- “So, my first piece of advice is if anyone had come out of a business in 2020, not thinking they need some kind of planning, please get a plan.” [48:52]
- “The future is very bright. I mean, I’m really happy with making the change, because now we can control our brand story, which we weren’t in control at all. And I think that that’s really important.” [41:24]
- “We’re still learning every day. There’s so much to learn. And but I also want to end on a big note of encouragement for anyone, I’m an optimist by nature, I believe you are, too as an entrepreneur.” [51:11]
Ken Kline: How to Adapt to Changes to achieve a more Profitable Business (From Traditional to Online)
How do you handle changes from a business perspective? How does it affect your goal in achieving a profitable marketplace?
In this episode, Luke Peters speaks with Ken Kline about how his business burned down and resurrected it from the ashes. Ken Kline, is helping clients at all retail levels to maximize their business model while operating with best practice in VHC Brands, Inc. He enjoys working with all levels of the business but has a particular emphasis on Product Development, Sales, and Creative/Marketing.
Learn the value of using mass retail marketplaces instead of traditional, curated retailers. The importance of moving forward despite the big impact of certain problems, its effects in the business, and how to adjust with the changes that needs to be done. The importance of being resilient and being able to find ways to stand out.
- How important to implement profit and how you expand your contributors.
- How to leverage the major marketplace platforms to become a leader in the field.
- The importance of building core data.
- [1:52] He describes the types of products that they create and sell.
- [2:18] He talks about their biggest customers that they work with, footprint, location, and the number of team members.
- [3:23] Talked about the private label in Amazon
- [4:16] Talking about if it is a consignment or taking full ownership
- [5:26] About square footage and number of team members
- [6:12] About where their imports come from
- [7:28] The marginal goal that they went and how they set it up
- [11:05] Deciding which customers they were contributing the most profit
- [14:56] Talks about the price increases, biggest contributors
- [16:33] Net margin points gained
- [17:36] Talked about the give and take why they moved over
- [18:22] Talked about their bottleneck
- [22:11] About the core Netsuite
- [25:42] NetSuite and managing international warehouses
- [33:52] His decision as to why he made the changes and what were the results
- [37:04] if there were problems they encounter about jack up prices.
- [41:24] How the future looks like and they are in full control
- [46:52] What he learned the most that he can share with business owners & Key Business Takeaway
Luke Peters: Thanks for joining us on the Page 1 Podcast. I’m your host, Luke Peters, CEO of New Air Appliances. And in this episode we’re honored to have Ken Kline, CEO of VHC Brands, back for round two on the Page 1 Podcast. We’re going to focus on life after COVID, ERP business system change that he ran through, his move from vendor central Amazon sales to 3P marketplace sales and how that’s helped his business. And we’re also going to talk about the profit first system that he’s implemented. So a ton of things we’re going to run through with Ken. Before we get into this episode, let me give a quick plug. This is really important for the Page 1 audience. I’ve got a new important announcement. I need help if you’re a vacation home owner for a new cause that I’m working on. Check out vetcation.org to see how we’re supporting veterans with dream vacations. Right now we need caring vacation home owners to donate a week vacation to a deserving military family during purple heart day in August. So what might just be another week’s vacation for you is literally the vacation of a lifetime for one of these struggling families. I really hope you’ll pause the podcast right now, check out vetcation.org to learn more. You can email me to get involved. Ken Kline is the CEO of VHC Brands and has been in the home textile import business for 25 years as a founder, entrepreneur. He leads a [inaudible 00:01:31] team at VHC Brands and transform eCommerce, wholesale channel partners and even direct to consumer where appropriate. So Ken, welcome to the Page 1 Podcast.
Ken Kline: Thank you.
Luke Peters: Awesome. And hey Ken, before we get started, why don’t you describe the types of products that you guys create and sell at VHC.
Ken Kline: Yeah great. We are a home textile design import company. So that would be bedding, rugs, and a lot of window treatments. Think curtains and valances and panels and things like that.
Luke Peters: All right cool. And we’ll just go through a couple of quick questions just so … We want the audience to really understand your business. Who are your biggest customers or main customers that you work with and talk about kind of your footprint and where you guys are located and how many team members.
Ken Kline: Yeah. Great question. Interesting. Our biggest channel in 2021 is actually private labels. It’s actually our top revenue source channel by sales, aggregated dollar sales, is private labels from other entities. But those brands … And this is the times we live in. Those brands are almost exclusively now Amazon FBA brands scaling rapidly. So that’s number one and then a close second who be ourselves at D2C on Amazon and Ebay and a couple of other platforms, which that’s a huge transformation in the past 12 months. But then, behind that would be Wayfair, and then Overstock, and then we’re seeing a lot of growth in some niche E-comm players. Touch of Class, which is interesting, and several others. But that would be kind of the stack.
Luke Peters: Yeah. Break it down a little bit more in that private label. So the private label is also on Amazon. Oh, you’re selling to other sellers on Amazon. Other FDA brands. You’re creating products for them and for their labels.
Ken Kline: That’s correct. And so in the case of these clients, we’ve had these clients for several years. We’ve historically done a lot of private label over the past 20 years. But in this case these happen to be like Amazon native brands almost that have developed on the platform in the past few years and then they kind of exploded in 2020 and so 2021 is just carrying forward that pretty explosive growth. So yes. We help them design product and we produce it, we import it, it’s all their private label. We do soup to nuts all the way, delivery to our DC and then ship it back out to FBA for them or their DC.
Luke Peters: Wow. Now, are they taking ownership of the inventory or do you have to … Is it consignment one way or the other or are they taking full ownership once it’s out on, say an FBA?
Ken Kline: No. They’re taking full ownership. It’s their private label. It’s their brand. Or brands I should say. There’s more than one. Yeah. It’s their inventory. It’s not a relationship where we cost share or we revenue share or anything like that. It’s actually soup to nuts their product concept that we do the heavy lifting on the import, distribution, production, all that stuff.
