An underlooked aspect of building valuable consumer brands is uncovering mispriced assets.
For example, what everyday items are undervalued?
Everyone wants an iPhone. That’s fairly priced.
Here’s one answer: eskies, or as the Yanks put it: ‘Coolerrrrs’
Creating a ‘premium’ version of everyday items is one way of value creation and a prime example of this is the story of Yeti.
In 2006, Roy and Ryan Seiders decided they were going to start a ‘cooler’ company.
Roy and Ryan were outdoorsy fishing guys. They spent years helping out with their father’s fishing rod business. Having grown up spending their time on boats and enjoying their love for fishing, they got fed up with the lack of a high-quality cooler.
Long stretches on the boat with a poor-quality cooler would cause fish to spoil. Also, no one likes to drink warm beer.
So they decided to make their own premium version.
Today, Yeti Holdings has a market cap of US$3.5 billion and does US$1.6 billion in revenue.
Its mantra? “Focus on quality. Design for durability. Never cut corners on form or function”.
Yeti sells the best coolers and outdoor accessories money can buy, selling $1000+ eskies designed to keep ice cool for days.
Two guys from Texas turned a fishing accessory into a multi-billion dollar retail empire, from inception to IPO in just 12 years. Pretty incredible.
Yeti’s genius is in taking a low-status product — ‘$20 eskies’ — and building a high-status brand around it.
Its target market? Cashed-up bogans.
I love this business model of creating high-status brands in low-status categories.
You don’t have to reinvent the wheel. You’re simply offering an alternative, “premium” product to an already captive market.
Some other examples?
Selling status is great business. Done well, you can sell commodity products at luxury prices.
It all comes back to branding – arguably the only moat that exists for consumer products.
Today, Yeti sponsors John John Florence, Jimmy Chin, and 200+ other fishermen, hunters, and outdoor adventurers.
Something very distinctive about Yeti is how it intentionally focused on brand-building early on.
Scott Ballew, Yeti’s head of content says it best:
“People, in the long run, want to feel part of a tribe or feel like they’re contributing alongside like-minded people; and that’s how a brand becomes a brand.
I don’t think people are wearing their YETI hats because they’re proud of their ice. I think content like ours gives a brand a soul.”
What Yeti realised is the same thing that Nike realised back in ’84 when it sponsored Michael Jordan: everyone wants to be like the pros.
As Yeti CEO Matt Reintjes explained in an interview: “the number of people who push Yeti products to the edge is … pretty minimal”.
In the same way that 99% of people wearing Superflys will never be like Ronaldo, 99% of Yeti users will never need to keep their ice cold for days.
But that’s not the point. The point is to feel like the pros. To feel like the best.
So, realising that nobody was sponsoring the top fishing athletes, Yeti started sponsoring every pro fishing magazine it could back in the day.
Roy Seiders commented on Yeti’s early marketing strategies:
“It was a huge help to have high-profile hunters and fishers reinforce that image with testimonials. At the time, no other cooler company was advertising to outdoor enthusiasts or taking advantage of the professionals in the sport. Ryan and I couldn’t quite believe it; it was wide open.”
Activewear brand Gymshark did the same thing with bodybuilders. They gave merch to micro-influencers with a YouTube and Instagram audience. Yeti had fishermen. Gymshark found mispriced assets in Gymbros.
That’s how niche brands spread like wildfire.
One of the other genius tactics Yeti had was to include a free Yeti hat and Yeti t-shirt with every order. This instantly kickstarted a viral growth loop within the communities Yeti was targeting.
And trust me: there’s nothing fishing people love more than a solid trucker cap.
One of the strongest signs of Yeti’s success is the fact a small number of their customers are ‘yeti collectors’ and buy ridiculous volumes of products.
I can’t fathom dropping $700 on an esky, but some people can’t get their hands on enough Yeti products. There’s even a subreddit for Yeti fans boasting 35,000 members! (R/YetiCoolers for those interested)
These kinds of power users with deep brand affinity are like gold for consumer brands.
And niche communities typically translate to lower customer acquisition costs (CAC) and higher lifetime value (LTV).
Financially, Yeti is a juggernaut of a company. In FY23, it made US$1.7 billion in sales.
