Innovator Roundtable

RICHARD HALL: Here is your non-executive director board, and I must say if I had to launch a product in this market, if I had this team I couldn’t fail. What would you like to ask them?

QUESTION: Given the Sweet Leaf [Tea] example, where there was some discussion of the DSD costs versus traditional distribution ?versus guerilla marketing spin, Bill, you’ve been through numerous launches now, how do you see a young company navigating in all of that mix at this point, where are the opportunities?

BILL SIPPER: I really think it’s about your budget and what your abilities are. You can do a lot more, obviously, with a larger budget. And you can move into different areas of guerilla marketing with a bigger budget, but when you come out the gate you’re probably not going to have any advertising dollars. So, your best bet is usually sampling.

QUESTION: A lot of entrepreneurs go into the natural trade nationally first, but they have thin coverage. [Knowing] the tradeoff on the expense side when you go DSD, any insight into those two systems?

SIPPER: I’ve been on both sides of that fence. There’s no doubt in my mind if you can put together a DSD network that will cover the territory, DSD’s the way to go. But the reality is it’s almost impossible to do that today. And you have to look at alternative methods of distribution if you want to accomplish that.

TOM FIRST: I think one of the answers is really if you’re going to go pure DSD upfront, it’s going to be expensive, and you’re going to have to put a lot of money and people behind it. So a lot of the younger companies, what they are choosing to do is to send through natural [channels], where you have thin but targeted distribution in a lot of markets. What it does is buy you a license to make a decision down the road. Now that decision down the road can be dangerous and it can be scary for two reasons. One reason is you have to extract yourself – potentially you’re going to have to extract yourself from the network where you built your channel. Is that going to anger the customer you’re dealing with The other thing is there’s going to be a margin difference. You can make some really good margins shipping direct into natural and the amount of money you’re going to be able to earn going DSD, especially when you pile the resources and the sales incentives and the promotion of the product on top of that is a lot less than the way you introduce to that market. But I do generally think that smaller companies have a better chance to gain traction if you’re a natural product , is through that segment up front [rather] than trying to spread yourself thin across a whole country DSD.

HALL: I was going to ask a question about slotting fees and the cost of getting into the market. Would any of you have any thoughts about the cost? You’ve got this great product concept, you’ve got to contend with the distribution problems, what about the cost of getting there?

MIKE WEINSTEIN: There are many accounts that require slotting, and as a startup, unless you’re pretty well funded, you have to pass on those at the beginning. A lot of it really depends on where you think the sweet spot for your product is, and what kind of accounts it’s going to sell in. If you have a product that appeals to young males, then probably gas station convenience stores are a channel you want to get to. If you’re going to do that, you’re best off going DSD if you can find the system. If you’re trying to do a natural product and you go into whole foods and accounts like that, DSD may not be the best way to go and you’re better off going through UNFI or Tree of Life or one of those people. There’s an economic equation, but there’s also a route to market issue you’ve got to deal with.

HALL: Tom, you just started up OWater. Do you find that the product has sold itself, or have you had to go through the traditional way because you’ve had the financial resources to do that.

FIRST: I think it’s a challenge whenever you start a brand. If you were Cadbury Schweppes or you were Pepsi you might spend $30 million and do market testing and focus groups to try to figure out where your product sells, who your consumer is and what channel you should go through, but that’s probably not how a lot of the entrepreneurial people in this crowd are going to approach it. So, what we do is we put the product on the shelf and we let the consumer and the retailer and our distributors tell us what’s going on. I think what Mike said is really true. You discover that if your product is female-skewed you’re going to have a better shot in certain channels than you are if it’s male-skewed and you make that decision.

SIPPER: I just want to add that for 80 to 90 percent of the people in this room, you’ve got to hold off on the slotting as long as you possibly can, and try to go in the early adopter chains that will put you in for very little. I wouldn’t refer to it as necessarily slotting, but they’ll give you a fair shake. But you have to hold off. We didn’t pay slotting at Nantucket Nectars for a very long time.

HALL: One of the rhetorical questions from the speakers came through to us. Key reasons why startups fail. You’ve supported and advised a lot of businesses and serviced a lot of businesses. What is it that disconnects when they’re getting going?

ERIK DONHOWE: Finance is a big one of course. Most everybody can get successful through one or two rounds of financing and then not be able to get the capital to really make more than a regional launch. I think a lack of focus sometimes. The counterpoint is passion. Successful startups are passionate. If an entrepreneur loses focus and tries to do too many things at once without looking at what their mission is, that tends to make them unsuccessful.