Luke Peters: Awesome. Okay. And then so for the audience, just so you know, this is Ken’s second time on the Page 1 Podcast and we had a great discussion earlier. Definitely recommend you guys check it out. And he talked about literally how his business burned down and he had to resurrect this thing from ashes. And then this past year he’s had an ERP change. We’re going to talk about that today. Implementing profit first. We’ll talk about that today. And also a big change from Amazon vendor to seller which just so many people talk about that so I think that’s going to be super interesting. Before we get into that Ken, where are you guys at as far as warehouse square footage right now and number of team members?
Ken Kline: Yeah. We have 50,000 square feet. So we expanded in 2019. We only have one distribution center which is here in southwest Missouri but we do ship to other distribution centers for others but this is kind of turnkey here. A little bit of FBA and then we have 41 or 42 US team members currently and we have 13 team members permanently in our Delhi, India office. That’s kind of our footprint. And again, that’s leaner than it used to be pre profit first, I have to admit too.
Luke Peters: Cool. And the interesting thing about you guys is I think 100% of your imports are coming from India, not from China or Vietnam or other usual suspects, right?
Ken Kline: That’s correct. That’s why we have the India team in Noida, actually just outside of Delhi. And so yeah, that is correct. Occasionally we do a container out of China but the vast majority of our containers are India. Maybe one container a year out of China and 200 out of India or whatever.
Luke Peters: Yeah. All right, cool. Let’s dive into these topics here. Let’s start with Profit First. Mike Michalowicz. Great book for the audience. If you guys haven’t read it. He’s actually a pretty funny author. He’s written a few other good books as well. And you’ve implemented that in the business. Talk about it. What was the margin goal that you went to and kind of how did you set it up? Did you go as far as setting up all the different bank accounts like he talks about? It’d be great to kind of understand how that works at the company. And before you get going, just so the audience knows if you haven’t read the book, Profit First basically means you basically take your cut first as a business. So if you’re doing 10 million, you’re going to put a million into a bank account assuming that you better have at least 10% net profit and then find a way to run the business with the other nine. That’s, I think, the basic principle of the book. But Ken, it’d be great to understand how you guys are doing that.
Ken Kline: Yeah. That’s a great summary actually, Luke. And the thing of it is, the way that he puts that out there, if you try to implement it on day one, it’s very doable, but when you’re already running a business at scale … In our case, north of $10 million. Below 20 million but definitely north of $10 million. Trying to implement some of this when you already have a culture in place and you’ve already had a business for 20 plus years, that can be a very daunting task. And so the idea though of exactly that. Hey, if your top line sales are 12 million then you’re supposed to have a minimum 1.2 million of net profit, then figure everything out from there. That is a huge game changer. And I think the vast majority of businesses tend to think well, you don’t know what your bottom line’s going to be but these are sacred costs. The sales team, the travel budget, the R&D budget, the whatever. The CapEx expenses, the plan out there. Those are all sacred cows you can’t touch. But by the way, if we’re sacrificing profit on the way, hey, who cares? So profit first basically says no, that’s the opposite. Actually your number two line item after top line revenue is profit equals 10% of that minimum. Holy smokes does that change the mentality. It makes you very profit centric. Basically just focusing on that is kind of bootcamp. We’ve always been profitable, just not thinking that way at scale. Things we implemented first of all was trying to change the mentality. Secondly … I’m simplifying Luke, just because it’s a podcast.
Luke Peters: Sure.
Ken Kline: Secondly, basically I went around with the department heads and we had big group meetings and just had pretty good heart to hearts of like, “Hey guys, this is where we’re taking the business. You’re either in or you’re out. If you don’t think profit first is relevant and you don’t read the book and you don’t want to drink the Kool-Aid and you don’t want to get onboard, probably not a good place for you.” So that was the first thing is like, you need to start thinking about whether or not you want to be a mass contributor to this thought or whether or not you’re going to be a load drag. If you’re a load drag, hey no problem. You’re just culturally different. Probably not a good place for you. So that was the first place I started was like okay, let’s see where we need to be there. And then we started drilling down on clients. Oh, every client’s great right? In sales thought, every client’s great. They’re delivering revenue. We’re rolling with them, they’re already in place. And you can drill down and go some of these clients just aren’t that great, not that profitable. And so these are relationships that maybe are big contributors to the problem. We went through that whole exercise of yeah, we’re doing a lot of money but does it make sense? And then like I said in the case study of jcpenny.com, we were scaling rapidly but I made a gut call and I said, “I don’t see where this is going to be good the way that they are probably not structured well with retail.” And lo and behold, COVID hit and they went bankrupt. So I was so glad we exited that relationship. Don’t want to drill down too much on that because we were doing volume with them. But basically, make those kinds of decisions is my point.
Luke Peters: Yeah.
Ken Kline: All the way-
Luke Peters: And Ken, quick question in there. We’re going to talk about your change from NetSuite later on, but at the time I think you’re using NetSuite. Were you able to do detailed customer P&L’s to know the profitability? And that would include P&L all the way through, including allowances and returns and all that stuff. Or did you not have that much information at hand as you’re looking at deciding which customers were contributing the most profit by percentage?
Ken Kline: Yeah. No, we did have that. In NetSuite we kept a really detailed P&L. So we would call out line items like JCPenny charge backs, JCPenny short pay, whatever. Like returns allowance. We still do that. We still say Wayfair returns allowance or whatever. Overstock returns allowance. Overstock coop discount. We still have a very detailed P&L so that you can track that and look at it and say … But it wasn’t just that. It was also the issue of the stuff that’s not P&L that way but it’s soft … Not soft expense, but how much time is the sales team spending on this? How much time does it cost us to implement new product across the platform? How much time are we spending on … Are we physically taking the returns? If so, how much time are we spending on that? Are the orders complicated to pull? Are they easy to do? Is the platform hard to implement or is it easy to implement? So we were trying to look at a lot of those pieces of the puzzle to make some decisions around that. And then of course, what’s our EDI expense or API expense? It’s mostly EDI at the time. And then secondly, okay, what’s our mindshare here? Or what’s the relevance of the … I’ve done all this work and I’m doing five grand a month here, or whatever. We’ve had clients that direction in eCommerce that we said, “That just doesn’t make any sense. Yes, in theory you’re making money per order. But in the big picture, this is probably not worth it, right?” So it was really making a lot of those kinds of decisions that really was driving. And basically ruthless cost cutting. But then, when you’re doing cost cutting you also have to make sure the team members understand this is not about a personnel cut, personnel cut, personnel cut. We’re trying to get to a core team of believers that really want to max this thing out. And that might be most of you. But if it turns out to be 20% less of you, that’s on you. That’s not on me as a visionary CEO, right? Would you agree Luke?
