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Taking Stock

David Kahan, CEO of Birkenstock Americas, on the brand-wide plan to do the right thing—even if it means pulling the cork on the world’s fastest growing retailer.

David Kahan

David Kahan

David Kahan wasn’t looking to pick a fight when the company recently notified Amazon that, as of Jan. 1, 2017, it would no longer be an authorized Birkenstock dealer. Nor was he seeking the media attention that quickly ensued, when CNBC and a host of other outlets picked up the policy letter the company sent notifying its retailers of the decision (which also bans third-party sales through Amazon Marketplace). To Kahan, the news-making decision had been a couple of years in the making—one that followed repeated overtures by Birkenstock to come to terms with its issues in order to maintain the relationship with the online behemoth. The decision, Kahan adds, is not strictly related to how Amazon conducts business, nor is Birkenstock seeking to spark a broader brand exodus. Rather, Kahan says the decision to go dark on Amazon is part of Birkenstock’s master plan to do what management believes is right by the brand wherever and whenever consumers come into contact with it and regardless of what the short-term sales implications might be.

“This isn’t a David vs. Goliath thing,” Kahan assures. “It’s just one brand trying to do what’s right for their consumers.”

A big part of doing what’s right, Kahan explains, is making sure that when a customer goes onto a reputable website to buy Birkenstock products that it won’t result in receiving counterfeit goods. For too long and increasingly often, that has been the case with customers purchasing through Amazon. “We started to notice over the last few months an inordinate number of customer complaints and, every single time, it was someone who bought something on Amazon,” Kahan states. “We did a handful of our own purchases and found, in some cases, the shoes arrived in plastic bags wrapped in rubber bands. They smelled fake, they looked fake and they were fake.” What’s worse is that the fake Birks could have been made by child or slave labor or made of toxic materials—or it could be a trifecta of bad scenarios, Kahan adds.

The collateral brand damage was potentially much more expensive than just making good with disgruntled Amazon customers. [For the record, in nearly every instance, Kahan reports the company did just that. “Because we genuinely care about these consumers, we took care of those who inadvertently purchased an inferior product,” he says, adding that going after the original seller is virtually impossible.] Besides, Kahan believes the customer is not really at fault here. It’s not like these shoppers logged onto some shady site or bought shoes on a random street corner. This is Amazon we’re talking about—one of the world’s largest retailers. “These are consumers who, by and large, trust the market,” Kahan says. “The assumption is that when they see a brand on Amazon—an established retailer—it is the real thing.”

That assumption, however, is not supported by Amazon’s business model, which is based on an open market system. For all intents and purposes, it’s a buyer-beware exchange. “The business practices of Amazon as they exist today do not give somebody the certainty that they are buying from an authorized source of the branded product,” Kahan says, noting that lack of certainty was the deal-breaker. “The trust between us and our end user can never be compromised,” he adds. “That’s why we will be encouraging consumers to buy Birkenstock products only from authorized retailers—to help ensure that trust.”

Kahan believes the decision is best for Birkenstock. Or, to paraphrase a certain Godfather: “It’s not personal, it’s strictly business.” Indeed, he stresses that this decision isn’t meant to be anti-Amazon or to single the retailer out. “I have no problem with what Amazon has created, which is something that has changed consumer behavior,” he says. “That’s never a bad thing. But as a brand that has a relationship with its end user that goes beyond the transactional purchase, there’s a friction point with a purely transactional marketplace.”

Amazon isn’t the first big-name retailer to get cut by Birkenstock. When Kahan arrived three years ago as CEO of Birkenstock USA (he has since been promoted to oversee North and South America regions), he lopped of its two largest dealers right out of the gate—QVC and Birkenstock Central. (The latter was an online dealer that sold millions of pairs annually.) Not many brand execs would willingly take such an immediate financial hit, but Kahan believed he had to send a message that the way the company had been doing business was over. “In order to prove ourselves to the retailers that were more consistent with our brand equity, we needed to clean up those accounts that were not consistent with that equity,” he says. “I didn’t think you could do both at the same time.” Kahan likens the approach to the Viking philosophy of landing ashore, burning the boats and either conquering the new territory or dying in the effort. “We burned our boats. This was all in or fail,” he says.

Birkenstock has done plenty of conquering of late. A combination of factors coalesced for its unprecedented run, including the Normcore and athleisure trends (both pair well with Birkenstocks), designers and fashionistas adopting its shoes as a sensible and stylish choice, aging baby boomers in need of orthopedic-friendly footwear and Millennials who have a thing for quality heritage brands in an era of disposable fashion. Sales have been on a record pace and, unlike previous Birkenstock runs over the decades, show little sign of slowing down. “This year has been fantastic, not only in the U.S., but globally,” Kahan reports. “We are ahead of schedule, and sales have gained momentum as the summer has progressed.”

