Innovative Design for Life, It’s Lovesac

In this episode of the Retail Visionaries Podcast Series, Shawn Nelson, Founder & CEO of Lovesac, a modern furniture brand with fully customizable design for life products joins Oliver Chen, Retail & Luxury Analyst. They explore strategies and lessons learned as a high-end direct-to consumer retailer with 200+ showrooms. 

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Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Oliver Chen:

Welcome to the Retail Visionaries Podcast Series, a podcast about visionary ideas and people. My name is Oliver Chen. I’m TD Cowen new platforms retail and luxury analyst. In this episode we’ll discuss miracle lessons from the LoveSac story. LoveSac is a modern furniture brand which offers fully customizable products, inclusive of the world’s most adaptive couch and the world’s most comfortable seat.

Today we’re thrilled to feature LoveSac’s founder and CEO and my friend Shawn Nelson. Shawn is a company’s head designer. He also leads sourcing, creative design, public relations, IR and culture. He also recently published a book on the LoveSac story titled, Let Me Save You 25 Years.

Congratulations, Shawn. And in 2005, Shawn won Richard Branson’s the Rebel Billionaire on FOX, and continues to participate in ongoing TV appearances. Shawn has a master’s degree in Strategic Design and Management and is a graduate level instructor at Parsons, the New School for Design in New York City. Shawn, it’s great to have you here.

Shawn Nelson:

Great to be here. Thanks for having me.

Oliver Chen:

Shawn, by way of introduction, can you walk us through the brand’s iconic history? It all started off as a sac. What milestones are you most proud of?

Shawn Nelson:

Yeah, thank you. I’ll try to keep it short, 25 years, but today LoveSac is most known for our couches. They’re all over TV. We make these extremely modular couches you could have the rest of your life. We have 270 LoveSac touch points that you can find your way into to see these things and understand them. And we’re really proud of what we’ve become. We have a long way to go. But we started when I was 18 years old, sitting on my parents’ couch.

I thought it’d be funny to make a giant beanbag from me to the TV, the whole floor. And I got off the couch, drove down to JOANN’s Fabrics, bought some fabric, brought it home, cut it out, sewed it up, took me three weeks to stuff it. Couldn’t find enough beanbag beads, so chopped up my parents’ camping mattresses on a paper cutter. And anyway, everywhere I took this giant beanbag, they would fill the bed of a truck. It was so big. Everyone was like, “Holy cow, where did you get that thing? I want one of those.”

And obviously new that there was some demand there. But look, I was busy getting through college. I took a couple years off to go become a missionary. I came back in college and pulled the thing out of the garage, used it again, and everyone wants one. So finally my neighbors convinced me to make them one. I make them one, start a company to sell it to them. It needs a name, love, peace, hate, war, hippie bag, beanbag love bag, love sac.

And before you know it, their friends want one and their friends want one. And it becomes my side hustle at the University of Utah as I’m getting through college selling love sacs, these giant, not beanbags, full of chopped foam to friends and family, whatever. And I’m waiting tables at night paying my way through school, just surviving. And really, in 2001, two things happened. We get a huge order from a giant retailer who wants 12,000 of these little ones, and that forces me to build a factory. We complete the order.

Break even. My workers want to keep going. So we open a store in Salt Lake City, Utah, called LoveSac because none of the retailers would have us, none of the furniture guys thought we were even a real thing. The store explodes, leads to many dozens. A few years pass by, we have stores all over the West in malls called LoveSac. People are trying to buy the couch in the corner that’s just there to look pretty. We start thinking about making couches.

I went on reality TV show with Richard Branson, a million dollars that helps us raise venture capital, eventually private equity. Somewhere in the middle we had to stop and reorganize the whole company. It was a terrible train wreck of a mess. It’s all in the book, Let Me Save You 25 Years, all the gory details and a lot of truth. Tried to be very honest about the mistakes, miracles and lessons from the LoveSac story.