Luke Peters: Yeah. And you have to do what’s best for the company. It’s always what’s best for the company and the future of the company. And you want everybody to get on board, and hopefully people do so you don’t have to make those changes.
Ken Kline: Right. In our case, we did have some key management positions that simply just didn’t agree with pushing it that far. And then also changing over to a portion … We’ll get into this. But switching Amazon from 1P to B2C, that was a big part of things. And then basically selling to the end user, which there’s an argument about you’re competing with clients. I don’t think that’s true, depending on the platform, at all so that’s a whole discussion. So yeah, we did all that but we also did other things procedurally. We had already decided … I just was really looking hard at this P&L thing a lot and saying, “Where can I get there? How can I get there?” Even things, Luke, like we had a really nice corporate headquarters that was 18,000 square feet and it was a longterm lease and it was a great price. But we had already decided in 2019, when we’re done with that that we’re going to phase that out and switch to telecommuting. That played right into our hands for COVID.
Luke Peters: Well Ken, let me dive in there. So you guys changed the mentality. Some people had to be turned over. It sounds like your margins were good but they weren’t where you wanted to be and so it sounds like with profit first you had to move them up, I’m just guessing, three or four percentage points or something like that. What were the three ways … Just to sum it up in a shorter version, what were the three ways that you were able to do that with the company? Did it have to do with price increases or … What were the three biggest contributors, I would ask I guess, to moving those margins up? Or did it have to do with working with more profitable customers and get rid of customers that weren’t profitable? Talk to me about that part.
Ken Kline: Yeah. That’s exactly the deal. And that was what I was going to mention as well so I’m glad you brought up. Because a key component of the profit first thing in our case … Our case study was, look, we need to move margins up 8% to 10% and then we need to be really sticklers about charge backs and about the overall profitability of clients per client and then we need to be really transparent with these clients and say, “I see you’re doing the volume but this is not where we want to be as a company with you.” And just be transparent. And that whole conversation. So absolutely the idea was we’re going to move margins up but you better be really good at what you’re doing. But definitely it was some price increases incrementally. Like 50 cents here, a dollar here. Some of it just had to be adjusted up some. And then other things were, look, we’re going to shaving away at chargebacks and coop fees and this, that, and the other, and our performance metrics are going to go up so there’s going to be less returns. We just kept looking at all those things like how do we move the dial on this? At the end of the day Luke, it actually ended up being a lot of cost cutting and efficiency and productivity on our side. Then that ties in to the change of ERP. But then it also was a big … Not totally, but there was a chunk of, we just need to be more profitable at gross margin. We just need to ask more for the product. And we were able to pretty successfully push that through. Took about nine months. But we were pretty successful at pushing through basically.
Luke Peters: And start to finish, how many net margin points were you able to gain?
Ken Kline: Interesting. If I look back two years ago from February 2019 to February 2021, I’m up 11 and a half points on margin.
Luke Peters: Oh, wow. That’s huge.
Ken Kline: Yep.
Luke Peters: That is huge.
Ken Kline: Yeah, it’s huge.
Luke Peters: Yeah. Well, congrats on that. I don’t think everybody can say that so that’s a huge achievement. It’s like you could do half the sales and make more money probably. That’s a good position to be in. Cool. Well, thanks for that. Profit First is a … It’s a cool book. I recommend it to everybody. It’s a really easy read by the way. And again, Mike’s a pretty funny author. So why don’t we move on to the ERP change? You were on NetSuite. We’re actually on NetSuite and love it. But it sounds like you found some better things that work for your company with … It’s called Ecomia?
Ken Kline: Yeah, Ecomia. Right. Exactly.
Luke Peters: Ecomia. Yeah. So why don’t you talk about the give and take and plus and minus in why you guys moved over to Ecomia?
Ken Kline: It was a big change for our company. We were on NetSuite eight or nine years. We started on NetSuite a while back and grew with the platform. And like you said, you’re on NetSuite and it’s a great platform. And it’s super solid. And it’s very robust. I mean, NetSuite’s not a broken system. You know that. You’re running it at scale. However, here’s the deal. It’s not an argument or whatever. We found that it was not robust for us on high volume dropship and issues around really, really pushing the needle on fulfillment. We found that was really the sweet spot that we really needed to focus in. An example-
Luke Peters: Is that on the warehouse part? What was the bottleneck in NetSuite? Was it the warehouse management system? Where did that hurt?
Ken Kline: Yeah. The bottleneck is not … And there’s solutions and stacks on top of NetSuite for the issue of like, okay, we have all these orders and we’re scaling, but the way the orders are organized is not optimized for fulfillment. So basically, with Ecomia what we did was we came in and we said, “Okay look, first of all our dropship is scaling massively in realtime.” And you can do dropship in NetSuite. That’s not a problem. The problem was the orders aren’t organized. In Ecomia, the orders are organized in batches first of all. So we have four batches a day. And the first batch is like 6 a.m. Secondly, it organizes those batches in priority of client. So if you have a penalty client or a client where there’s a metric you have to hit every day, whether that’s Amazon or Wayfair or Overstock, et cetera, then those orders organize into the file first. Next … This is really key. Then, within Ecomia, all of our product is in there for dimensions and weight. So it takes each order … Could be one SKU, could be 10 SKUs, could 25 SKUs per order. It takes each order and it organizes those orders. If it’s 50 of the same SKU, it puts all those orders together across Amazon, Wayfair, Ebay, or whatever you want. Then the other thing is it looks at those dimensionally and it predetermines what box or what bag or parcel you’re going to use. Then it goes out and fetches the freight as per your negotiated freight rates across carriers. It fetches and cross checks the freight rates dimensionally and per weight for that total order and it applies that to the order. So when you get the order printed, it already tells you what carrier, it already tells you the cost of the carrier, it already tells you what bags or boxes you need to pack that in and how almost. And then basically all the work’s done for you. So all these little micro decisions that warehouse employees would be making, like, “Okay, let me look in FedEx, let me look in UPS, let me look at all three screens, let me think about this, let me do this,” that goes away. “What box do I use? Oh, I’m out of this bag. Let me go get a bigger bag.” No. You’re not allowed to. You go on down the things like that. So [crosstalk 00:20:58]-
Luke Peters: You know what’s funny about that Ken? It’s like, how many times have you used software and you’re like, “Wow. These people … How come they don’t know our business?” They’re making software for the business but they don’t know it. And it sounds like these guys and girls at Ecomia actually know the business. Like they’re actually thinking like you would think as a CEO in wanting to run this thing efficiently in the warehouse with as few clicks as possible and as few decisions as possible. So yeah, that decision tree makes sense to me. But you know what’s interesting about NetSuite? You can get all of those things. It’s just that you’ve got to stack other software on top of it, just like you said. We had to get to a second WMS. And then you can even handle those freight decisions as well and shipping decisions. But the core NetSuite is not going to do any of that. Even on the customer service side. And actually on most sides. The core is just really a financial core with kind of weak processes around the different other disciplines of the business. You really do have to go out and add a few other products to the stack.