In fact, Kahan believes Birkenstock has moved beyond “having a moment” to a broader and longer term growth phase thanks, in part, to the athletic market (i.e. white shoe) management approach he has incorporated into a brown shoe brand. That athletic mindset includes limited editions, special introductions and distribution scarcity. Kahan, a former Reebok exec, attributes Nike and Ugg’s success (the latter led at the time by athletic industry veteran Angel Martinez) to that approach as well. He cites five Birkenstock silhouettes that are currently selling well as proof that this is no fleeting, item-driven fad. “Our retailers have come to understand that this goes way beyond ‘Birkenstock is hot/how can we make the most of it while we can,’” he says. “They understand the discipline that we have introduced to managing the brand and that it’s a long-term growth plan.”

To that end, Kahan believes Birkenstock is just getting started. What’s more, he believes, if he does his job right, he’ll be one in a long line of future brand stewards. “For me, the short-term and the long-term are the same,” he says. “I’m not thinking about the next seven days, months or years. If I do my job correctly by staying true to the values of the brand and, above all else, the expectations of our consumers, somebody will be sitting in my chair 100 years from now.”

How much business is Birkenstock giving up by cutting off Amazon?

We can quantify what we sold to Amazon directly, and it’s relatively insignificant to our total business. But what we can’t quantify—and nobody can—is how many shoes are sold on Amazon by third parties—legitimately and illegitimately. Between counterfeits, illegitimate sellers and legitimate sellers, there is no way to quantify it. Regardless, we decided that doing the right thing for the brand and the consumer was far more important than any short-term potential financial impact.

Have you heard anything from Amazon since making the decision?

We have not had any discussions directly with Amazon since we shared our policy with our retailers and them. But we have had many discussions with Amazon over the last year or so and we would like to continue talking with them to try and resolve our issues. This was not a surprise to them. We had told them that if there was no way that they would allow only authorized retailers to sell on Amazon, then we would have to change our policy.

What type of reaction have you received from the industry overall?

It has been phenomenally supportive—more than I could have even imagined.

And that support includes retailers selling Birkenstock through Amazon Marketplace?

Absolutely.

Why do you think they are supportive, as they will be losing sales?

Because I think they believe that what we are doing long-term is right even if, near-term, it impacts them negatively. Maybe they are finally seeing a brand trying to do the right thing, which is becoming increasingly rare. I’m not claiming to be holier than thou, but it’s becoming harder and harder to find brands that you can admire. So whether somebody agrees with us or not on this particular decision, I believe they have to at least respect the fact that we are doing what we believe is right for our brand and ultimately for our consumers. I absolutely believe consumers want the assurance that they are buying Birkenstock from an authorized source. I also believe this is an important step for our brand—one that has been around for more than 240 years. For its long-term health, I cannot allow it to become purely transactional. And let me stress that this is not specifically an anti-Amazon stance; this is a pro-brand stand.

Birkenstock, in that sense, is bigger than Amazon.

I benchmark against the best brands in the industry. I can’t benchmark against mediocrity. If Nike, for example, felt that there was a big opportunity on Amazon, I would think they would have created some ways to sell their products and connect with consumers there. But Nike doesn’t sell on Amazon. Nor does Chanel or Hermès. When I look to the best brands on the face of the earth, the transactional brands are on Amazon and the most elite brands are not.

Still, it’s must not have been an easy decision taking into account how many of your authorized retailers are selling through Amazon Marketplace.

It wasn’t easy, but it’s the right thing to do. I also believe that Marketplace sellers are training those customers to find that product on Amazon and, once they’ve done that, they’ve lost them forever. If we train consumers to go to Amazon to find the newest Birkenstocks, then eventually that’s where that consumer is going to go. And, as it stands now, we would be training the consumer to go to a marketplace that is currently not consistent with the equity of our brand. So, to answer question, yes, making the decision to drive consumers to places where we believe they will have the best brand experience is harder than just letting it be sold on Amazon. It just involves a much higher level thought process from brand, marketing, distribution and discipline standpoints. And, frankly, at a time when the industry is a sea of chaos, my goal is for Birkenstock to be an island of sanity. We’ve already made this same decision with brick-and-mortar retailers and the last place we didn’t do it was on Amazon Marketplace. So all we’ve done is make Amazon consistent with the way the brand is found in any mall around the world.

