The World We Design- Panel Zeitgeist Americas 2012


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Transcript:
Google Zeitgeist October 15, 2012
The World We Design
>>Lorraine Twohill: Last session of today. This is very uplifting session to bring us
home for the day. Before we start, I wanted to quickly mention Jeremy's Icebreaker is
giving everybody a gorgeous Icebreaker T-shirt. You will find a card in your room you need
to bring to the concierge's desk to get your T-shirt. They are very, very cool. Thank you
Jeremy. This final session is called The World We
Design. We have a phenomenal moderator who is going to join us on stage, I want to introduce
Andrew Ross Sorkin, who is a financial columnist with the New York Times. We are thrilled to
have you here, Andrew. Andrew is also the co-anchor Squawk Box on CNBC and has written
a very famous book, Too Big to Fail. So Andrew, please come on stage. Thank you.
[ Applause ] >>Andrew Ross Sorkin: Thank you very much.
We've had a great couple of sessions this morning. And we're going to be talking to
a number of very special and amazing people this afternoon, who are going to be telling
stories and hoping to inspire us about new business models, habits, social and sustainable
mission and new ways to think about stories through photographs and motion pictures. But
before we do that, what I wanted to do, if I could, was to take a moment to speak briefly
about a theme that I imagine we're going to be hearing about a little bit this afternoon
from our presenters, especially those who are starting and creating and running emerging
businesses and emerging enterprises. It has to do a lot with their success and
the success as a result of what I'm going to describe as long-term thinking and patience.
And the reason I wanted to bring up this idea of long-term patience in terms of thinking
is here we are at Google, and at the Google Zeitgeist event, and everybody here has their
-- I was about to say iPhone, I shouldn't. I should say their Nexus device or their Samsung
device or whatever they have, Android device, and we live in this very, very instant world.
We want instant gratification, we want response time, we want to tweet, we want to FaceBook,
we want to do whatever. But when it comes to business, and when you
think about your own enterprises and the decision making that goes into it, one of my greatest
worries these days is that when you think about markets and specifically capital formation,
there's become a remarkable sense of short-termism that has creeped into every facet of business
thinking. I want to give you some stats just to hopefully make everybody think here for
a second. Consider these numbers. The average stock today in the public markets is held
for -- can you guess? 22 seconds. [ Laughter ]
>>Andrew Ross Sorkin: Okay. Now, 70% of the stocks that trade in the market on any given
day, the volume you see on CNBC at the end of the day is being moved by computers, high
frequency trading. The other 30% of stocks, out there in the world, the average hold time
is seven months. That's the number. So take out high frequency trading, seven months is
the long-term holds. Of the world's actively managed mutual funds
in this country, nearly 100% of the portfolios are turned over every single 12 months. Okay?
A survey of more than 400 corporate managers recently found that almost four out of every
five respondents indicated that they would decrease discretionary spending on areas such
as research and development, advertising, maintenance, and hiring in order to meet short-term
earnings targets. And more than half the respondents said they would delay new projects, even if
it meant sacrificing value creation. They say that -- they actually responded and
said that the object for doing so was to smooth out earnings or to actually hit the quarterly
target. Now, I say all of this -- by way of background
in that we live in a time right now where we keep talking about shareholder democracy.
And we claim that we, all of us in this room and the country, wants more shareholder democracy.
We want a bigger seat at the table. We think that if we just had a seat at the table, we
would be the long-term thinkers. But I would argue to you that we are the problem.
That we have become the ultimate ADD nation. And in many ways, when you think about what's
happening in corporate America, we are getting exactly what we are paying for. Now I wrote
this book Too Big to Fail, to quote FDIC chairwoman Sheila Bair, she said the overarching lesson
of the financial crisis was the pervasive short-term thinking that helped bring it about.
And she's absolutely right and we absolutely have a problem.
I was with a CEO last week, you all know this CEO, a Fortune 50 company. She has made some
serious investments over the last couple of years that have not paid off, not yet. They
may or may not pay off in two years. I will bet you within the next two years she will
lose her job or the company will be broken up. That can't be the right answer. Now some
say we need to incentivize managers differently. We need to give them more skin in the game.
That's what we say. We want everybody to have skin in the game. And every time I think about
skin in the game, I therefore think about Dick Fuld, the former CEO of Lehman Brothers.
This is a number worth remembering. Dick Fuld had a billion dollars of stock in his company.
He had, quote, unquote, more skin in the game than just about anybody in the business. He
rode his billion dollars of stock all the way down to $56,000.
That's the number. When you really think about what we can do
to incentivize people and motivate people to make the right decisions, it is a very,
very tough task and money is not the only answer.
Finally, Google, FaceBook and others, have created governance systems to try to push
back on some of this pressure. But in all honesty, my worry is it's only going to really
help at the margins. Ultimately we are going to need a new level of trust and patience,
and that's something that's only going to come from everybody in this room, hopefully
not just today, but when you go back to wherever you came from, to talk about that patience
that's needed. We're going to be hearing from some tremendous people this afternoon. I want
to get some thought about some of these issues. Let me do this. Let me introduce to you two
women who are very special. They are my new friends this afternoon. And they are doing
very big things in the not-for-profit world of sustainable and social businesses in an
effort to create profitable businesses. If you would join me, please, Leila Janah, the
CEO and founder of Samasource Social Business -- please, please, it's a social business
that connects people -- [ Applause ]
>>Andrew Ross Sorkin: -- living in poverty to microwork. And basically what they do is
they take small computer-based tasks and try to build skills in emerging markets in places
that you would not believe. Samasource I should say has partnered with many tech companies,
including Google, Microsoft and LinkedIn and she's going to talk a little bit more about
that in a moment. Then Linda Rottenberg is the CEO of Endeavor,
a not-for-profit that identifies and supports high impact entrepreneurs in emerging markets
-- [ Applause ]
>>Andrew Ross Sorkin: And this is a great fact, Endeavor has helped its entrepreneurs
generate more than 90,000 high-quality jobs. So I welcome both of them.
>>Linda Rottenberg: 200,000. >>Andrew Ross Sorkin: 200,000? Your bio is
wrong, it says 90,000. I apologize. What I'm hoping that you can do, just to start us off,
is just explain a little bit about what these institutions do. Because I'm not sure the
audience does. But answer this while you are doing it, if you could. In a world when we
think about where there's been a real shift about how we think about capitalism, in the
past four years, and both of your enterprises at some level are about -- either making a
profit or -- or using the profit incentive, to make your businesses grow or to make your
enterprises grow, how do you think about that? How do you go to countries that have looked
at our version of capitalism here in the U.S. and say, you know what, we just watched what
happened here and this may not work the way we thought. I am going to start with you,
Linda. >>Linda Rottenberg: Well, your question, also
about patience, really gets to the heart of Endeavor's model. So in the mid 1990s, I was
living in Latin America, I had fled from Yale law school knowing only that I was never practicing
the law. I was struck by how many young people aspired to government jobs. I didn't understand
this. And how many taxi drivers had Ph.D.'s in engineering. So I kept asking why is no
one starting a business? And it was explained to me that in Latin America and other emerging
markets, if you weren't from one of the top 10 families, there was no way that you could
start a company. No one would give you support, there were
no role models, no venture capitalists, no mentors, and then also they were seen as greedy
and corrupt. Why would you aspire to do that, anyway? I said no, no, no, I'm talking about
entrepreneurs, people who innovate, create jobs.
