Reflection

IMD-7-2068 v. 02.12.2019

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Copyright © 2019 by IMD - International Institute for Management Development, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior written permission of IMD.

BAABUK’S ALL WOOL, NO BULL: CHOOSING THE BEST NEXT STEP

Stuart Woodcock, Adrian Hunn and Ulrich Wendt (IMD EMBA 2018) prepared this case under the supervision of Professor Jim Pulcrano as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation.

Dan Witting took the two espressos from the shiny Italian machine (the cornerstone feature of the tiny Baabuk office!) and sat back down at the desk with Galina, his wife and the CEO of their business. As Galina took a sip, she looked out the window and reflected that after months of considering options, and one final lengthy discussion over lunch, the couple finally seemed to have settled on a plan – but a plan that still required big decisions to be made in the weeks to come!

It was one thing to consider whether the time was right to seek outside investors, but another topic had been taking up just as much of their time over the last months. It seemed so simple, but Galina still did not feel that they had the right solution: What price should they charge for Baabuk’s products? In 2014, they had just been glad to sell the footwear for a gross profit, but the couple now felt their approach to pricing was a little too opportunistic, particularly if they wanted to prepare a solid business case for outside investors.

Galina thought of the dramatic changes they had seen in the market over the last four years and how they were far from alone in believing that woolen footwear might have a big future. She had no doubt that Baabuk’s products addressed a highly differentiated and attractive niche – their competitors’ entry and experience seemed to prove it – but pricing seemed to have gotten very complicated, very quickly.

Baabuk’s approach of selling through a mixture of retailers, distributors and its own online store had resulted in a multitude of different margin considerations when balancing retail and online pricing (refer to Exhibits 1, 2 and 3). Also, benchmarks set by competitors had to be considered, especially as Dan and Galina believed that the higher quality of Baabuk’s products justified an up-market price point.

Dan finished his coffee and headed back to the design and production workshop, while Galina moved back to her desk and began to look once more through the revenue and margin spreadsheets; her task for the afternoon seemed clear.

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Overview of Baabuk and Company History

Galina and Dan founded Baabuk in 2013, hoping to fulfil their entrepreneurial spirits and leave their corporate jobs behind (refer to Exhibit 4). The inspiration had come when Dan received a pair of traditional Russian woolen boots (Valenkis) as a present from Galina’s parents (refer to Exhibit 5). He was so impressed with the warmth and performance of the boots that he decided it was exactly the type of idea they had been searching for – to revive the Valenki tradition and take it to the world! The couple developed the first Baabuk boot and slipper designs in their spare time and set up their own production facility in Nepal. Felted footwear is labor intensive (the production of a pair of slippers or boots takes two to three days from start to finish) and Nepal offered a combination of cheap labor and a long tradition of expertise in wool felting.

In February 2014, the couple headed to ISPO Munich – a sports trade exhibition – and almost had too much success. Every spare minute in the next few months was spent fulfilling their first order for 1,000 pairs of slippers. The main order was 700 pairs from a Dutch outdoor retailer with 10 stores. The experience gave the couple confidence that there was a market for Baabuk and that it was time to quit their jobs and commit to the venture 100%. Despite the many challenges of a start-up, the couple managed to stay self-funded; they also used several Kickstarter campaigns offering heavily discounted products for growth capital.

The next big step in 2015 was to develop a new product category – a casual woolen trainer – to reduce the reliance on the winter season (refer to Exhibit 1). This new product line was closer to mainstream footwear manufacturing techniques, so the couple identified a third-party manufacturer in Portugal that could meet their requirements. In Nepal, all materials had to be imported, and import taxes were high, as were the air freight costs from Nepal. Portugal seemed like a better solution.

The couple recruited their first employee in 2015, and the team grew to five by September 2018 (not including the 20 Nepalese employees in a separate 100% Baabuk-owned company). The team was based in Lausanne and some inventory was stored in Germany to serve that market. The production footprint included the workshop in Nepal (boots and slippers) and the outsourced manufacturing of trainers in Portugal.

By 2017, with three products – slippers, boots and trainers – Baabuk was now able to offer products across all four seasons for both indoor and outdoor use. Through a mixture of retail, distributor and on-line channels, the business began to develop sales in a number of countries and grew to CHF1.4 million in annual revenues (refer to Exhibit 6).1 In 2017, four countries (Switzerland, Germany, US and Australia) represented 77% of revenues, but the remaining 33% were split across about 20 other countries (refer to Exhibit 6). Baabuk’s reputation had spread, but Dan and Galina struggled with how best to grow the geographically diverse revenue base – especially for a physical product that came in different sizes. The revenue split by product line was 54% from trainers, 34% from slippers and the remaining 12% from the Valenki-inspired boot. Add in the split across sales channels and the business looked very fragmented. Dan and Galina found themselves frequently discussing the best approach for each market and how best to price the product in each channel.

