit in different places along that continuum. Right. And those pluses and minuses to both, we think a lot about that in terms of, you know, can you retain a customer? Can you sell them more? And a great example of that is, you know, during COVID when you say what recedes back. Well, I think a lot of heavier one-time purchase things like flooring or decking or grills, you know, that that can be tough.

Speaker 3 (35:03):

I mean, we live in the city of New York. We have a small little lake house, we have one grill. You've probably got, you know, seven mattresses, but we have, we have one, we have one grill, right? As, uh, as opposed to, you know, thing, things where there could be a better repeat cadence or you can have accessories and things. And I didn't, lighting's a good example for sure. I think small appliances are a good example where you can sell people more than one and you know, those guys, I think we'll continue to do. I'll look in the pet space. What's interesting about that as an example, you know, it's a very hot frothy space, but what's interesting is, and this is probably the wrong phrase, but the installed base has gone way up. And what I mean by that is I know I hate that because we have a pre COVID two and a half year old German shepherd. So we don't, we don't fall into this, but a lot of people bought dogs right. More, more than more than the current trend and dogs have to have products to toys, food, vet care, you know, a dog fence, you name it. I mean, there's an, and so if the steady state was that it was growing at a certain clip per year, and all of a sudden that inflected up that installed base is way up. And by the way, when people buy one dog, they're like 21 or 2% more likely to buy a second dog,

Peter (36:18):

Oh God, don't say that

Speaker 3 (36:22):

To us. The pet space, depending on the product you're selling, when people say, well, the wave's going to come in and the way it's going to come out, I'd say, you know, maybe when it comes to a lot of these pet things, I'm not so sure that's right. I think that, that, that those businesses are sustainable at newer higher floors, if you will, because of that installed base concept where I think, you know, if you redid your deck, right, or you read the, you know, the floor and you're in your dining room, you know, maybe you'll read you one other room that's possible, but I'm not sure you're going to get the same sort of repeat rate or continuity that you might in other categories that were also impacted by Coke. If that, if that makes sense.

Peter (36:58):

I love the, um, the focus on D to C I find it so interesting because for a lot of the larger brands that, that we, we talk to through the digital shelf Institute D to C is a completely new motion to them. Incredibly scary seems the path to profitability seems really challenging acquisition costs. Um, having to have a customer data platform, you know, there's a whole bunch of new motions. Um, having actual sort of consumer marketers with a consumer mindset is a completely different thing. But for your sector, it sounds like at least for the companies that you're interested in, they, they know their consumers, they, they created their company to serve them. And is that accurate? Do you feel like, um, for a lot of the larger brands, DTC can be challenging because it really, it it's it's profitability can be tough.

Speaker 3 (37:54):

Um, I like Peter, I think you're on the money. I mean, I think, look, we, we are not adverse to having stores, right? I mean, depends what they are, right? So we own a, uh, auto aftermarket services business that has six, 700 stores, but that's all services, right? We're not selling product. I think when it comes to selling product out of the store, the, the issue we have is, is you think about a category and you got to ask yourself, is this category going to be more or less penetrated online in five years? And I think it's very hard to think of maybe consumer electronics is peaking. I I'd give you that. Right. But, but almost anything else we look at you and say, you know, people are more likely to probably buy it online than, than in a store, you know, five years from now.

Speaker 3 (38:39):

And so, you know, do we want to own 50, a hundred, 150 stores? I think on the flip side, when you are that store business, right? When you are that store business, it's a very different paradigm because that is where you come from. And so when seven out of the eight people around the table are store based people, it makes that DTC transition a lot harder, just from a cultural perspective in terms of emotional Mindshare, intellectual capital, you know, and, and that, and that's where I think we as investors, you know, try to create an advantage where we're focused on exactly to your point, Peter, an entrepreneur who really understands the product has a great supply chain and has been able to generate a margin profile that is better relative to his peers. Oftentimes people ask me, Eric, what do you think the most important metric in any consumer businesses?

Speaker 3 (39:28):

And, and, and that's a hard question because there's a hell of a lot of good of different answers and opinions. My view on balanced is that it's gross margin. And the reason I say that is gross margin relative to your peers, because to me a strong, gross margin implicitly, I think unless you've got a great supply chain, which may be even more impressive, but, but all things being equal, it's an implicit statement of your customer's view of the value of your product relative to others, which means you may well have a slightly better and more recognized or appreciated brand. And I go, okay, that's great. That's, that's a good start. Number one. Now, if there's a combination of price and supply chain, I love it even more. Cause it needs this as someone who's really thought about how to dial down their cost structure and the pike with respect to not just speed, not just quality, but price, all three of these things.

