The winds of change are blowing at TOMS headquarters.
New CEO Jim Alling, a former longtime Starbucks executive who joined the company in April, is leading a transformation at TOMS, and it could be significant.
He is taking a different approach and is meeting with retail customers, something that was rare in the past, retailers have told me. He is vowing that TOMS will be easier to work with going forward, and has even taken back old inventory that customers had been stuck with.
The new sales leadership team has appointed a point person for action sports, Mike Makos, who previously worked at Billabong and Rip Curl.
Mike reached out to SES and arranged an interview with the new CEO, Jim’s first interview with any media outlet since he joined in April. TOMS had hardly given us the time of day in the past.
We’re glad we got to meet Jim, and we had a very informative talk. He comes across as open, sincere and down to earth when talking about things that need to be fixed at the company, what is working well, and where he sees the brand evolving.
We all know the TOMS story. The startup footwear brand started by Blake Mycoskie launched the now widely copied giving trend nearly 10 years ago.
TOMS grew like crazy from 2010 through most of 2013 in core stores and became a huge – and profitable – chunk of many retailers’ businesses.
The action sports channel wholeheartedly adopted the brand, but at the end of 2013, TOMS’ sales began a sharp fall, and sales continue to decline at core retailers, according to ActionWatch.
While sales are nowhere near where they used to be, TOMS is still a top women’s brand for many stores, and retailers continue to stock its shoes despite complaints about how difficult the company has been to work with in the past.
Retailers have also been mystified by brand extensions like coffee, eyewear and handbags, which seem like distractions and have not been well received by consumers.
Private equity firm Bain Capital bought 50% of TOMS in 2014 in a deal that valued the company at $625 million according to news reports.
Jim has been at the helm for about seven months, and he’s learned about the company’s history and evolution. What TOMS has accomplished in a short amount of time is admirable, he said – the giving concept, the company culture, the amazing staff.
He emphasized, though, that the company is still very young, and there have been some bumps.
“We’re hitting adolescence early, and we’re really awkward as an adolescent,” he said.
The TOMS dichotomy
One of the biggest surprises he discovered when he joined is the differences between the giving side of the business and the commercial side.
TOMS does a great job of listening to its nonprofit giving partners, and the giving piece of the business is very well managed and executed, he said. To date, TOMS has given more than 45 million pairs of shoes to people in need.
“The giving execution is very, very impressive,” said Jim, who went on a giving trip in Peru early in his tenure.
“In that area we’re humble, and we’re willing to listen,” he said. “For whatever reason that humility and willingness to listen has not translated as well to the commercial side, and that has to change.”
“We got a little full of ourselves”
Since he joined as CEO, Jim has spent a lot of time meeting with employees and retailers. He thinks he has a good handle on what went right, and what may have gone wrong over the years.
“We caught lightning in a bottle with the Alpargatas (the original TOMS silhouette) and we were basically focused on keeping up with demand,” he said.
“Blake did an exceptional job as the front person, telling the story. On many levels, it was just phenomenal.
“Part of the great sales growth covered some underlying problems,” Jim said. “I’ve talked to a lot of people we do business with and one of our biggest problems is we got a little full of ourselves.
“That’s not a good thing. We basically said, ‘You’re lucky to be selling our stuff, and if you have problems, you bought it, you figure out how to move it. It’s not our problem.’ ”
“We developed a reputation for being hard to work with, and that’s maybe a nice way to describe it.”
Jim said he understands that TOMS needs to earn back its business and its credibility in all channels, including action sports.
“It’s not an entitlement,” he said. “It’s a very important channel for us, and we want to focus on this area. There are opinion leaders in action sports, and we’re in some great accounts.”
Given what he has learned about the TOMS attitude of the past, he has been expecting a more frosty reception during his retail meetings.
“I’ve been expecting them to say, ‘We’re kicking you out, don’t let the door hit you.’ But they are saying, ‘We want you to do well, we want you to be successful.’ They are even giving us ideas.”