The Product

Stemming from the Valenki style boot, the founders developed their vision of Baabuk’s value proposition. Baabuk’s key differentiator was the use of felted wool for its footwear. Felt is a textile material that is produced by matting, condensing and pressing fibers together. There had

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been a general trend towards the increased use of wool, with its natural, insulating and breathable fiber, in activity driven clothing (e.g. Icebreaker). Baabuk’s aim was to extend this trend to footwear. All of the products were designed and prototyped by the Baabuk team in Switzerland.

The boots and slippers comprised a single piece of material and were made in Nepal using traditional techniques that did not require the use of glue, stitching or chemicals. The wool was sourced from Nepal and New Zealand. The requirements for the felt production were simply water (liquid and steam), soap, wool and tooling with different friction/density coefficients. (Refer to Exhibit 7 for the production technique.) Once the felting process was complete, the footwear was finished by adding the sole, decoration, etc. The techniques were highly traditional and from start to finish the production of a pair of slippers or winter boots took two to three days. The production cost was about CHF 12 for the slippers, CHF 27 for the trainers and CHF 60 for the boots plus additional shipping costs to Switzerland.2

The footwear was shipped from Nepal to Switzerland in large master boxes, to save on airfreight, but the final quality control and packaging was done in Europe. Each master box contained 30 adult pairs and 40 kids’ pairs and weighed about 25 kgs. The shipping cost was US$1.8 to $2.5 per kilo.

The trainers were made by a contract manufacturer near Porto, Portugal – a region with a long tradition of footwear production that had undergone rapid change in response to competition from Asia. In 2017, the industry in Portugal was still represented by 1,473 primarily small– medium-sized companies that exported 95% of their production with a focus on quality-driven and/or niche areas of the footwear market.3 Baabuk’s trainers were still produced from felted wool but utilized an automated and scalable production process. The supplied cost to Baabuk for its trainers was about CHF 30. If Baabuk had done it themselves, Dan estimated that the machinery – everything from die cutters to sole stitchers to packing equipment – would have required an investment of over €130,000, plus at least €3,000/month to rent space (plus employee wages). Dan and Galina decided that it was better to use the expertise and equipment of the Portuguese.

When shipping large volumes to their US distributor from Portugal, say in lots of 500 pairs, Baabuk used airfreight, and the cost was about €3.5/pair. They had also used Deutsche Post to ship from Germany to the US; the cost was around €9.5/kilo, but it took 8 to 10 days to arrive, and tracking the shipment was impossible after it left Germany. Shipping directly to US customers from Switzerland via UPS cost CHF 19/pair, and orders arrived in 2 to 3 days, with shipment tracking. Sales outside Europe were without VAT.

The boots and slippers were made in Nepal in Baabuk’s own production facility, which had 20 employees. The facility had begun as a joint venture with a local partner, but, after two years, Baabuk took over complete ownership. Most work days started with Dan Skyping with his factory manager for several hours. Although complicated and costly, Dan and Galina felt the Nepalese expertise was unique, and it added to Baabuk’s authenticity. They had originally considered manufacturing in Indonesia. Exhibit 2 provides the expected revenue distribution by channel.

Market and Market Segmentation

As Galina reviewed the global footwear market, she noted it had reached $246 billion in 2017, and it was expected to have a compound annual growth rate (CAGR) of 4.5%, reaching approximately $320 billion in 2023.4 The market consisted of four regions: North America,

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Europe, Asia Pacific and the rest of the world. North America was the largest in terms of revenue (35% market share) followed closely by Europe and Asia-Pacific.5 In terms of volume, Asia Pacific was the largest contributor in the market in 2014, accounting for a market share of approximately 40%.6 This was primarily attributed to an increasing middle class population and the rapid expansion of the footwear industry in emerging countries such as China and India. The European shoe market was dominated by Germany and France (each with 17% of revenues), UK (16%) and Italy (12%).7 The Swiss footwear market – where Baabuk generated 30% of its 2017 revenues – constituted only 2.2% of the European market and 0.7% of the global market. The Swiss market was considered mature, with an annual growth expectation of 1.3% (CAGR 2018–2022).8

The dynamics of the footwear market were dominated by three forces that result in relentless pressure on margins (refer to Exhibit 3): a strong rivalry between existing incumbents, strong bargaining positions of the leading retail chains’ purchasing departments and increasing raw material prices. Together, these forces pressured the footwear industry’s manufacturing and supply chain to move from Europe and the US to China, Vietnam and Indonesia. Baabuk’s founders complied with these dynamics, locating the manufacturing site for the initial Valenki- inspired boot in Nepal, thereby combining a low-cost environment, a geography that resonated with images of ruggedness and a tradition of felting. In 2015, the addition of the woolen trainer products required a more scalable and flexible production approach, which led Dan and Galina to commission the new product lines with a Portugal-based manufacturer while maintaining the production site in Nepal.