And I used the story about the computer. And people would say, "Nice story, but guys like
me, we don't even have a garage." So Endeavor was really set up to address this
issue. What we said was just like you said, if we wanted to be impatient, we would start
a venture fund and invest in three of these companies. But we wanted to build an ecosystem.
We said we are going to do something non-traditional. We're going to set up as a non-profit, of
by and for entrepreneurs. Not just any entrepreneurs, the high impact ones. The ones with the greatest
potential to scale, create job, create revenues. We said if we do our job right, these entrepreneurs
will not only change the way business is done in their societies, but they will give back
and make us self sustaining. Everyone said I was crazy. I was literally the chica loca
in Latin America. And here's where we are today. 15 years later, Endeavor operates in
17 countries, in Latin America, the Middle East, Europe, Asia, and Africa. We have screened
30,000 entrepreneurs. Certified 722 -- 450 companies. Once they become Endeavor entrepreneurs,
we help them build business plans, build advice reports, access capital, in some cases fire
their mother-in-law. Last year they generated $5 billion in revenue and 200,000 jobs, but
here's the more important thing. They are now becoming the mentors. They are now becoming
the angel investors. So in fact one of my favorite days at Endeavor was we were down
in Brazil, the editor of the Portuguese dictionary came to us and said because of our work, they
were going to add the term "empreendedor" into the language. So now there's something
that people can aspire to that has a positive connotation.
>>Andrew Ross Sorkin: And your investment -- one of the things that's so interesting
to me is you are now investing in businesses that you hope will turn a profit.
>>Linda Rottenberg: We are, yeah. >>Andrew Ross Sorkin: You are hoping they
will become an NPO and take that profit turn around and invest in other emerging businesses.
>>Linda Rottenberg: Yes, my colleague Bailey Kempner is here. We started something called
Endeavor Catalyst. It's actually acting as an endowment, so it's taking donor capital
and we talk about return on donated capital, RODC. And the idea is we are co-investing
in our entrepreneurs, raising $5 million from venture capitalists and we will use the returns
to make Endeavor sustainable and to go to the next countries where they don't yet have
an entrepreneurial ecosystem. >>Andrew Ross Sorkin: Okay. Leila take us
through what you do, because it's pretty crazy and pretty interesting.
>>Leila Janah: Sure. Just to tell you how I got started. When I was 17, I got a scholarship
from a tobacco company, from the Lorelei Tobacco Company. And I decided to use it and volunteer
in Africa. So I went to Ghana, in West Africa. I was assigned to a small school in a little
village. And I thought that I was going to go there and save the world. And yet my students
were incredibly bright. They spoke beautiful English. They could tell me the name of U.S.
senators, which by the way some of my high school classmates couldn't tell me. And I
thought this was the great untold story of poverty and development. There is a mass of
untapped human potential. I think this organization does a great job of addressing that. So I
studied development. I wasn't really thrilled with what I saw in the traditional aid model,
which is essentially that we view poor people as these passive recipients of handouts and
we don't really give them any credit. So I formed an organization called Samasource.
Sama means equal in Sanskrit. And we connect some of the world's poorest people, people
living on less than three dollars a day, to work via the Internet. This is a really interesting
business model that's only made possible by some of the recent advancements in the last
five years, Internet connectivity and thanks to Moore's law, really cheap computing devices
all over the world. There's one that launched last year, the $25, Raspberry Pie. So we've
taken advantage of this new infrastructure and this new connectivity to take people who
are living at the bottom, 4 billion on less than three dollars a day and connect them
to what we call microwork. We divide up big digital products, which are typically outsourced
like image tagging, like transcription, like captioning, captioning videos, and we send
that work to people living in slums and villages in poor parts of East Africa, South Asia and
Haiti. And today -- we started four years ago, we
paid out 3,000 people, so 3,000 women and youth who had never had formal work experience
before, have actually made this money doing real work for companies like eBay.
We've paid out 3,000 women and youth and we've also paid them over $2.5 million in real revenue
from for-profit companies. And I think what's so interesting about this new world that we
live in is that people are starting to realize that capitalism and charity don't have to
-- be this dichotomy that's existed for so long. People really want to embed the meaning
that they find in their charitable work on weekends and evenings and in the latter half
of their lives into their businesses. >>Andrew Ross Sorkin: So, for example, if
I am living I don't know where, you come to me and you say you're going to train me to
tag photos; is that how this works? >>Leila Janah: It's a little different than
that. If we did that, probably no one would want to work with us.
[ Laughter ] >>Leila Janah: So we work with local recruiting
partners. The work can be a little bit boring. But here's how we do. So we work with local
NGOs that operate in slums and villages that do things like training people in leadership
skills or teaching them how to save money. And those organizations become feeders for
us and they send people to our local partners. We have a network of 16, some for profit,
some non-profit entrepreneurs that operate existing computer businesses, internet cafes,
computer centers, in developing countries. These people then, as an agreement with Samasource,
hire poor people to do the work in exchange for us sending them the contracts that they
wouldn't be able to have access to in developed countries.
>>Andrew Ross Sorkin: So here's the question. Google is a client, if you will, or a partner,
right? Microsoft is a partner. Do they work with you so they can check off a box that
says social responsibility or social mission or something? Or do they work with you because
ultimately they're getting a good value for what you are actually doing?
>>Leila Janah: So this is a great question. At the beginning, my hypothesis was that businesses
would behave like consumers do. Consumers in many cases are willing to pay a premium
for socially labeled goods. Businesses, as I learned after starting my business, are
not. Businesses pay us to deliver good quality services, with competitive costs and competitive
turnaround times and we're competing with for-profit outsourcing firms. So what we have
found is that the social mission is really the icing on the cake. The good quality services
have to be there first and then all other things being equal, of course people would
love to work with us, they know that we're a non-profit.
>>Andrew Ross Sorkin: If you succeed, what happens when an entire village is tagging
photos and doing all sorts of things, realizes I can be an entrepreneur, and they get involved
with you. The price by the way all of a sudden goes up for you, so Google says, "I don't
know can I use you" or do I -- or do you consider that success?
>>Linda Rottenberg: But success is a good thing. Look in our case. We are seeing these
tech and other entrepreneurial ecosystems spawn up in Buenos Aires, in Amman, places
you would never -- Egypt after the revolution. In Greece now. These are places that you wouldn't
expect business to be happening and -- >>Andrew Ross Sorkin: You just started in
Greece. >>Linda Rottenberg: We just started in Greece.
>>Andrew Ross Sorkin: Very strange place to start.
>>Linda Rottenberg: I know. You call me crazy again. And I said when the economy looks down,
entrepreneurs look up. It's the best time to be in an entrepreneur in Greece. Chaos
is a catalyst. Chaos is your friend. But what's interesting is we looked -- we went to Argentina,
Jordan, Turkey, Brazil, we said all right. We want to investigate all of these start-ups
that are happening, why? We looked to the 200 start-up companies, too early for Endeavor.
We take companies, you know, one to $20 million in revenue.
We said we -- we asked them four questions. Number one, who inspired you? Number two,
who mentored you? Number three, who if anybody actually invested in you? Number four, did
you ever work for an entrepreneurial firm before?
5 years ago, there was no word, there was no company, there were no role models.
What happened is they started referring back to the companies. We started seeing patterns.