Ken Kline: Yeah. And that was the thing. It wasn’t just that. And again, at our level, looking at this, we were like, “Okay. NetSuite is very robust and we’ve been on it a while and it’s got a lot of strengths. On the other hand, we’re going to have to add these other software stacks.” And it wasn’t just that on fulfillment and optimization. Also on top of NetSuite we added Salsify, which was our PIM cloud management system. Because we have thousands of SKUs. Which you and I have talked about this. But we have 5,000 plus SKUs so managing the content and images and video for 5,000 plus SKUs across a dozen or more platforms and then in realtime, and then is it API, is it EDI? So you can see between NetSuite, Salsify, EDI, the stack can start to get confusing and not exactly like a perfect jigsaw puzzle. And Ecomia does have issues. And we’re a beta tester for it. Not the first beta tester. Okay, but it does solve a lot of these issues into one enterprise system. Then the other thing is it … To your point about CEOs really know their business. Ecomia was founded by a guy that owned a pure eCommerce business doing massive scale dropshipping for Amazon, Ebay, Wish, Walmart, name it. So all the issues he was facing, he was like, “Look, there’s no software for this at scalable, mass volume dropship.” So he developed this whole business software system around his needs and then he said, “Wow. This works really good. I think I’m going to go sell it to other people.” So he’s got other clients of which we’re … We’re a client but we’re certainly not one of the bigger clients. They have some clients that are much bigger than us that needed a really robust, super high volume dropship setup in realtime. Like I said, the key thing here is I can get thousands of orders a day, which in NetSuite created a lot of micro decisions and frankly a lot more personnel. And I said, “Let’s just really look at this and kick the tires.” So that’s when we discovered Ecomia and had some pretty detailed conversations because we were their first wholesale retail hybrid company to go on the system. Everybody else is very highly scaled on eCommerce only or almost purely. However, B2C. So whether that’s Amazon … Like I said, went on down the list. In our case, as you know Luke, and you and I have had conversations about it, we love Wayfair, Overstock. Go on down the list. We’re implementing Home Depot. I’m a huge believer in that ecosystem of wholesale partnerships in eCommerce at scale. And so just trying to really address that issue. So that’s how we became the beta, I would say, for Ecomia. Which they’ve worked very closely with us as a function of that to leverage into more clients nationwide that want to scale on Wayfair and Home Depot and whatever. But the other big thing was switching everything from EDI to API. That’s all part of their implementation functionality, which I love.
Luke Peters: Which is a big savings.
Ken Kline: Oh, it’s huge.
Luke Peters: Hey Ken, how long did it take you, start to finish, to implement Ecomia? Because I mean, these are huge deals sometimes and this can take forever.
Ken Kline: This is a huge deal. I agree. And so that’s why I feel like we could have another whole talk around that. But here’s the deal. The funny thing is … Chris Rush is the guy that started this and he owns HiFi Sound Connection here in Missouri. So I started reaching out to some groups I have online, some chat groups that are all entrepreneur CEOs and I said, “Hey, here’s my fundamental functional challenges with NetSuite and fulfillment and I’m scaling rapidly in COVID. I’m doing way more residential dropships because I’ve added direct to consumer.” I mean, we were already doing it for Wayfair. That’s dropship. Okay. But now I’m scaling even more and I’m going to see the wheels fall off. So Chris was like, “Look Ken, I actually built a whole software company around that. Let me come down there and talk to you and see if this is a fit.” That was early summer. Luke, literally I inked the deal July 1. We went live November 9th.
Luke Peters: Oh, wow. That is pretty fast. You must have a great team then. That usually takes really good financial people and then someone good on the API or EDI side to get that up and going.
Ken Kline: Yeah. And you are right to call that out. Great team. And I was very proud of how my team pulled it together. And in fact, on the Ecomia side, they told us, they were like, “You actually have a team and you really pull things together for the purpose of implementations in general.” And that’s part of our DNA in general Luke, just from the standpoint of part of the thing with … Going back to the profit first at the top of the talk here was like, okay, one of the ways I can scale massively is add more platforms that are going to be scalable. And that means Overstock, that means Home Depot, that means some of these guys coming along like Wish or whatever that I think can be … No, they’re not Amazon, but they’re not $5. I mean, there’s a lot of money out there. So my team is already used to implementation and doing some pretty sophisticated kind of brain surgery type stuff. So that was a big help. And I keep that team. It’s not like I don’t keep on full-time and there’s constantly stuff like that to do so that kind of fit in our wheelhouse of crossing the T’s and dotting all the I’s. And then it did definitely help with the Salsify type stuff where we already used to dealing big data and content management and making sure things flow smoothly. So it all kind of flowed project management style. So it could have gone a lot worse than it did. I mean, there’s still some kinks to work out but there always are with implementation. I’m certainly not recommending I’d like a 10 week implementation.
Luke Peters: Yeah. But afterwards are you happy with it? Has it made big efficiencies in the warehouse and saved you costs on that end?
Ken Kline: Yeah, it has. Great question. In 2019 I had 32 fulfillment employees. In 2020, heading into COVID, I had 24. So we’d already realized some efficiencies, profit first and this, that, and the other. Now I’m able to do twice as many orders a day minimum with 14 people.
