On Running: The Shining Consumer brand

TLDR:

Hope to see you in LA!
5 Lesson from On Running’s Stellar 2022

Am I going to see you this week?

I’m flying out to LA tomorrow for DTCx Retain (250 in-person conference I’m hosting next week) and hope to see you there. We’re bringing together amazing brands in one of LA’s coolest nightclubs to talk about what’s working in DTC today and what the future will be.

I’m really proud of the lineup of killer brands from across the spectrum speaking: Hexclad, Stance, Dr. Squatch, Hello Bello, Jaxxon, Mid-Day Squares, Faherty Brands, Topicals, APL, and Feastables. My goal every year is to have $1B in total GMV present from the stage and I think we crushed it again this year.

Hopefully you already have your ticket since we’ve already sold out and are hoping we don’t exceed the venue capacity. It’s always crazy to think about hosting a 250 person conference.

If you’re interested in a breakdown of what’s goes into hosting an event of that scale let me know and I can cover it in a future newsletter.

But let’s get into the good stuff. Why On Running is a shining example all consumer brands can learn from.

On Running Shoes should be the shining example.

On Running is crushing it. Double-digit YoY growth, Net Income profitable, and seems to be taking the world by storm.

Trading at $30.28/share with a $9.6B market cap they are fairing better than most companies we talk about. It’s still -22% since it’s IPO in 2021. It’s still trading at a P/E ratio of 99. That’s too rich for my blood on an acquisition play, but still think there are plenty of they’re doing well.

So let’s take this week to examine why it’s such a great example of a consumer brand and see what they’re doing right.

The Financial breakdown

The Financial TLDR:

Truly one of the most impressive consumer stories of 2022. On is demonstrating how a real consumer brand is built. On’s category leading +69% growth in a tough year shows the resilience this brand has.

What’s even more impressive is they flipped the company from a -$188m Net Loss in ‘21 to a +63.9m Net Income in 2022 (+134% YoY), by growing Sales while keeping SG&A basically the same.

Like most other businesses we’ve been looking at their Gross Margins are getting chipped away (-6% YoY), but other than that this is a strong brand, growing rapidly and is Net Income profitable. 👏👏👏

Let’s see how they accomplished this.

Here are 5 lessons from On’s Earnings:

1) Wholesale is larger + growing faster than DTC

• Wholesale: $860.40m (+73% YoY)

• DTC: $492.88m (+61% YoY)

Wholesale has and continues to be the core of On’s business. From the beginning, On pushed to be in running retail stores. (Which seem to be one of the last holdouts of traditional retail that won’t die). But there’s another important component here. At the scale On’s operating considering economics and market factors becomes more important than individual company strategies.

80% of consumer spending still happens in store retail. Don’t get me wrong, DTC is meaningful at almost ½ billion/yr, but the wholesale business is nearly double that and alone is pacing to $1B/yr. Plus, growing even faster than DTC.

Footwear as a category is more conducive to in-store purchasing so that makes sense to me, but there’s an important part of the strategy that isn’t highlighted here. At a certain point all your margins are eroded to the same level.

• In Retail, it’s the wholesale pricing + trade spend.

• In DTC it’s CAC + Landed costs.

At the scale On, is playing the relative channel margins net out to the same place. The more crucial play is selling as much of the product in as many places as possible to offset Marketing + Overhead expenses.

One point that’s working well for On here that’s missed in the DTC vs. Retail conversation is how much faster your brand can grow by leveraging other companies’ resources.

Yes, On is conceding brand control and maybe some on pricing with a heavy Retails strategy, but they’re also avoiding the capital commitments to build out global Retail stores. That isn’t to say they won’t be able to do that later with more resources, but at their current scale they’re pushing hard through other companies’ channels.

Lesson: Don’t underestimate the value of Wholesale and how quickly it can scale your brand.

2) SG&A is consistent YoY

For a growing company in this environment that’s actually very impressive. Out of the 10 public companies I’ve analyzed this year, On is the only growing company whose SG&A increase was less than +10% YoY.

This is the key data point from losing -$188m in ‘21 to having a +$63.9m Net Income in ‘22. They made the infrastructure investments in 2021 to scale in 2022, but didn’t fall into the trap of over-hiring into that growth and ballooning their overhead with that new scale.

It’s easy to fall into the trap that companies’ always need to hire to maintain/keep up with growth. We’ve seen plenty of other businesses SG&A jump by 20%+ YoY.

Don’t get me wrong, it’s more painful for the team that is there when you don’t hire with your growth, but incredible team members can carry you to new heights with the right strategy.

Lesson: Controlling SG&A through incredible Topline growth is the key profitability lever.

3) Grow through Internationalization

A Swiss company is rapidly expanding across the globe. While they’re performing well in the key regions you’d expect, they’re also rapidly expanding into new markets.

% of total sales by region:

• NA - 60% (growing 80% YoY)

• EMEA - 29% (growing 36% YoY)

• APAC - 7% (growing 88% YoY)

• Rest of World - 4% (growing 310% YoY)

No surprise home markets like Europe and NA are 89% of the biz. But the growth in the US is astonishing. It’s On’s largest market and is still almost doubling YoY.