Three or four companies, some of our ex-entrepreneurs, have become the angel investors, the mentors,
the venture capitalists. When you take them away, the ecosystem disappears. So what happens
is it's like the PayPal Mafia effect or the Googlers, you can have a few entrepreneurs
paying it forward, it creates the next generation of a multiplier effect that happens very rapidly.
What you are doing at Samasource, we hope they will be the one that entrepreneurs would
help. Ours become the VCs. That's success --
>>Leila Janah: I have a great story. I just wanted to show you an actual worker if we
can bring up the slide. Just to show you how this ecosystem works. So this is a woman named
Jacquelyn (saying name). She's 25 years old, she's from rural Kenya. She's from a country
where the vast majority of people make less than two dollars a day. That's, by the way,
adjusted for purchasing power. That's what two dollars would buy you in the U.S. in 2005.
That's where they she lives. And yet 95% of people under 30 in Kenya can read and write
in English. She's one of them. So Jacquelyn came to us, then this next slide, shows you
what she's doing now. She came to us, she had never had formal work experience before.
She had to drop out of school because she didn't have enough money to afford the school
fees. And she got this job at one of our computer centers in Nairobi about a year and a half
ago. She made enough money to pay her rent, her single mom's rent herself and put herself
and her sister through school. That's how much more money you can make doing computer-based
work than doing basic formal employment. And then she left and actually the ideal scenario
is -- for us is for our workers to leave after six months or a year and earn higher paying
work in the for-profit private sector, because then we're not using non-profit funds to subsidize
people forever. And so I hope that some day she becomes an entrepreneur and works with
Endeavor. >>Linda Rottenberg: Actually one of my favorite
stories also grew up in the favela, slums of Rio, and her mom was a maid and her father
was a janitor and she got a job at McDonald's. She said, "You know what? Why can't I do this
franchising thing, but for poor people? Why can't poor people feel beautiful."
So she and her cousin Ziga started something called the Beleza Natural Hair Salon. We found
her when she had two salons. You think oh, that's a nice story. They had actually concocted
this product in their kitchen. Tested it on their husbands. The husbands' hair fell out.
We found them and there were like four hour and six hour waits at the salon, so we helped
them understand franchise and get mentors. And today Beleza Natural, it's a $75 million
business. They employ 1500 mainly women who grew up in the poor areas of Brazil, and she
wants to take on Loreal and starting a new hair clinic in Harlem. These are the stories
that if you tell them it's amazing, young kids sitting in these places today think,
I can do it, too. >>Andrew Ross Sorkin: When you think about
investing in these businesses now, you talked about not return on equity, you said return
on donated capital. >>Linda Rottenberg: Yeah.
>>Andrew Ross Sorkin: What's the threshold? Especially when you are doing it, I assume,
side-by-side with -- I don't want to say real venture capitalists, but venture capitalists
who want to make a profit. >>Linda Rottenberg: Yeah. Although we hopefully
get the terms better. Entrepreneurs are still getting unfair terms. We are being of, for
and by entrepreneurs. We are neutral. We don't set the valuation. We actually did a notional
fund. We said okay, what would have happened if looking back over 15 years we had done
this type of endowment that would invest in our entrepreneurs. The ROIC would have been
3x, 48% IRR. These are for an emerging market venture fund, that's great. The difference
is that when we hopefully become profitable, we can move on to the harder places. We can
actually create these ecosystems where we eventually we hope the venture capitalists
come. We hope one day we are not needed in Brazil, but we need an organization that kind
of creates the ecosystem in neutral way. >>Andrew Ross Sorkin: Hardest country so far?
What's the country you would like to conquer? >>Linda Rottenberg: We have Google. Let's
do Egypt, let's say Egypt. >>Andrew Ross Sorkin: I'm curious on your
end, in terms of most of the things that we talked about are low-skilled work. Is the
goal ultimately to raise the skill level? Meaning is that something that you want to
do or is that a different business? >>Leila Janah: I think that would be a different
business. Our goal is to tackle poverty. Right now there are so many people who can read
and write in English, who can do our work but just don't have access to it. And so many
companies have this work that's just sitting there that we could do.
So our first goal is to expand the number of people doing this low-skilled type of work.
And to Linda's earlier point, we look at a similar measure. We look at how many people
we are able to move over the poverty line and for much donor capital. What's so exciting
about businesses like ours, now you can track that. In the digital age, I can tell you for
a very limited amount of your funds, we can actually move somebody over the poverty line
and all of the evidence suggests that they don't go back to it once they've had formal
work and training. So our goal is to dramatically expand Samasource, and then I have a broader
vision for my organization, which is to become like the virgin of social enterprise. I think
that Sama could eventually become an incubator for various other social businesses that all
use technology to address problems related to poverty.
>>Linda Rottenberg: One interesting point that gets to your point about how we do business
and capitalism. I think you are hearing today these two non-profits who are using the tools
of the private sector, right? And we're aiming for profit, both with our businesses and ultimately
we want to be self-sustaining. And we're generating profits, just turning it back into ourselves.
But here's what businesses can learn from the non-profit world. It's something that
I call psychic equity. I think that so many times when you think that you have all of
these financial equity to give, you don't take -- you don't take the care to think about
the -- the ownership structure. When people are waking up every day, are they feeling
like they're making a contribution? I think these young people, these millennials, are
actually telling people they will take a tradeoff in salary, in the -- in the power they have,
to actually make a difference. And I think that comes --
>>Andrew Ross Sorkin: You think that's true? You think that's not just a good sound bite?
>>Linda Rottenberg: Yeah, I think they care about making an impact. I think companies
that tap into that, and actually make their profits but give people the sense of ownership
and psychic equity and un-silo things, I absolutely think if you want to retain young people today,
you have to. I do. >>Andrew Ross Sorkin: We're going to be talking
to some people after this, who have done something like that and have some interesting stories
to tell. On your side, after our lunch today, we were
talking before this session, you were saying that -- that you end up actually competing
against for profits. How does that work? >>Leila Janah: Well, it's tough, but we're
in a space that some people call it crowdsourcing that's now filling up with new companies that
are finding ways to create marketplaces for these basic what are called human intelligence
tasks. Amazon runs one called Mechanical Turk, we used to share office space with a firm
called CrowdFlower, which also does what we do. So we're in a competitive industry. Actually
many non-profits are in a competitive industry. >>Andrew Ross Sorkin: What's the most advanced
thing that I could come to you for right now? >>Leila Janah: Writing content. Writing content
for your website. Maybe not the kind of content that you write, but --
[ Laughter ] >>Andrew Ross Sorkin: What kind of content
are you talking about? >>Leila Janah: So, you know, Captioning an
image or a video. We do -- we do a lot of really short form content, so answering questions
that, you know, communities online don't want to answer. Maybe fact checking for news stories.
So all sorts of content writing and basic tasks that are in this category of basic human
intelligence work. So requiring literacy and a little human ingenuity.
>>Andrew Ross Sorkin: Do you buy this assertion, Linda's assertion on sort of social mission
in this generation? I think we're all part of the same generation, and I have to admit
I'm a little skeptical. >>Linda Rottenberg: It's not social mission.
We actually did a study and in fact, companies that are aiming for profits scale faster.
I'm not saying that companies should become Ben & Jerry's with that mission or talk with
their social. In fact, people who see trade-offs who say
they're going for social profits oftentimes have a hard time scaling. That's all I'm saying.
