This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
Over the last decade, Crocs has become the quintessential consumer product success story. The company was founded in 2002 in Broomfield, Colorado, by Lyndon Hanson and George Boedecker to create a foam clog for boating. Since that time Crocs have become massively successful, selling 103 million pairs of shoes in 2021 with three straight years of double-digit growth. The inflection point came around 2007, when the company registered Crocs branding across 40 countries and extended their scope to customization and other apparel products. Most items in their footwear lineup are made up of their well-known Croslite resin, but the company recently also expanded to a second brand through a substantial strategic acquisition.
Twenty years is a lifetime in the retail space, but the acquisitions, marketing breakthroughs, and pivot toward digital during the 2007 -2009 timeframe are what set Crocs on the path to widespread cultural adoption. Let’s walk through these quickly, and then dig into what Crocs’ go forward strategy is as a mature brand, with a global DTC and wholesale footprint.
The 2006 IPO of Crocs was the largest footwear initial public offering ever at the time, raising approximately $200M at $21 a share. The dazzling growth was just beginning, with full year 2005 revenue of $108M growing eightfold vs $14M in 2004. President George W. Bush was commonly seen wearing the Crocs clog with socks, in addition to other photographed celebrity Crocs fans during that time including Kate Middleton and Michelle Obama. As the brand built a following of high-profile customers, the polarizing Crocs “lovers versus haters” battle played out in celebrity magazines and late-night comedy.
The timing was impeccable, as Crocs had just made a key $10M acquisition of Jibbitz in October 2006. Jibbitz manufactures accessories that snap into the holes in Crocs shoes and these products became a high margin add-on product that continues to sell in 2022. The Crocs ecommerce platform rolled out in 2009 to give customers on-demand access to the widening range of colors and customization options. These key moves drove success during the early years as a public company. The 2010s saw continued growth post Great Recession, but sales appeared to stagnant from 2015 to 2018.
Crocs revenue and year-end share price. (Via Crocs)
Fast forward to today, the massive break out in sales and transformation of public opinion on the product couldn’t be more obvious. The company offers the Classic Crocs Clog in 28 different base colors and offers nearly 400 different Jibbitz add ons. A subculture has gathered around the product, demonstrated by elaborate customization projects, TikTok skits, and widespread use among middle and high schoolers. Even 2022 Prom themed clogs are an option. Even at the 2019 point of mass success, there might not have been a shoe more attuned to the needs of the pandemic home dweller than the Crocs Clog. Which brings us to Q4 2021 performance.
Activity in Google Search Trends since 2014. (Courtesy image)
Revenues were $2.3 billion in FY2021, growing 67% over 2020 and 88% against 2019. The company has been able to take price while growing volume globally, expanding their already hefty gross margins by 730 basis points to 61.4% in FY2021. This margin expansion came from lower promotional activity and well-timed pricing action in 2021. The Q4 earnings call termed their 2021 price increases as “early” relative to competition, this allowed them to get ahead of inflation pressures. Additional 2022 price increases are included in their guidance of $3.4B revenue for 2022 ($2.75B from Crocs & $0.65B from HEYDUDE).
Q2 2021 Investor Day showed LTM Product Mix as 71% clogs, 16% sandals, 6% Jibbitz, 7% other (Courtesy image)
Management refers to their digital DTC channel as “a top priority” with impressive Digital sales growth of 48% in 2021, representing 37% of total 2021 sales. Digital as a share of total sales is slightly down from 42% in 2020 but remains elevated above 2019’s 31%. The company has above average digital share in the EMEA region, coming in at 54% in Q4 2021, with all other regions landing around 40% in the period. Their FY2021 AOV of $25.71, was up 19.7% over 2020 performance. Digital sales includes Crocs.com and third-party marketplaces including Amazon, Zappos, and Zalando.
Crocs' regional growth. (Image via Crocs, Inc. Q4 2021 Earnings)
Their digital marketing strategy is a three-pronged approach encompassing the Crocs App, a focus on global social media platforms and digital talent including influencers & fashion collaborations. The Crocs product lineup is clearly a great fit for social channels, as Crocs’ imagery and content is fine tuned to show many color arrangements and variations.
Growth initiatives include 4x expansion of sandals sales by 2026, focused pursuit of Asian markets and marketing innovations to fuel brand strength.To enable further growth, management made a key strategic acquisition in Q4 2021, buying casual footwear maker HEYDUDE in December 2021 for $2.5B. The HEYDUDE brand, founded in Italy in 2008 by Alessandro Rosano, derives 40% of its sales from online. Investors were not happy about the deal upon announcement, sending Crocs shares down by 12% and they may have been on to something as CROCS has forecasted HEYDUDE sales lower since the acquisition. HEYDUDE FY2022 was forecasted at $700M to $750M as of late December 2021 (+27% YoY) which was at time of acquisition but as of the March 2022 earnings announcement, HEYDUDE is expected to achieve sales of $620M to $670M in FY2022 (+13% YoY at midpoint of range) and an 11% cut from original guidance.