Do you expect other brands to follow your lead?

I can’t speak for other brands. Some have talked and talked about it. We decided we are not going to be talkers; we are going to be doers. I want our partners to know, whatever policy we are talking about or direction we are heading, that when we say something we are going to actually do it. We are completely transparent and customer focused. This is just an example that is consistent with the values we are creating. We don’t want to talk about something for three years where everybody comes to our booth and bitches about it for a half hour and then we say, “Good meeting,” shake hands and six months later it’s Groundhog’s Day. We did something. Is it the right or wrong answer? I don’t know. I don’t know if there is a right or wrong answer. We just believe that it’s right for us. And let me add that the financial impact wasn’t really even brought into consideration. This was not a decision that was made with spreadsheets. This was was a decision based on what’s right for the brand and our consumer.

Could this impact your relationship with Zappos?

We certainly hope not. I have a long-term relationship with Zappos management, both personally and professionally. We value that relationship. We enjoy working with Zappos. They have been a phenomenal partner of Birkenstock’s. Our mission is to bring happiness and satisfaction to consumers and that perfectly aligns with the mission and values of Zappos. We see no better retail partner—online, especially—than Zappos, and we see no reason why, long-term, we shouldn’t continue to build our brands together.

Other than this little bit of news, what else is new?

The whole Amazon thing, honestly, is negligible compared to what’s really happening with our brand. The year has been fantastic, not only in the U.S. but globally.

Why has this time been more than another passing trend?

Traditionally, planets align and a brand or item gets hot. Often when that happens, you tend to think you are a lot smarter than you really are. What you do in those moments proves how smart you are. We believe we have a very smart team. First and foremost, we have kept our discipline. Our strategy is based on relative market scarcity. We never use the phrase, “maximize the business.” We use “capture the business.” We want our retailers to capture the business while never quite catching up on consumer demand. We want to leave some demand on the table.

The law of supply and (almost meeting) demand.

The analogy I use all the time involves buying bananas. Say you buy three bananas, you eat them and you’ve had a good week. The next week you buy six bananas, you eat five, but when you are making your new shopping list there’s a brown banana sitting on your counter and you say to yourself, “Ugh, I’m never buying another banana; I’m buying apples.” I tell our retailers: I don’t sell apples; I only sell bananas. So my job is to make sure that you never have a brown banana from Birkenstock. That’s the way we have managed our business. It is simple inventory management, but I think one of the hardest things for a brand to do when the planets align and you want to make everybody happy is to capture the business instead of maximizing it. Fortunately, we have constraints on our production—we can only make so many pairs. That’s one factor helping prevent us from overdoing it. The other involves discipline: to keep our hand on the faucet and do what’s right long term for the brand. The more we do that, the more it allows us to spread the brand beyond a hot item.

And that has been the case of late?

When most people think of Birkenstock, they think of the Arizona sandal. Well, right now in a half dozen of the biggest retailers across the country, their No. 1 item is not the Arizona. The Gizeh, Mayari, Madrid and Daloa sandals are all selling well, which tells us it’s a brand story. We also believe that when somebody new comes to Birkenstock—be it an orthopedic need or a 17 year old who thinks it’s trendy—they become stark-raving fans. It’s a life-changing experience. So even if, next year, the hottest trend is six-inch heels, you will have a hard time getting those people out of their Birkenstocks.

In addition to managing supply and demand, there seems to be other factors contributing to the brand’s success—like Boomers and Millennials both being customers, for example.

Aging boomers have orthopedic needs that we fulfill. Secondly, health and wellness and athleisure are much more than just passing trends; it’s part of a lifestyle revolution in the marketplace. Lululemon, for example, went from being a yoga store to ubiquitous fashion. It’s become the uniform. And what pairs well with Lululemon, Nike or Under Armour tights other than sneakers? Birkenstock. The third aspect—and this is one I’m seeing more of lately—is Millennials coming to the brand who are of the first generation to grow up in what I would call a disposable ready-to-wear society. Their store isn’t the Gap, it’s H&M and Zara. These are consumers who are, by and large, environmentally and societally conscious, yet they buy disposable clothing. In contrast, Birkenstock makes them feel like they are buying something iconic, authentic and long-lasting. They may wear a Zara outfit three times and then throw it out. Their Birkenstocks might go with 10 different of those outfits and they’ll wear the shoes until they’re literally falling off their feet. I think that’s a major factor right now for our brand.