Psychic equity, I think it's about making people feel that everything they do has an
impact and that your business is making a difference in the world.
>>Leila Janah: I buy it and here's why. The Internet has dramatically broadened our circle
of empathy. No longer is a woman in a slum in Kenya someone who doesn't deserve the basic
human dignity that we can afford to provide her.
And I think that as the world shrinks more and more people who graduate from college
are looking for meaning in their jobs and they don't want to relegate meaning to weekends
and after hours nonprofit work. They want meaning to be central to what they spend the
majority of their time doing. That's certainly why I started my organization. It's why we
run what I call an investment banker reform program. We get a lot of consultants -- not
to insult any investment bankers in the room. We have a lot of people who used to work at
McKenzie and Goldman and they said, you know, I've spent my time the last three years making
lots of money for the man and now I want to do something for mankind. And I see that as
a broad trend that is shaping my industry and many others.
>>Linda Rottenberg: Can I say one more thing about your original question and about the
patience? When we started out no one believed there
were any of these entrepreneurs in emerging markets. So what I used to say when people,
including my parents, didn't know what I had done, I had gone to law school and gone into
retirement, they thought. I said, you know, what we're doing is bottling
up the magic of silicon valley and putting it in places where there's ideas, but there's
no support. That's what I'd say. And today I'm asked so many times on college
campuses to do the inverse. I say now that people in Jakarta and Rio and Istanbul may
believe in the American dream more than our own kids do. And people are saying, Look,
there's no stability. I can't become an entrepreneur. IT's too scary out there. What will happen?
And I think if we bottle up this energy that half the Fortune 500 companies today were
founded in periods of downturn and this idea that in fact when the world is a bit chaotic,
you have to think in the longer term, you have to be more patient, and it's the best
time to start something up. Because the idea that we're creating this
risk averse generation I think can be overturned with examples of people in the for-profit
and nonprofit worlds that are trying to make change.
>>Andrew Ross Sorkin: On that very promising note we're going to leave it there.
Thank you to both of you, Linda and Leila. This was tremendous. Thank you, thank you.
Are you ready? It is now my honor -- I apologize. It is now
my honor to introduce not only a great writer, but a friend. Charles Duhigg -- and a colleague
by the way. Charles Duhigg is an author and colleague of mine at the New York Times Company.
He is the best-selling author of the Power of Habit. I promise you he will blow you away.
Why -- the subtitle -- I'm trying to sell your book. They get it for free. Why we do
what we do in life and business, which explores the science of habit formation in our lives.
I should also note if you don't read what he's doing in the "New York Times," you should.
He runs this really a series that we've been doing called the iEconomy which has been a
series examining Apple's manufacturing in China, many of you have seen it, the challenges
of the patent system and many other things, including tax strategies. It's off the charts
awesome. I wish you luck, Charles. >>Charles Duhigg: Thanks so much. Thank you
all for inviting me to join you this afternoon. I'm a reporter at the New York Times and the
author of this book the Power of Habit, which will hopefully come up in back of me at some
point. If you're familiar with this book it might
be because you read a piece in the "New York Times" magazine about how Target was studying
shoppers' habits in order to determine if some of their female customers were pregnant
or you might have seen a piece in Sunday in the paper about how the Obama and the Romney
campaigns were studying voting habits in order to try and entice low propensity voters into
the booths. But what I want to talk to you about today
is I want to talk to you about a product that you might not have heard about, or maybe some
of you have, named Febreze. And I'm going to admit at the outset that
I'm going to try and trick you. Because what I'm going to try and do is I'm going to try
and convince you that we are living through this golden age of understanding the science
of habit formation. We're learning more and more about how habits work, and the same things
that made Febreze into a hit that you can use within your own companies or within your
own lives to make the world a better place. So you can tell me at the end if I'm actually
successful at this. And in order to do this I first have to start
by telling about a rat. So about a decade ago there was a woman named Dr. Ann Graybiel
at MIT who is a neurologist, and for years she had been doing experiments to try and
get sensors into the craniums of rats so she could measure what was going on inside their
heads as they went about their daily business. As you can imagine it took a long time and
a lot of rats to figure out how to do this, but eventually she got to a point where she
could get about 150 sensors into a rat's cranium. And she would do the same thing with every
single rat. After the surgery she would take them and put them in the world's simplest
maze. This maze works the same way every single time. There's a click, the partition moves
and the fat is free to move up and down. Now if anyone has ever done this with a rat,
what you know is when you drop a rat in a maze like this it looks like the world's stupidest
animal. The rat will run up and down the center aisle and sniff and scratch. When it gets
to the end it will actually see the chocolate and then go the opposite direction.
This is actually one of the reasons why rats are used in experiments is because it's considered
that if you can teach a rat something you must be able to teach any animals anything.
So she would do this experiment, but for the first time she was able to see what was going
on inside the rat's head. This is a simplified neurological graph of the first time that
a rat is dropped in this maze. What you will notice is that its brain is
actually working hard the entire time. So when the rat would scratch on the walls, the
scratching centers would light up, when it would sniff, the sniffing centers would light
up. It's actually trying to process as much information as possible. This is what learning
looks like. So Dr. Graybiel takes the rats, each one,
and drops them in 100, 150 times. And as imagine, over time the rats learn how to navigate through
the maze faster and faster. Click, the partition moves, the rat will make a beeline to the
chocolate and it actually becomes a habit. But what's really interesting is Dr. Graybiel
sees for the first thing what is going on inside the rat's cranium.
As the rat gets faster and faster, as the habit to find the chocolate becomes stronger
and stronger, the rat essentially thinks less and less and less.
This graph at the bottom is a simplified neurological graph of the 150th iteration of a rat running
through a maze. And that dip you see right there is the same dip that you would see if
a rat went to sleep. There was a scientist at Duke University a
couple of years ago who did a study to try and figure out how much of your day was habits.
She followed a bunch of people around and found that 40 to 45% of the actions we take
everyday aren't really behaviors. They're actually just habits.
And if I could somehow stick 150 sensors into your head which I would not recommend, then
when I saw you backing your car out of your driveway or walking down the hall muttering
to yourself or making automatic decisions, I would see your brain looking like this.
But what's interesting is if you notice there's these two spikes in neurological activity.
When there's the click we see a burst of neurological activity and then essentially the brain almost
goes to sleep. Then the rat finds the chocolate and it's if as the brain sort of wakes itself
up again to pay attention to what's going on.
This is the neurological signature of a habit. This is what we've discovered in the last
six years. And this is so important that it's become
enshrined in psychology and neurology as what's known as the habit loop. We now know that
every habit has three components. There's a cue, which is like a trigger for an automatic
behavior to start, and there's routine which is the behavior itself, and finally a reward.
And the reward is how your brain, and in particular the part of your brain named the basal ganglia,
learns to remember this pattern for the future. For centuries when people thought and talked
about habits they always focused on the routine, on the behavior, but what we've learned is
it's actually the rewards and the cues that shape how habits work. That's how we influence
how people behave on the most automatic, almost subconscious level.
Just to give you an example let me tell you about an experiment that was done in Germany
where they took about 700 people and they wanted to get them to exercise. So they took
one group and told them to choose a cue, like go running at the same time everyday or always
put your clothes next to your bed. And they told them when they got home from working
out they should eat a small piece of chocolate, which of course is counterintuitive because
we all exercise to lose weight, not to eat chocolate.
