In March, The Squeeze highlighted the concept of the Lindy Effect. Author, philosopher and statistician Nassim Nicholas Taleb neatly summarised it as “For the perishable, every additional day in its life translates into a shorter additional life expectancy. For the non-perishable, every additional day may imply a longer life expectancy."
As an example of the Lindy Effect, that article compared the UK’s crumbling reinforced autoclaved aerated concrete to the resilience of ancient building materials such as limestone. However, this effect can also be seen with companies. Half don’t make it past five years, while 80 per cent fail within the first 20. But make it past that and a few can last centuries.
Last week, a very old company posted another excellent set of results. In the three months to March, 250-year-old sandal business Birkenstock announced its revenue had increased 23 per cent year-on-year to €481mn.
When compared to modern brands, Birkenstock is ancient. The first sandal was made in the 18th century by Johann Adam Birkenstock in the German village of Langen-Bergheim. The company stayed in the family and in 1963 Karl Birkenstock invented the Madrid sandal the company is most famous for.
The sandals were brought to US in the 1960s and sold in health food stores. Initially, they circulated in the hippie community, where comfort rather than style was prioritised. However, year-on-year the brand slowly spread to the mainstream and now the sandals are ubiquitous summer wear amongst the middle classes. Last year, the company listed in the US and its market cap is now more than $11bn.
This most recent strong quarter has given Birkenstock management the confidence to increase the full-year revenue growth guidance from 17 per cent to 20 per cent. The impressive thing is this performance is despite consumers cutting back on discretionary spending. “The overall global consumer market remains weak, Birkenstock achieved 23 per cent growth, beating the market soundly as we continue to take market share,” said chief executive Oliver Reichert on the earnings call.
To put Birkenstock’s performance in perspective, sustainable Californian shoe company Allbirds saw its revenue drop 27.6 per cent year-on-year in the same period. This isn’t because Allbirds is charging a higher price. In fact, Allbirds makes less profit on each shoe and its gross margin of 47 per cent is significantly below Birkenstock’s 56 per cent.
Compared to Birkenstock, Allbirds is brand new. It was founded in 2016 by Tim Brown, a former New Zealand football player, and Joey Swillinger, a renewable materials expert. The shoes are made of sustainable materials including merino wool, eucalyptus tree fibre and sugarcane.
Initially, they were a hit. Between 2018 and 2020, in the run up to the company's IPO, revenue rose 74 per cent to $219mn. However, when the post-pandemic inflation emerged, Allbirds revenue went into reverse. This year, analysts are forecasting just $197mn of sales, down 34 per cent from 2022.
For those familiar with the Lindy Effect, Allbirds’ decline compared to the success of Birkenstock shouldn’t be a surprise. Allbirds’ brand was built on the fashion of sustainability that emerged in 2010. However, being such a young business, it had no track record to rely on. And it turned out that when customers were faced with a cost-of-living crunch, sustainable branded footwear was one of the first expenses to be cut.
It is not just in the shoe market that the newest companies are suffering. Founded in 2005, HR software-as-a-service company Workday experienced rapid growth in the 2010s as companies adopted its software to lower costs. However, it has recently had to cut its full-year revenue forecast because customers were “committing to lower headcount levels on renewals”.
The issue is that with interest rates rising, companies are focusing more on generating cash flow which means trying to get by with fewer members of their HR, finance and marketing departments. For Workday, this is a problem that will only get worse. Last year, technology consulting company IBM used artificial intelligence to create a chatbot that enabled it to lay off hundreds of HR employees. It is well on track to achieve the $2bn of annual cost savings it promised for 2024.
When a new technology emerges, the most recent innovations usually get replaced. Videos were replaced by DVDs, which were then made redundant by streaming. The digital camera pushed film cameras out of the mainstream, but now everyone uses their smartphones, and Apple is one of the most valuable companies of all time.
Yet people still want to stroll around in comfortable sandals with their friends. And odds are, in hundreds of years that will still be true.
