Why Rothy's Built the Factory Before They Built the Shoe

Speaker A: They would show ads of people putting the shoe in the washing machine without losing its shape, and people just went bonkers for it.

Speaker B: Hey, everybody. Welcome back to E Commerce on Tap. I'm your host, Aaron Alpeter. If you're new here, thanks for joining. Each season, we do a deep dive into a different industry. We explore at least six brands whose stories, supply chains or exponential offer really useful lessons about where the category is and where it's headed. This season, we're turning to a category that we all know really well, and that is footwear. But, um, we're approaching a little bit differently alongside the deep dives and into some of the most influential companies in the space. We'll also be joined by a rotating lineup of co hosts for each episode. And so today's co host I'm really excited to introduce is someone I've always admired and someone I've always wanted to work with. It will happen at some point. Uh, Barbara Almeida is a brilliant marketer and operator who has spent her life kind of pulling herself up by her bootstraps and generally just making things happen for herself and people in her life. And so, Barb, thank you for being here. Do you want to introduce yourself a little bit to the audience?

Speaker A: Thanks, Erin. It's really great to be here. Um, I'm really excited about today's topic because shoes is actually in a interesting turn of events. What brought me to the US Was on a running scholarship. So, um, I came to the US On a running scholarship. So footwear has been part of my life longer than most things in my life have been. I came on a running scholarship and ended up staying in New York for grad school. And honestly, that's where my entire E commerce and startup journey began. In a class with your wife? Actually, she's the one that suggested I meet you. And that's where I had my first real taste of startup life. It was an internship at Hubble Contacts. I don't even think you guys were hiring for an intern. I just said, hire me. I just want to learn. You don't even have to pay me. And it was considered a graduate school credit at the time. And this was back when you were the chief supply chain officer at Hubble Contacts. What honestly hooked me was the startup mentality of just figuring it out. Um, there was no SOP There was no handbook, and there's something about scaling fast and you having to be the one to just figure it out. That really just kind of hooked me. Um, you just roll up your sleeves and you own it. And that ownership mindset really shift shaped how I think about business now. And it's what eventually led me to where I am today, which is I own my own boutique consultancy called Super Bloom Insights, where I work with brands today, helping them grow and scale. And for those of you, if this is your first time here, um, we hope you stick around. Be sure to subscribe. Um, I've been having a really great time listening to previous seasons. Um, and if you want to continue catching the rest of the season, hit, subscribe. Aaron, before we get into it, I heard you got a tidbit for us.

Speaker B: Uh, yeah. I'm obviously very tied into what's going on with the tariffs and all of that drama. I was surprised to see that, according to court filings, the Trump administration has already refunded over $20 billion for the tariffs. And so I had lots of questions on if this was actually going to happen. I thought for sure they were going to either drag their feet or just decide that they weren't going to comply with this or find some other way to keep the money. Um, but they are. They're doing it now. We still have a long way to go. There's about $120 billion that are eligible for refunds, but we should expect those to be paid out in the next 612 months.

Speaker A: Interesting. Uh, do you. Or do you have a hunch of which categories are going to be seeing the biggest refunds? Because I would imagine footwear is right on the top of that list.

Speaker B: Well, yeah, it's certainly, uh, anything that's coming from China. I mean, remember, there was a 185% tariff at one point. I would probably say sourcing from China.

Speaker C: Ah.

Speaker B: Something that's made out of steel. And when you start stacking all these sorts of things, it gets pretty big.

Speaker A: Yeah. Um, my tidbit is a little bit closer to home here in ecom world. Um, this month actually marks 20 years since Shopify launched. And the origin story is one of my favorites. These three guys who just wanted to sell snowboards online, and they couldn't find a decent platform to do it on, so they built their own. And it turned out the tool that they built their store was worth a lot more than the store itself. And now, two decades later, they're one of the most valuable companies in Canada and power a huge chunk of global commerce. And for those of us who've spent most of our careers in E commerce, it's a good reminder that sometimes the biggest opportunities are hiding inside the problem. You're trying to Solve?

Speaker C: Yeah.

Speaker B: I mean, gosh, could you imagine a world without Shopify?

Speaker A: It's one of the first things I do when speaking to clients is trying to understand what platform they're on. And nine times out of ten, it just, It. It makes obvious sense to transition. And so I can't even imagine what we would be doing without Shopify nowadays. Okay, so, Erin, I have to ask you something.