The footwear market was segmented into athletic footwear (49% of revenues) and non-athletic footwear (51% of revenues), the latter of which could be sub-segmented into (i) leather footwear and (ii) sandals, textile and other products.9 The athletic footwear segment was dominated by global players such as Nike and adidas. The non-athletic segment remained highly fragmented with a mix of smaller global brands and regional players. New footwear styles, such as ethical footwear and recycled footwear, were emerging and were increasingly driving the market.10 This, in combination with the rising purchasing power of the youth population, was boosting the demand for footwear in the major countries of Europe including France, UK, Italy, Spain, Germany and Netherlands.11 Galina reviewed the major trends in the industry:12

Increasing use of eco-friendly products

Innovations in sole technology

Growing preference for premium and customized products

Celebrity endorsements being used to strengthen brand equity.

Galina thought that Baabuk’s products aligned with at least the first and third trend – and she still had hopes of seeing Roger Federer in a pair of Baabuk’s one day! Could they even imagine some sort of celebrity sponsorship? Federer had earned around $150 million from working with Nike for 20 years, but their footwear deal ended in March 2018, and the Swiss tennis star had recently signed with Uniqlo for clothing.13

But what markets should Baabuk focus on? Market reports indicated an increasing spread between the low-cost and ultra-premium segments for the Asia-Pacific (APAC) region. Also, it was reported that counterfeit products challenged the major brands in APAC. The EU and the America’s had lower growth but a more stable environment. Here, the dominant trends

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were in line with industry trends: (i) The onset of mass customization driven by dominant players such as Nike and adidas, (ii) continued strong market share in non-premium upper- market segments and (iii) the increasing customer focus on ethical, eco-friendly footwear.

Dan and Galina had foreseen these trends in 2013/2014, and they felt that Baabuk’s was well positioned at the interface of the casual/athletic and eco segments with a level of differentiation that allowed it to price the products in the “fine segment,” which in 2015 captured €9.1 billion in sales and a 19% market share in the EU alone (refer to Exhibit 8).14 Baabuk’s product awards at the 2014 and 2017 ISPO sports trade exhibitions also seemed to support this view. The highly successful market entry of the adidas ocean plastic “ultraboost” shoe (refer to Exhibit 9) was further reassurance. It seemed that casual/athletic woolen shoes could evolve as a trendy and differentiated niche category, allowing a small and specialized manufacturer like Baabuk to develop through strong organic growth. Galina had recently read an article that mentioned eco-fashion was now a $5 billion per year industry, whereas just ten years ago it had not even cracked $1 billion.15 A 2016 Morgan Stanley Research survey done in the UK found that when choosing among retailers, more than half of young consumers found ethical credentials somewhat or very important.16 This may have been a small share of global revenue, a weak signal perhaps that was announcing a major shift. Baabuk played in that niche and could benefit from this trend.

Galina also played with the thought of designing and selling merino wool apparel under the Baabuk brand, perhaps as a way of having year-round products; some of her competitors had gone this route.

Competition

For their initial business plans, Dan and Galina had analyzed the competitive space with care and identified half a dozen to a dozen competitors that produced felted footwear (refer to Exhibits 9 and 10). The competitors were mostly private companies, operating with a regional focus in places where felted footwear had a tradition. Typical examples were Gottstein and Giesswein, which were both family-held Austrian firms, founded in 1926 and 1954 respectively. Both focused on high-quality Austrian-style felted house shoes – “Filzpantoffeln.” The Finnish firm Lahtiset was founded in 1921 as a felt boot factory in the village of Partala in central Finland. Contrary to other competitors, Lahtiset was already combining traditional and modern designs in the way Baabuk was planning to do. However, Lahtiset operated in Finland only. Given the local focus of existing competitors, Dan and Galina considered them an encouraging confirmation of the product concept and an opportunity for growing the awareness of the segment. The mission of Baabuk was to (i) build on its award-winning and fresher designs and (ii) move felted footwear from the traditionalist shops in the alpine valleys and Scandinavian tourist centers to becoming a new and hip footwear category in Europe and beyond.

