Exclusive. Unprecedented. Invaluable.
Today’s newsletter is altogether different.
You’re getting an unabridged and behind-the-scenes look at Matthew Bertulli’s forthcoming book.
As the CEO of Lomi and Pela Case, Matt’s been in the consumer-product game for over 20 years. This excerpted chapter is centered on what he calls the …
Brand Health Checklist
It’s an eight-part framework for scoring your business and then knowing where + how to improve.
If you have any feedback, please don’t hesitate to write back!
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Matthew Bertulli
CEO, Lomi & Pela Case
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Consumer Brands: Health Checklist
What makes a brand great?
Everyone has their definition of success, but mine is pretty simple. A great brand is profitable and relevant over the long term. Another word for this might be sustainable.
If you’re going to go through the pain of building a consumer brand, you should start out knowing that this is likely a ~10-year investment of your time, especially if you want to build something bigger than $50-$100M in revenue.
If you spend time on social, you’ll find lots of people bragging about how they scaled to $10-$20M in less than three years.
There’s always these examples.
There just aren’t many still around after five years. Even fewer after ten. The most profitable and enduring brands I’ve seen all went a lot slower.
They grew 20-30% per year, achieving large revenue numbers and profitability by compounding and — more importantly — through leverage.
That’s what this chapter of the book is about. Leverage.
To build a great brand, you need to know what one looks like. Lucky for you, there are proven leverage points in a consumer goods business that, when present, will be strong indicators of profitable performance.
Think of this like your consumer scorecard.
Your goal is to check as many of the boxes as possible. The more you check, the more your chances of success improve.
If you work for a consumer brand, you should be taking this to your leadership team and scoring yourselves. Knowing how you stack up provides clarity on where to focus your efforts.
When you are done with this chapter, consider this your homework:
Brand Health Checklist
- High Gross Margin
- Low OpEx: <15%
- Cash Conversion Cycle
- First-Order Profitability
- High Lifetime Value
- Strong Organic Demand
- Great Product
- Large TAM
Learning the Hard Way: Pela Case
I first invested in Pela Case when it didn’t have any revenue. I met the inventor of the product, Jeremy, at a mastermind in California the year before. He had an idea I really liked — a more climate-friendly plastic alternative that could be used to make all manner of consumer goods, starting with a phone case.
I made the investment. Then got to work finding customers who would buy a compostable phone case made from plants.
This had never been done before.
We were entering a very competitive category that was quite mature and sort of overbuilt. Most people thought we were stupid. Many still do.
As we grew the brand, we learned the hard way that many of the standard operating procedures in the phone case industry weren’t sustainable. Most of our competitors were burning money playing the traditional retail game. Even if they weren’t losing money, they certainly weren’t growing very fast.
We also discovered that to be competitive, we needed to find a way to differentiate our brand beyond the sustainability + eco-friendly niche we carved out for ourselves.
Having been in consumer for a long time, I started to reach into my network and talk to other operators building brands in product categories similar to Pela.
Accessories. Small. High-margin. Competitive. Design-oriented. DTC-first business models.
Out of this work, I identified where we needed to change if we wanted to be long-term profitable.
At the beginning, we had only three of the eight leverage points in this health checklist:
- High Gross Margins
- First-Order Profitability
- Large TAM
You might think, “That’s pretty good!” And it was.
But we weren’t consistently profitable and the business felt difficult to run, more difficult than I thought it should be.
The first area we began working on was cash conversion cycle. The phone case industry has one major fatal flaw — inventory complexity. Apple, Google, Samsung, and the rest of the smartphone makers release new phones every year.
This demands new investments in tooling for phone case companies. Beyond just the phone models + sizes, you also have the added complexity of colors and designs. For reference, Pela Case today has more than 12,000 active SKUs on our .com, and we’re growing to ~40,000 across 62+ phone models.
Inventory complexity created a massive balance sheet and cash flow problem. Even if we could extend our payment terms with manufacturers to 90+ days, we were still guessing which phone models and design combinations to bring into inventory.
Our balance sheet was bloated. Cash, stretched. It sucked.
So we had a crazy idea. What if we brought our manufacturing in-house? Did it right in our own backyard here in British Columbia, Canada?
Everyone I talked to said this was stupid.
“You’re a brand. Focus on marketing, not logistics … and definitely not manufacturing.”