Management views the acquisition as a “perfect fit” for Crocs, adding that HEYDUDE’s offerings of comfortable and lightweight products are aligned to long-term consumer trends. CEO Andrew Rees plans to “leverage our global presence, best-in-class marketing, and scale infrastructure to build upon Hey Dude's strong foundation and create significant shareholder value.” Leverage has also been the clear strategy with the balance sheet as the deal was funded by $2.05B in new debt and $0.5B in stock. This comes on the heels of significant shareholder payouts over the last six quarters that saw $1.2B in share buybacks vs $0.8B in operating cash flow. Management is focused on reducing leverage over the next two years before restarting stock buybacks.
Crocs is unquestionably a mature brand with a global presence and scale. Their challenges around supply chain, balance sheet leverage and maintaining their position are “good problems” that most DTC founders would love to eventually encounter. These are the strategic decisions that come with creating arguably the most successful footwear item of this young century. Crocs should be mentioned alongside the Converse Chuck Taylors and NIKE Air Jordans, but with a much broader appeal and a price point that allows for true global penetration. They look set for continued success with their original brand and through applying all they’ve learned to their new acquisition.
ChatGPT, and transformers in general (the technology underlying ChatGPT and a lot of the newer software that’s emerging in the search and discovery world) are incredibly exciting. One of the most exciting parts is how easy it is to build something with ChatGPT, and we’re currently seeing a glut of new software that does just that. Still, what isn’t clear is how to leverage this technology in ways that aren’t just gimmicks, but are actually helpful to people.
It’s clear to just about everyone that we’re in a hype cycle, and that’s why it’s so important for new technology being marketed as “powered by ChatGPT” or “powered by transformers” to prove its business value and usefulness to end users. Not to mix blockbuster movie references, but with great computing power comes great responsibility.
So it’s a good time to ask the multibillion-dollar question: how can technology companies use ChatGPT responsibly and in ways that actually benefit people in the months and years to come?
We’ve adopted some overarching principles internally at Constructor that will serve as our north star as we continue to innovate in this space. As we came up with them, we realized they could be useful as best practices for technology companies in general, and especially those like us who are serving large e-commerce companies. As more and more ecommerce leaders across B2B and B2C evaluate AI solutions in the middle of a hype cycle, we think it’s especially important to publish our principles publicly.
Our hope is that if we stick to these principles, then we’ll maintain our customers’ trust while innovating on new technology, and we’ll do this while doing the right thing for shoppers as well.
Lots of companies can release a cool-looking new product and make claims about its efficacy, but it’s important for all of us to recognize that we’re early in our understanding of what applications of ChatGPT are genuinely useful to humans, and which are just science projects.
Why? Because the vast majority of those results are still unproven.
With ecommerce technology, for example, it’s important to consider whether a technology partner is going to actually deliver a product that has a legitimate impact on revenue or user happiness. Succeeding at that is ultimately a manifestation of extensive experimentation, including testing, failure, iteration, and re-testing — over and over again. Like most good things, data science takes time. It’s complex, and it’s nuanced.
Why is this so important for all of us in ecommerce tech to recognize? Because if we release a bunch of gimmicky technology and promise it’s the next big thing, then when we do come up with something useful, no one is going to trust us anymore.
The critical takeaway here is that any breathless proselytizing about most ChatGPT-based tech at this stage is counterproductive and simply not honest. If a vendor says they know for certain where the gold is right now, it’s just very unlikely to be true.
That’s the critical difference between a culture of experimentation versus one that’s only interested in shipping the “new hotness,” no matter the results. Before a product goes to market, the company that created it needs to be able to explain, and ideally prove, how it will bring ROI.
Is it just a novelty, or will it — in our case as an ecommerce product discovery company — actually help shoppers discover more products they want to buy in a way that’s more convenient, more natural, or more delightful than what they already have? And how do we know?
At Constructor, we’re excited to be experimenting with ChatGPT and large language models and transformers, both internally and with willing customers. We’re excited about the experiments we’re doing, and we hope the customers testing them are too, but we also want to be very clear that these are still just experiments. I’m providing a sneak peek at one experiment we’re very excited about below, but please read on before watching it:
Because here’s what we’re not doing: we’re not claiming we’ve invented the best thing ever. We’re not promising 10000% ROI. This is an experiment we’re excited about, but there is a real possibility that it doesn’t work out.Taking risks is what innovation looks like. The difference is that at the end of the day, our charter is to create real value (and ideally revenue) for our customers — and we won’t sell them a product that delivers anything less.