Another competitor came along in 2014, mahabis.com, based in London, with a mission to “make life more comfortable” According to mahabis’s website, “inspired by Scandinavian design, our minimalist range of slippers are designed to be worn both indoors and out. There are a range of styles to choose from, to suit your downtime and everyday adventures.” Manufacturing was with a family-run firm in Portugal. Its Classic2 slipper sold for €80 but was often discounted online to €64. Its kids’ slippers were priced at €60 (reduced to €45) a pair. The majority of its sales were online, but its products were also available in a small number of select retailers. In addition to slippers mahabis sold branded pens, pencils, notebooks, iphone cases, watches, leisure wear, backpacks and candles.

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In 2015, a new competitor surfaced – Allbirds – a San-Francisco based start-up, which had a related business model and was venture backed with a seed investment of $2.7 million. Allbirds manufactured felted woolen sneakers, similar to Baabuk’s with a US design and an Asian-based production set-up. The original Allbirds plan was to sell only online a single line of sneakers for $95 with no seasonal sales discounts (refer to Exhibits 9 and 10). Allbirds expanded quickly and raised $7.5 million series A funding (2016) and another $17.5 million series B funding (2017). By 2018, Allbirds had grown to more than 100 people, selling its products in the US, New Zealand, Canada and Australia. Allbirds sold its products direct to consumers and via two retail/concept stores in San Francisco and a brand new 4,800 square- foot flagship store in New York, which opened in September 2018 (refer to Exhibits 11 and 12). It created buzz around its products through creative partnerships – Outdoor Voices (jogging apparel) in November 2017, Nordstrom (three-month pop-up store) in Spring 2018, ShakeShack (New Zealand-inspired milkshakes) in May 2018, and Air New Zealand (wool sleep mask) in September 2018.

In late 2018, Allbirds reported sales of about 1 million pairs of shoes over the last two years and was listed as one of LinkedIn’s top 50 start-up firms in the US. It was featured on Bloomberg, CBS and CNBC and in Time Magazine with Fashion Magazine referring to Allbirds as “the world’s most comfortable shoes.”17 In September 2018, Allbirds announced its October 2018 online launch in the UK with plans to expand to other markets. In the same month, it was reported that Allbirds had entered the unicorn club with the announcement of $50 million in Series C funding. According to the Wall Street Journal, the company was now valued at $1.4 billion.18 One of the investors in the latest funding round was a leading internet retail entrepreneur whose aim was to boost the global presence of Allbirds. This would include additional retail stores in the US and beyond. Joey Zwillinger, an Allbirds cofounder, said the company’s focus was to create an incredible customer experience,19 which had so far resulted in a Net-Promoter Score (NPS) of over 80 – a very high score (Apple had an NPS of 72 in 2017 and most traditional shoe companies hover around 30).20

Galina and Dan recognized that Allbirds, with all that money and a focus on expansion (not to mention a founder that was a highly competitive ex-professional footballer with a London School of Economics MBA) was a serious competitor.

Route to Market

Galina was fully aware that the footwear industry was facing a tremendous change in customer purchasing habits. Online was the growing distribution channel, putting pressure on “bricks and mortar” retail stores. In 2016, the offline segment accounted for 84% of the global market with the other 16% online, but this was set to change.21

In 2017, Baabuk distributed its shoes through all three major channels, and online sales were already accounting for 38% of sales. Specialized retail stores in Switzerland accounted for 24% of sales and the rest were through distributors.

• Online channel. Galina looked once again at the latest market reports which confirmed that e-commerce was the primary growth driver in the footwear industry. The biggest challenge for selling shoes online was the reverse supply chain. When Zalando began to sell footwear, 60% of all the products shipped were returned because people ordered different sizes to be sure of the right fit. Galina reflected that online sales were great because the margins were much higher, but sales came in increments of one pair of shoes at a time, and it was hard to promote and gain traction for a single-brand online

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shop. In 2018 the conversion rate from website visits to online purchases was 0.7%. Spikes in publicity led to spikes in sales, but these tended to be short-lived. Baabuk was lacking a consistent model to drive web traffic and customer conversions.

• Distributor channel: Baabuk’s first big customer order of 700 shoes, which started the business, came from a distributor. In footwear, distributors acted as wholesalers to stock the items and connected producers or brands with retail outlets. They typically operated on margins of 25%-35%. In a market where the retail price of footwear was decreasing and the cost pressures on manufacturers were increasing, the temptation to circumvent distributors was obvious. Galina had certainly considered cutting out distributors and going directly to retailers as they were already doing in Switzerland. On the other hand, there were clear benefits of working with distributors because they ordered in bulk, an advantage that had convinced them to accept lower margins and other distributor demands like additional marketing support.