Speaker B: Okay.

Speaker A: Um, I've known you and your wife now for a long time. Um, and I know she's an amazing cook. I can speak from firsthand experience. Um, but be honest with me. How much food actually makes it out of your kitchen versus in the trash?

Speaker C: Oh, gosh.

Speaker B: Uh, way too much. I mean, you know, some stuff. So in Canada, we have, like, you have to compost in Montreal. And so we have these bags that get filled up every day. And some of the stuff is, like, things you'd expect. So it'd be like potato skins, the ends of carrots, or like, chicken bones. Stuff that we were never, ever going to eat too. Um, but my wife has also a very strict rule. If it's been in the fridge for more than a couple days, it's got to go. And I'm much more of like a smell test kind of guy. And there's definitely been things where. Times where she, like, set it out for me to throw it away, and I've just heated up and eating it.

Speaker A: Hilarious. That's exactly how it is in our household. Um, my husband likes to test how long food can actually last in the fridge, and I'm constantly trying to throw it away.

Speaker B: You go, it's fine.

Speaker A: He says, no, that's not how it works. Um, I think the reality is that most of us, when we buy things, you know, whether it's a finished good or the ingredients themselves, usually we don't think about the waste that went into creating the product that we have today. When you buy a pair of shoes, you often focused on the finished product. You're not thinking of everything that went into it. And so that's the reality of every manufacturing process and sort of the process at large. And unfortunately, it creates waste. And so sometimes the waste is really obvious. Things that show up in a dumpster somewhere, like scraps on a factory floor, the package is damaged or you have broken inventory. Other times, it's work that you can't see. It's waste that you can't see. It's access, labor, overproduction, time in idle, um, where you're just waiting, or even unsold inventory that you ultimately end up having to throw away, especially for goods that go bad, like the ones in our fridge, like we just talked about. And so the reality is that the product that you buy is only the survival, driving output, um, of a much, much larger system.

Speaker B: Yeah, that makes a lot of sense and that's something that I have lived firsthand in my career. Um, not a lot of people know this, but I worked in the Lipton tea factory in Suffolk, Virginia. That's right, about 18 months. And I had a great job there. I was the factory supervisor for a day shift, night shift. So I had 24 hour responsibility and we were responsible for making millions of teabags every day. And so like when people see a box of Lipton, they see the 100 count. It's well organized. They just see as you know. But when I see it, I think about all the dust that was on the machine, uh, the tea bags got stuck in conveyors, the tea that was in my ears, my nose, all of my clothes at the end of a shift. And so all of that, that waste, right, was something that was baked into the price that Lipton sold the tea for. And it usually wasn't like a super big thing. Although, um, I do have some stories I can share after the record of like, things going wildly wrong and, and just, you know, massive amounts of waste that we had to deal with. Uh, but in general it was, it was a thousand, uh, tiny losses that happened over millions of units. And these inefficiencies became very expensive. I mean, so waste was a major cost driver at the factory. And even though it was a relatively small, when you look at it in a cost per ton basis, it was still something we were always focused on. We're always trying to minimize.

Speaker A: Yeah, that sounds pretty messy. Um, I've never worked at a factory, but, and I'm not the best person in the kitchen, but I've carved a turkey a day of my life. And no matter how careful you're trying to be, there's always scraps left over. Um, there's the skin, the bones, um, the tissues, just different parts of the turkey that you're never going to eat. Um, some people will make some soup out of it or stock, uh, but nobody really expects to get 100% of the turkey into a perfectly sliced meat. The more I think about it, that's, uh, really the key thing about manufacturing. Historically companies have always accepted that, uh, there's a percentage of every raw material purchase going to become waste. And the question wasn't necessarily like, how do we eliminate Waste, which I find to be really interesting. The more I think about it, it was like, how do we manage the waste? Which is the fundamental mindset of like, not how we eliminate it, but how do we manage it. And this framing has really, really become prevalent in almost all of manufacturing across every single industry. Historically, most companies approach waste reactively if you think about it. So we designed a product, you build a factory, you measure the waste, you try to put in place, um, things to mitigate that waste. But the company we're talking about today, Rothy's, they really took an entire different philosophy to identify the source of waste and footwear design and then build a product accordingly. It's ultimately a very interesting worldview that we're going to dig into and that the more I read and learned about it, the more interested I became.

