How Sustainable Startup Rothy’s Found Success Turning Recycled Water…

On a corner in San Francisco’s Jackson Square, formerly part of the city’s famed Barbary Coast and now an enclave of design firms and disruptive start-ups, the fog swirls just beyond the windows that run the length of Rothy’s headquarters. The fog is so thick and ever-present the locals have named it Karl. But inside, surrounded by whitewashed walls and blonde wood, a small team are designing and shipping distinctive women’s shoes made entirely of recycled water bottles knitted into a soft, flexible flat. The shoes have captured the attention of women across the country—and some big investors, too.

Down a steep stairway and through a cavern of rooms, sits the Rothy’s design studio. Amidst vibrant spools of thread made from water bottles and mood boards with color swatches, Creative Director Erin Lowenberg and her team have been working since January on a new silhouette: an ankle boot called The Chelsea, which launched this week.

The company that made its mark with ballet-style flats and then expanded with a sneaker is giving its customers what they have been asking for since nearly the beginning, which is to be able to wear their Rothy’s all year-round. Customers gave prodigious feedback about wanting a shoe that covered more of their foot and Rothy’s, which thinks a lot about their product being at “the front of the closet,” wanted to have “more seasonal relevance in the back half of the year,” Lowenberg said.

The design team used the Chelsea boot as inspiration for its version, both for its practicality and as a proven silhouette that “we could make beautiful and comfortable,” Lowenberg said. They began with the Rothy’s sneaker’s sole as the foundation, given its additional height and thickness. The team quickly determined that to align with the previous silhouettes’ washability and materials, they wouldn’t introduce a zipper or leather, which meant the boot would need to stretch open and have a pull tab in the back. And which meant like all the previous designs, with no laces or closures, the fit had to be perfect.

Some might argue that Rothy’s timing has been pretty perfect as well. The company has burst onto the scene as little known practices in the retail world have come under public scrutiny in the last couple of years, particularly the problem of what to do with the millions of units of clothing and shoes that go unsold each season. Some end up donated, a lot of it ends up in a landfill and then the remainder is—literally—incinerated. Rothy’s hasn’t just made use of innovative materials, it has designed a whole supply chain that has taken the industry’s traditional chain bogged down with scrapped material, overproduction of product and energy costs on transporting excess down to “virtually zero,” according to its founders.

Startup story

Rothy’s was founded back in 2012, when co-founder Roth Martin, who was ready to leave the gallery world, noticed the proliferation of Lululemon yoga pants in San Francisco—on his wife, at the grocery store, downtown, everywhere. And while the stretchy black pants had gone from being a niche piece to a wardrobe staple, swinging from styled casually to more put together, there was not a shoe equivalent. Over dinner one night, Martin told his friend, Stephen Hawthornthwaite, about what appeared to be an opportunity for a woman’s flat that was comfortable enough to be a staple, but more stylish than a workout shoe—and used innovative materials. Hawthornthwaite, it so happened, was looking to exit finance for something more entrepreneurial.

Within a year, the duo had determined that the flat would be made out of plastic water bottles, something in plentiful supply and not entirely new to the textile world, thanks to Patagonia’s fleeced yarn. The Rothy’s pair decided to develop a non-fleeced yarn from the plastic bottles (that have been melted into pellets and then extruded into soft, flexible strands) that could be knitted. The next step in sustainability was in how to use the yarn. They had discovered during this process how wasteful shoe manufacturing could be, how much raw material ends up on the cutting room floor, and so they decided to eliminate the cutting process. If they could develop a 3D knitting process for the entire upper, which hadn’t been done, then Rothy’s would be using only material that went into the shoe, no more.

Another year was spent in a factory in Maine making prototype after prototype—“it was a very long development time to get this process correct,” Martin says. But the 3D knitting meant no cutting at all, which meant no seams, which meant no additional construction, which meant the fit had to be perfect. The pair concluded that the scale and skill to achieve this meant going to China. There is a very small margin for error in the printing process, and the depth in skilled labor with the programming and the finishing work done by hand, including stitching the upper to the rubber sole, in 55 more steps off the knitting machine, was only available there. Martin and Hawthornthwaite also knew they couldn’t contract it out. “It is so hard to do, it’s why we had to set up our own manufacturing process that’s not one that’s easy to replicate,” Martin said.