This has become a pattern in the outlier brands in consumer goods. The ones who do nine figures in revenue and healthy profit all do things that most conventional wisdom tells them not to. Even today, conventional wisdom tells you to ignore what these brands do because they’re big and can afford it.
My view is the opposite. These brands are big and profitable because they did it differently.
Making the decision to invest in our own manufacturing capabilities was not easy. It was also expensive. It slowed the business down for a couple of years while we restructured.
We had to shrink our team and focus more resources on building the manufacturing platform. We had to change our business from making 6-8 colors to making hundreds of designs, sometimes dropping 8-12 designs a week. The machine needed to be upgraded. It was painful.
We now manufacture the majority of our products for our DTC business right here in Canada. We make only what we sell and don’t rely on long-lead-time supply chains from China.
We are nimble, reacting to trends quickly. We have real leverage that our competition doesn’t.
I share this story to show you that getting just one more leverage point on this list is very hard. It can take years.
In addition to going after our cash conversion cycle with owned manufacturing, we also improved upon some other areas. Our OpEx shrunk, and our product also improved. Today, our health checklist looks like this:
Pela Case Health Checklist: 6 of 8
- High Gross Margin ✅
- Low OpEx: <15% ✅
- Cash Conversion Cycle ✅
- First-Order Profitability ✅
- High Lifetime Value 🚫
- Strong Organic Demand 🚫
- Great product ✅
- Large TAM ✅
Let me explain some of these even more so you can see a very clear picture of what makes this business good to own and the areas where we are still improving.
1️⃣ High Gross Margin
Pela Case has 80-90% ex-factory margins. If you aren’t going to have strong LTV, you need super high day-one margins, especially if you intend on being heavy ecommerce.
2️⃣ Low Opex: <15%
This is really about payroll. Pela’s OpEx falls below this number because we made our team small and nimble. We’re mostly a team of generalists. We are constantly looking for ways to automate jobs to be done.
3️⃣ Cash Conversion Cycle
The basic idea here is that you get paid from your customers before you have to pay your suppliers.
The best brands in consumer all have negative cash conversion cycles. They mostly achieve this through very long payment terms with suppliers, usually >90 days.
Pela Case achieves our negative cash conversion cycle because we built our own manufacturing capabilities in Canada.
We manufacture the inventory we need for consumers as we sell it to them. This means we don’t have cash tied up in inventory.
I’ll write more on this when we get to the manufacturing section of this book. For now, it’s enough to know that this is a superpower for Pela.
4️⃣ First-Order Profitability
You need to be able to acquire customers profitably on day one. Banking on LTV is creating more difficulty in your business. Lots of people do it, but I wouldn’t recommend you start with this kind of model.
Pela Case has terrible LTV, so we have no choice but to make profit on every order in our business.
5️⃣ High Lifetime Value
We fail miserably here. People don’t buy multiple phone cases. Some do, but most don’t. As hard as it is to accept, LTV is far more determined by the nature of your product itself than “retention” tactics.
6️⃣ Strong Organic Demand
This is another weak area for us; however, but we’re getting better. We built the business entirely off the back of Meta and Google advertising.
The next 5-10 years of consumer brands will be defined by organic demand instead of paid traffic.
The ecommerce industry as a whole is at a precarious stage in the lifecycle for paid ad platforms. They’re getting insanely expensive, we’re over-reliant, and most consumer goods categories don’t have the margins to win the game.
7️⃣ Great Product
I define a great product by how different it is combined with how much a user likes it. Pela has a really different product than our competition. Plus, we have a product people really like to use. Our marketing minors on the value proposition of eco-friendly sustainability; it majors on why people will love it.
8️⃣ Large TAM
Mobile accessories is a monster category. We’ve only scratched the surface.
How to Use the Health Checklist
If you’ve evaluated your brand and know your score out of eight, what’s next?
The very best operators focus relentlessly on improving their score. They pick one or two areas. Go hard after improving them. These areas form the basis for annual planning and major rocks in the business. They give you direction!
I’m lucky to have a huge network of brand builders who I’ve watched do this over the last 20 years. Some have even built in public. You may have seen them do it, too. A good example of this is Sean from Ridge.
Rather than tell you to just go work on improving your score, I want to help you think through the interplay between these leverage areas.
None of them exist in a vacuum. Sometimes, you have to accept that getting them all might actually make your business weaker.
That’s the nuance in building in consumer. There is no “one right way” to do things. I know a few super profitable businesses that have only three of the eight leverage points …
But they make it work.