Speaker B: Yeah, I'm really excited to dig in as well, especially as somebody who's spent time and loves to go see factories. And what's interesting about this effort to rethink waste in general is been the effect that it's had in other industries. And so this isn't something that has made its way into footwear before. I recently read that Apple has produced their own chips and they have like a six core chip that uh, they use for, I think it's like uh, the imac or something. Uh, but when one of the cores fails, it can no longer be a six core, but instead of throwing away, they're now putting that six, uh, core with one faulty core. So it's a five core into another product. And so it's kind of an upgrade for these other products. But it's also a way to eliminate cost and waste on that end. When you think about waste, you've got to talk about Toyota as well. Uh, they're just one of these massive pioneers when it came to thinking about identifying and taking waste out of a process. Uh, the Toyota production system is something that any supply chain person has been taught about. And it's not just about identifying the raw material waste, but also the wait time, the production excess, the processing excess, the inventory, the buffer, all those sorts of things that go through there. And so this, this doctrine and manufacturing around reducing waste is something that's been around for a very long time. And in fact, most people probably think of waste as something that's like landfill or recycling or garbage and things like that. But in manufacturing it's much more encompassing than that. It is defects that ultimately don't pass inspection. It could be products that need to be reworked before they're sent. And so even if you actually sell the product, the cost that you're spending, reworking and identifying those issues is a form of waste. Um, it's also a product that nobody buys. Right. We don't think of that as waste, but that is a huge factor in waste. And then idle time, labor, inventory, transportation, all of those things are piling up to being something that can be considered waste in a manufacturing process.

Speaker A: That makes sense. So what you're saying is every industry has waste. In this broader definition, um, what would you say makes footwear special or unique or even more difficult than other industries?

Speaker B: Yeah, so footwear is one of the most waste intensive consumer categories, period. And I think it's because when you look at it, it is touching on almost every difficult manufacturing characteristic. You're dealing with flexible materials, multiple suppliers for those materials, extensive manual labor, variability around fit, seasonal demand, fashion risk, inventory, risk returns, all those sorts of things. And so each of those dynamics is difficult to manage on their own. But put together, it becomes a really, really hard mountain to climb. And so if we dig into the different types of waste, specifically you're cut and sew raw material waste. Uh, you think about like when you're ever making cookies, uh, you have some dough after you press things out that with cookie dough you can reuse and make, make more. But when you're cutting out leather, you can't smush it together and make new leather. It's just that stuff is just not there. From a sampling point of view, you typically have a lot of sketches, prototypes, fits, wear, tests, those sorts of things that are important steps in the design process, but they never reach the end consumer. And so those can be considered a form of waste. You've, uh, got defects, so issues with adhesive stitching assembly, um, those sorts of things. But probably in footwear, the absolute biggest risk is inventory. And if you make too many sizes, too many colors, too many styles, or the wrong allocation of them, you end up with markdowns, liquidations, debentory, things like that just go back to Hubble contacts. If I have the wrong power of lenses, it doesn't matter. Like, you, uh, know, I may have 10,000 units of negative 8, but if I need a negative 2, it's not going to help me. Like, it's, it's just, it's wasted.

Speaker A: Exactly. I mean, most people seem to miss that. Waste isn't what gets thrown away. Waste is everything you've paid for that never created value for the consumer. I don't need negative 8, I need minus 1.2, 5. What slight stigmatism nowadays. So once you start looking at manufacturing through that lens. Funny. Um, the story of Rothy's becomes very interesting. It isn't really about recycled plastic bottles or sustainability. It's about what happens if we designed waste out before we ever designed the shoe. So let's dig into Rothy's now. Tell us who are our founders and how do they go about building the company we're talking about today.