But what they found -- and the reason why they found this is that people who did this
exercised twice as much habitually as other people, and the reason why is because you
might think that you want to exercise, but your brain thinks that you are a dirty liar
and that you hate exercise. And so in order to convince your basal ganglia that you should
actually form this habit, you have to pair the activity with a reward you generally enjoy
like chocolate. Over time your brain will learn the endorphins, the endocannabinoids,
the neurotransmitters that are released by a physical activity are a pleasurable sensation
and you'll start exercising habitually more on your own.
But as I mentioned, the reason I'm telling you about this is because I want to talk to
you about Febreze. Does anyone in here use Febreze? Is anyone a Febreze customer? So
Febreze, for those of you who don't know what it is, is this chemical that I cannot pronounce,
but the initials are HPBCD, that was discovered about 11 years ago by Procter & Gamble.
This guy who was a smoker was working in the lab one day and he used this chemical and
when he got home he noticed that he didn't smell like cigarette smoke anymore.
What he figured out is this chemical, if you aerosolize it you can spray it on to fabric
or other things and it will draw out the molecules, the scent molecules, and as it evaporates
the scent will essentially disappear. This was a huge deal for Procter & Gamble
because for years consumers were saying they wanted some product that would not just mask
bad smells, but make them disappear. So this guy goes to his boss and says, "I think I
can make this into a product," and they give him seven and a half million dollars and three
years later he comes up with Febreze, this product that they're going to sell.
The executives turn around and say we need to give this to one of our marketing teams
because we think we can make a gazillion dollars off of this.
So they give it to this guy named Drake Stimson, a mathematician on Wall Street. He has a whole
bunch of psychologists, consumer psychologists working with him, and they come up what they
think is a brilliant advertising campaign. It's modeled around a habit loop.
The cue is going to be if you have a bad smell in your life you will spray Febreze and it
will get rid of the bad smell and everyone's gonna get rich.
So they make a couple of test ads because they wanted to test this out and they actually
showed them in three markets, including here in Scottsdale, this was one of the test markets.
Let me show you one of them. >>> Guess what the kids call dad's easy chair?
>>> The stinky chair. >>> I have a stinky chair problem, too. His
name is George. >>> Now there's a way to get bad smells out
of fabrics for good. It's called Febreze. It's new. And you won't believe how many places
you'll find to spray it. >>> Febreze will clean fabrics in a way you
never could before. >>> It's not just covering up the smell.
>>> Exactly. Just spray Febreze. Its patented cleaning system finds the smells trapped in
fabrics and gently cleans them away as it dries.
>>> Once it's dry the smell is gone for good. >>> Febreze? Check the laundry aisle.
>>> Check this out. >>> It's safe from dress blues to teddy bears.
Febreze cleans bad smells out of fabrics for good.
>>> I wonder if they'll call it the sleepy chair now.
>>Charles Duhigg: What I like about this ad is you forget that the late '90s had a visual
esthetic until you see it in that old commercial. So they did this ad and this ad actually won
awards before it even aired. This was considered a model for explaining a new technology to
consumers. You watch this thing and know what Febreze does. It's pretty clear.
They roll it out in the three test cities, they send people tons and tons of free product.
Actually, Drake Stimson told me that they were so certain they were going to knock this
out of the park that one afternoon everyone wrote down a list of what they were going
to buy with their bonus, and he wrote down that he was going to buy a Ferarri and a Ferarri
for his girlfriend. It was the height of like "I'm going to be successful."
And he never bought the Ferarri. It totally flopped. Febreze was actually the largest
flop in Procter & Gamble's history, a company that's been around for over a century. They
had spent more money trying to get Febreze into a product than anything else and nobody
brought the stuff. In fact, they considered killing the product altogether.
So Stimson goes in and says, Look, give us one more chance. We just want to figure out
what's going on here, And he gets this team and they come out here to Scottsdale and they
interviewed customers who had gotten free bottles of the stuff.
In particular the dime dropped for them when they interviewed this one woman who owned
a couple of cats. Now, I don't know if anyone in this room owns any cats. Go ahead, raise
your hand if you own cats. A couple of people. You know cats have a certain
scent about them, you know, you grow to appreciate. This woman owned a huge number of cats.
[ Laughter ] >>Charles Duhigg: In fact, she owned so many
cats that when the researchers walked into her house one of them started gagging when
he went into the living room because the scent of cat was so overpowering.
But what was weird is this woman is kind of a neat freak. Everything was fine except for
the smell of cats. So they sit down with her and they say, "we
sent you some bottles of Febreze. Have you used it?"
She says, "Yeah, I used it a couple of times." And they say, "would you ever use it for the
cat scent?" And she says, "A couple of time I've used it for the cat scent."
And the guy who was gagging says, "what about right now? Would you consider using Febreze
right now for the cat scent?" And she kind of smiles and says, "you know,
I don't like to brag, but I have the best cats. They hardly ever smell." Which is of
course when the team realizes what's going on, which all of you know, which is that if
you have bad smells in your life, you become desensitized to them.
They had built this entire advertising campaign around bad smells, but people who have bad
smells don't know that they have bad smells, right?
We spent our entire seventh grade year being in fear of the fact that we smelled bad and
couldn't tell. You were right, you smelled terrible and you had no idea.
So as a result none of the marketing worked because the cue was something that people
can't notice and the reward is meaningless if you don't know that you have a problem
in the first place. So they all go back to Cincinnati where Procter
& Gamble is based. They go to the lab. Now, Procter & Gamble has the largest library of
videotapes of people cleaning their homes on earth. This is stock footage because P&G
won't let me show any of the tapes. They started by watching videotapes of people
vacuuming their home, and what they noticed is this one woman in particular would start
in a corner and she would start vacuuming backwards like this, and when she was done
she would go back to the beginning and she would line up the wheels so they were exactly
parallel, and then come back so there were these even grooves on the carpet. And then
when she was done with the entire carpet, she just kind of looked at it and, like, smiled.
And then -- I'm going to show you my favorite photo of all time. Because there's nothing
I like more in the morning than having some special time with my daughter cleaning the
mirrors throughout our house. I usually do my hair before we break out the scrubber.
This is obviously a staged photo. But what they actually found when they were
watching these tapes is that people had this ritual. When they were cleaning a mirror,
they would spray the mirror with a spray and then wipe it like this. And then and then
look at their reflection and smile at themselves. But you're laughing because you've done this.
You know exactly what I'm talking about. What they realized, but nobody had really
paid attention to before, is that cleaning had its own habits, cleaning had its own rituals.
They figured out to sell Febreze, they could piggyback on existing habits rather than trying
to create a new one. They go back and come up with an entire new market campaign that's
built around a habit loop. This time it's when you're cleaning, at the end of your cleaning
ritual, pull out the Febreze and spray it so that you can make things smell as good
as they look, which, of course, there's no reward there, because Febreze destroys scents.
So they went back into the laboratory and they spent another $3 million inventing a
perfume that was strong enough to withstand the chemicals of Febreze so they could pour
it into the bottles. Then they go back to the same test markets, and these are the ads
they run. [ Video. ]
>>> (Bell chiming.) >>> Get your fix of freshness. Febreze. Anytime,
anywhere, it's a breath of fresh air. >>> Mm.