And anyway, fast-forward to today. We now have 220 of our own locations, 50 more LoveSac shop-in-shops inside of Best Buy. We do no wholesale. We sell mostly couches. These couches we invented along the way that are modular, changeable, washable, I think the best solution to really a fragmented category, big ticket item that’s grown our business rapidly.

We came public on NASDAQ in 2018 at about a hundred million in sales, and this year we’re wrapping up close to 700, I think five years later. So pretty proud of the growth and continues. We continue to invent new things with this design philosophy that emerged along the way called Designed For Life. And there’s a lot more to talk about there, but that’s 25 years as I guess rapidly as I could.

Oliver Chen:

Shawn, thank you. Circularity is a big topic for us as well as sustainability. What is your design philosophy? What is Designed For Life mean and how does that interplay with the world’s most adaptable couch?

Shawn Nelson:

If Sactionals are the chicken that turned out to be the driver of the growth that we’ve built this company on, Designed For Life is the egg. And we didn’t know that at the time. We had the chicken before the egg, but as we watched customers loving our products and really raving about them online, obviously sharing them with friends, driving the growth that I described, I mean, we’ve been on kind of a 40% [inaudible 00:06:17] for almost a decade, right? It’s pretty radical.

And we ask ourselves, why is that? Right? This is years back. Why is this product really working? What is it about the product? And as we observed and spent a lot of time and I was doing a lot of reading, achieving a master’s degree at Parsons, and then teaching there in the realm of sustainability and in the realm of sustainable design and all of these topics, we realized that our product answers the demands of real life better than other products in its category, right?

Our couch is machine washable and changeable and modular. It could move with you to your next location. Matter of fact, some of my Sactionals in my life are 16 years old, mated with brand new pieces, mated with our new shape and styles. I think they’re on the now 11th set of covers just because it’s fun to change the covers and have a new fashion, new style. They can evolve with your life as your life changes.

They even have our embedded technology inside. So Designed For Life has, we’ve teased out from Sactionals means products that are built to last a lifetime and designed to evolve as life changes, which sounds like some marketing, but the end result is true sustainability, products that were designed to actually sustain not just because they were built well, but because they can actually change and grow and modulate as life changes.

And designing those functions into products that you might be familiar with is a hard task, which is why we don’t launch a lot of products, but when we do, we intend to sell them for decades and we intend them to be with you for decades. And it’s a whole different way of thinking about product I think in a day and age when most stuff is disposable, even the best stuff is disposable.

And the biggest companies were built on the backs of selling us the same device every year and discarding the old stuff. And so anyway, we’re really proud to make things that could last a long time. And look, the implication is we’ll have to innovate into other categories in order to keep growing, and we’re excited for that challenge.

Oliver Chen:

Shawn, on that topic, what does innovation mean to you? StealthTech is very interesting and also I think you think a lot about the connected home as well.

Shawn Nelson:

Yeah. So technology for us is just another outgrowth of the designed for Life approach. It’s undeniable that technology plays a significant role in all of our lives. And why not the couch? Why not your living room? I mean, it’s already there. Everyone’s streaming, watching Netflix and chilling. We need to be in that ecosystem. So we created StealthTech, complete immersive surround sound system.

You’re looking at it in this chair I’m sitting in, front speakers, rear speakers, Dolby 5.1 audio, also charging my phone right here as it sits on the arm invisibly. You won’t see any of this. It’s invisible. It just looks like an armchair. It looks like a couch, a sectional, that’s StealthTech. And it projects through the foam and fabric and even decorative cover layer to produce perfect, no sound quality loss audio on the other side. That’s a significant investment of time represented there.

It is a really good embodiment of Designed For Life and action because the StealthTech pieces that are in this chair are added to a seat, a Sactionals seat that by the way is 16 years old, subwoofer hanging under there and everything. Everything we invent is reverse compatible with the platform we’ve already put out there.

And so this whole ethos of sustainability and circularity, these pieces can go on and be used perhaps by others and through trade-in programs, all this other stuff that’s coming from LoveSac over time services. So we are the intersection of home overlapping with technology and services because ultimately it’s already happening. You could get on Facebook now and see people trading Sactionals pieces. They’ve decided to go to a different shape, different profiles.