In 2015, they set up shop in Dongguan with two knitting machines and a programmer. The following year, they began selling their first batch online in the U.S., while continuing to build out a factory in the southern Chinese city.

The flat was an immediate success and the company soon added a pointed toe style, now the most popular, and then a loafer and a sneaker. Rothy’s high-touch direct-to-consumer model and heavy social media made an immediate impact. The aesthetic and the sustainability story are intertwined and interdependent. The women who wear Rothy’s enjoy the water bottle origin story of their shoe, that it telegraphs a message as innovative or responsible as you want, but they wouldn’t wear them if they didn’t love how they look.

On the ‘gram

The company continuously refreshes its connection with the consumer, sending regular emails with updates on a color launch, styling ideas or teasing a new silhouette. The shoe company has over 250,000 followers on Instagram and such a developed brand identity that its Rothy’s wearers, not its marketing department, who are responsible for the thousands of posts of #rothysinthewild and #liveseamlessly.

Three years in, Rothy’s wearers acknowledge each other with a shared look or brief nod and are used to being approached in public, “Are those the….?” Everyone who owns a pair of Rothy’s has, at least once, stepped out of their pair and insisted that an inquirer try them on.

Lowenberg and her team keep the interest level high, launching new hues and patterns every few months, while swapping out colors and one-off designs and sending them into retirement. Some might come back, some might never return. It’s a constant curation, while certain classics—a navy loafer, the black point (worn by Meghan Markle in New Zealand on her first international tour)—remain in stock. This year, they launched a “honeycomb” style and added a mesh texture for the summer. The design team likes to surprise and delight with small capsule launches, a birds-eye pattern or a bright coral camo or an orange pull tab on a normally all-charcoal sneaker, capsules that are “fun and they aren’t meant to be massive volume drivers, as much as they’re emotional and they keep our website fresh and it’s what we can do differently than any other footwear brand that isn’t knit,” she explained.

Martin and Hawthornthwaite bootstrapped the financing of the development process, and once they went to market, the shoes were profitable. The limited outside capital in the early days was by design, Martin said, and the first $5 million from Lightspeed Venture Partners in April 2017 was unsolicited. Jeremy Liew, who was the first investor in Snapchat, said he and his partners noticed the brand as the flats proliferated amongst friends and colleagues. “The fact the product generated that sort of enthusiasm, that reputation, not just in people loving the product and buying it, but evangelizing it to their friends.” So Lightspeed called Rothy’s, which wasn’t looking to raise capital, and convinced the company their capital could help meet the demand.

Rothy’s pulled in $140 million in revenue in 2018 and President and COO Kerry Cooper confirms the expectation that Rothy’s will double that by the end of this year. At the end of 2018, Goldman Sachs infused $35 million into the company, bringing its outside funding up to $42 million and a valuation of $700 million.

Some of the funding was used to open Rothy’s tiny flagship store on Fillmore Street in May of last year, and the company has plans to add five more stores this fall, in markets like New York, Washington, D.C. And Boston, where there are large pockets of knitted flats wearers.

And some of that capital has been continuing to fund the real growth-driver that is in Dongguan, China. The Rothy’s factory now is 250,000 square feet, has over 450 employees and 260 knitting machines, 20 of which are used just for product development.

Almost 99% of the shoes in the United States are imported from elsewhere, 70% from China. In the last few years, amid political and trade uncertainties, as well as some rising labor costs, some bigger shoe brands have been slowly reducing their dependence on Chinese factories, diversifying their manufacturing to other countries in Asia, India and Bangladesh, and even Mexico. Now the industry is bracing for the impact of the 15% tariffs on Chinese imports, including almost all footwear, that went into effect on Sept. 1. The CFDA, the FDRA and more than 200 companies, called for their cancellation and spelled out the uncertainty of the supply chain, as well as the equal uncertainty on the shared hit to company and customer of rising costs, as much as $4 billion.

Cooper acknowledges that Rothy’s is all in on China. There is no option to diversify, based on tariffs. The company will absorb the impact, though doesn’t seem terribly worried it will lower the margin. “For us, there is so much skilled labor in China, and the supply chain is so strong that our production in China is incredibly efficient. Ultimately, we’re not concerned about tariffs impacting our bottom line,” she said.