Topline revenue growth for the business has remained relatively strong. It is on track for 8%-10% total revenue growth in FY24, although historically, it’s difficult to tell how much of the growth in 2020-2022 was driven by COVID versus true long-term sustainable growth.
In any consumer business without a clear structural advantage, margins are always one of the big questions that come to mind.
Yeti’s gross margins are very healthy, hovering around 57%, and up from a dip in 2022. Yeti’s recent focus on direct-to-consumer (DTC) sales has helped to support this, with 60% of sales now coming directly from its website (vs 53% in 2020).
But interestingly, this strong margin expansion and top-line revenue growth hasn’t translated into higher operating profits, with 2023 operating profits of $225 million barely higher than the 2020 number of $214 million.
Digging a bit deeper, Yeti doesn’t really seem to be realising any operating leverage here.
In 2023, selling general and administrative (SG&A) expenses increased by US$80.7 million (up 14% YoY).
A big portion of this increase in spending was in the form of hiring new staff to drive growth, marketing expenses, warehousing and facility costs.
There was also a big jump in variable SG&A costs (US$39.7 million) directly associated with DTC sales.
This was in the form of:
It feels like the real companies that benefited from the shift to e-commerce were in the infrastructure layer (FAANG companies, online payments processors, and freight and logistics companies), not the e-commerce companies themselves.
One of the things that struck me about Yeti was that despite being relatively young (37 and 41), Roy and Ryan don’t run the business anymore.
After eight years of running the business, they decided to partner with a PE fund in the US, Cortec Group.
They also decided to hire Matt Reintjes as a professional CEO way before going public back in 2015.
Reintjes has deep operating and supply chain expertise, having worked for around 15 years at a medical device manufacturing company, and he’s also spent time in the outdoors industry.
Roy and Ryan still remain significant shareholders in the business, together owning about around 13% of the company, but obviously realised they lacked the expertise to take their business to the next level.
It’s a good lesson for any founder that if your business needs a step change in growth through a new channel (store rollout, overseas expansion, etc), the business might be better off under the leadership of someone who has deeper expertise in that area, or investors who can inject capital to help you grow.
Everyone thinks of Yeti as a ‘cooler’ company. After all, this is what Yeti is famous for, and what it has built its brand off the back of.
But it turns out that around 58% of the revenue generated by Yeti is in its drinkware business.
From decades of building expertise in cooling technology, Yeti is better equipped than anybody to produce drinkware that keeps your coffee warm (or cool).
This segment of the market feels far more competitive though, selling higher volumes of lower-cost ($30-$50) products. I suspect consumers buying a coffee cup would have far less brand affinity than those buying a $300+ cooler product.
For any company, but particularly brands leaning into e-commerce, CAC is such an important driver of business success.
At first glance, Yeti’s CAC numbers look really good; it is only spending around 4% of revenue on advertising. As a benchmark, Him’s and Her’s spends around 50% of revenue on customer acquisition every year.
But what’s the catch?
Management doesn’t disaggregate marketing expenses as well, only direct advertising expenses.
Yeti might be trying to hide something here, especially given that operating margins aren’t going up. I suspect the company has had to continue to spend more on customer acquisition to drive new growth over time, and doesn’t want to show that.
Yeti’s ability to continue to perform as a publicly listed company is highly dependent on its ability to withstand competition.
Truth be told, paying $700 for a 70L esky is insanely expensive to me. You can buy return flights to Bali at that price!
So I did some research into competition.
Even in the luxury cooler category, competitors offer a product at a fraction of the cost of Yeti, with RTIC’s 65L cooler retailing for US$250, versus the Yeti alternative at US$350.
And let’s not forget the iconic Esky.
You can grab one of these baddies at half the price at your local Bunnings.
I suspect more brands will emerge over time which are about 80% as good as Yeti, but significantly less expensive, and will eat away at Yeti’s margins.
But who knows?
Luxury brands tend to age like fine wine. And as crazy as it sounds to say, Yeti is a luxury brand.
This is an edited version of an article that was first published by SBO Financial.
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Jason Andrew is a chartered accountant and founder of SBO, an accounting and operational finance firm serving small businesses globally. He’s passionate about helping business owners extract value from their numbers and data.