Lastly, in the past when when Birkenstock got hot, we didn’t want to come across as deserting our core customers. Even though fashionable people have now come to the brand, we are not deserting who we are but we are also doing some limited editions, introducing trendy materials and running exclusive programs with partners such as Barneys, J. Crew and Concepts. We are embracing both types of customer. But we will never do anything that will compromise the wants and needs of our core sit-and-fit consumers.

What are your goals for the rest for this year?

We’ve experienced growing pains this year with regard to some deliveries and operations. So my main goal is to gain operational efficiencies to better service our customers. Second is to make sure our that our closed-toe shoes and boots programs for this fall are successful. Last season we planted some seeds and had some great sell-throughs in a season that wasn’t a great one for boots overall. We expect this year to be better. Last but not least, my role is changing considerably. I came here initially to jump start the U.S. division, but as CEO of Birkenstock Americas [which includes the U.S., Canada, and South America], my goal is to set up an organization that will enable us to succeed across the entire region. It involves adding key team members like Scott Radcliffe, our first true vice president of marketing. We’ll be adding some other leadership roles that will allow me to act with a broader perspective rather than as a day-to-day sales manager. There are some bigger picture aspects that I need to focus on.

Such as?

We are setting up a completely decentralized business model for this region. We are in the process of hiring a creative director just for the Americas. It will allow us to have design and merchandising resources focused solely on our product needs. We are also setting up an office in New York to house a digital marketing team and serve as our Americas design headquarters. In our California offices, we will be adding more merchandising roles. Overall, I wouldn’t call it autonomous, rather it’s about thinking globally, acting locally.

Speaking of big picture issues, the growing direct-to-consumer (DTC) movement is one. Nike, for example, expects to do $5 billion annually in five years—that’s a lot of money that used to go through retail. What is Birkenstock’s position on DTC?

There is no doubt that we need a more robust DTC connection and, over the next year, I’m going to allocate a lot more resources to it. I’m saying “connection” because we think our consumers want a connection with our brand. Any time we sell through a retailer, we give up some control. That said, the No. 1 focus of our DTC efforts isn’t for commercial reasons. Rather, we believe our brand message has to be shared with our consumers and DTC is one of the best avenues to do that.

Devil’s advocate: DTC competes with your retail partners.

That’s very true, but I think it’s just a reality of business today. It’s one ecosystem of retail, and as a consumer brand and not just a transactional one, who better to own our messaging than us? It’s nothing negative about our retailers—we value them and we will do everything to drive traffic to them—but we have to make sure that some element of the communication to the consumer is done directly. And we will find out over the next one to three years how much of that converts to a commercial element.

I find it hard to believe the majority of consumers will ever prefer to shop strictly DTC—meaning one brand site to the next. Zappos, for example, is successful because of its breadth of brands.

Nike sells Foot Locker because their products in one of their windows validates the brand. When somebody sees Birkenstock in Nordstrom, Dillard’s, Journeys or in the best independent stores, it validates the brand. So I don’t want to ever be so presumptuous to think that our DTC will purely validate the brand. I just think there’s a place for everything in the market. But I don’t believe DTC will ever replace our good retail partners. By good, I mean are retailers doing the same thing year after year and expecting business to improve? One of the main reasons brands are focusing on DTC is due to the amount of staleness at retail. But as long as the retailers tell our story well—via shop-in-shops and powerful brand statements—we are not looking to shift the consumer’s buying patterns.

You mentioned chaos at retail. Is there a chance of it calming down anytime soon? Or is this the new normal?

The past few weeks have been pretty good. Having said that, a lot of retailers are acting like ping pong balls: one day they are up, the next day they are down. It rains, they are sad. If it’s sunny, they’re happy. If it’s too hot and humid, they are sad again… There’s just no consistency, which is the same of shopping patterns. There’s nothing scientific to help make decisions. It brings me back to the only thing you can be consistent about is how you operate your brand. I believe if you do that, then you can better withstand whatever the chaos in the marketplace may be. That’s why I believe the only store in the mall that is consistently mobbed of late is Apple. They are consistent spaces where you can really connect with the brand. And there are so few brands right now that haven’t wavered trying to chase the chaos. You are an outlier if you have been consistent. Now that doesn’t mean that we haven’t adjusted to what’s going on, but it shouldn’t involve giving up on who you are entirely either. That’s part of the consistency that we are bringing to everything we do as a company.

What do you love most about your job?

Absolutely, the people. Our global team includes some of the hardest working and most visionary people I have ever known. I believe we have an amazing group here in the U.S. and our retail partners are terrific. I just love the fact that there are so many people in this industry that I can call friends. •

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