Seth Berger is founder and former CEO of AND 1, a company specializing in basketball shoes and apparel. Started by Berger and several classmates while they were students at Wharton in the early 1990s, AND 1’s original product line featured t-shirts targeted at young basketball players; the company later expanded to offer a full line of apparel. Under Berger’s leadership, revenues increased from $1 million in 1993 to more than $200 million in 2001. In 2005, Berger sold AND 1 to American Sporting Goods, a private footwear company based in Anaheim, Calif. Currently the head boys’ varsity basketball coach at the Westtown School in Westtown, Pa., Berger spoke with Knowledge@Wharton about what it takes to build a successful company. An edited transcript of the conversation follows.
Knowledge@Wharton: To start off, successful entrepreneurship is all about seizing the right opportunity at the right time. Where did you get your idea for the business and how did you know that it was the right time to pursue that opportunity?
Berger: My idea came while I was here at Wharton. When I was in grad school I did an advanced study project for a business plan called The Hoop, a basketball retail store, in a class with Miles Bass, who teaches undergrads. He’s a great teacher. In my second year of grad school I morphed that business plan into a database business targeted at basketball players. I actually left school when I graduated to do the wrong business at the wrong time, which was a basketball database business. In about three weeks I realized that I was broke. I was going to stay broke unless I changed my business idea very quickly.
In the sports and footwear apparel industry, there are lots of companies that did multi-sport. Nike, Adidas, Reebok at the time would do basketball, football, tennis and soccer, whatever it might be. But no one was focusing just on the basketball player. We thought we could [find a] niche … in basketball.
The second part of your question in terms of knowing when it’s the right time: I don’t think we ever knew. I also think we got lucky with a few things that happened: Michael Jordan retiring, Lattrell Sprewell making a great playoff run just after they had signed him…. When the ball bounces, you say in hindsight, “Oh; that was the right time.” But when you’re sitting there, you’re crossing your fingers saying, “I really hope this is the right time.”
Knowledge@Wharton: After launching AND 1, what challenges did you and your business face, and how did you overcome these challenges?
Berger: That’s a hard question, because I think everything was a challenge. When we started, we had no experience first and foremost. None of us had experience in clothing or footwear. The biggest challenges for us were figuring out what the right questions to ask were.
Once you know what the right questions to ask are, you can always find the answers. But I had two or three partners and they were really smart kids. One was a Wharton undergrad with a 3.96 GPA. The other kid had gone to Stanford. Then you had me. I was looking at these guys for the questions, and then we’d figure out the answers. So, the first hurdle we had was lack of experience.
The second hurdle we had was that we were young. We’d walk into a room at 25 years old and say, “We’re here to show you a product that we can produce over in China; we can deliver it to your factory within four months.” They would look at us and say, “No, you can’t do that. You’re kids.” Once you get past the hurdle of, “Hey, we deliver when we say we’re going to deliver”, people trust you. We got past that challenge of being young.
On the flipside of the challenge of being young, I think it’s a huge opportunity. Whenever I speak with [students], I always try to tell them, you should start your business now, before you have a bunch of experience, because what your experience will tell you is what you can’t accomplish.
When you graduate at 21 or 25, you have no idea what you can’t do. You think you can do anything. That’s the best time to go start a business. When you’re 40, you’re looking back saying, “Wow. How did we get that done? That was insane.”
Knowledge@Wharton: You mentioned that part of entering at the right time was Michael Jordan’s retirement. Why was that such an opportunity for you and your company?
Berger: It was in the fall of ’93. I remember we were riding to a friend’s high school to give a talk about what the first couple of months of starting a business had been like. I heard over the radio that Michael Jordan had retired from basketball. Jordan at the time [was] a dominant player in basketball, so immediately retailers had hundreds of millions of dollars of Jordan clothing that they wanted to replace, because they thought no one was going to buy it.
Actually, the first time Jordan retired, his sales [dropped]. Since his second retirement, Jordan has continued to grow. But for the first couple of years after Mike stepped out, it created a huge opportunity for us when consumers and retailers wanted something different. If Mike had not decided for whatever reason to retire, you wouldn’t be interviewing me today.