Speaker B: So I think it's important to start by, by really talking about who these founders are. Not. This is not a story about uh, a Nike or Adidas executive who was really motivated by sustainability. It's not a story about a footwear engineer, a factory owner, a shoe designer who want to do something different. Instead, this is really two outsiders to the footwear industry. I think it's really interesting because when you look at this, a company that ends up being as radical as Rothy's is probably wouldn't have been successful with two insiders because insiders are trained to optimize the system that they know. Outsiders on the other hand, keep questioning why the system works the way it does in general. And that seems to be what happened here. They gave themselves permission to rethink absolutely everything about the product architecture and the manufacturing process when it comes to shoes. And so our two founders who decided to question everything are Stephen Hawthornwaite and Roth Martin. And so let's start with Stephen. Uh, he came from an investment banking background, so he's finance oriented and just this consumer operator mindset. And he was largely seen as a systems thinker. He was really good at understanding how the footwear system business actually worked when he started to dig into it. And I don't think that he was really motivated to design a prettier shoe, but he was really influenced by ideas around sustainability, economics, process optimization. And what's interesting is that when most finance people enter the fashion focused business, they're laser focused on like margins and distribution and uh, retail and all those sorts of things. Instead, Rothy's ended up focusing on manufacturing and materials and waste reduction. And that's pretty, pretty unusual. And our other co founder, uh, Roth, who is the Rothys in Roth, uh, is, yeah, he's, he's really this aesthetic and creative force behind the brand. Before starting Rothy's he, he operated an art gallery and he worked in creative environments. And so he had this really deep exposure into design culture and his philosophy, uh, in design and also in Rothy's was really heavily influenced by Japanese minimalism. And so there was a focus on simplicity, clean design, and reduction rather than addition. Uh, so don't add more things. Take them away and see if you can still keep the core. And I think it's hard to overstate the impact that this Japanese minimalism had on their overall design process, because they intentionally looked at everything and said, hey, how do we take things away? And that sounds very much like Toyota, like we talked about, because of the Japanese connection.

Speaker A: Wow. It really does sound like these guys just came from completely different worlds. Um, how did they even meet? Or how do they even get involved in trying to start a company?

Speaker B: It's really interesting because it almost feels like it was accidental. Um, they had known each other and were friends in San Francisco before Rothy's was even a thing. And so they had overlapping entrepreneurial and creative circles. And they just had interesting backgrounds that on paper is like, oh, this is a really natural founder pairing. And so I don't think they sought out with that, but that's what they did. But it's also important to think about the time and the place that they were in. So they were in San Francisco in the early 2010s, and you think about San Francisco at that time, this is the beginning of the bubble, right? Uh, Airbnb and Uber are massive companies then. And then they were. They were a fraction of the size of what they are today. Uh, software was eating the world. You had venture capital that was exploding. Apple was dominating every consumer product conversation. And so this backdrop was. Was where people were looking at systems that could be reimagined and redesigned. And Silicon Valley was very much a let's break everything kind of perspective. And I can't really find evidence that either Steven or Roth cared about shoes a whole lot. Um, it feels like they saw an opportunity in an overlooked consumer market and just decided to go after it.

Speaker A: Based on how you've described their backgrounds, what I just can't wrap my brain around is, like, why shoes? If neither of them came from this world and had no prior experience, like, I would have been running for the hills. That is the last thing I personally would consider doing. Even as a runner. They could have built a T shirt company. They could have done anything else that was better aligned with something that they kind of associate themselves with or have a passion for or a deeper interest in. Uh, why were they so attracted to footwear specifically?

Speaker C: You know, that's a really important question, because I think you're right. There were a lot of other things that could have been easier, but I think that they chose the most complicated consumer product imaginable because it was difficult and they wanted to go out and solve that.

Speaker A: I respect that and I can see how ultimately it worked out for them. So let's talk a little bit about that. So their early days, um, as I understand it, they started the business formally in 2012. The interesting thing is that despite starting the business, they didn't launch right away. They quickly realized that they knew nothing about this product. Who would have thought? Um, and they had no idea how to even manufacture it. So it really kicked off what was a four year journey of just development that looked at very different sort of startups at the time. If you think about 2012 specifically, this is the vintage of Harry's Warby Parker Blue Apron. Often their playbook was to find a product to source a factory design and brand it and ultimately launch everything in less than a year. Like it was all about speed and figuring out how to make everything more efficient and go to market. But Rothy's did something very different. They focused on developing the materials, then the manufacturing process, the knitting process, the architecture of the shoe as you've described in prior, um, episodes and, and a comfort profile. And only then they launched. And this launch ultimately happened around 2016, so four years later. Which honestly begs the question, like, why did it take so long? And the more I dug into this, the answer was really that they were completely obsessed with doing something better, um, and doing something new. Um, transforming recycled plastic bottles into yarn. At first glance it sounds simple, but it really wasn't. Um, I don't know if you know this, my background, my undergrad is actually an environmental studies major. I wanted to save the world from climate change and I interned at the Department of Energy and Environmental Protection. So this is a topic that's very near and dear to my heart. Um, so so much respect for how they were approaching it. And as a result of that, they had to solve a few things simultaneously. So from a material perspective, could recycled pet become a premium textile? That was the question they were trying to answer. From a comfort perspective, would plastic bottle yarn feel comfortable enough for daily wear? It's a fair question, not something that you immediately think is going to be comfortable. Durability. Would this actually survive real consumer usage? Just think about us women walking everywhere. In the cities of New York City, you easily get 10,000 steps a day. Um, and from a manufacturing perspective, how are they going to knit it consistently at scale, over and over and over again? And aesthetically, obviously it could look, it could be, um, comfortable, it can last but if it doesn't look good, we're not buying it. So after they did all of this work, um, would it even look good and would people want to buy it? And usually most companies only solve for one, maybe two of those issues. But they were determined to tackle all of them before launching. And so really interesting way to go about it and so much respect for them and how they approached it.

