Member Practical: ButcherBox’s Growth Arbitrage

Between 2010 and 2016, a number of CPG retailers and digitally native vertical brands came of age with the help of a licensed gym movement that shaped a decade of influencers in health, nutrition, and fitness. That list includes fixtures like NoBull, FITAID, Rogue, Mizzen + Main, Zevia, Siete Foods, and RXBar. Built within or on the periphery of the CrossFit movement, these brands have gone on to amass mainstream followings and notable physical distribution. A few are now household names. One quieter brand has made an impact on a market long overdue with modern challengers.

In 2015, ButcherBox founder and CEO Mike Salguero began a hunt for high-quality, grass-fed beef. His wife Karlene, diagnosed with an autoimmune issue, was told to follow a diet of grass-fed animal protein. But after an exhaustive search in the Boston area, Salguero found limited options. Rather than give up, he sought out a direct source, connecting with a New York-based farmer.

ButcherBox launched after Salguero recognized a market for claims-based meat sold from farm to customers online. The company, which now employs 160 people, aims to help boost farmers’ businesses while expanding access to best-in-class, grass-fed meats.

Today, ButcherBox is one standout in a class of DTC brands working the mechanisms of influencer marketing to rally customers around a common goal, in this case, to bring high-quality produce to direct-to-consumer channels. In 2020, the company saw revenue increase by 110%, with growth driven by effective influencer work. Over the past five years, ButcherBox built a business carried by a coordinated community of influencer partnerships.

Early days: Partnering with influencers

In 2015, Instagram wasn’t a core sales driver, with limited link sharing. Instead, partnerships with bloggers who had large lists of email subscribers became the strategy that led to early growth. As Salguero learned, many of these influential health bloggers wrote often in support of grass-fed beef, but they lacked a call to action – there was no place online for readers to then stock up. ButcherBox filled the void. Salguero:

These people commanded huge audiences, had very authentic approaches, and had vast amounts of trust and ethos with readers. Plus, the content was already there. ButcherBox was a natural fit within the conversation.

As a startup with no outside funding, ButcherBox couldn’t pay an up front, lump sum to partners. Instead, they deployed an affiliate revenue-sharing model where influencers would earn a cut of sales made using unique coupon codes. The approach turned into a powerful marketing machine that drove MRR for both parties.

DTC suffers from the misconception that you need to raise VC to be successful. This is a transactional approach wherein companies often end up throwing money at influencers rather than truly viewing them as partners. At ButcherBox, we decided to only partner with influencers who were truly aligned with our values and mission instead. That created partnerships that were truly valuable; there was buy-in from both parties.

In the early days, ButcherBox’s affiliate model operated so that partners were paid on a recurring per-box model, with a $20 commission per box sold.

When we started, affiliates made up about 50% of the marketing mix. This gave us time to drive sales, but also to experiment with other channels. As we’ve grown and expanded into other marketing channels, we’ve supplemented this channel to make up a smaller portion of the overall mix.

Today, ButcherBox’s affiliate program operates through ShareASale, offering different payment models depending on the partnership. While most of their affiliate partners are individuals, they do work with a few agencies and deal sites. Affiliates earn commissions for sales driven within a 30-day window based on tracking cookies and earnings are paid out once per month on a designated day. According to Salguero, ButcherBox has paid out more than $1,000,000 in affiliate commission revenue to its more than 3,000 US-based partners.

Landing notable influencer partnerships

The flywheel of influencer marketing took off for ButcherBox when they landed partnerships with notable figures in the Paleo nutrition space. Chris Kresser, author of The Paleo Cure, became an evangelist of the brand. Kresser’s fact-based blogging, large email list, and easy path to purchase made for a strong partnership, but Kresser’s validation and “seal of approval” put ButcherBox on the map. Having Kresser on board as a partner drove sales and helped reinforce trust, ethos and value in the ButcherBox product.

Popular nutrition coach Thomas DeLauer also came on board as a notable influencer partner. As social platforms became places for shopping discovery, DeLauer’s YouTube videos and social media content became a powerful referral engine for the company.