>>> Shouldn't I be the one on the couch, doctor? >>> No!
>>> Get your fix of freshness. Febreze. Anytime, anywhere, it's a breath of fresh air.
>>Charles Duhigg: Here's what I'd submit to you, if you came over from China and you saw
these ads and you had never met an American, you would think that we were a country that
gets sexually aroused by smelling fabric and that Febreze is a fetishist product that's
designed to apiece that. Also mention one other thing. The second ad
it's clear what's going on. She's a psychiatrist. When they show that ad, when Procter & Gamble
shows that ad on the coasts, everyone knows what's going on. When they show it in the
middle of the country, it totally flops. People have no idea what is going on in that commercial.
[ Laughter ] >>Charles Duhigg: Anyway, they roll these
ads out in the test markets and then they end up going national with them. And it's
a hit. Within the first year, Febreze sold $200 million worth of product. Today, Febreze
is one of 13 Procter & Gamble products that's a billion dollar a year product. Procter & Gamble
has hundreds of products. Only some of them sell a billion dollars a year, and Febreze
is one of them. And if you asked them why, they will tell you because of these ads, because
they created a new -- they piggybacked on an existing habit instead of trying to create
a new one. In fact, the campaign's been so successful that now, a decade later, if you've
seen the ads for Febreze lately, they blindfold people and they take them into these rooms
that are disgusting, and they can't smell anything. For the first time, Febreze can
actually admit to people what the product does, which is, it kills bad scents, instead
of advertising it as the most chemically advanced air freshener on the face of the planet.
But the reason I'm telling you this story is because you can grasp this understanding
of how habits work, I think to make the world a better place. To give you an example of
this, let me just tell you really quickly about Starbucks. Starbucks has this basic
problem, which is that they sell customer service; right? They kind of nominally sell
coffee. But what they actually sell you is someone smiling when you walk in. To do this,
they have to hire thousands and thousands of people who are 18 years old who have never
had a real job and get them to deliver customer service. What they found was that a whole
bunch of people at the beginning of the shift could do a really good job of greeting a customer,
and at the end of the shift, they'd be exhausted and if a customer comes in, they're rude,
they're rude back or they get drawn into workplace drama. This became a problem for Starbucks
because they had a couple of incidents. Let me show you a tape of one of them. And before
I show this to you, just imagine that you work for Starbucks; right? You spend as much
as sometimes $100 million a year on advertising. You work really hard. You miss dinners with
your kids. But you believe in Starbucks. You believe in teaching the brand, that this is
a place you can come and relax. You come home, you turn on the television, and this is what
you see. >>> She was a loyal customer of Starbucks,
loved the coffee, loved the service. But that changed a few weeks ago. This native New Yorker
got steamed not by what was inside her cup, but something written on the outside. That's
when she called our Nina Pineda and ordered a special brew of fully caffeinated 7 On Your
Side. >>> And then when you looked at it, what did
you think? >>> I was shocked. I didn't understand why.
Why would they do that? >>> Vickie Reveron is talking about this Starbucks
cup. On the side, a Starbucks employee wrote what she ordered, a Carmel Frappuccino. Instead
of writing her name on the side, she says he wrote the "B" word.
>>> It says (beep). My name is not (beep). It's Vickie.
[ Laughter. ] >>Charles Duhigg: So have you ever casually
wondered what $100 million in advertising sounds like going up in flames all at once.
It turns out it's, "My name isn't beep, it's Vickie."
This is a huge problem for Starbucks. Howard Schultz, who had just returned to being the
CEO of the company after being chairman, calls together all his executives, because they
have to solve this problem. And the way that they solve it is, they decide that they have
to increase workers' willpower. And to do that, they have to teach them new habits,
willpower habits. One of my favorites is, in fact, something
that they teach in their training manual called The Latte Method. And this is what it is.
They tell employees, when an angry customer comes in, that's your cue. And you use "latte,"
right, which they chose because it's Starbucks. Which is, you listen to their complaint, you
acknowledge their complaint, you thank them for complaining, you take care of their complaint
by giving them a new cup of coffee or whatever they want, and then you explain why this will
never happen again. Now, I have a four-year-old at home. I'm sure
many of you have children. If I could teach my son that when I come up and I'm angry at
him, he should listen to Dada's complaints and acknowledge, Dada, I understand that you're
upset with me, and thank me, Dada, for yelling at him. If I could teach him The Latte Method,
I think this kid would go on to be president. And, in fact, in the book that you'll get
tonight, there's actually the story of Travis who is this kid whose mom was a prostitute,
and his dad, the first time he saw him overdosed on heroin, he was seven years old. And he
dropped out of school, and he got a job, actually, at McDonald's that lasted three hours because
a woman came in and he thought she was rude to him, so he took the McNuggets out of her
box and threw it at her head. This is a kid that, basically, life had failed and was destined
to be kind of a failure himself. And then he started going to Starbucks, and he learned
these willpower habits. And I actually talked to him a couple weeks ago. He's the manager
now of two Starbucks, and he oversees about 60 employees, about $1.2 million a year in
revenue. He just signed his first mortgage. I guess the reason I'm telling you about this
is because I genuinely believe that the companies you work for, if you learn this science, if
you try and share this science with your employees or with your customers, with your families
or with your coworkers, you have this capacity to change lives. We understand now how habits
work for the first time. When you teach people to diagnose the cues
and the rewards in their life, you give them this tool to change these small patterns that
they feel powerless against otherwise, including all of us. And I hope that this is something
that is useful to you as you strive to make the world a better place.
Thank you so much. [ Applause. ]
>>Andrew Ross Sorkin: When you think about glasses and when I think
about whether I'm going to go buy a pair of glasses, how important is it to the business
that you actually donate another pair to someone who needs one?
>>Neil Blumenthal: So our research has shown that for the consumer to actually buy the
glasses, it's actually not that significant. So when we've done focus groups, interviews,
surveys, when we've observed people buying glasses, the most important thing is how those
glasses look on their face. So when we describe ourselves, we're a fashion brand. We're a
lifestyle brand that designs beautiful eyewear, because that's the foremost reason why people
buy glasses. Second, they think about price. Third, they
think about quality and service. And fourth, if at all, our social mission. That's not
to say that our mission, which is to transform the optical industry and to demonstrate that
companies can scale, can be profitable, and can do good, but it doesn't necessarily sort
of help us make that first sale. The strong business rationale helps us retain
and recruit top talent. It helps keep us motivated and excited every day, and we think that it
helps customers be more loyal and perhaps more likely to tell their friends, but we're
not sure that it helps them actually make that first purchase.
>>Andrew Ross Sorkin: Okay. But when you started the company, why did you decide to do it this
way? >>David Gilboa: I think all of us on the founding
team, Neil and I and our two cofounders, were just really passionate about creating an organization
that did something good in the world. And we saw this massive industry, $65 billion
worldwide, that really hadn't had any innovation. And we had the opportunity to disrupt that
industry, provide great value to consumers. And that was exciting to us. But we also just
wanted to make sure that we created an organization that we were excited by just getting up and
going to work to every day. And we wanted to just do something good in the world.
>>Andrew Ross Sorkin: Okay. But you have some big-name investors, some of whom are in this
room, who probably don't traditionally invest in fashion companies and who I imagine can't
really be thrilled that you're buying carbon offsets and giving away glasses.