We launched those profiles, people with StealthTech, without StealthTech that want it. On the secondhand market, there’s just so much. And it’s so ironic to be doing technology, by the way. We’ve sold more than a hundred million in StealthTech already, and that’s not insignificant.

That’s just StealthTech, not including all the couches they’re attached to. And so we’re not a small player already in home audio. And we started as a beanbag company. So connecting Designed For Life with circularity, with technology and home, that’s where LoveSac will continue to innovate and thrive. And I think you’re going to see a lot more innovation because no one else is doing it the way we do it.

Oliver Chen:

Shawn, adaptability of course, is a hallmark of one of your core products. What are the most common ways in people use adaptability typically stepping back as examples?

Shawn Nelson:

Yeah. We see it in our business. 40% of our transactions roughly are repeat transactions, which for a company that only sells a few products currently still sacs, Sactionals, StealthTech with Sactionals. The various accessories that you can add on and modulate the product shows you that people are adapting the product from the moment they get it. In fact, we find that most of that repeat business happens in their first year.

As people buy a couple more pieces, they get at home, they set it up, they realize, “Hey, I’d love it to extend a little further. I would love an ottoman out front to kick my feet up on.” They’re buying more Sactionals pieces, the covers to match what they already have. They’re satisfied when they do that, not just the first year, but maybe four years in and surprised we still have their fabric in stock because we never drop fabrics.

We may move them from our stock line to our custom line, but your fabric will always be there so that you can add to your Sactionals and have them grow with you. So this kind of adaptability is just unheard of in our category and in most categories. And it’s unique. It’s the way we designed the products. It was a bit of an accident. We just wanted to invent a couch that would fit in a box and be shippable and editable and all these other things.

But we solved all these problems along the way by breaking it down into these individual components. And by the way, these aren’t just covers. Most couches look like a floppy slip cover, ours are very tight. And so adaptability is designed into the product platform. And then on that platform we can proliferate, accessories, obviously cover designs, new skins. And this will apply to other things that we do as well because forget the usefulness of that.

Your dog chews a hole in the one corner of one cushion or arm, the whole couch could be made new by one cover. That’s pretty neat. And from a sustainability standpoint, very critical. But you also just change your mind. Your tastes change. You want to go navy, you want to go black, you want to go all white, you want to have stripes like the one I’m sitting in. It’s all possible with Sactionals and with Designed For Life products in general.

Oliver Chen:

Shawn, the industry structure is also interesting and fairly fragmented. What are your thoughts about growing your awareness in this context and also how you think about channel strategy?

Shawn Nelson:

So LoveSac evolved from survival mode as a side hustle in college to being a retailer. We operated dozens of locations all around the country through venture capital, private equity. And did fine, but we really flourished when we saw what was going on in 2015, 16, adopted a full direct consumer business model and stopped thinking of them even as stores, but as showrooms to show the product that was being driven by digital advertising online, the website, and even traditional advertising, TV, et cetera.

That advertising model worked for a product like ours that’s so visual, so unique, modular can move around, do all these cool things functionally. And to this day, we are 100% direct. We may be the only direct consumer brand that is. Really, we have no wholesale. And by the way, profitable. Still growing faster than our category. We’re really proud of all of this success.

And from a movement that by the way, is now in many respects, disparaged because of so many flame outs and I think misinterpretations or mis-executions of that movement. So thankfully we not only survived through it, but thrived and we come to today where we operate, for instance, 50 of our 270 touchpoints are inside of Best Buys as standalone LoveSac shop-in-shops that we operate, our people, our checkout, our iPad, our data, which is critical to maintaining these relationships with customers over the long term.

And we view that as critical and we do very well inside of that channel. And we’re not against wholesale opportunities or other executions. We’re open-minded as a brand generally. And we will continue to evolve as a true omnichannel business as we are today. But I’m very proud of how we’ve pivoted and grown.