“I don’t know if we have been arrogant, stubborn or just deaf,” he continued. “That goodwill is there. We want to tap into it.”
Flushing the channel
One way TOMS has tried to earn some goodwill is by taking back old inventory from retailers, an idea that Jim had to sell to the board of directors.
“We needed to flush the channel,” he said. “How can we ask for new orders when retailers are still sitting on a bunch of inventory?”
So Toms is taking it back, and the product is moving through liquidation channels, he said.
“We don’t like that, but we had to do something with it. We don’t want to flood the market, so we’ve metered it through this year, but then the question is when does it sell through that channel.”
TOMS does not plan on having an inventory problem of this magnitude again in the future, he said.
“Ideally we don’t oversell ever again,” Jim said. “I think we were guilty of that in 2013 as I understand it,” he said. “We said, ‘If you want it, you’ve got to take this much.’
“Why? This industry is so weird to me, it’s so based on prebooks and orders vs. sell through.”
But he understands how it could have happened.
“Growth covers a lot of problems and when your biggest problem is keeping up with overwhelming demand, do you really want to take the time to figure out sell through? You are so focused on filling the next order.”
He joked that he wished he had a memory eraser tool he could use to zap retailers’ memories of the huge TOMS sales volume of the past and some of the customer relations challenges.
TOMS is still an important and profitable business for retailers, but that previous sales frenzy is likely not coming back.
“That can’t be replicated and people shouldn’t yearn for the days of old,” he said.
Focus, focus, focus
After bursting onto the scene in footwear, TOMS expanded into unrelated categories such as eyewear and coffee, both of which have an admirable giving component, but have been head-scratchers to retailers and outside observers.
Eyewear and coffee were started with the best of intentions, with the impetus coming from the giving side and the positive impact that can be made, Jim said.
“But you can’t do that good if you don’t do well commercially,” he said. “It has to be commercially viable and sustainable. At best, we’ve had mixed results there.”
Jim said he and the team haven’t decided to exit those categories. However, “We’ve run a little far afield in my mind,” he said.
“We want relevant extensions with the TOMS DNA stamp. We don’t want, ‘Wow I never would have guessed that.’ We do get that with coffee, we do get that with handbags, though I could see making the bridge to handbags. But coffee has definitely been an eyebrow-raiser for people.”
“Footwear and giving should be our top priority – it’s what got us to the party, it’s what we are famous for,” he continued. “It’s what I want us to continue to innovate in and be even more famous for.”
And the need to focus extends within footwear as well. While some of TOMS footwear extensions are selling well – a Brogue and Chukka boot for men, and the Desert Wedge and Majorca for women – Jim firmly believes TOMS moved away from its core style, the Alpargatas, way too soon.
“We’ve had a tendency to get distracted by the shiny new object and forget about what got you to the party in the first place,” he said. “I don’t think we’ve innovated enough against the Alpargatas.”
The lure of the new is reflected in the large number of designers devoted to new projects rather than to the core Alpargata, which he thinks is a mistake.
“Across the organization, I see tremendous positive intent, tremendous belief in new ideas, but almost a boredom with some of the basics. We could do a lot with the Alpargatas with different materializations and constructions,” he said.
Jim noted that sales of espadrilles in the larger shoe market are still growing, but TOMS comps are down in that style, which still makes up a large chunk of overall sales.
Exploring natural extensions to the Alpargata that work with the TOMS brand will be more likely in the future.
“Flip flops, for example, are selling really well,” he said. “We haven’t nailed it yet, but they are doing really well and are selling way ahead of projections.”
New products have to fit with TOMS personality, Jim believes. You’ll never see TOMS do a dress shoe, and he’s still scratching his head at a rain boot TOMs played with. Trimming back SKUs is definitely on the agenda, he indicated.
The overall message when it comes to adding categories or footwear extensions is less is more.