Luke Peters: Yeah, that’s great. That’s awesome.
Ken Kline: Yeah. Huge savings. Huge, huge savings. Plus nobody’s stressed out. We’re not trying to figure out the traffic flow. It’s all there. So I’m really happy with that. But Ecomia is basically like an apex predator for fulfillment functionality. That’s where it really shines. I mean, we had to go backwards on the financials on the hard core stuff, the P&L stuff. We had to switch back into QuickBooks, which I hadn’t been on QuickBooks since the ’90s. So we did go backwards on that. I say go backwards. I’m super comfortable with it. QuickBooks a lot better than it used to be. I don’t have all the functionality of NetSuite but I wasn’t using all that anyway so as per me Luke, I’m good to go. I think in a company like yours, which you’re a much bigger company than us, it may not matter as much whether or not NetSuite tries to move the needle on the cost structure another 12% or 20% a year. But to me, plus all the other stack on top of it, plus the rapid scaling, I was like, “I just think we can try something different.” You know what I mean?
Luke Peters: Well, that’s a cool story and I’m sure people are going to want to check it out so everybody running a warehouse … If you’re not running a warehouse then it’s a lot simpler I guess, but when you’re running a warehouse, everything you said about batches and about how many units you’re running and about the people, we count all these metrics. Try to get 100 units out per scan station per hour and all these different things. Goals that we want to get to. Limit the clicks. All of these things that make it faster but honestly make the job a lot better. Right? Because the thing is you have to go down and do the job yourself and you’ve got to click eight different screens to ship one product. It’s mind numbing. I wouldn’t want to make someone do that. And that’s how you just have to say they yourself, hey, how do we get this down to two, three clicks? You got to scan out serial numbers and other things like that. Hopefully Ecomia can do that. Those are rather nice features of different WMSs in NetSuite where you get all the-
Ken Kline: Yeah. The other big takeaway here Luke is the issue … In Ecomia, the way it’s set up, the whole idea here is kind of a gamification of warehouse fulfillment. So basically, to your point, every function in the warehouse now has a score. So you can elect to do that function, including go clean the bathroom if it’s slow that afternoon on Thursday. Clean the break room. Start restocking. Start back stocking. Start destocking. There’s all these things that are in there that line up as tasks and the tasks start lining up every day, including orders which are priority, and you get a certain amount of points for dropship orders. You get a totally different point score for an FBA order that’s, say, 20,000 bucks. So the warehouses workers … It’s all on big jumbotrons in the warehouse now. Everybody sees everybody’s score. They see that John is consistently low. They see that Pattie is consistently crazy fast and great and making everybody look bad. So you’ve got to do better. So it’s this whole idea of gamification of warehouse-
Luke Peters: That is awesome.
Ken Kline: It’s crazy. I’ll tell you what, I’ll give you Chris’ info because I don’t even know the … It’s almost like they pick their clients. It’s kind of strange the way they do it. It’s not like a NetSuite scalable. You’re not going to go find a bunch of information. But you can get a lot of information from the guys that are running it. And like I said, we could talk a lot about that, but that’s basically the idea. And as you said, the name of the game now … I mean, this is 2021. eCommerce is not going away. It scaled rapidly last year. People have habits in place that they’re not going to quit doing it. People take orders at their door all day from groceries to essentials to whatever they find on the web. It’s been a huge game changer. So you have to put your best foot forward with all your systems in place. And I’m a big believer Luke, you can’t … I used to think you could just work harder. There’s no way man. Some of this stuff is so complex and overwhelming in how fast you have to move in realtime. So that really kind of was the driver. That was kind of the big background driver. If I want to triple my volume in the next three years, how can I do that? And I want to flex my muscles. I don’t want to have to be kicking my tires every time going, let me put a band-aid on something. You know?
Luke Peters: Yep.
Ken Kline: That was the idea Luke.
Luke Peters: Yeah. For sure. That’s a great story and we’ll put that in the show notes. Why don’t we transition quickly over to Amazon? You made a big change here going from 1P to 3P. Vendor central to seller central. Having a relationship with Amazon to selling on the marketplace. Would love to hear you talk us through that. Why you made the change, what the results were.
Ken Kline: Yeah. That’s a great question. And it was a big change and it’s been about a two year change for us. Completely transforming. Historically, we were a wholesaler so our first instinct was okay, we’ll just sell to Amazon and let them worry about the rest. So that’s one piece. Amazon being as big as they are, that relationship scaled really rapidly to seven figures. But the problem was channel conflict with regard to pricing and all the things you hear about with Amazon and whether or not it was causing issues on other channels and it absolutely was. So we were already going to have to examine that relationship. Then secondly, we had third party sellers on Amazon that were scaling and some of them were quite large. Their whole business is … There’s very large revenue companies that just focus on being an Amazon play at scale with 50,000, 100,000 SKUs, of which we have a small assortment in their portfolio or whatever. So the thing of it is just basically the lack of control and then also we felt like, let’s just take a look at this and see if we can introduce some consistency here and kind of clean that all up and then kind of manage the relationship to the consumer much better with the direct to consumer dropship play. So it was a big transition from selling to Amazon and third parties to consolidating almost everything. There’s a little bit out there not like that. But basically consolidating everything under our brand and then launching our own store on Amazon. We did hire an agency to help us do that in transition. And there was a pretty steep learning curve Luke. I won’t like. I mean, there’s a lot of issues around Amazon with brand registry when you start as 1P and you switch over to seller. There’s issues around content and listing. It’s a very interesting ecosystem to navigate that’s not as clean as some other closed loop systems that are really pure or possibly a lot newer, ala Wayfair or whatever, that are a lot simpler and you don’t have these listing issues and you don’t have listing competition issues. It’s just your product out there. So it was a-
Luke Peters: And Ken, your products-
Ken Kline: Go ahead.