That paired with the fact that new markets for them, APAC and Rest of world, are growing at near exponential rates shows how much head room the brand has to grow into.

This is where wholesale really matters. Internationalizing operations is a major undertaking that takes time + massive amounts of capital (Physical, human and focus) vs. expanding with wholesale.

This isn’t a simple decision. International wholesale works incredibly and the company rapidly expands into new markets, or is uncontrolled and tarnishes the brand in those regions.

One thing to remember is that this isn’t a one-way street. International Wholesale is a great way to test and learn if it’s worth building an owned infrastructure. Then recapture the margin and brand control when the company is ready.

If On at $1B+/yr is leveraging international wholesale, it can work for your brand as well.

Lesson: Taking your hit show on the road globally is a next-level growth unlock.

4)  Started from an extreme niche and worked backwards

On was founded by runners in 2010. They originally went after the hard-core ‘Marathoning’ community. The founders were apart of the community so it was a natural pairing. They built the original product for marathoners and spent time becoming deeply involved in communities across the world.

Famous marathoners used their product to accomplish new feats, expanding their reach. Then the company grew from the Marathon sub-niche → Running niche. Runners started to see what marathoners could do and wanted to achieve similar accomplishments.

As they expanded into the Runner niche they started attracting famous celebrities (like Roger Federer) to train in their shoes. This exploded their reach and put them on the map. Now they’re taking the next logical step (with one of the most famous athletes in the world who’s also an investor) and expanding into Tennis signing the #1 Female tennis player in the world, Iga Świątek.

Now, I see people going to work on the NYC subway wearing On shoes. The expand into new community through grassroots and celebrity endorsements playbook is being executed brilliantly. This type of top down and bottoms up marketing makes the product really sticky in the market.

I’m also getting real Nike vibes from this company. If you’ve ever read Shoe Dog this is eerily similar to the Nike story except swap Marathon with Track. But Nike went from Running (Track) → Tennis → Basketball in their original growth trajectory.

Lesson: Average consumers will always buy what’s solves the needs of their extreme aspirations even if they don’t actually need the features.

5) Successfully jumped to Category #2 (Apparel).

This playbook is so well established there isn’t much of an insight here, but considering how poorly Allbirds executed this it’s worth taking a moment on.

1. Solve a problem with Footwear.

2. Build a brand around an aesthetic tied to your innovation.

3. Expand into Apparel once they love the footwear.

Making footwear is hard enough. Capturing the ‘lightning in a bottle’ of a consumer fashion trend makes that even harder. Once a company nailed both in footwear producing Apparel falls into place. Or at least it should be (😮‍💨😮‍💨 Allbirds).

The consumer buys from each brand for a certain reason. They’re looking for a specific feel and value prop(s). The company needs to translate that to new categories to effectively capture more of their wallet share.

On has done that well. When you look at their Apparel it looks like what hardcore runners would wear. They’ve nailed the concept and now just need to execute and stay top of mind.

Not all consumers will buy category #2 and that’s fine. It doesn’t always need to be a new market entry product. Especially is it’s a high purchase frequency category (like Apparel). Selling back into the core audience is the main objective and will unlock a new level of growth.

Solution: Nail category #1. Then build category 2 solving similar problems.

Final Thoughts

There’s a reason this company’s P/E ratio is 99, which is incredibly high. This company is firing on all cylinders, meaningfully growing while remaining profitable. If a consumer brand wants to idolize a successful brand, but is still on the rise On is one to keep an eye on.

It’s in the early stages of global expansion, I know sounds weird for a 13 year old company, but if you consider NA its core market it hasn’t really started to penetrate the other markets of the world and has tons of room for growth. It also appears like their category expansion is still in it’s early days as well.

Which is underrated. It’s so much harder to scale really far into the hundreds of millions/billions on a slim product catalog, which is one of the greatest revenue growth levers most brands have. The fact that it’s still sitting in front of them means they still have plenty of growth left.

On’s two comps are worth $162B (Nike) and $31B (Adidas). At it’s current $9.6B valuation illustrates how much potential growth it still has and most likely the playbook to get there.

🧠 The Takeaways

On Running is growing quickly, profitably, and has a massive TAM to still explore.

1. Wholesale is the largest and fastest growing channel that appears to be gaining more momentum.

2. It’s still early for On. Despite their $9.6B valuation.

3. Disciplined growth is still king on the street. Don’t underestimate how big compounding at 20-60% growth can be. It isn’t all about the triple-triple-double-double.

👷 What can you do about this?

1. Play the game in decades. Not years.

2. Really get a grip on how your SG&A and track it to your Topline growth.

3. Don’t underestimate the power of international wholesale to grow and learn more about other markets.

The best ideas in business are usually approaching your same problems with a different approach.

Jeremy Horowitz

P.S. If you’d like to learn more check out some of our other resources:

1. If you're looking for daily insights like this follow me on Linkedin 🧠

2. Interested in know what the Top 100 apps used by Shopify Plus Brands? Shop News and Reviews 🤯 

3. If you have any feedback always send it through. Hit Reply and send me your thoughts. These emails go directly to my inbox.