I’ve got two particular combinations of leverage that sometimes work against each other that I think we should explore before you move on from this chapter.
Large TAM vs. Cash Conversion Cycle
Without a large TAM, it’s going to be hard to get suppliers to give you really good payment terms. The reason is pretty simple.
Large markets usually have mature supply chains to go with them. Some manufacturers understand the market as well as you do. Sometimes better. This means they are more comfortable extending you better terms.
Smaller markets go hand-in-hand with uncertainty.
We saw this with Lomi.
There were no factories in China that made machines like Lomi. The first factories we worked with were very hesitant to extend us terms. This made our business incredibly cash-hungry. It was a big part of the reason why we raised venture capital.
First Order Profitability vs. LTV
Almost nothing I say in this book is absolute. With that, I have rarely seen great LTV brands be first-order profitable at scale.
Some do it. They’re unicorns. Most try to break even on day one of a new customer and make profit on repeat purchase rate. I know of many subscription businesses that operate this way.
Consumables usually mean you’re banking on LTV. Knowing this now will help you model your business out accordingly — particularly when it comes to cash flows.
Your score in this health checklist should help you figure out what to do next in your business.
I’ve looked at hundreds of brands through the lens of this health checklist. It’s surprisingly accurate at predicting sustainable profitability of a brand.
I’ve also witnessed how the combination of many of these leverage points can help create a real moat around a brand.
Accumulating maximum leverage is what allows you to invest into the brand with confidence.
This is the root of good strategy in consumer.
Note: Huge shoutouts to Taylor Holiday (Common Thread Collective), Sean Frank (Ridge) & Kevin Espiritu (Epic Gardening) for all the great thinking over the years. Their thinking greatly inspired much of this chapter — to say nothing of their influence on my businesses themselves.
Mike's New Brand: Introducing Trevi
BFCM Debrief! The Marketing Strategies That Paid Off … and the Ones That Didn't
This week’s top-five trending news stories, curated by the editor of CPG Wire
1. Shopify Releases Winter ‘25 Updates: Shopify
Shopify is closing out 2024 with 150+ updates designed to improve the platform for vendors and end-users. Though we can’t point to one spectacular new feature, it’s focused on smoothing rough edges, improving performance, and ensuring that integrations work well together.
Shopify’s President Harley Finkelstein breaks down the Winter ‘25 updates here. And be sure to check out the “Not Boring” versions — they’re outstandingly wild.
2. BIC Acquires Tangle Teezer For $210M: NewBeauty
BIC is shelling out $210M to acquire Tangle Teezer, a UK-based producer of patented hairbrushes distributed in over 75 countries. Founded in 2007 by Shaun Pulfrey, Tangle Teezer is profitable and expects to finish 2024 with €70M+ net sales.
Drew Fallon (Iris Finance; previously CFO of Mad Rabbit) posted a great breakdown of the acquisition ↓
3. Hershey Rebuffs Mondelez’s Takeover Offer: Reuters
Early last week, Mondelez — the confectionery & snack giant worth more than $80B — tried yet again to acquire Hershey, the candy maker with a market cap hovering around $40B.
The union would’ve created a CPG giant with nearly $50B of revenue and over $6B of net income, but The Hershey Trust, which controls roughly 80% of the voting rights, rebuffed the offer as too low.
4. AG1 Expects To Finish 2024 With $600M In Revenue: Instagram
According to a recent article in Forbes, AG1 expects to finish the year with $600M in revenue (up 4x since 2022). What’s even wilder is that AG1 hit this revenue milestone with one product sold via one channel. Insane.
Next year, AG1 will begin experimenting with the retail channel. Hats off to Kat Cole and the AG1 Team.
5. LVMH Doubles Down on Hospitality: Skift
Though best known for its luxury handbags and top-shelf champagne, lately, the luxury giant has been focused on building a formidable hospitality portfolio.
On Tuesday, LVMH disclosed a minority investment in Les Domaines de Fontenille, a boutique hotel operator with 11 properties across Italy, Spain, and France. LVMH shelled out $2.6B to acquire luxury hotel operator Belmond in 2018.
The Marketing Operators are ramping up for a year-ending MOperators Hotline!
We’ve collected a ton of questions (especially from the tool stack series) and passed them all over to get answers.
Have your own burning question?
Hit reply and let us know!
With thanks and anticipation,
Aaron Orendorff (Executive Editor)