Speaker 3 (40:16):

So it gives you more dollars to play with, particularly in a higher AOV average order value category. If you're talking about, you know, lighting business for the average order is 500 bucks, right? And the average gross margin is 50%, right? That's 250 bucks versus if someone's at 60 that's, that's an extra a hundred dollars. That's that is, I mean, even if it's 55, that's an extra 50 bucks, that's a weapon. I mean, you're in that. And that's where you start spending a lot of time with Rob and his team thinking about, okay, how can I smartly deploy that capital to create better customer acquisition and retention dynamics to give me better escape velocity versus my competitive set. That's exciting. And I think, you know, oftentimes when you have a store based business, right, you've got a big fixed cost base. And again, I'm not saying that we don't think stores have a purpose stores have a great purpose.

Speaker 3 (41:09):

And I think depending on the category, they can also be weapons with respect to branding and marketing. There's no doubt about that. But for me, when we think about the DTC ecosystem, when we think about some of the modes we've talked about earlier around Amazon or other competitors, we do also look very carefully at that, at that gross margin profile and try to think about how does it compare with their peers and oftentimes Peter, what you'd, when we talk about some of these businesses that traditionally have multi-step distribution, meaning, you know, bigger, bigger items in showrooms, those guys have hundreds, if not thousands of less gross margin points to play with than a DTC guy does. Right? And so that's a luxury. I mean, that is a, that's a weapon. And, and, you know, often the entrepreneur will say, well, I put that money in my pocket and I don't want to answer this.

Speaker 3 (41:58):

That's great, frankly, I probably wouldn't do right. Why not? But because you're doing great and you're growing 10 or 15%, it's like, life's good. And why would I mess with that? And look, our answer is you shouldn't, but if you want to, de-risk a profile, you know, maybe you can have a chat with some of the folks we have around the table that might have some ideas around how to, how to invest behind that marketing capability and a little more of a strategically thoughtful and frankly, tactically more clinical test testing regime to be more effective.

Peter (42:31):

Well, um, Eric after, thank you so much for coming on here, because first of all, I, you know, it's just, it's great to be inspired by a private equity firm. That's really thinking about being operational partners, uh, because I that's, this sector that you're talking about, I think is where the sort of, a lot of the action is that's that's, as you said, is kind of bubbling under, underneath sort of the, the glossy surface, but it's where like real human beings who are passionate about what they're doing our trust, trying to figure it out and, and building an infrastructure around the, that that passion I think is, is a really exciting thing. And

Speaker 3 (43:12):

I'm grateful that you shared a lot of fun because you meet you, you guys are an example today, you get to meet really smart people. Who've been very accomplished in life in areas that I don't. I mean, I barely understand, you know, I'm intellectually curious. And so you get to sit there, you know, and have a meal or have a beer or have lunch or coffee, and just kind of talk about life, talk about family, talk about their career. How did they get there? How did they end up doing what they're doing and how do they think about the dynamics? And, you know, I often am sheepish that I'm taken more than I'm given because I, you know, what I can add is, is probably more than most of the people I work with. And so I feel grateful, frankly, you know, Peter for that opportunity and particularly when you're spending time with a great entrepreneur and a founder, I mean, to me, it is, it is inspiring.

Speaker 3 (44:04):

It's somewhat intimidating. Um, because these are, these are folks that, you know, really battled oftentimes long odds, um, and, and, and had big dips, right? Nothing ever goes up until the right. I mean, in retrospect, it looks like that, but at the time they're going through it, it feels very different. They've got young kids, they've got a mortgage, they've got employees, they've got to keep the lights on which bills are we going to pay? And then all of a sudden, you know, they, they've kind of figured it out and they've gotten to this place of profit and scale and growth. And, you know, it's just, it's a lot of fun intellectually, you know, I've, I've made a lot of good friends along the way. Um, and, and I'm always happy to have an opportunity to chat and really appreciate you guys inviting me on to participate here today.

Peter (44:49):

Oh, thanks for sharing that journey with us. We really appreciate it. Thanks to Eric Roth for sharing his investment passions with us. Please share this episode with your colleagues and peers and leave a review to help build our audience. We really appreciate it. Thanks for being part of our community.