Ecommerce is full of unique problems and use cases for the ways people find products and content. For example, an add-to-cart and a purchase are both “conversions,” but they’re very much not the same type of conversion. Software that’s built for ecommerce has to understand the distinction, because it’s incredibly important to the KPIs that B2C and B2B ecommerce companies care about.
That’s the primary reason that we built Constructor’s AI core from scratch — the keyword-matching and vector search algorithms that work for general document search just aren’t the best technology to apply to ecommerce product discovery where you have rich feedback from users via their clickstream, along with zero party data like answers in a product-finding quiz. And the same principles apply when we apply ChatGPT to ecommerce.
The idea here is, let’s not try to boil the ocean. We don’t need to create Artificial General Intelligence that can answer every type of human query. We just need to create a very specific form of Artificial Intelligence that does one thing (helping shoppers discover products they’ll love, in our case) very, very well.
In order to return the most personalized, attractive results to a shopper’s query, ChatGPT needs to be augmented with AI models trained on ecommerce-specific data like clickstream behavior, average order values, margins, and product attributes. What’s really exciting here is that it’s the underlying technology itself that has the potential to completely reshape ecommerce. At Constructor, for example, we are working on using transformers to provide better product retrieval and filter out irrelevant results in search queries. It’s possible that this work may have the greatest impact on customer revenue, even more than the “conversational commerce” element of ChatGPT. But we don’t know yet — that’s why we’re experimenting.
(Image courtesy of Constructor)
Another advantage to training transformers on ecommerce data is that it also might mitigate some of the public concerns around ChatGPT’s accuracy. We only surface products for shoppers based on their own zero-party data and an ecommerce company’s own catalog. This heavily limits the types of wrong answers the system can give, and is about as accurate (and effective) as you can get. You may not be able to ask the ChatGPT solution at your favorite retailer about the year Albert Einstein was born, but it will be much better equipped to help you find a shirt you’ll love, or that one snack you tried and enjoyed, but can’t remember the name of. That’s a sacrifice I think most companies will be willing to make.
We’ll be releasing the full results in the next few months, but our team at Constructor recently performed a survey of 400+ U.S. online shoppers. We found that more than half of them were at least somewhat hesitant about using ChatGPT to find products on websites.
In our current landscape of third-party cookies and data breaches, that response is understandable. And ChatGPT could trigger a similar backlash if it makes shopping uncomfortable or intimidating. New tech can be scary, and it’s a fair concern that you might not want to ask your grocery store to create a shopping list of your regular purchases if it automatically adds sensitive items like gas relief medicine without asking you first.
We don’t have all the answers yet (as a company, an industry, or even a society) for how we’re going to solve these problems. Some of it, especially in this experimental phase, will be creating more transparency for the shopper. Expedia is an example of a company approaching this the right way, in my opinion. They recently launched a ChatGPT interface, and they’re very open about it being experimental and not trying to “trick” customers into using it. It’s a small but important step in building customer trust and delivering the value that leads to long-term relationships.
(Image courtesy of Constructor)
Questions will come up as we break new ground here. They’re important to talk and think about, and that work is the shared responsibility of retailers and the partners they work with. Ecommerce companies and their technology partners coming together to consider these murky waters — and being willing to think through new solutions to put customers first — will be absolutely critical.
The amount of excitement and buzz around the (virtual) water cooler here at Constructor when it comes to ChatGPT can’t be overstated. Speed to market is a noble pursuit in this agile, volatile economy, and we are experimenting every day to figure out which of our ideas with ChatGPT and transformers will bring customer value and which require rethinking.
But we also want to balance that excitement with humility. When ChatGPT and transformers are raising legitimate questions from consumers, from companies, and even from others in the AIcommunity, moving forward carefully and intentionally is equally important.
In this retail tech arms race, it’s the companies who widely release technology that doesn’t help their customers that have the most to lose. Ultimately, AI shouldn’t exist just for AI’s sake. Artificial Intelligence needs to yield real value if the companies using it want to be valued by their customers. We hope that our customers have come to trust us for doing right by them and their shoppers, but recognize that trust is something we have to constantly earn and maintain. My hope is these principles will help us and the wider technology ecosystem do exactly that as we embark on this next exciting adventure in AI.
Eli Finkelshteyn is co-founder and CEO of Constructor, an AI-powered product search and discovery platform tailor-made for ecommerce. This piece originally appeared on Constructor's blog, and was reprinted with permission.