• Retail channel: In Switzerland, Baabuk had pursued an approach of selling directly to retail outlets. Success had come from stores that specialized in outdoor activities and carried all the major brands in this category, such as Mammut, North Face, Patagonia, etc. Another successful segment was gift retail shops in Switzerland where tourists bought souvenirs. Selling directly to retail outlets required a lot of resources. In order to sell in markets outside Europe, Baabuk would need to manage its own supply chain and hold enough inventory of every style and size to supply the retail outlets. Supply chain management was a major challenge, where the multitude of stock keeping units (SKUs) – colors, style and sizes – increased complexity. General footwear retail was in decline, but specialized retail was on the rise. The benefits of working directly with retailers were the direct customer feedback and showcasing the brand.

• A mixed model (with flagship stores): Baabuk’s US-based competitor, Allbirds, had opened flagship stores in San Francisco and New York and was just about to open a new store in London. Dan and Galina had considered a similar approach, but they were intimidated by the capital requirements. Still, if they opened only a few flagship stores in selected regions could this be a vehicle to increase the customer awareness Baabuk needed so desperately. And to what extent would a well selected footprint in stores help them to learn about regional customer needs? A first foray into brand building with fixed assets was the Baabuk caravan, sort of a moving pop-up store. The converted old caravan (refer to Exhibit 13) had been used to build awareness at public events such as the Paléo music festival and the Lausanne marathon. The caravan had a certain novelty value, but could it also be the first step in an innovative brand building approach?

The Consumer

Looking at Baabuk’s website, Galina asked herself if it optimized the company’s offer in line with customer needs: “Who are our customers anyway?” Baabuk recently conducted a customer survey and Galina looked at the feedback:22

I have worn my Baabuk Urban Woolers across the world, literally! I am asked about them most places I go and receive many compliments on their style and look. That’s all great, but the best part is the comfort, fit and durability. Andrew R.

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The rubber used on the slippers gets dirty easily, and it is very difficult to clean. It’s more of a cosmetic issue, but even when you try them on to see if the size is right, after a few minutes of walking in them in the house, the rubber outsole collects the dirt which looks like the slipper was used for a few days. Elizabeth F.

Try to reduce pricing! Peter K.

Baabuk offered products for men, women and children; slippers for all three groups, the trainers for adults (women and men) and the boots, mainly targeted at women. The women’s segment dominated the market with 50% of the overall share, followed by men and children.23 Galina knew by focusing on a couple of segments, Baabuk could reduce its SKUs dramatically, from 1,200 potentially down to 700. However, the children’s segment was very attractive because children outgrow their sizes faster. Population patterns and lifestyle trends were also affecting the product mix. Baabuk was well positioned to serve the emerging eco-shoe trend that revolved around natural and renewable materials and being responsible with nature’s resources. Another growing category was outdoor activity gear. Galina always described Baabuk as the “Icebreaker for the feet.” Icebreaker was a well-known brand from New Zealand that offered merino wool outdoor and performance clothing. Founded in 1995, at the time of its acquisition by VF Corporation in 2017, Icebreaker had sales of $220 million. Its own stores accounted for 32% of sales. It had moved its manufacturing to China in 2003.

I am fond of natural products. Thomas D.

Please add additional neutral versions of the shoes. I have a black pair which works well in a semi-smart setting. Most other designs are rather informal, while I'd like to be able to wear Baabuk’s to the office. Kerstin L.

Another trend that Galina saw was the aging of the population. It was clear that older customers would be more inclined to combine comfort with style. In general, customers were getting more conscious of health and well-being. Wearing a casual outfit to work had become more accepted. Taken together, many factors seemed to support a positioning of Baabuk’s product with messaging relating to style and comfort at the same time. Available reports supported this view: The demand for comfortable and trendy footwear had driven the market for non-athletic footwear. In addition, per capita disposable income played a major role in the spending decision of individuals and households. The discretionary items were in competition with each other; a new smartphone competed with a new pair of Baabuk shoes. Galina looked again at the customer survey:

I often saw shoes in the store that I liked very much but are out of stock in my size. The product itself is just great. Maybe it would be great if customers could configure the color of their shoes or at least the color of the laces. Jessica A.

Have a free return policy. I was interested in sneakers, but I am afraid to have to pay to return the pair if it doesn't fit. Jussi L.