Luke Peters: One of the things with vendor that’s nice, if the products are really, really inexpensive, it’s really nice because you’re not … I don’t know how to explain this but I think the listeners will get it. But if you’re under, say 20 bucks, and shipping’s a decent part of your order, vendor can work really well. Because Amazon just puts things together in the packages when the consumer buys it and you’re not really penalized for that. But then on the 3P side, you’ve got to jack your price up quite a bit. So the ending retail price can tend to be a lot higher, at least that’s what I’ve seen. Because you’ve got to be profitable on that one sale. For some of your SKUs, did you guys have a problem with that? And did your retails have to change? And at the end of the day, are you going to make more money or less money? Are you getting more orders or less orders? What ended up panning out there?
Ken Kline: Yeah. That’s a great question and you’re absolutely right. That is the issue around is that 1P is awesome for the stuff that’s cheap and high volume. And we definitely have margin challenges and definitely identified a lot of margin challenges around … We sell a lot of product that’s below $30. We sell a lot of product that’s like 25. $15 to $25, there’s a lot of bandwidth there that we do a lot of volume. But that wasn’t the issue. The problem is you’re selling more volume on Amazon, but what we found … In our particular case. And this is not a knock on Amazon or their model or whatever because people have different outcomes. In our case, it was a zero sum game where Amazon buys it, there’s a negotiated price that’s a little bit cheaper, but they sell it for a lot cheaper, and then eventually all the other traffic dries up because Amazon’s got by far the cheapest price and you didn’t necessarily get more volume. So that was the downside to the Amazon thing growing was it can grow like crazy but it could also crush us. So we were like, we’re not really comfortable with that. But then in switching to direct to consumer and seller, then you absorb the freight, which you have that whole problem. So we did in fact have to go in and say, “Gosh, some of the pricing is going to have to go up here to manage this whole animal and then we’re going to have to create some other efficiencies.” Which then that also hurried the discussion on NetSuite versus Ecomia, things like that. You have to be ruthlessly efficient and then build volume, which that was a huge learning curve in 2020 for us because we went from basically not having residential freight be part of our wheelhouse … Unless it was on someone else’s bill. Like we’re shipping for Wayfair but it’s on Wayfair’s account, Overstock, Overstock’s account, Houzz.com, their account, whatever. Now it’s on our account so that $20 pillow, you just basically ate it on freight.
Luke Peters: Yeah, for sure.
Ken Kline: Yeah, for sure. So yeah, that’s a big learning curve that we’ve gone through and we’re now going through and we’re fixing a lot of that. Luke, that’s probably my number one challenge now is that piece of logistics. Because we have a 25 year history of wholesale. You ship wholesale, they either pay the freight or you bill the client for the whole freight. You don’t eat the freight on wholesale. There’s no fee freight. So that phenomenon’s new for us. The way we’re addressing that though, this is another Ecomia thing, is virtual bundles. We’re going to be rolling out virtual bundles that move the price points up. So maybe that one pillow’s 25 bucks or maybe that one window treatment, but what if you buy three of those? You got a better deal but my freight didn’t go up three times. My freight went up two bucks right?
Luke Peters: Yeah. Your AOV’s going to go up. It’s kind of like an upsell but it’s just a bundle. And you’re going to be doing that through seller central you’re saying? Or just across all of your channels basically you’re going to be creating these bundles?
Ken Kline: Yeah. We are creating bundles for Wayfair, Overstock, for A Touch of Class, for our seller side on Amazon. We’re going to be doing it on Ebay. Yeah. So we’ll be doing virtual bundles across … And then we’re going to be doing exclusive virtual bundles. So a bundle on Amazon is not going to be the same bundle that we’re selling direct consumer. It’s not going to be the same bundle that we’re offering Wayfair. So Wayfair now has an exclusive and we have an exclusive. So there’s ways to resolve this. We’re just in the experimental stage but it looks super promising. And I know bundles is kind of a hot topic now anyway. But that was another key thing. But that right there Luke is probably a one year, 15 month rollout. It’s not something you snap your fingers and all of a sudden you have 3,000 bundles. I mean, that’s a lot of work.
Luke Peters: Not with your number. You guys have a ton of SKUs. We have 150. You guys got 5,000 or whatever you have. But at the same time, you have the ability to make a lot more bundles so with that complexity can come some advantages. How did it work? You ditched the 1P. Now you’re in full control. You’re 3P. How does it look now? Are you guys making more money? How does the future look on it?
Ken Kline: Yeah. The future is very bright. I’m really happy with making the change because now we can control our brand story, which we were not in control at all. And I think that that’s really important. Our gross margins are much better. Now, I do have that freight hurdle so I’m not happy yet with my net, but I’m getting there very rapidly. We were doing really nice business with Amazon directly, then we were doing nice business with third parties. When we consolidated all that though, we were still up dollar for dollar in 2020 versus prior years. But we scaled up our own direct to consumer on Amazon from like 100,000 in 2019 to over 2.6 million in 2020, which is … That’s crazy growth. But we also had the free freight in there which was a big expense. We also had the ad expense on Amazon that we didn’t have before. So I’m getting a grip on those and I’m learning as I go. Those are interesting animals to deal with and you have to mind your P’s and Q’s really closely and it really is in the details. You can’t just throw a budget number there, a P&L line item, and say, “This is the number for the year.” You have to very much proactively manage that on the ad spend side on Amazon. Which that’s the biggest platform. Everybody has an ad platform almost now. But by far that’s the biggest and most sophisticated. But Luke, I do see us scaling yet again massively this year. And then I’ve got targets that tie in with profit first and then also tie with where I want to be P&L wise with my overall B2C business that’s got to make a lot of sense. So I have very hard targets. I hired a top flight Amazon, overall operations agency out of Seattle. We actually start on Monday. It’ll be their day one with me. And they took a look at us. They would have not have even considered us a year ago. Our business model maybe didn’t make any sense. I looked them up, I researched them, and I bubbled it up and they said, “Yeah. We actually wouldn’t have even looked at a client your size a year or two ago, but we took a look at you and we think this could be a pretty serious play and definitely is scalable. So we’re into this.” So that was real positive because frankly, the Amazon management and ad cadence and some of this stuff can be really overwhelming. Again, not with time and learning but with the fact that I’ve been a wholesale company for 20 plus years so some of this stuff is totally new to us. So I think having a top flight agency for … It’s not just ad agency. It’s every aspect of Amazon management. Like are they dinging you too much for returns? Are they doing this? Are they doing that? But where are you on your ad spend? Where are you on your TACos? What’s your ad cost to sales? Where are you on your metrics? How can we overhaul your store better? How can we improve your content even more? So I feel really great about what we’re doing. But on our side, we do crank out a lot of content. We have our own photo team. We do a lot of our own videos. We crank those out. I’ve got third parties that we work with on content and video and images as well. So we’re bringing our full game. It’s not like I’m leaving it up to someone and saying, “Hope you guys figure it out.” I mean, we want them to handle the stuff that’s really surgical and important on Amazon for optimization and then we’re going to handle the stuff that we’re awesome at, which is going to be the fulfillment and the scaling and the product development. And the portions of content that we’re supposed to do, whether it’s video or images or whatever. So that’s really the idea here of like, let’s bring our best game. Let’s recognize where we don’t have our best game and let’s go try to hire that. Where we can’t get that best game, we need to hire that best game, right?