“Those new things sometimes take away from our full mission,” he said. “We do less good in the business and in the world because we are chasing too many things.”
TOMS stores
We have noticed TOMS in some new retailers like Dillard’s, and asked Jim about the distribution plan.
TOMS has added some new retailers, including Zappos, he said. The company is trying to pick partners who do not “high low” the product, and Zappos recently changed its strategy on that front.
He does not envision TOMS going too much deeper in the distribution base, but does envision opening more TOMS stores.
Company stores are “a great place to tell our story, engage with customers in a great ambiance,” said Jim, who has a retail background.
“For us to be successful, consumers need to know our brand story and that is best controlled in our own retail environment.”
Stores are also a great place to test product, he said.
Jim emphasized TOMS will have a flagship strategy, rather than a large fleet of stores.
Currently, TOMS operates five stores in the U.S. and is looking for more, but no commitments have been signed yet.
Distributors in Asia have opened TOMS stores, which have done very well, and there are a few stores in Europe.
The growth plan
Given that Bain is now an investor in TOMS, I asked Jim where the growth will come from.
He said that Bain’s “hold window” for TOMS is likely five years, which is the average for private equity firms, and possibly more.
Bain knew the company needed to invest in TOMS’ infrastructure and business practices, which is happening now.
Bain wants sustainable growth both on the top and bottom lines and to create a company that has even more potential in the future for a potential buyer down the road.
TOMS, which is privately held, will record overall sales growth this year, the first time in three years, Jim said. But it has come at a cost as the company has invested in infrastructure and other projects.
However, key channels like action sports will have comp declines again.
In the next several years, Jim sees TOMS growth coming from:
- Simplifying and focusing – Jim believes this can have a big impact on both the top and bottom lines.
- Retailer relations – Moving from being a difficult vendor to work with to a preferred vendor
- Telling the brand story – TOMS is testing “out of home” marketing in five regions right now with a combination of broadcast advertising, advertising in movie theaters, etc. Jim said it’s too early to say if it is working, but the early results are encouraging. Telling the brand story is a key, Jim believes, citing consumer research Bain conducted. The research showed that half of the people who buy TOMS don’t know about the “one for one” mission. And if they did know, consumers were more likely to buy the brand.
- International expansion – TOMS is a U.S.-centric company that happens to be global, he said. It needs to transform into a truly global company. Jim was at Starbucks when it made that development leap and said, “There’s a great upside when you get it right.” Currently, TOMS’ biggest market internationally is in the UK. Korea is also very strong, thanks to a good distributor there. TOMS recently added a new partner in China, a company that also distributes New Balance. TOMS is searching for a new head of Europe.
- Direct-to-consumer – Both from ecommerce expansion domestically and internationally, and from adding domestic retail stores.
TOMS has hired some new executives to help on several of those fronts including new Chief Marketing Officer Susy Korb, who came from Anthropologie; Richard Ostell, the new Creative Director over product and design; and Craig Reingold, who is heading up sales and is the former president of Sperry Topsider.
Lots of changes
Given all the plans, I asked Jim how he plans to change the TOMS culture, so that truly partnering with retailers becomes a priority.
Jim doesn’t believe the difficult attitude was necessarily on purpose but rather it developed over time, especially because employees did not receive information about how the company was performing.
Before in monthly employee meetings, the staff was given information about the number of shoes that were given, which rightly was a point of pride, Jim said.
“But there was less openness about where we stood financially, where sales trends stood, the challenges we faced,” Jim said.
“I think the more people who touch our customers know what’s happening, the better they will be at figuring out their day-to-day job.
“I’ve tried to be very transparent and share as much as possible,” he said. “And it’s not all happy talk – when you are having negative comps on your Alpargatas, that hurts.
“People here are really, really smart, they are really engaged,” he added. “We need to give them the relevant information they need so they have the ability to positively impact the business.”