>>David Gilboa: We think kind of everything we do on the social mission, whether it's
being carbon neutral as an organization, distributing a pair of glasses for every one that we sell,
getting involved in the community, investing in our employees through executive coaching
and a bunch of other things that certainly add to the expense portion of our P&L actually
enhance our brand. They allow us to attract and retain the most talented employees. They
allow us to build closer relations with customers. And at the end of the day, they make us be
a better business that is going to generate positive returns for those investors that
are motivated purely by financial returns. >>Andrew Ross Sorkin: Jeremy, the same question
to you. Look, the sweaters is gorgeous. The tee shirts are gorgeous. You're wearing one
right now. If I was going to buy one, I think I would buy it because of how it looked. But
you guys have a whole other ethos that's part of this.
>>Jeremy Moon: If we go back to that kind of chance discovery for me, I met a farmer
who gave me a tee shirt from wool, which I hated because I had to wear it when I was
a kid, and I was so shocked because it didn't itch. But then I got into it, and I discovered
that it was superior to the other products out there, because it was renewable, and it
felt soft and it let my body breathe. And I started doing sports in it with my friends.
And when I got into the outdoor industry, I realized it all was made out of plastic.
Every brand which was about connecting people with nature was using petrochemicals, polypropylene
or polyester. Here was this kind of undiscovered fiber which had just been ignored. It was
this brand-new idea that was 5,000 years old. And it just needed to be packaged.
So I started off wanting to build a sustainable product, but when I spent time with the farmers
and in the manufacturing, I really tried to focus on building a sustainable company, because
I didn't want to just make clothes. I didn't want to build a fashion company. I wanted
to build an alternative to -- based on something real.
My thought was, in an age that's becoming increasingly unreal, the value of what is
real goes up. And I think that's kind of behind some of these amazing founding stories and
these new birth of businesses that are being born, you know, recently.
>>Andrew Ross Sorkin: I want to go back to Warby Parker for a second.
I want to talk about glasses, the business of glasses. We're going to put the social
mission aside. We'll come back to it. Glasses are typically ridiculously expensive, couple
hundred dollars a pair, if not more. You sell them for $95. How?
>>Neil Blumenthal: The big thing is, when you look at this industry, it's dominated
by a few large players, one of which is Luxottica, an Italian company that is basically vertically
integrated. So over the last 30 some odd years, they've been able to acquire every major company
within -- >>Andrew Ross Sorkin: But am I wrong in saying
virtually every major either glasses or sunglasses company, whether it's Ray-Ban to you name
it is them? >>Neil Blumenthal: Exactly. So they own Oakley,
Ray-Ban, Oliver Peoples, Persol, Arnette. They license every major fashion brand: Ralph
Lauren, Chanel, Prada, you name it. They own LensCrafters, Pearl Vision, Sunglass Hut,
Sears Optical and Target Optical. And then the icing on the cake is, they own the second
largest vision insurance plan in the country. >>Andrew Ross Sorkin: People talk about regulating
the tech industry. I don't know about maybe the glasses industry.
Okay. >>Neil Blumenthal: Our thought was, what if
we could design the frames that we love, use sort of materials that, you know, we were
accustomed to buying but work directly with the suppliers and then sort of bypass the
industry, bypass the middleman and go direct to consumers by selling online. And with that,
we could cut -- sort of basically sell the same product but for a fourth of the price.
>>Andrew Ross Sorkin: What kind of margin are they getting and are you getting?
>>Neil Blumenthal: Typically, glasses are marked up between ten and 20 times.
And when you look also at the retail level, often those margins are 3 to 5 X whereas typical
apparel or accessories is two to two and a half X. We're able to give all that sort of
retail markup to consumers. And because we developed our own brand, we're not licensing
a brand, that licensing fee we're able to give to consumers.
>>David Gilboa: Essentially, we're able to offer a product that normally costs $500 for
$95 by cutting out the licensing fees and all the middlemen.
>>Andrew Ross Sorkin: This is only a two-and-a-half-year-old company, for those who don't know about it.
But those who do, it is a strong brand that actually means something.
What did you want it to mean and how did this happen in just such a little time period?
>>David Gilboa: So we really wanted to design just glasses that we loved. I lost a pair
of glasses. They cost me $700. And I couldn't figure out why glasses cost more than an iPhone
or an Android phone. And so we -- we decided, you know, to -- We realized that we could
create our own brand that really stood for beautiful design, convenience, but at a great
price point for customers. And then we wanted to build a business that did something good
in the world. And we think it's an inherent good to offer a product that normally costs
$500 for $95, but wanted to think about all the stakeholders that we touch. So our employees,
the environment, close to a billion people around the world don't have access to eyeglasses,
and they can't function the way that all of us do.
>>Andrew Ross Sorkin: Why do you think nobody did this before? Why -- like, why did nobody
else try to undercut Luxottica? >>Neil Blumenthal: I think you see most disruption
is caused by outsiders. It's not the insiders. They're sort of benefiting from the status
quo. We were consumers. We had that experience walking into an optical shop, getting really
excited about a pair of glasses, and walking out feeling like we got punched in the face.
And we sort of -- We knew what it actually cost to manufacture glasses. I used to run
a non-profit that would train low-income women in the developing world to start their own
businesses actually selling glasses in their communities. And one of the things that we
found is that people would rather be blind than wear a donated pair of 1970s cat eyes,
because you just -- you'd look ridiculous. And, frankly, fashion matters no matter where
you live in the world. You don't want to be ridiculed by your neighbors and friends. I'd
see coming off the production line glasses that we were selling in Bangladesh and parts
of rural India alongside some of the biggest names out there, Marc Jacobs, Lanvin, you
name it. >>Andrew Ross Sorkin: Jeremy, you just said
something really interesting before. I don't know where you want to go.
>>Jeremy Moon: Well, I just want to jump in. The rules of business have changed. So I started
Icebreaker 16 years ago. And I had to go around with my samples and say, look, it doesn't
itch, and get people to wear it. And it was bit by bit. Now you don't have to do that.
If you guys wanted to start a business 16 years ago or even ten years ago, you had to
be -- you had to be a wholesaler. You couldn't afford to open your own stores. There was
no online commerce. So the rules of business have totally, fundamentally
changed. And now, as a traditional wholesale company, we can have our own stores. We've
got ten stores in the U.S. We can have an online business. We can supply thousands of
outdoor stores around the world. And we can do it all at once. So there's a massive scramble
going on at the front-end which is creating a total rebirth of what these business models
are. >>Andrew Ross Sorkin: You said something interesting
to me, because it was directly opposite what he just said, which was that you don't think
of yourself as a fashion business. Why not? >>Jeremy Moon: Well, companies are defined
by their founding moments. And for me, it was about wanting to create a natural alternative
in an age of synthetics. And synthetics for me meant stuff which was disposable. So, look,
I'm no purist here. I fly on airplanes. I wear Gortex. But I didn't want to wear polyester
and all those fabrics that stunk -- I need some Febreze -- and all the problems that
were associated with it. So any people in the outdoor industry would know the downside
of them. So we kind of want to be the opposite. So
when I launched Icebreaker, the brand was about people in nature, it was about men and
women. It used to be only about kind of sweaty men climbing mountains. So we wanted to redefine
what the outdoor industry was about. And also, we wanted to make products that lasted. So
I wanted products to last for five or seven years. Our products have styling, but they're
not fashion. I want them to look good with what you want to wear in three years. So we're
trying to build in values. So our product is more expensive than a typical outdoor product,
and I think it's better valued, because it lasts longer and you can do more in it.