Luke Peters: Yeah.
Ken Kline: That was really my theory there.
Luke Peters: Well, and we’ll have to get you back on that one. We’ll find out how this agency is. Everybody’s always looking for good agencies so you can test drive that and … I mean, that’s a huge change. I’m glad you talked through that. You guys have already done it, but everybody every day who’s on 1P or vendor always says, “What if I was on 3P?” And probably vice versa. And it’s hard to make that leap and see how it’s going to come out on the other end because there’s benefits to both. It depends on your product dimensions, your AOVs, your velocity and number of SKUs. All of those things are going to factor in. Maybe your relationship with your buyer. We got a fantastic relationship so it’s like, man, that’s worth its weight in gold. How large you are, because if you are big enough on the vendor side, okay, you’re going to get some attention and that’s different than if you’re just starting out. You can’t even get a vendor relationship. So so many things go into it. You know what I’d like to do is just finish up with the last question and just to succinctly … You’re always doing something. It seems like every time I talk to you, you’ve got 20 other things that you’ve done. But speaking of COVID, everybody’s still in the midst of this. A lot of brands are doing better. Some of them have gotten hit actually, pretty hard. What is maybe your best word of advice that you can give other business owners or just in a short way of saying that? Or maybe the biggest thing you learned in the last year that helps you and that you want to share with other business owners?
Ken Kline: Yeah. Great question. We basically took a three year transformation business plan that we had in place after our restructuring, then we were going to add a heavy dose of B2C like we’ve been talking the past hour. We basically compressed that into a six month timeframe from March through September basically of a complete overhaul. I took a huge chunk of my team that was on E-comm operations and product development and general sales and we basically put everybody under two people. One was E-comm ops. She didn’t already have people under her. We added people. And the other one was content and optimization output. So my product development director, I basically put everyone under her for content because there’s a single arc from product concept all the way through to launch so let’s tackle content and then let’s make that workflow all one seamless workflow. The reason I brought that up is basically have a deeper bench where you’ve got really trusted team members that are battle tested with you. And as we’ve discussed on the prior discussion like a year ago Luke where we went through a fire in 2016. We totally burned down. So my team in 2020, we had already restructured. We had a core team from the fire that we had whittled down to a really core team heading into our next phase of our growth with profit first. And basically we took a look at COVID, and it was ugly on the front end. Sales in March, 2020 for VHC dropped 55%. That was totally scary Luke.
Luke Peters: That is tough.
Ken Kline: It was scary friend. I mean scary. Coming off a great first quarter. January and February, 2020 were great. And then March, COVID hit, sales dropped 55%. Well, one thing Luke, we already had a plan in place of what’s the next VHC so we just started implementing it more rapidly. So my first piece of advice is if anyone has come out of a business in 2020 not thinking they need some kind of planning, please get a plan. In our case, we had a plan and we accelerated it. So that calmed nerves. We didn’t not have a plan. We already had a plan. We were already going to telecommute. We were already going to cut costs. We were already going to cut travel. We were already going to do more virtual. We were already going to move to B2C but on a slower timeframe. We just accelerated all that. But it was because, Luke, we had a plan. So my first piece of advice to anyone out there listening in God’s green earth, please have a plan. You may not execute the plan and some of the parts of the plan, Luke, might be mud pie. But have a plan. That was the first thing. My second piece of advice is I have team members that have been with me longterm and that are now battle tested twice. Those guys are hardcore. Most of them are women by the way. Most of my senior lieutenants are women. And that’s just the way it’s worked out. That’s not me saying I’m all women. And I’ve certainly had men running departments. But currently, the majority of my senior team is women. And they’re battled tested with me and they have great team members under them. So we really preach all the way through the ranks, “Hey guys, we’re in this to win. We work hard and we want to be rewarded. But Ken is with you if you work hard. Know that.” Really key. Luke, same lesson from the fire. Same lesson. Am I not right?
Luke Peters: Yeah. Well, you’ve been there. And the other thing is can talk the talk because you’ve walked the walk. I mean, when you have to take a business from ashes and bring it back, people are going to listen. And you’re the leader of the company. So have a bench. Have that battled tested team and rely on that battle tested team, I guess, is the message right there. That’s a good one to finish with.
Ken Kline: Yeah. That’s kind of my takeaways and I think it’s pretty exciting. I mean, we’ve been through … I wouldn’t necessarily have chosen this, but we’ve been through two massive changes as a result of massive external macro factors. So it is an interesting story. So yeah, one was a fire, the second was COVID. Lessons in transformation I guess you could say. Luke, I try to be humble. I mean, we’re still learning every day. There’s so much to learn. But I also want to end on a big note of encouragement for anyone. I’m an optimist by nature. I believe you are too as an entrepreneur. And I think that I’m optimistic. I mean, it was pretty scary March, April, May. I won’t lie. But let’s don’t freak out and run for the hills. And I had major buyers, Luke, I was talking to that like … Trying to have conversations with buyers, that they were literally freaking out. And I’m like, “Okay. Look, you don’t need to freak out.” “Well, the world’s falling apart.” “It looks like the world’s falling apart. I guarantee you this is not the second coming so it aint that bad. Trust me.”
