Birkenstock’s IPO, Middlemen, and Profit Margins
Know the company Birkenstock?
Just about everyone does- my wife has several pairs of their shoes and sandals in her closet. It’s an iconic brand that was founded almost 250 years ago by German cobbler Johann Adam Birkenstock (cobblers…who knew?).
The company went public this week.
Birkenstock’s financial results have improved after shifting more effort toward a direct-to consumer (DTC) model- I’ll get to that explanation in a minute.
Since being acquired by a private equity firm, the company has performed well. According to CNBC:
“Between fiscal 2020 and 2022, sales jumped from 728 million euros ($771 million) to 1.24 billion euros. Over that time, the company grew direct-to-consumer sales, strategically exited certain wholesale partnerships and focused on driving sales of items with higher price points.”
What about company margins? Again, from CNBC:
“It posted net income of about 187 million euros in fiscal 2022 and saw margins of about 60%. Birkenstock has room to grow those margins if it expands its direct-to-consumer sales, which have grown from 18% of sales in fiscal 2018 to 38% in fiscal 2022, it said in a securities filing.”
Since the pandemic, more people work from home and embrace casual comfort (I’m wearing hiking shorts and sandals as I write this- why not?). Another great quote from Trung Pahn on Twitter:
“Birkenstock went wild during the pandemic (work from home boost) and 90% of interest is word-of-mouth (US Birkenstock owners have 3.6 pairs on average).”
The company is well-positioned for more growth- but how much growth through DTC?
How Direct-to-Consumer Can Work For You
A 2021 Harvard Business Review article explains that: “Commentators hail DTC’s online-only, social-media-promoted, no-middleman model as the future of marketing. At the peak of the hype, the Interactive Advertising Bureau announced the advent of a direct brand economy.”
Here are some other DTC brands that have thrived- you may know these names:
Why not cut out that pesky middleman- the guy you must pay to get your product into a retail store? Lower costs mean higher profit margins…
Let’s DO this!
Trouble is, other businesses have jumped on the DTC train- and times are tougher now.
Is DTC for You and Me?
In 2023, DTC firms operate in a crowded market.
Think about how many ads you see in a given day from DTC brands. Text, social media posts, Google search ads displays, TV ads (remember TV?).
To get attention in a crowded market, you have to spend more- and that spending has to differentiate your business from the competition.
Many companies are embracing AI as a tool to provide hyper-targeted ads to consumers. Aidaptive explains that AI may “drives increased conversions and average order value (AOV), boosting revenue for your business.”
I read history and biographies, and I bought some books to take on summer vacation. When I went to Amazon to buy Book A, the software showed me two other books in the same genre- and I bought both of them.
The result?
The order size increased- and I’m more likely to buy more books from Amazon (does anyone else still sell books other than Amazon?).
The Lesson
Levi Strauss didn’t make money panning for gold in the California gold rush. Instead, he profited from selling “clothing, bedding, combs, handkerchiefs.. tents and later jeans” to other people who panned for gold.
Find a niche, understand your market, and watch your costs- you may be able to make money in the DTC space.