Knowledge@Wharton: How did you seize the industry opportunity and provide products that consumers wanted?
Berger: We knew our consumer extremely well because we were consumers. When we created basketball apparel and footwear, we thought we knew what a ball player wanted. At 25 I was just on the edge of the target consumer — a 16 to 18 year old ball player…
The most important thing for us was knowing our consumer, and then putting out a product that we thought he would want…. Our first shipment in November [was] a disaster. We did shirts, and the colors were lime green and purple, so [they] didn’t really sell.
They gave us another chance. We came back in the spring and fixed the colors, and our stuff flew off the retailers’ shelves. Within three weeks they were completely sold out. [In 1994], we went from being in 10 Foot Lockers in February [to] 1,500 Foot Lockers in June across the country. We went in four months from being zero in the t-shirt market to being their number two basketball supplier.
Knowledge@Wharton: As you mentioned, AND 1 targets a very specific market, the niche market of 16- to 18-year-old basketball players. How did you cater to this market? What kinds of strategies did your company employ in order to market to this very specific group of consumers?
Berger: Our product was our biggest marketing. As a small company with a limited budget, the [best] way to message to your consumer is actually your product. Our product had to be great to wear and actually say something to the consumer [so that] he could represent himself as a basketball player…. Also, we would conduct focus groups. We would take our stuff out to the basketball courts all across the country and ask kids, “Which of these shirts do you like? Which of these shorts do you like? Which of these shoes do you like?”
As we grew, we continued to hire young basketball players in our product and marketing area. We hired kids from Penn, from Stanford, from Haverford, [all of whom] played ball. They would be our first filter. If our stuff can’t get by them, it is not getting out the door. [Next] we go to the kids who are going to be buying our products six or nine months down the road. In the end, it doesn’t really matter what I like the best…. It matters what that 16-year-old kid likes.
Knowledge@Wharton: Given your company’s success in the competitive retail industry, how did you distinguish AND 1 from other brands?
Berger: The most important thing was that AND 1 was a basketball-only brand. We felt that we couldn’t occupy the consumer’s mind for all of footwear and apparel in athletics. We wanted to make sure that when you thought of basketball, you thought of AND 1 first. If you thought about soccer or tennis, we didn’t want you thinking about our brand. In fact, some folks would say, “I don’t know what AND 1 means. I am not going to buy that.” We would say “great. If you don’t know what AND 1 means, then you shouldn’t be buying our product.”
[Targeting that niche customer] started us on the right path, kept us going. Actually, when we veered away from that path later, it really screwed us up as a company.
Knowledge@Wharton: I know that your company developed an entertainment division that managed several promotions for the brand. Can you tell us a little bit about that?
Berger: Yes, that is fun. Rafer “Skip to my Lou” Alston is an NBA player. I knew Skip back in the city when he was seven, but everyone started to know him when he was 17. He had been around a bunch of different high schools before he went to Fresno State. He was a great basketball player.
We actually had sponsored the Rocker all star game, which is a great game in New York City for playground ball players. We had these tapes of Skip and some other great ball players. There is one all star game that had Conrad McRae, Skip, Kareem Reed, a kid named the predator; it was an unbelievable all star game.
We had these tapes, and actually, a kid was working at an ad agency. He said, “Why don’t you make a mix tape of those games, put it to music. You may see this all the time because you are from New York, but folks outside the city have never seen this kind of basketball.”
So we made a tape. We gave 50,000 tapes away. It was the most successful promotion in a weekend that Foot Action had ever had. Then the ball players actually said, “Why don’t we host some games?” The first game we hosted at Hunter College, and Mos Def did a concert after the game. It was jammed pack in the summertime. Then from there, we approached ESPN and said, “Look, we have this idea for a tour for a TV show.” It was early on in the reality thing. They ran with it.
Actually, in its second or third year, street ball was a better performer for ESPN than SportsCenter among teen males.
Knowledge@Wharton: You mentioned that moving away from your core product was actually detrimental to your business. Could you explain that a bit further?
Berger: Sure. When you start to grow as a business, [you want to] keep growing and be as big as you possibly can be. That conflicts with continuing to be true to who you are as a company and servicing the same consumer.