The Task for the Afternoon

The problem to be solved seemed clear – the Baabuk pricing and channel strategy. Galina began to look at the revenue and margin spreadsheets and started to work out the magic numbers – the “right” retail price for each of Baabuk’s products. These prices would obviously need to be sufficient to allow the firm to make a profit and continue to fuel its organic growth,

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but they also needed to balance the demands of retailers and distributors as well as recognizing the price points established by its competitors. She asked herself: “With what strategy can we continue to compete in this market?”

Galina almost felt jealous of the simplicity of the Allbirds pricing model! Then on the other hand she also reflected on how the emergence of competitors had made the couple more convinced than ever about Baabuk. The market for woolen footwear now seemed proven and Baabuk felt poised to be a major success if it could just get the formula right. But was it purely mathematics and price sensitivity, or could they do something different? The recent switch to a new supplier in Portugal had reduced the manufacturing cost of a trainer by CHF 7. Should they use this as a chance to earn more margin, or did it offer the chance to reset their pricing models?

Galina had been studying the data gathered for the global footwear market report, but for a nimble niche player like Baabuk, how useful was that data? Should the report, which included data on behemoths like Nike, really have any impact on her calculations?

Added to her thoughts was the news that mahabis.com had declared bankruptcy just before Christmas 2018, after selling almost 1 million pairs of slippers. Was it a cashflow crises? Inventory problems leading up to Christmas? Not enough traction with its paid advertising model?

Baabuk was still small and flexible enough to pivot if necessary. The thought prompted Galina to think once again about the prospects of an outside investor – was this really the right time to invite someone else into their business? Additional funding could certainly be helpful for strengthening the brand and building new channels, and if the company had more funding maybe it could drive sales, even at a premium price. But Galina and Dan also had to decide how much control they were willing to give up and what type of investor they were looking for. And would outside investors be attracted or repelled by Baabuk now that it was certified in 2018 as a B-Corp?24 She and Dan were playing with the thought of exiting the business in three to five years to pursue other entrepreneurial projects. To orchestrate that successfully they needed to grow Baabuk fast. When the office clock struck 14:00, it snapped Galina’s thoughts back to the present. The couple had agreed to leave the office at 18:00 for their anniversary celebration, so Galina had four hours to tackle the task that seemed to underpin everything – a clear, coherent and robust pricing strategy for Baabuk.

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Exhibit 1 Baabuk’s Product Line

Baabuk’s product lines as represented in Baabuk’s 2017 business plan for investors. Projected consumer prices (in CHF) represent one of Baabuk’s scenarios from the original business plan. The product lines include the woolen slipper (left), the woolen trainer (middle) and the Valenki style boot (right).

Source: Baabuk

Exhibit 2 Baabuk’s Woolen Trainers

Projected consumer prices (in CHF) and expected revenue distribution by channel.

Source: Baabuk

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Exhibit 3 Margins in the Shoe Industry

The figure shows an illustrative breakdown of margins for of a typical non-premium running shoe (trainer). Source: Source: “What Does It Cost to Make a Running Shoe?” Soleview, May 22, 2016. <www.solereview.com/what-does-it-cost-to-make-a-running-shoe/> (accessed March 15, 2019)

Exhibit 4 Baabuk’s Founders

Galina Witting Nanba. Over four years of experience with Philip Morris International, first as an IS analysts, and then as a packaging expert, and then a bit more than a year with SQLI, a French digital agency. Bachelor’s degree in Information Systems, and a Master’s degree in International Management, both from the University of Lausanne. Dan Witting. Master’s degree in Computer Science from the EPFL (Swiss Federal Institute of Technology-Lausanne). Eleven years of cross-functional experience in Brand Building, and CRM Information Systems at Philip Morris International. Experienced in managing remote and international teams in matrix organizational structures. Co-Founder of Baabuk. Strong entrepreneurial spirit. Results oriented, creative and committed. Fluent in five languages.

Source: Baabuk

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Exhibit 5 Baabuk’s Product Vision

A modern emulation of the Russian Valenki boot. Baabuk’s products received prestigious prizes at

ISPO, the top international trade fair for sports apparel and equipment. The woolen sneaker received a GOLD award in the category “Shoes” at the 2014 ISPO, and the Valenki type boot received a GOLD award in the category “outdoor” in 2017.

Source: Baabuk

Exhibit 6 Evolution of Baabuk’s Revenues

Left panel: Baabuk’s illustrative profit and loss statement for the 2016 and 2017 reporting periods. Right panel: Regional split of Baabuk’s 2017 revenues.