ButcherBox now has more than 600 influencer partners with audiences of varying sizes that reach well beyond the Paleo realm and help extend the company into adjacent spaces, like the diet and nutrition spaces of The Whole30 and Keto. Beyond marketing, these influencer partnerships have helped shape the trajectory of the company. A 2015 Kickstarter benefitted from word-of-mouth. More than 1,000 individuals pledged over $210,000, fully funding the campaign to launch the brand, validating the interest around quality grass-fed beef.

Adapting to the current influencer environment

According to eMarketer, there are now more than 500,000 active influencers on Instagram. Statista reports indicate affiliate marketing spending in the US is projected to reach $8.2 billion by 2022. Affiliate marketing accounts for around 16% of all online sales globally, while affiliate marketing platforms like Refersion saw more than $21 million in conversion revenue during BF/CM 2020. Worldwide, global affiliate marketing spending is growing at 27% CAGR. With 81% of brands now leveraging affiliate marketing and 38% of marketers using this tactic, competition to partner with the best creators is fierce.

At the same time, many influencers have begun pursuing their own branded product lines, prioritizing these lucrative ventures over affiliate relationships and revenue-sharing models. While ButcherBox now has the capital to pay influencers upfront, rather than via affiliate payouts, the brand’s strategy has evolved as well.

ButcherBox’s future-facing influencer marketing play

ButcherBox is currently shifting beyond the health and nutrition space to reach a wider market that includes chefs, fitness experts, and other types of influencers with health-adjacent interests.

While its products are still only available through the brand’s website, expansion through other physical and digital marketplaces is in the plans. The company is also leaning into owned marketing channels on platforms like YouTube, where they’re producing branded content and educational material around their products. CEO Mike Salguero on those plans:

In 2021 and beyond, we’re planning to become more of a brand rather than just a ‘meat in the mail’ company. We’re also looking for opportunities to expand into partnerships with restaurants and grocery stores to reach that next stage of growth.

The influencer marketing game has changed, but because they started five years ago, ButcherBox has the early advantage. “We’re glad to have been early to the trend and maximized the potential when it was still a fairly novel concept,” Salguero said. As ButcherBox leaps from digitally-native brand to enterprise retailer, the strategy has reflected as much. No longer is Salguero and team focused on the model that helped them arrive atop the 2PM DTC Power List. The soft spoken brand now has eight television ads in circulation, reaching millions of top of funnel customers who are well beyond the niche that brought them from relative obscurity to relied upon by hundreds of thousands of customers.

But the influencer model that brought them from zero to one remains an important chapter that new brands should emulate. In six short years, ButcherBox has become a household name by owning the meat drawers of countless discerning customers. Salguero expects growth to continue.

Research by Kaleigh Moore and Web Smith | Editor: Hilary Milnes | Art: Alex Remy

Editor’s Note: This Member Brief was unlocked by #Paid.

Special Report: The Changes To Come

Set aside partisanship for a moment. With each new administration, things change. With each election cycle, the anticipation of those changes can make the difference between success and failure.

本会员简报专为以下人士设计 执行委员为了方便加入，您可以点击下面的链接，获取数百份报告、我们的 DTC 权力清单和其他工具，帮助您做出高水平的决策。

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备忘录被遗忘的中间层

The shift to eCommerce has been overstated, according to one common refrain. There’s some evidence to back that up: total eCommerce penetration accounts for an estimated 14.3-16.1% of all retail sales in 2021, a small slice. Anecdotal support of physical retail’s continued prominence is also regularly called to mind. In a well-researched essay by Elena Burger, an investment analyst at Gilder Gagnon Howe & Co, she explains: 

The takeaway shouldn’t be “eCommerce is eating the world” it should be “despite lockdown, store closures, mass layoffs, and global logistics networks that rival militaries in terms of sophistication, eCommerce was less than one-sixth of sales in the US.”