Luke Peters: That’s funny. Listen, I was talking to the biggest buyers at the biggest companies that you and I both sell into. So these are the biggest retailers. Public companies thinking their stock’s going to zero. Everybody was thinking that. It wasn’t just us. And this is during that crazy one or two week period where nobody knew what was going to happen and then the government came in and did all kinds of things. When people look back, even the biggest companies didn’t know what was going to happen. Now, two weeks later everything changed, but there was that period where it was pandemonium I guess.
Ken Kline: Yeah. Exactly. And I get it. I think the bigger lesson here, and maybe the deeper lesson to be a little philosophical, is you can’t live in fear. You need to be tactical, but you also need to be strategic and you need to be calm and think. And we really had that conversation with our senior team and our people. Be calm, do your job, keep your head down. Do the output. We’re changing our structure yet again to address this. And we’re going to come through this and it’s going to be fine. The other big thing I did Luke that was … And this is my last takeaway because I could talk all day and you know that. I’m a talker. But the other big thing I did was we’ve always had some level of corporate debt. We’ve always been in our line of credit. Sometimes we’d come out of our line of credit and got tons of cash coming in huge years. But most of the time I’ve had some money sitting in a line of credit. That’s the other thing I did starting last April. I was like, “You know what, no more line of credit. I’m not going back. I’m sorry.” So we lowered our inventory dramatically. We created a ton of efficiencies. We also implemented Ecomia. Did, like I said, a lot of other things. It’s a big year. It was like three years in one year. But the other thing is I lowered my corporate debt Luke. I’m proud of this. My debt scream for you today is I lowered my corporate debt from 3.1 million March 1, 2020, to zero yesterday afternoon.
Luke Peters: Wow. You ought to call up Dave Ramsey on that one and get on one of his-
Ken Kline: I know.
Luke Peters: But you know what’s funny Ken is a couple other people that I listen to love Dave Ramsey. Actually have been to a summit. Been to a couple of his events. But then a couple guys on the Rich Dad, Poor Dad and just some of the guys in their network which are always fun to listen to, their new thing is that debt is a new asset right now since it’s so cheap. So it’s funny how this world has turned around.
Ken Kline: Yeah. And I had a friend of mine tell me that two nights ago. When I was out on my hour walk I ran into my … My next door neighbor’s a good friend of mine. He was like, “Yeah. I know what you’re saying Ken, but I’m going to go the opposite way because debt’s so cheap right now. Why wouldn’t I do that versus inflation?” And I was like, “Well, I think there’s a whole argument there that’s a fair argument.” My dad made the same argument. My dad was the top finance guy at a Fortune 500 company. Hey man, if debt’s cheaper, if you can finance it this way and play the numbers, go ahead. So I get that. So I’m not that guy saying debt is evil and you should … I’m just saying that I felt like as a function of that’s one more line item that I’m not paying out for the year on line of credit expense. Hey, that’s a little bit more towards that profit first realization of goals. But I’m with you there. I did the EntreLeadership deep dive with Dave Ramsey for a week like five years ago and he preached the same thing. Like look, you can have debt. And he’s a puritan on no debt at scale. But I think also there’s great companies at scale that are … I think we’re learning that profitability at scale, it’s not just you’re big and you’re not necessarily profitable, just big. I think Satya Nadella and Microsoft is proving that at 100 billion plus a year now. $33 billion net income. I think-
Luke Peters: That’s crazy.
Ken Kline: Yeah. There’s big, scalable, very profitable, very well run companies now. That, in my opinion Luke, is also moving the dial as what is best practice of business. Would you agree?
Luke Peters: Yeah. Well look, the business is … It’s your asset and you just basically deleveraged it. You cleaned up your balance sheet. And to do that you had to clean up your inventory, which is very smart. So your cash flow’s going to be better and your capital allocation’s better. I mean, you did all the right things to get to that point so it’s all good. It doesn’t mean that … You want to do some future investment, you can go pull on that line of credit. But if you don’t need it, you don’t need it. And if you can run the business like that and be profitable … That’s a great note to end on. I’m glad you kind of fit that in there. I think that’s awesome. And people love to hear real numbers so thanks for sharing that and that debt payoff. Those are like gold because too many people talk in generalities. So it’s nice to hear that. Ken, why don’t you just finish here and let us know how listeners can find you, where they can find your business.
Ken Kline: Well, I am super old school and I only have LinkedIn. I’m only on LinkedIn and then I love email. Good old snail mail email. Kkline@vhcbrands.com. And I love to read all my emails and I do respond back. So that’s the way to reach out to me if anyone does and that’s great. So yeah, that’s basically it. So on that note Luke, it’s really been great talking to you again. And like I said, thanks for having me again on the podcast and I hope this is helpful. And by the way, a plug for you, and this is sincere, I really do enjoy the podcast and the guests you have on there and really keep up the great work and I think you’re doing a great thing. And also I love the topic of … It’s very hard to find people, that’s why I like talking to you, that actually are trying to scale at wholesale eCommerce. Sometimes I have these conversations about Wayfair and Home Depot and Overstock and whatnot and people look at me like, “Well, don’t you know Amazon’s the whole game in town?” I’m like, “Well, I don’t think it’s the only game in town.” I want to keep having these conversations. I think we could build a whole tribe around people trying to talk about this stuff that just don’t have a voice out there so that’d be my big ask. That’s the second podcast you’re going to launch.
Luke Peters: Yeah. And you’re right. There’s a lot of big players out there. It just depends what categories you’re in. But in your category you’ve got plenty and so do I so I’m glad you brought that up. And yeah, thanks for joining on the Page 1 podcast. And before I let you go in the audience, just remember, anybody out there, you got a vacation home, we need your help on vetcation.org. Check it out. We’re looking to help out some veterans with a free week’s vacation in August. The kink in the hose, the bottleneck is that we need more vacation homeowners who are willing to donate that home. And in return you’re going to really change someone’s life. You’re going to help out a family like you wouldn’t believe. And we’re going to have amazing stories by the way. Every one of these veterans is going to leave a story up there. A video. You’re going to see how your home and that vacation changed their lives. So please check it out. Vetcation.org. It’s a great cause. I’ve been doing it myself in my own place for 10 years and so taking this across the country. That’s what I’m doing. And I hope everybody enjoyed the interview. Please leave a review on iTunes if you did. And we’ll catch you on the next episode.
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