So it depends what you optimize for. So we're optimizing for long-term customer value, not
short-term value. >>Andrew Ross Sorkin: Let's talk about the
future of retail a little bit. You started your business, as he just said,
online. And in many ways, you're going backwards; right? You're starting stores now. You're
starting your first store in New York City. What's that about? Does it have to happen
that way? >>Neil Blumenthal: We do think the future
of retail is some intersection between bricks and mortar and e-commerce. When we were thinking
about business, the thing that we couldn't sort of get over was, would people buy glasses
online if they couldn't try them on first. And that was sort of -- we would have sort
of countless nights sort of talking, sort of trying to figure this out. And we came
out with this idea to do a home try-on program where people could select five frames, we
ship it to them free of cost, and they have five days to try on those glasses at home
before actually purchasing and before we put the prescription lenses in and ship it to
us. We thought that would sort of eliminate the barriers to purchase, it would help reduce
return rates and -- when somebody scratched the lenses. The lenses are sort of part of
the cost of goods sold. What happened is that when we launched, we
launched to features in Vogue and GQ, and the company just took off like a rocket ship.
We hit our first year's sales targets in about three weeks, sold out our top 15 styles in
four weeks, and had a wait list of about 20,000 people. And we had to immediately shut down
the home trial program. And people started calling up and saying,
"Hey, I heard you're in Philly." At the time, we were full-time students at Wharton. "Can
we come by your office?" And we said, "You can come by our apartment."
And people would come in, and we'd lay the glasses on the dining room table. And at first
we thought this was going to be a very suboptimal experience. But what we found was it ended
up being a very special experience, because these customers had a chance to meet the people
behind the brand, which is pretty rare these days. And we sort of created these amazing,
like, super advocates. So when we moved back to New York and set
up our office, we set up a showroom in the office. We've now moved on to our second office
where we have a showroom. And about 600 square feet. Last month, we did over $220,000 worth
of sales, you know, selling a $95 product on a sales per square foot basis, there's
only, like, two retailers that are really beating that, like, Tiffany's and Apple.
So we now had sort of the customer service component, like, wow, this sort of helps.
And that we can do it profitably, why not try to experiment and do this in other ways.
So we partnered with some sort of cool boutiques around the country that sell, you know, many
leading sort of contemporary apparel lines and we'll rent sort of a wall from them to
display our glasses and pay for a staff person there to take people's orders on a tablet,
runs actually through our Web site. We ship it to them. And now we're opening up our first
flagship store right on Prince and Greene in Soho, next to Ralph Lauren, across from
Apple, because we think that this will help sort of really anchor the brand, because there's
never been a major fashion -- >>Andrew Ross Sorkin: Is the dream of online
only, of online only retail, is that dead? I mean, does there have to be -- maybe you
can speak to this. Does there have to be a touch component, as Apple proved, that people
want to actually touch the stuff? >>Jeremy Moon: This is my position at the
moment. So we're selling in 40 countries. And 80% of the business is still wholesale.
But I know, you know, that my role is to learn what's -- I need to change about myself and
about my company; right? So it's -- the next five years is about changing that percentage
to at least 50% direct. We just see this triangle: Wholesale at the
top. The role of wholesale is to give everyone the first touch. The role of retail is a high-touch
personal experience. The roll of online is, obviously, convenience and depth of storytelling
and repetitive. So there's harvesting and nurturing, which is more the online. It sounds
like I know what I'm doing. If you know what you're doing, can you help me?
[ Laughter ] >>Jeremy Moon: It's a work in progress; right?
But I've got a clear vision of how we need to evolve the brand and the model.
Can I just pull up one slide? >>Andrew Ross Sorkin: Go for it.
>>Jeremy Moon: So the company's a little bit different, because this is our fiber factory.
So it's not a normal sheep that sits there eating grass. And he lives in the Southern
Alps. If you go to the next slide. So we buy about -- if you go to the next one.
We buy a quarter of the merino wool, which covers 2 million acres.
Now, if I can tell that story to my customer, they realize they're not just having some
mass-produced product. There's this whole kind of back story about a product that's
born in nature. And if I can't show them that, I'm just another tee shirt guy.
I'll show you a final slide. So the whole thing, then, is about transferring
that story into stuff that you can wear. But I want people to actually feel that experience.
Now, in the wholesale environment -- and I've got that much of REI -- you can't do that.
In your own retail stores, like in Soho, we're around the corner, or online, you can do that.
So it's actually coming about storytelling vehicles. The thing is, the stories have to
be true. And the founding stories that you're telling are what people connect with. There's
this new age of storytelling being born. >>Andrew Ross Sorkin: In the last session
with Leila and Linda, Linda in particular talked about -- and Leila, both of them did
-- this sort of new generation of social purpose and social mission. And I wanted to end on
this issue, which is profits. When you think about your business, is there
a cap on profits for yourself, either a salary that you take, the way you think about the
business? You obviously -- Everybody here is involved in a sustainable business. How
do you think about that issue? >>Neil Blumenthal: Do you want to take that?
>>David Gilboa: Yeah, I mean, we actually take probably the opposite point of view,
where we're out to prove that a business can be scalable and really profitable while doing
good in the world. And so we don't think that organizations should have to make a choice,
and that the next great brands of our generation are going to be built, you know, as businesses
that solve real problems and create value for customers, but also do good in the world.
And -- >>Andrew Ross Sorkin: But let me ask, Neil
was saying to me during lunch that a lot of the people that have come to work for you
come to work for you because of the social -- the social mission. That is the purpose.
>>Neil Blumenthal: Absolutely. >>Andrew Ross Sorkin: If they see this company
making billions of dollars -- God bless you if you do -- how does that change the dynamic?
>>David Gilboa: I think it's all about the impact that we have. And we try to be really
transparent. And, you know, I think both our employees and our customers are demanding
transparency and authenticity. And so as an example, last year we published an annual
report which wasn't like a typical annual report. It was pretty sparse on financials.
But we gave people an inside view on the impact that we were having and kind of little tidbits
about our team, you know, the breakdown of the types of bagels that we eat at our weekly
team meetings, and -- we -- we just wanted to kind of provide a window into how our company
operated. And that was tweeted out thousands of times and it drove our three highest consecutive
days of sales and drove an engagement between us and our consumers. And I think just millennials
in general want information. They want to understand the impact they're having. And
we want to provide that to people in our organization and people outside of our organization.
>>Andrew Ross Sorkin: Jeremy, I'll leave you the last word.
>>Jeremy Moon: I love the tension of profitable sustainability. So I don't want to -- both
those things are critical; right? We must have profitable businesses. I love Eric's
piece of advice: "Do not run out of cash." It's a good piece of advice.
So we in the business view profit as like the lifeblood. But how we make that is what
is important. So I believe that our customers have a shared
value. It's not everyone. It's for people who care. We're trying to create a conscious
business. We're appealing to people with a conscience.
So we have to deliver a product with integrity. People will pay a premium for that. The thrill
is to try to make profit and sustainability an and not an or.
>>Andrew Ross Sorkin: Gentleman, thank you for the conversation. This was really very
special. Thank you very much.