Source: Baabuk

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Exhibit 7 Production of Felted Shoes

Baabuk’s slippers and boots are molded into one piece without any stitches or glue. The process is inspired by 200-year-old Russian felting techniques. The ingredients to create felt are water (liquid and steam), soap, 100 % wool and different tools with different friction/density coefficients. No chemicals are used. The initial steps of washing, carding, dying and pre-felting are outsourced. Critical in Baabuk’s production is the Hand Felting step, requiring skilled employees to place pre-felted wool layers over a flat shoe shape and work them by hand to build the shape and target weight of the shoe. Steam Felting exposes the wool layers to hot steam and friction movements to further felt the wool. The Cylinder Felting step applies circular rotation to advance the densification process. Hammer Felting exposes the material to pressure, increasing the density and hardness of the shoes.

Source: Baabuk

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Exhibit 8 Segmentation of the European Footwear Market

This segmentation was used by Dan and Galina when they created their 2014 business plan.

Source: “CBI Market Survey: The Footwear Market in the EU.” CBI, May 2010. <http://expertdirectory.s-ge.com/data/files/2010%20-%20footwear%20-%20EU.pdf> (accessed March 15, 2019).

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Exhibit 9 Selected Competitors

Adidas (120 - 200 €) Gottstein (50 – 80 €) Glerups (60 -70 €)

Lahtiset (100 -200 €)

2014 2017

Giesswein (50 -130 €)

2014

2017

Allbirds ($ 95)

Left upper row: adidas ocean plastic made “ultraboost” eco shoe. Rest of upper two rows: Products of family owned businesses that operated in felted footwear by the time Baabuk was founded in 2014. Note, that some of these incumbents reacted to the challenge by Baabuk and Allbirds, by upgrading their designs. Specifically, Giesswein’s felted merino wool sneaker resembles Baabuk’s felted wool trainers both in design and pricing. The family firms have consistently opened independent web-stores. No financial data is disclosed for these firms. Lower row: San-Francisco based startup Allbirds entered the market in 2014 and offers a product similar to Baabuk’s woolen trainers.

Source: Baabuk

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Exhibit 10 Competition Assessment by Baabuk

Source: Baabuk

Exhibit 11 Allbirds New 4,800 F2 Flagship Store in New York

Source: Tyler, Jessica. “The company behind the ‘world’s most comfortable shoe’ is planning on opening stores across America. Here's what it’s like to shop at one.” Business Insider, September 4, 2018. <www.businessinsider.com/allbirds-store-opens-nyc-2018> (accessed March 15, 2019).

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Exhibit 12 Allbirds Store in San Francisco

Source: Author

Exhibit 13 Baabuk Caravan

Used at events such as trade shows and the Swiss Paléo music festival.

Source: Baabuk

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References

1 For reasons of confidentiality the authors are using illustrative revenue numbers. 2 For reasons of confidentiality the authors are using illustrative manufacturing costs. 3 “Portugal exports over 95% of its footwear production.” The International Union of Shoe Industry Technicians, March 2017. <www.porto2018.uitic.org/info/portugal-exports-over-95-of-its-footwear- production/24.html> (accessed March 15, 2019.) 4 “At CAGR of 4.5%, Global Footwear Market Share Will Reach USD 320.44 Billion by 2023: ZMR Report.” Zion Market Research, August 23, 2018. <https://globenewswire.com/news- release/2018/08/23/1556035/0/en/At-CAGR-of-4-5-Global-Footwear-Market-Share-Will-Reach- USD-320-44-Billion-by-2023-ZMR-Report.html> (accessed March 15, 2019). 5 “Footwear Market is Expected to Reach USD 258.22 Billion and 12.11 Billion Units Respectively in 2023: Transparency Market Research.” PR Newswire, April 1, 2016. <www.prnewswire.com/news- releases/footwear-market-is-expected-to-reach-usd-25822-billion-and-1211-billion-units-respectively- in-2023-transparency-market-research-574271141.html> (accessed March 15, 2019). 6 “Footwear Market is Expected to Reach USD 258.22 Billion and 12.11 Billion Units Respectively in 2023: Transparency Market Research.” PR Newswire, April 1, 2016. <www.prnewswire.com/news- releases/footwear-market-is-expected-to-reach-usd-25822-billion-and-1211-billion-units-respectively- in-2023-transparency-market-research-574271141.html> (accessed March 15, 2019). 7 “CBI Market Survey: The Footwear Market in the EU.” CBI, May 2010. <http://expertdirectory.s- ge.com/data/files/2010%20-%20footwear%20-%20EU.pdf> (accessed March 15, 2019). 8 “Footwear Switzerland.” Statistic, March 2019. <www.statista.com/outlook/11000000/155/ footwear/switzerland?currency=usd> (accessed March 15, 2019). 9 “At CAGR of 4.5%, Global Footwear Market Share Will Reach USD 320.44 Billion by 2023: ZMR Report.” Zion Market Research, August 23, 2018. <https://globenewswire.com/news- release/2018/08/23/1556035/0/en/At-CAGR-of-4-5-Global-Footwear-Market-Share-Will-Reach- USD-320-44-Billion-by-2023-ZMR-Report.html> (accessed March 15, 2019). 10 “Footwear Market: Europe Industry Analysis, Size, Share, Growth, Trends and Forecast 2015–2021.” PR Newswire, September 9, 2015. <www.prnewswire.com/news-releases/footwear-market---europe- industry-analysis-size-share-growth-trends-and-forecast-2015---2021-300140442.html> (accessed March 15, 2019). 11 “Footwear Market: Europe Industry Analysis, Size, Share, Growth, Trends and Forecast 2015–2021.” PR Newswire, September 9, 2015. <www.prnewswire.com/news-releases/footwear-market---europe- industry-analysis-size-share-growth-trends-and-forecast-2015---2021-300140442.html> (accessed March 15, 2019). 12 “Top 3 Trends Impacting the Athletic Footwear Market in the US Through 2020: Technavio.” BusinessWire, August 23, 2016. <www.businesswire.com/news/home/20160823005099/en/Top-3- Trends-Impacting-Athletic-Footwear-Market > (accessed March 15, 2019). 13 Badenhausen, Kurt. “Roger Federer’s Uniqlo Deal Pushes His Endorsement Earnings to Highest by an Athlete.” Forbes, July 2, 2018. <www.forbes.com/sites/kurtbadenhausen/2018/07/02/roger-federers- uniqlo-deal-pushes-his-endorsement-earnings-to-the-worlds-highest/#7f71cfe142a1 > (accessed March 15, 2019). 14 Baabuk business plan 2015. 15 “The Growing Demand for Eco-Fashion.” Ethea, February 18, 2018. <https://ethea.co.uk/growing- demand-eco-fashion/> (accessed March 15, 2019).