Intelligence, for the moment, is outpacing life. [1]

The essay is tremendous. A number of takeaways will leave you wanting to understand more about the fascinating times of digital agglomeration’s clash with traditional retail. My concern, however, is that it glosses over two larger issues: retail infrastructure is not solely resting on New York’s soil (the city is mentioned 12 times throughout the essay), and throughout the country, pockets of front-office employment has evaporated. As retail store managers and associates have faced furloughs or worse, there is opportunity for lateral movement to other retailers, brands, or comparable industries. This is not so with the tens of thousands who’ve lost their jobs in front-office retail.

One brand’s success in an area like Soho, New York is often held up as the anecdotal argument that retail’s demise isn’t so dramatic, with stories that read, “Retail is not dead, look at what Allbirds is accomplishing in physical stores!” Yet if you zoom out, recent reports from CNBC tell a different story: rents have fallen to $367 per square foot, a 62% decline from the area’s peak in the spring of 2015, and are declining 25% year over year [2]. The average gross margin of a major retailer fell from 28.44% to 16.76% between Q2 and Q4 2020, with EBITDA margin falling nearly 100 basis points over the same period [3]. Meanwhile, foot traffic has yet to return to pre-COVID form.

We built a bubble of physical retail that reflected changes in America’s social fabric. We did not account for what an even a single-digit change in foot traffic could do to those creations. Ms. Burger explains:

In that period, engineering solved the rather unwieldy problem of “how do we bring an unfathomably large number of people together so they can shop, and justify the millions of dollars we just spent building out this department store or mall.” While developers had other tools to ensure profits (mall operators used a 1954 tax change to accelerate their depreciation schedules and, in turn, realize higher tax write-offs) this is something really worth highlighting. [1]

It’s important to note that preceding this 1954 tax change was another major shift in society, taking place earlier that same year.

The U.S. Supreme Court abolished segregation in schools after Brown vs. Board of Education was decided. This meant that urban areas around the country were characterized as unlivable by some. Nowhere was this felt greater than in the midwest, where affluent families and government-funded veterans moved to the suburbs to allow their children to avoid certain schools. […] This massive exodus to the American suburbs corresponded with a construction boom in the outskirts of many metropolitan areas. [4]

We built these new malls as a means to modularize new cities removed from urban centers. We built these malls far too fast and far too often. America is simply over-retailed. Between 1950 and 1990, the aggregate population at the center of American cities declined nearly 17% while population grew by 72% in the suburban areas. Before the 1954 tax change was enacted (accelerated depreciation), there was one regional mall in the United States. By 1956, that number rose to 25. There was 6 million square-feet of retail in 1953 and nearly 31 million square-feet by 1956.

We did not account for a future of re-urbanization. We did not account for a future that saw a decline in car ownership. And we did not account for a future that saw digital means of trade as an alternative to the physical.

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When you learn just how little retail’s physical development is tied to population growth, you begin to understand why so many retailers relied on debt and persisting sales promotion to account for waning interest. eCommerce does not have to exceed 30-40% of total sales to negatively impact the retailers who failed to prepare for a future without the consistently high rates of foot traffic that mall developers advertise. In fact, eCommerce as a percentage of retail only needs to remain where it is to continue disrupting America’s 70 year-old model of mall retail. And eCommerce is not responsible for the “contraction of physical retail.” It’s more complicated than that.

Authentic Brands Group’s recent acquisitions are shaping up to be a bright spot in the mall retail sector (Frye, Nautica, Nine West, Volcom, Barneys New York, Forever 21, Lucky Brand, and Brooks Brothers among them). But there are a number of retailers whose positions are increasingly vulnerable. Foot traffic remains unreliable at many malls across America. A number of major retailers are enduring disruption, some worse than others. Your mall is overwhelmingly represented by one American city that is 560 miles away from Manhattan and 2,800 miles away from Los Angeles. It’s the forgotten middle.