Speaker C: Yeah, I feel like instead of, uh, you know, the old staples easy button, they looked for the hard button and just said let's, let's keep doing that. Why were they so fixated on turning plastic water bottles into shoes?

Speaker A: Yeah, I mean if you're going to make sustainability a core niche of your brand, when you actually think about it, plastic water bottles are an easy thing to explain. The consumers immediately understand that this is waste diverted from the landfill. If you've ever been to the doctor and you see all the plastic bottles coming in from the ocean, you immediately resonate and it's visible sustainability. Realistically, PET plastic could be transformed into strong fibers. There have been also instances where plastic derived yarn worked extremely well with knitting systems and digitally controlled environments. That just meant this wasn't just a sustainability story, but also a potential manufacturing input story, which is really fascinating.

Speaker C: Yeah. You mentioned a four year development cycle and that feels like an eternity.

Speaker B: I know companies that got funding started,

Speaker C: launched and shut down within four years. I also think like going back to that time period where you're seeing all of these other companies that start at the same time doing amazing things and having these really high evaluations. How do they do this? Did they bootstrap the whole thing or did they just have like the world's most patient investors?

Speaker A: I know, yeah. It's really interesting because it looks like they put roughly 2 million of their own money. 2 million into the business. Yeah. In this time. And so this is just a substantial amount of money for anybody to self fund. Unless you're a billionaire, which if you're wondering, these guys were not. Um, but think about this like there's no point proven market, there is no guarantee that customers are even going to want this product that they're building. And they're trying to take on a very extremely difficult manufacturing problem with no prior experience.

Speaker C: Yeah, $2 million. I mean, uh, talk about conviction. I don't know if they like intended to spend $2 million to bring the product to market or if it just kind of happened. They said, well, we've already spent a million dollars, so let's keep spending. Um, but I mean it's really just kind of this question of what were they actually doing for four years. The reality when we dug into this is that they were trying to perfect the manufacturing system for the brand they envisioned. And so the real first indication, this was never really about footwear, it was really about manufacturing first. That happened to enter footwear. Looking back on these four years where they're writing checks, sizable checks from their own funds, uh, really figuring these out, which is so formative and it's, it's hard to understate, uh, how important of a foundation this was. They began experimenting with materials, inventing new manufacturing capabilities in both knitting and fit refining, and eventually they started moving from producing prototypes to actual production. In fact, there was a, there's a quote from Roth Martin that I found where he was talking about this, this period. He says, uh, quote, with a computer program, we were able to write a pattern that basically used the pet fiber exclusively. And I don't know, I thought that quote was interesting for a couple of reasons, because this is a founder, but it's not the language of a fashionista, uh, or a creative. Even though Roth was the creative person, this sounds like a tech person. This is manufacturing. This is how you go about thinking about doing things so radically different than what other people have done.

Speaker A: I couldn't agree more. And I mean, they put 2 million at this point in time into the company. All the money had to be going into the company. Where were they working out of? Were they like your typical Silicon Valley startups at the time or they were working out of a garage at this point?

Speaker C: Well, it wasn't out of their garage, but they did try to start manufacturing, uh, closer to home, at least initially. But they found that the more that they pushed the envelope, the more they realized that US manufacturers, even the small custom built prototyping shops, simply didn't have the capabilities that they needed. Um, because what they realized they needed was advanced knitting expertise, specialized machinery, textile engineering, manufacturing flexibility, and all of these things eventually led them to China. And so they didn't choose China because it was the cheapest. They chose China because it was where the capability was. You think about where people are today and like, oh man, we can't get around China. It's so strong. Like that ecosystem was so strong in the 2010s, and uh, it's just, you know, the rest of the public has woken up to that, uh, with the tariffs.