Even if Rothy’s remains the last American company producing shoes in Dongguan, the company’s decision to build its own factory, rather than contract out, might be the biggest factor in Rothy’s success. Because unlike Nike or Converse or Keds, Rothy’s owns and controls its entire supply chain, down to the materials used and the elimination of production excess. Because of its DTC model, it now has years of data about what silhouettes sell in what colors in what markets. When Rothy’s launches a new color, it knows after one day of selling if it will continue making it that night, producing just enough pairs to keep stock in line with demand.

The company generally has a good sense of what the Rothy’s customer likes, but there are always surprises. Lowenberg was delighted that the point in copper, a springtime hue, was so popular it briefly surpassed the black point. On the flip side, a subtle black and navy camo print she thought was going to be a hit got a cool reception. And while points almost always outperform flats in the same color, the round-toe has surged past in the fig python. And so they adjust.

The course correction is much smaller than ordering 18 months out and producing (and shipping) too much or not enough by the end of the selling cycle. When Rothy’s was on the cusp of launching its first non-knitted silhouette in the spring, a sandal made of vegan leather, it only discovered quality issues in the final sample batch less than 48 hours before going on sale. The team decided to pull the launch, better to not go into production if quality was remotely a question mark—and emailed customers, who’d days earlier gotten news of the sandal, to let them know it was called off. It was an unexpected step from the company, who pushed up its launch of honeycomb in summer colors ten days early, that quickly receded because the explanation made sense. (Cooper says the sandal will still make its appearance in 2020.)

Lasting impact

Martin is now interim CEO after Hawthornthwaite stepped back in June for health reasons. He thinks that while the company’s shoes are certainly innovative, it’s Rothy’s production strategy that could have the biggest impact. “We’re not committing materials to something that’s maybe not going to get sold and we’re not committing to shipping it around the world unnecessarily. We’re not committing to making boxes to put products in that may not get sold and the industry is just broken in this way.”

The four-year process to create and reliably produce the shoe’s perfect fit, and which had been such a headache, ended up eliminating many of the challenges the rest of the footwear industry is now facing as brands grapple with how to address sustainability. There are few smaller brands like Rothy’s or Allbirds, another San Francisco-based shoe start-up that focused on using sustainable materials (in their case wool and foam produced from sugar cane waste) to make one product really well with mindful manufacturing and then slowly expanded.

For some, the talk of sustainability is buzzy, but its meaning elusive—what does sustainability mean and who defines it? Sanford Bernstein’s Luca Solca says an industry shift is early in stage and that “today all certifications are self-defined and the heads of sustainability [at brands] are, in most cases, former heads of PR.” The luxury goods analyst believes that integrating better processes upstream in their manufacturing is the only “serious option” for shoe companies to transform.

Andy Polk, senior vice president at the FDRA, is optimistic that small steps will beget large change. “You really have to define what it means for your brand,” he said, and then companies need to measure things like shoe waste and what’s recyclable, water waste, energy usage, and digging in with suppliers, freight companies, warehouses. “Part of the ecosystem of mapping it out and figuring out where you can make improvements,” Polk said, implementing smaller changes and then going further on material and production innovation. The trade organization, of which 90% of the American shoe industry belongs, has turned much of its efforts to providing resources and tools for brands and retailers to shift to more sustainable models. One component of this is sharing knowledge amongst peers, of which Polk wishes that Rothy’s was doing more.

“They have done a great job of focusing on the consumer and telling that story,” he said, but he thinks that Rothy’s has “an opportunity to be a real leader” and be more forthcoming and open about their own processes, which would encourage other brands to invest where needed and take on the risk of transforming their practices. “You know, a rising tide lifts all boats,” Polk said.

Solca also thinks that a transparency, of sorts, is what will drive industry change and that smaller niche players, who “put their money where their mouth is on craftsmanship and sustainability” and make that apparent to the consumers on each product will pressure larger brands to do the same.

And the boot

Meanwhile, the boot is kicking off in eight colors, three of which are patterns. You can see the bones of the sneaker in it, though the antique white of the sole is meant to look less sporty. Lowenberg says her current favorite is a muted charcoal and olive palette that looks like a modern neutral. “I love doing these neutrals,” she said. “Our customer loves an elevated, beautiful basic.”

This one is called Fog Melange. Perfect for fall—or year-round, in San Francisco.