As 2019 came to a close, I was sitting around a table with retail of executives from L Brands (Victoria’s Secret, Bed Bath & Beyond), Designer Brands (DSW), Ascena Retail Group (Justice, Lane Bryant, Ann Taylor), Abercrombie & Fitch, and Express. Each headquartered in Columbus, Ohio, the stakes of the conversation were alarming. According WWD, Columbus is the third-ranked city for fashion designer employment behind New York and Los Angeles. This region of Ohio depends on corporate retail like Pittsburgh once depended on steel mills or Detroit boomed on domestic automotive manufacturing. Even a fractional change in the retail ecosystem can cause seismic damage to the city’s tax base. The city’s economic development website boasts:

The Columbus Region is home to some of the world’s most recognizable retail and apparel brands who drive innovation globally – ranking No. 4 along large U.S. metros for concentration of retail headquarters. A concentration of headquarter operations is joined by businesses focused on market research, analytics, design, technology and omni-channel efficiencies – creating a market that uniquely connects retailers with customers.[4]

Well into the day, eCommerce rose to the forefront of the conversation. While some of the leaders were prepared for an eventual digital-first economy, few were eager to depend on it so heavily and so soon. By the second quarter of 2020, digital and logistical infrastructures would be put to the test as mall foot traffic fell precipitously. That foot traffic has yet to return to its pre-COVID form. And neither have the gross margins that sustain the large corporations that depend on them for the maintenance of five-figure workforces.

Retail is resilient but all retailers are not. Since that conversation, the collective of brands in that room has eschewed thousands of front-office jobs, disrupting suburbs and schools and places of worship that depended on the consistency of enterprise retail. The reality is that the No. 4 metro for retail employment and the No. 3 metro for fashion design has been impacted by the shift to digital agglomeration. And it’s a leading indicator for further disruption, if I have ever seen one. We are talking about a class of corporations that are commonly operated with extraordinary amounts of debt and little room to tolerate disruption. In The Credit Report, I explained:

A number of key retailers are carrying debt-to-EBITDA ratios that are not sustainable under COVID-19’s conditions. For example: JCPenney owes $8.30 for every dollar earned, Office Depot owes $4.60 per dollar earned, and Walgreens owes $5.80.

Perhaps the traditional retailers who’ve relied so heavily on foot traffic will find new ways to build omnichannel successes. It is a matter of margin, room for error, and tolerance for disruption. Retail is on shakier ground than many can understand. Here, in the forgotten middle, I see the struggle to pivot towards a digital-first economy. Digital agglomeration [6] and eCommerce are undeniable factors in this newfound vulnerability. It may be difficult to see at the New York or Los Angeles street levels, where luxury brands and popular stores are still thriving despite it all. But, without considerable changes, the mall retail system is incapable of tolerating further disruption. The shift to eCommerce is actually understated because the old guard will have to adopt the technologies of today just to survive the decade. In a wonderful excerpt, Burger explained:

Because technology made the relationship between the consumer and consumerism more convenient, and because its acceptance was relatively uncontested, shopping itself sponsored the complete alteration of urban and suburban sprawl. [1]

In the 1950s, malls were the retail technology of its time. Seventy years later, you wouldn’t possibly rely on olden technology to power retail for the next seventy. Mall owners will require its retailers becoming great eCommerce practitioners. Without that, these developments will struggle with delinquencies and vacancies, perpetuating a ruinous cycle. Physical retail needs eCommerce more than ever.

作者：Web Smith | 编辑：Hilary Milnes | 艺术：亚历克斯-雷米 |关于 2PM

Editor’s Note: Elena’s essay is one that is sure to take the retail ecosystem by storm, and rightfully so. Within the hour that it was published, seven different people sent it my way. It is well-researched and well-positioned. The author is a hedge fund analyst, which informs her views. She explains that the narrative around eCommerce’s impact on physical retail is overstated. She and I hopped on a traditional old phone call to discuss what we agreed on as well as what I would contend with or elaborate further on. What I most appreciated about the exchange is that we discussed ideas candidly and constructively without as much as a prior introduction. It’s what I hope happens more often in this era of Substack creators, newsletter operators, and operators-turned-writers. If you’re new to 2PM, read the rest of this week’s Monday Letter here.