Speaker A: Yes, absolutely. And I mean, and today, now, even in conversations with clients, they want to launch in the US And I was like, there's just literally there isn't the capability to produce this product here. Um, and so it's just one of those conversations we often have to have. And they discovered it early on. So let's talk about the launch a little bit more. So at this point, we're in 2016. They've invented a lot of stuff along the way, um, and they've decided to launch their company. And once again, they did things very differently. So let's go through it. So rather than launching with a huge footwear line, they launched with an incredibly narrow product system in 2016. D2C only with two core styles. I'm very familiar with these two core styles. So they have the flat and then they have the point. So the flat is this round toe ballet flat, and they sell it for $125. Um, and the point is a sharper pointed toe version for 145. That's my favorite. Um, they were built around the full Rothy's proposition. Recycled plastic bottles, 3D printing machine, washable, which is, I've been asking women and I, as I see them wearing it lately, like, how does it wash? They love it. They, they say that, like, it brings back its form minimum, um, waste and office appropriate styling and comfort. So they were able to get really good coverage from outlets like Vogue. They were able to then describe their three printing manufacturing process as almost eliminate. And so the fact that they were washable and available in two designs with lots of color options actually didn't hurt them. One might think it would, but it didn't. And we can talk a little bit about that in a sec. So it's also worth noting that from a merchandising perspective, the launch looked really small. But ultimately it's all the color testing that went into it. So from a color testing perspective, it was a bra. They had 17 different colors. And that gave the consumer a way to learn demand without exploding the construction complexity. Their early reviews from press and from customers were extremely positive. And right off the bat, it looked like this was going to be a hit.

Speaker C: Yeah, and again, I kind of try to put myself in their shoes. I can't imagine the emotion that went into this moment. They've got $2 million that they've set on fire. Four years of their lives locked into developing, and now it's out in the wild. So what did the first 18 months of the launch look like?

Speaker A: Well, in 2017, they raised a 5 million Series 8 from Lightspeed Venture Partners and opened their own factory in Ganzhou just a few months after launching.

Speaker C: Yeah, I think both of these are pretty interesting because at this point they had validated the product existed and that of course the manufacturing system behind it was working and that the consumer demand was there as well. So they had de risked it pretty well where I don't know if this business would have been fundable four years earlier. And I think it's really interesting because most venture investors at the time were buying DTC multiples, Facebook acquisition economics and digitally native brands. And Rothy's was really unusual because the thesis for the investment was really more around manufacturing IP and process design and production capability. And it was almost as if like lightspeed as well, saw them not as a shoe brand, but as a manufacturing operating system that happened to sell shoes right now. And the factory in Guangzhou was also like a really aggressive move because most young consumer brands would outsource longer and stay light on assets to preserve their flexibility. But they doubled down on vertical integration just months after their public launch.

Speaker A: Yeah, this vertical integration really just unlocked so many capabilities for them. Um, they continue to add more colors and eventually new silhouettes and, and By September of 2018 they had the flat, the Point, which they started with the loafer at 165, a line of girls flats for $65. I remember when this one came out, um, a San Francisco store and their sneaker at $125. And so they were also in this amazing golden area, as we all recall of D2C advertising, when you could still rely on Facebook. Those were the days, um, as a car consumer acquisition channel. And so the Point in particular became a cult favorite. They would show ads of people putting the shoe in the washing machine without losing its shape and people just went bonkers for it. The early ads basically had three hooks for the product. So it was made from recycled bottled machine washable comfort flats for professional women. And all three claims made them very, very shareable.

Speaker C: Yeah. And I think the interesting piece here is despite all of the manufacturing processes that they invented and all the IP and the investment thesis and all that stuff, you can't explain a knitting system to a consumer. You just have to say these cute flats are made from plastic bottles and you can throw them in the wash and like all of that other stuff didn't matter to the consumer. These, these benefits they got.

Speaker A: Exactly. You know, supply chain's the unsung hero once again. I'm curious to get your perspective, perspective. Why do you think owning, um, their factory was so vital in their perspective?