As a basketball brand [targeting young males], we started to feel like there was only so big that we could get. So we started to do other products. We did a slip-on shoe. We did a training shoe. We started to do training clothing. I really feel that it diluted our brand. We started to alter our logo so it wasn’t so basketball-only. The idea was, “Hey, we need to enable more consumers to feel that they can buy our product.”
I actually think that started our slide down when we really should have said, “Look, you know what? If we can be a $200 million, $300 million, $400 million, $500 million company, and it might take us 10 years to get there, that is as big as we can be.” That is doing the right thing for the consumer versus saying, “I want to be a $500 million company in two years. We need to expand our product line.” You forget why the consumer likes you.
Knowledge@Wharton: Instead of expanding vertically, what did you do to ensure that your business had scalability in your target consumer market?
Berger: When we went vertical, we realized that this business has a limited size. At our height in 2001 with our licensees, we were about $285 million…. [But] we are in an industry where we are competing with $1 billion, $2 billion, $12 billion companies and they can spend so much more in marketing. So we felt like we needed to generate more money so we could spend more money on marketing.
I think the mistake we made was saying, “You know what? If we can be a very profitable $300 million company, that is great. Let’s do that. If we want to grow, what we should be doing is buying other brands that have different meaning to their consumers. So let’s buy a running brand. Let’s buy a fashion brand, as opposed to trying to make AND 1 broader to the consumer.”
Nike is probably the only brand in the footwear and apparel industry that has done a really good job of being true to itself as an athletic brand and yet somehow being able to bridge the fashion gap. Adidas tried it; they failed. Reebok did it; they failed. Under Armour is going to try and I hope they succeed, because Kevin is a good friend of mine. But I am not so sure.
But Nike has always said, in terms of their marketing, all they will say is athlete, athlete, athlete, athlete, athlete. That enables people my age to wear a swoosh and think, “Ah. I look like an athlete now.” Yet somehow, that has become very fashionable. I think they are the only ones that have been able to do it.
Knowledge@Wharton: What would you say is your best and worst experience while building AND 1?
Berger: Wow. I don’t know that I had a worst experience. I can give you a moment of horror. We had signed Stephon Marbury from Georgia Tech who left as a freshman and played for the Minnesota Timberwolves. He was our first sneaker endorser. He was number four or five, I think, in the NBA Draft. I think Rayon was fourth. So we are invited by the Timberwolves to sit court side to watch Steph play his first regular season game. We had done a massive national TV campaign. We gave away 10,000 t-shirts at the Target Center. The campaign was called, “Breaking Ankles with Stephon Marbury”. He was supposed to break an ankle; someone is supposed to cross you over and they are breaking ankles.
So he is having a good first quarter. He is starting. Him and Garnett, they are playing relatively well. About five minutes into the first quarter he comes down on Cadillac Anderson. Now Cadillac Anderson is seven feet tall and he is not a great player. But his foot makes Shaq look small. He comes down on Steph’s foot, rolls his ankle, breaks it…. They pick up Steph, carry him over and sit him down right next to us because they had sat us down at the end of the Timberwolves bench.
Steph looks at me. I look at him. He is thinking, “These shoes stink.” I am thinking, “What the heck were you doing trying to drive on Cadillac Anderson?” We have $six million of shoes on order at that time. The shoes are due to hit our warehouse the next week. Then get shipped out to retailers. I literally called my director of marketing back home and I say “Aaron, it has been a great run. Just so you know, there is a really good chance we are going to go bankrupt, because we can’t float these shoes if the retailers ship them back to us; Marbury ain’t going to be on the court for four months.” But it all worked out. He actually was out for four months with a broken ankle. We got ripped in the media for our campaign “Breaking Ankles.”
I really don’t know if there is a best moment; there are so many. I mean the whole experience with AND 1 was incredible. Twelve years with great people and way more success than we had ever imagined. If I thought of one moment though, it was the first time I saw a kid wearing our t-shirt. It was actually a 12-year-old girl at a “hoop it up.” I was out that first summer and hadn’t seen anyone really wearing it…. It was like “Oh, perfect. Our target consumer is right here; a hard core basketball player wearing AND 1.” She had cut the sleeves off and was trying to look diesel. It was great.