And this movement from being a retailer to operating touchpoints is very, it sounds like marketing or something, but in reality, most of the people that are coming into our showrooms today, they’ve been shopping for Sactionals for a while. They’ve heard about it from a friend, they’re planning on it, “But come on. It’s five, seven, 10, 15 thousand bucks with StealthTech embedded, I got to see this thing in person.

There’s no way it’s that solid. There’s no way it’s that reliable. There’s no way it’s that comfortable. What about the StealthTech? I got to hear it, feel it myself.” That’s what the touchpoints are there for. And the next products we invent will be similarly complex and unique and probably will require touch points as part of the executions. And so I can’t advocate for this business model other than it pairs well with what we do and it’s been really successful.

Oliver Chen:

Another retailer we really admire is Costco. Would love for you to elaborate on your popups with Costco and the rationale there.

Shawn Nelson:

We love Costco as well, of course. They’ve developed an amazing customer, an amazing reputation. They speak to a high-end consumer. They speak to a value minded consumer all at once. Of course, that’s where our customer is. We don’t sell cheap stuff. It’s easy to misinterpret LoveSac because we started as a bean bag company for some kind of value furniture plate. And then we are value in the sense that we provide value.

Washable, changeable, long-lasting stuff fits really well with the whole Costco ethos and the whole Costco customer. But our stuff’s expensive. And so even within Costco where people are happy to get a little bit of value from a package deal around LoveSac, it only comes in these colors, classic Costco setup, it’s also our setup.

We operate these temporary pop-up shops that are there for 10 days. They rotate around Costco’s. We probably operate four or five, six of them at a time right now in real time at any given moment all around the country. And then they move around. It’s our person, it’s our execution. We control the environment.

We’re very passionate about that and it’s worked really well for us and we’re really proud of that execution. And I think we’re one of the most successful popups that according to Costco, that they’ve ever seen. And it has a lot to do with our product, our marketing and the size of prize and all these other things. But it’s a great partnership and there could be others like it looming, but we’ll continue to be open-minded about channel strategy.

Oliver Chen:

Another part of the business, Shawn, which you’re laser focused on is customer lifetime value. What’s led to stickiness? What are the key drivers that you’re focused on to both reduce churn and acquire new customers?

Shawn Nelson:

Well, for LoveSac, one of the hallmarks of our success is that we are taking a significant customer lifetime value chunk at the first purchase. I mean, our CLV to CAC ratio is typically around four or five X, and most of that is taken at the first purchase. And so we are not relying on that hopeful third, fourth, fifth purchase to get us over the profitability hump.

We’re there on day one and then we add to it and we track our cohorts by year. And what’s neat is within that CLV to CAC ratio that we publish in our deck, for instance, we don’t even show out years because we’re just, we choose to be really conservative about the ways that we report. But in truth, we see people repeating past a decade of owning their Sactionals because they last that long. Our core products, our sacs do as well.

You can come back for a new cover for super sac you bought from me in college in the early 2000s. It’s not a joke. And they are out there. And so that’s what leads to stickiness, products that last a long time and have been developed as a platform to provide ongoing adaptation, improvement, upgrading, the StealthTech I mentioned, all this stuff that we’ll continue to layer on and make reverse compatible.

And look, it’s really antithetical to how the world does product, new season, new collection, out with the old in with the new. But that generates a lot of waste and that’s something that I’m not proud to be a part of as a part of this new economy. And so I am proud of how we choose to do business. And look, we didn’t set off this way. I was trying to make a big beanbag. But these attributes that I keep harping on around Designed For Life or what creates the business model that’s working for us, and we’re really proud of that.

Oliver Chen:

Shawn, we’re living in one of the world’s most volatile supply chain environments we’ve ever seen. What are you seeing with the supply chain? And also what about prices and the cross currents on volatility of inflation?

Shawn Nelson:

Oh, man. So much happening in supply chain over the last half a dozen years. A quick observation. I don’t think the world appreciates just how much damage the Trump tariffs did to China. I think it’s fascinating to watch. Companies like mine that had most of their manufacturing in China, I don’t know five, six years ago, are now completely out of China almost. And many in Vietnam spread all over Asia back to Mexico. We’re even doing stuff in Mexico and North America now.