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16 Russell, Judith. “Beyond Sustainable: The Growing Demand for Ethical Fashion.” The RobinReport, April 3, 2018. <www.therobinreport.com/beyond-sustainable-the-growing-demand-for-ethical- fashion/> (accessed March 15, 2019). 17 “Allbirds Has Taken Footwear Industry into New Territory.” Bloomberg, July 17, 2018. < https://www.bloomberg.com/news/videos/2018-07-17/allbirds-has-taken-footwear-industry-into-new- territory-video >; Vella, Matt. “The World's Most Comfortable Shoes Are Made of Super-Soft Wool.” Time, March 1, 2016. <http://time.com/4243338/allbirds-wool-runners/>; Lewis, Carly. “The Misandrist T-Shirts That Go Way, Way Beyond ‘The Future is Female.’ Fashion, March 7, 2019. <https://fashionmagazine.com> (all accessed March 15, 2019). 18 Clark, Kate. “With $50M in fresh funding, Allbirds will open new stores in the US, UK and Asia.” Techcrunch, October 11, 2018. <https://techcrunch.com/2018/10/11/with-50m-in-fresh-funding- allbirds-will-open-new-stores-in-the-us-uk-and-asia/?utm_medium=TCnewsletter> (accessed March 15, 2019). 19 Kahn, Barbara E. “Why Is Allbirds Opening Up New Stores If We Are in A Retail Apocalypse?” Forbes, September 6, 2018. <https://www.forbes.com/sites/barbaraekahn/2018/09/06/why-is-allbirds- opening-up-new-stores-if-we-are-in-a-retail-apocalypse/> (accessed March 15, 2019). 20 Kahn, Barbara E. “Why Is Allbirds Opening Up New Stores If We Are in A Retail Apocalypse?” Forbes, September 6, 2018. <https://www.forbes.com/sites/barbaraekahn/2018/09/06/why-is-allbirds- opening-up-new-stores-if-we-are-in-a-retail-apocalypse/> (accessed March 15, 2019). 21 Weinswig, Deborah. “US Consumer Analysis: Apparel and Footwear.” Slideshare, February 24, 2017. <www.slideshare.net/dweinswig/us-consumer-analysis-apparel-and-footwear> (accessed March 15, 2019). 22 Customer survey from Baabuk’s customer database, July 2018. 23 “Footwear Market is Expected to Reach $371.8 Billion, Globally, by 2020.” Allied Market Research, 2019. <www.alliedmarketresearch.com/press-release/footwear-market-is-expected-to-reach-371.8- billion-worldwide-by-2020-allied-market-research.html> (accessed March 15, 2019). 24 https://bcorporation.net/

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