Knowledge@Wharton: Clearly you have experienced a lot of success in a very competitive industry. If you were to start another company today, what would it be?
Berger: [laughs]. I don’t know. I really don’t think I would do that actually. We sold the business in 2005. I’ve got three young kids. I have been coaching high school basketball. I’ve had three or four opportunities to do really cool things; each time I have decided that the time with my kids and the time that I am spending with the kids from my high school, because I coach them six months during the year, are more valuable than starting another business.
Knowledge@Wharton: What do you think is the next big thing in the athletic apparel industry?
Berger: I think it is going to get even more vertical. Towards the end of our run, the dynamics of the industry got very difficult. You had sneaker factories that were squeezing the vendors, the retailers and the consumers; then everyone is squeezing back. So it is very difficult these days to be a successful vendor, meaning a Nike or a Reebok. The margins are too slim. I think [we] have seen a lot of consolidation.
At a certain point there is going to be some funky combination of Internet, retail and manufacturer. Nike, Adidas or UA is going to say to Foot Locker, Champs, and JC Penney: “We are going to open up a thousand of our own stores. We no longer need you as a pass through to the consumer.” The Internet, I think, has [increased] the availability of information to the consumer; at this point the consumer must know that for that $100 shoe, they are spending an extra $40 that they don’t need to spend because it is passing through too many hands.
[Companies] might even start [looking] over in China because they are beginning to lose some business to other nations. They might say, “Look. You know what? We are going to buy a brand, have the vendor, and we are going to own a retailer so that we can deliver a shoe that a kid would be spending $100 on for $60.” That has to happen. I think that is probably the next stage.
Knowledge@Wharton: Speaking of China, in terms of brand marketing, there has been a lot of hype in the business world around advertising during the Beijing Olympics. What is your take on marketing athletic products through this event? Given that there is so much competition for advertising, do you think that it is a worthwhile pursuit for athletic brands?
Berger: I think it is worthwhile for Nike, and I think everyone else is wasting their money.
Knowledge@Wharton: Why is that?
Berger: At the end of the day, athletes are associated with the brands that they wear. Kids don’t really care who put the commercial on. At the end of the day they know LeBron James wears a Nike shoe. So Adidas, Reebok or anyone else can “sponsor” the Olympics. Actually, it happened it Atlanta…. In Atlanta, one of the other brands sponsored the Olympics and Nike just flooded the Olympics. Michael Johnson was wearing a golden shoe when he broke the record running the 400. No one knew that Reebok had sponsored the Olympics. No one cared because the athletes were wearing Nike.
So for Nike, and to a lesser extent Adidas, I think it makes sense for them to invest. Everyone else, they should take their money and go put it on number eight on a roulette wheel. It is better spent.
Knowledge@Wharton: As a successful entrepreneur, what advice do you have for students who are interested in starting a business?
Berger: Start a business before you go get a job. Here is the reason. If you go get a job, you are going to succeed…. If you come out and work, what are you going to make? 50K to start? You tell me.
Knowledge@Wharton: I don’t know. [laughs]
Berger: If you work for a bank or something like that?
Berger: OK, great. So let’s say you are 21 and you get out of school making $60,000. You do real well and three years later they say, “I am going to send you back to grad school. I am going to pay for you. Then, come back to work. When you come back you are making $175,000.” Five years after that, you are going to be making a half million bucks. You are going to have a husband or a wife, two kids, nice car, summer home, country club. At what point are you going to say, “I am going to go start my own company.”? The answer is never.
What you will do is work until you have made enough money, somewhere in your 50s, to go do something you really want to do, instead of now, when you are broke…. When I got out of graduate school and I drove a Honda Civic Hatchback. I was broke. I didn’t care. It just didn’t matter. But once you get used to the good life, you won’t go back. So if you are thinking about starting a business, start the day you graduate. You don’t need experience. You don’t need money. You don’t need someone else to tell you that you can do it. Just go start it before you get used to making all that money.
Knowledge@Wharton: Great. Thanks for joining us, Seth.