And China has changed dramatically, still very robust. And so much of the machinery and milling and all that stuff happens there. And it’s a very strong environment, but from a capability standpoint. But the economy is so lackluster right now in part because of those tariffs in particular that kind of forced us to rethink our entire supply chain. So we’ll start there.

Obviously what’s happening with container prices just went bonkers during COVID, cost us a fortune and just wasted money honestly as container prices just went berserk in that environment. And it was sad to see our gross margins get down below 50% where for LoveSac, we’re back up to the high 50s where we’ve kind of always trafficked and we’re proud of that in our category.

And yet we’re facing container pressure again, hopefully not to that degree. We’ll see with what’s going on in the Red Sea. And so from logistics overseas to manufacturing that’s now been diversified. And for us it’s unique as well because of how we do things. Like for Sactionals, you buy a bunch of seats, buy a bunch of sides, you can build any couch you want. As long as we never run out of seats and sides, we’re generally pretty good.

And that’s a huge advantage in our world, just the way that we designed it. Well, we redundantly manufactured those seats and sides across many geographies throughout Southeast Asia, which gives us a lot of insulation as things get crazy. The container thing though is just another aspect of this chopped up supply chain that’s out there.

And that’s why again, we continue to and many others like us, continue to look at re-shoring, continue to look at Mexico, continue to dabble in that and move production there piece by piece as we sort of morph and react to this, as you said, very disrupted global supply chain that continues to be disrupted on an ongoing basis.

Oliver Chen:

Shawn, I see you as a CEO, but I know you’re also an artist, a fellow lover of fashion. You’re purpose driven and you’re a TV star too. What motivates you? And do you have any closing remarks as well?

Shawn Nelson:

Thank you. Yeah. Look, sometimes people ask me 25 years in, why are you still stoked on this? Look, we have threaded the needle with LoveSac. It took us a long time to get here. We made a lot of mistakes. I’m very honest about it in the book, Let Me Save You 25 Years. It’s all there. Check it out if you want the whole story and some of the gory details. But what motivates me now is that design philosophy.

We’ve stumbled through. By originally making a beanbag and parlaying that into couches that were in the corner of that first store trying to make a better one, we stumbled into this beautiful design philosophy in making things that are built to last a lifetime, designed to evolve. It’s an inspiring philosophy. And I don’t mean that to toot my own horn. Like I said, we stumbled into it, but with it, we think we can dominate this category, other categories and design really, really good things that are beautiful and not cheap.

And compel people even like that value customer that I spoke of to break out three credit cards or take on our Synchrony financing, to buy our expensive products in the hope that they can buy better stuff to buy less stuff, which is a weird thing for a company that makes stuff to say. But that’s our stated purpose at LoveSac. And that keeps me going and gives me the opportunity to design products, beautiful products that are not just aesthetically beautiful but useful and value-able and sustain-able, real value they really sustain.

And then even work with artists like Jeremy Scott that was with Moschino and Stacey Bendet and recently Swarovski Crystals on a collab for Nordstrom around our blankets and beautiful things as well. What a blessing, what an opportunity. And I’m just proud after so many years to still be here and see the company thriving and believe that we’ve got another 25 years in this brand at least.

And that keeps me going. And so keep your eye on LoveSac. I think we have developed into a company I’m really proud of and one that’s proud to bear the ticker on NASDAQ LOVE, appropriate for a culture that’s built on that ethos and proud of all these aspects of this business that I’ve had the pleasure of building over all of my adult life.

Oliver Chen:

Well, Shawn, it’s been a pleasure. It’s great to see this continuous innovation, also the trust that you’ve inspired across many stakeholders, from customers to your employees and rethinking this industry, which is ripe for lots of change and sustainability efforts as well. Thanks for joining us, Shawn.

Shawn Nelson:

Thanks for having me. Great to see you.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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