Speaker C: Yeah, it's a really interesting question because I think we can actually learn a lot about Rothy's and their decision to do that from Ikea. And what I mean by that is a lot of people think that Ikea's innovation was furniture, but it really wasn't. It was redesigning furniture around manufacturing, transportation, and storage processes. And so with Ikea, most traditional furniture companies ask, what kind of furniture can I make? And so they would spec it out, they'd build everything, and that would be that. And they'd probably look at what other people were doing and what consumers were buying. And that was the brief that they went, ikea did something different. They said, how should furniture be designed if manufacturing logistics mattered from the beginning? And that led to things like flat pack construction, standardized components, fewer SKUs. Ah, which all of that ultimately resulted in easier transportation, warehousing, assembly. And in the case of Rothy's, they started asking what should exist if manufacturing efficiency was considered from day one. And so they started to knit their uppers. They used fewer components that generated less waste. It was more repeatable, more digital patterning. Um, so you really have this idea that the shoe becomes software. It's the zeros and ones that create, uh, and they just happen to be having a physical output instead of software output at the end. And so when you think about, like, why they opened a factory so early in the history, the reality is that the manufacturing system was a part of the product and the factory stopped being a vendor was more of an asset, a core asset to what made the product, their product.

Speaker A: Um, by the late 2018s, they already had over 160,000 followers on Instagram. And the market reaction was even stronger. They were framed as the most San Francisco shoes ever. And Vogue positioned them as environmentally friendly shoes that also, also look good. And if you compare this to Albert's, uh, which is having their heyday as well right now, um, these guys were actually doing something different. Turns out people really like the shoes and not just a sustainability angle. Women bought multiple pairs of a narrow product architecture in different colors. And Rothy's was able to make small tweaks to the process which allow them to provide novelty to the consumer without changing the underlying production.

Speaker C: Yeah, and by 2018, they had sold over a million pairs and had generated $140 million in revenue. And they raised, uh, $35 million from Goldman Sachs growth equity. And on the surface, this just looks like a big VC round, but the fact was that they were doing $140 million in revenue two years after their public launch. And so it was growth stage Equity. And this is not just a splashy round. Goldman was treating Rothys very different than other companies there. Um, you typically don't hear about Goldman Investing in D2C companies, or brands for that matter. But they said that they were attracted to the production process and the product offering with differentiated ip. And it's just really interesting how they talked about this, because they didn't talk about the sustainability mission or the brand or the community, but it was the production process. That's really what stuck out to people when they were thinking about this type of investment. And they had a leadership change in 2018 as well. Jenny Ming steps in as the president and CEO of Rothy's, while Steven transitioned to the role of executive chairman. And so Roth at this point was still involved in the creative direction of the business, but became more private and less visible. And Jenny was really fascinating because she became first well known as the president of Old Navy during their explosive growth years. Um, later, she was the CEO of Charlotte Russe and served on multiple retail boards, which is very invested in consumer businesses in general. She's not a footwear innovator. She's a scaling operator. And so her job wasn't to invent something new. It was to take something that had already been done, all the hard work from Steve and Roth, and instead make it bigger. Take it from being founder led to something that's a little bit more institutional. And so by 2019, they had 1.4 million customers, 105% increase from the previous year. 2020, they started getting the handbags. And in 2021, uh, Albert Gaddas, the owner of Javelinas, acquired a 49.9% stake for roughly 475 million, which valued the company at a billion dollars.

Speaker A: Wow. So what do you think they were really buying here? Like, was it the brand, the consumer base? The more I think about it, it really is the manufacturing capability. Alpargatis is not a marketing company, as I understand, it's a footwear company, and they understand production. So that seems to be the obvious answer.

Speaker C: Uh, yeah. Um, I guess maybe we'll dig in this a little bit more. But it felt like they were on this big trajectory, but they really weren't in a world unto themselves. Because there's a really interesting parallel to the story that we haven't touched on with a small shoe company in Oregon that you might have heard of.

Speaker A: I'm excited to dig into this one. Yes, we absolutely have to talk about Nike. One of my best friends has been working there for a couple of years. And, and I've got some inside scoop. Um, and I'd love to talk about their Flyknit program. If you go Back to the mid-2000s, Nike had a problem. Traditional athletic shoes were becoming increasingly complex. They often needed multiple layers, stitch panels and overlays. And all of this was adding more weight. And in around mid 2000s, they began exploring what if the upper was knitted instead of assembled, um, that upper section of the shoe. And that resulted in what they call the Flyknit. They started working on this back in 2004 until 2011, uh, which took nearly a decade to develop the technology. So in 2012, the same year Rothy's was founded, they launched the Flyknit racer and the Flyknit trainer the same year.

Speaker C: That's really interesting. Makes me wonder. Well, actually, I have even more questions now because on the one hand they are proving that there's. The technology is there. But on the other hand, I, uh, guess I'd have to spend $2 million of my own money to try to do something similar. I mean, that's just a very difficult thing. And, you know, how am I going to justify to myself or to my family or to investors that, you know, let's spend $2 million and we're going to beat Nike? That's just, it's just crazy.

Speaker A: I mean, yeah, Flyknit was revolutionary for Nike and therefore for the whole industry. It gave their engineers so much more successful support, flexibility and design options. And it also promoted another benefit, waste reduction. Um, Nike publicly claimed that Flyknit reduced upper waist by roughly 60% compared to traditional cut and sew methods, which is a huge number if you think about it.

Speaker C: Yeah, this, this is starting to sound a lot like Rothy's. So did Rothy's end up ripping off Nike or did Nike sue Rothy's for

Speaker B: doing the same thing?

Speaker A: I know, right? Surprisingly, no. Although Nike did sue Adidas over Primeknit, which meant that Nike viewed Flyknit as ip. Despite the technology between Rothy's and Flyknit being similar, their objectives were completely different. So Nike was trying to optimize for performance, speed, fit and athletic repeatability, sustainability, comfort. If you sum it up, Nike was using programmable knitting to build a better shoe, and Rothy's was using programmable knitting to build a better manufacturing system.

Speaker C: Yeah, that's interesting because I think when you compare Nike and Rothy's, Rothy's appears to have built the product materials and manufacturing process and the sustainability story around that knitting architecture, which is just very different from what Nike had done.

Speaker A: Let's Fast forward to 2025. It's estimated that they were around 225 Knights million in revenue with roughly 24 million in net income. I have to feel that Alpargatus is pretty happy with this performance and I think it's only a matter of time until they complete the full acquisition.

Speaker C: Uh, yeah, I would agree that's probably the most likely outcome for Rothys. I think the question is probably more of like, why hasn't this happened yet? Why buy 49.9% and I think the reality is that Rothy's is still very North American centric if they're going to be expanding successfully into Europe, Asia, Latin America. I think the acquisition logic makes a lot more sense for Alagatas. I think the real question is what kind of growth trajectory are they on? What happens if their growth plateaus and if they're at uh, 250 million for the next couple of years and it doesn't change a whole lot? Is that just the market for the technology they have? Is that what Alpagada is interested in? But, um, maybe they're trying to also look for proof that it can be a billion dollar brand or a multi billion dollar brand before ponying up and paying the rest of the purchase price. Even if that means that they end up paying more than if they bought it completely in 2018.

Speaker A: Yeah, seems like there is a lot more to pay attention to and learn from here.

Speaker C: Yeah, well, um, I definitely have a bigger appreciation of Rothy's and just I hope I get a chance to tour their factory at some point because just the videos I've seen online and kind of how it's been, it is unlike anything else that I've seen before. And uh, Barb, you're a naturalist. Thank you so much for being on the podcast. Um, what are your big takeaways from Rothy's?

Speaker A: Oh, thank you for having me. I'd have to start with the radical focus on waste and looking at waste as a design problem in all of its aspects. Most people will obsess over branding, marketing and acquisition because, uh, customers never saw the knitting machines, the product software or the factory architecture. Those are some of the most valuable assets there for Rothy.

Speaker C: Yeah, you're absolutely right. Supply chain is the unsung, um, hero like you said. And as a supply chain guy, I'm just really impressed with how they designed the manufacturing system before they designed the product. And that's just so upside down and backwards from what most people do. And it's probably something that people should do more of, honestly. Uh, because most business problems happen upstream. You used to always say that 80% of the problems or the headaches, you're going to have the business come down to where you built your supply chain and how you built it and the partners you pick. Um, but the fact that they spent four years and $2 million of their own money solving the production problem before even trying to identify demand was just really, really inspiring. Um, and maybe reckless to some extent. Um, I think it's just the opposite of what most founders do, especially in that vintage. And so just all kudos to them in general. Thank you all for tuning into this episode of E. Commerce on Tap. Uh, we hope you liked it. Please let us know what you think. Rothy's and do you have a pair? How many times do you wash it? And, uh, I'm curious to know how long they hold up. Thanks so much for listening, and we'll see you back next time.