HALL: Taste would be a big thing for you too, wouldn’t it?

DONHOWE: Yes. The market’s changed so much in the last 10 years. Five or ten years ago you could make a highly functional energy drink or enhanced water that had an off-flavor. Nowadays, a beverage company is challenged to making something taste as good or better than a non-functional beverage. That’s the beauty of the mainstreaming of functional beverages, but that also is a challenge.

HALL: Do you find taste is a big problem for you, Tom?

FIRST: I think it actually has been a challenge because we have a functional product. Everyone knows what apple juice tastes like, and everybody knows what cranberry tastes like so there’s sort of a benchmark, but I think when you start getting into functional beverages, there may not be an exact expectation from the consumer of what it’s supposed to taste like and there may not be a good precedent for how it’s supposed to taste so you have to be a pioneer and you have to be critical and you have to listen to the consumer and obviously yourself and your peers. So when you’re doing something new, I think it’s actually harder than making apple juice taste good. I knew that fresh pressed apple juice tasted better than concentrate apple juice and we could make that choice by buying from the right source. When you start to get into categories where there isn’t good precedent for product, I think it’s more challenging to get it to taste right because the consumer’s not sure what their expectation is going to be.

HALL: Mike, you talked about the difficulty consumers had with clear energy. Did you reformulate your taste as well as the clarity of the product at the same time?

WEINSTEIN: We did. We made our product more full flavored. We found they wanted color. If it was clear, and Tom gets a little bit of this if it’s clear, they expect it to be water, and they don’t want stuff in it. I find the biggest challenge people run into is they fall in love with their own ideas and they don’t want to hear that it’s a good idea. The distributors are the ones – the first to tell you what’s wrong with your idea, and you better well listen to them. Don’t assume that they don’t know what they’re talking about. They know exactly what they’re talking about. So we were able to change quickly. There are so many people who have called me and asked for my opinion and if it’s something they don’t like they say ‘that’s a bad idea.’ And it may in fact. I may be wrong, but you better be open minded to hearing what people have to say.QUESTION: I’ve got a question about packaging sustainability. “Sustainability” and “Earth-Friendly” are becoming a hot button in packaging in beverages. What does it mean to all of you and how is it changing your business plans moving forward to incorporate sustainability issues.

FIRST: We’re in PET1. And It is becoming an issue, obviously. Everyone in this room’s probably concerned about it or following it. I actually think one of the most important things we can do as an industry is be proactive about it rather than be reactive about it and I think the plastics industry should join us. In reality, PET1 can be a great material if people recycle it. And it also can be a great material if we can use enough recycled material to create new bottles. If those two things happen, then the last sort of frontier we need to cross is accelerated biodegradability. And if all three of those things can happen, then we’ve got a material that we can be really proud of because our transportation costs and our ability to produce on site in a lot of cases makes it a… low carbon footprint product. In reality PET1 has, I think, the estimate is 1/50th of the carbon footprint of glass. But it’s got a bad rap because plastic is being swept with a broad brush right now. I hope we as an industry and as a group along with the plastic industry can be proactive about this and I think we should advertise.

QUESTION: I’d like to know for those of us who are starting at small scale, when we go to outsource, when we go to co-packers, when we got to distributors and suppliers, we’re constantly being told “we have to charge you top dollar because you’re a small customer right now and when you get larger you’ll get this discount and that discount, it’ll be cheaper.” It’s very tough to make the cost structure work as a new entrepreneur. I’m wondering what suggestions you might have for somebody starting out at the industry as to how to make a profit at the beginning when you keep hearing that story over and over again.

SIPPER: You know, I could you a great song and dance, but unless you have some revolutionary product or revolutionary concept like a clearly Canadian at the time – it was so different that it took off – forget about it, you’re not going to make money for three-to-six years and you’d better put it in your plan now. That’s the biggest problem I find with my clients, is that they come to me and they say ‘Here’s a business plan,” and you look through it and they’re making money and you say ‘Well where’d you figure that?’ At some point you’ve got to be realistic, and I would advise everybody to err on the side of caution as it relates to making money, because its going to happen if you can make it through those first five or six years.

JIM TONKIN: As I said before, I hate to reiterate the failure rate, but it’s one of those things that as an entrepreneur, you need to be heads up about, and anybody that you talk to, whether its anyone on this panel or whoever your mentor is in business, they probably didn’t get there overnight. Anything worth doing takes a long time.

HALL: Would you say get a mentor?

TONKIN: I think mentoring is a great way to start a business. Many people have great ideas. I always use this with my clients. I basically say, ‘How are you going into this business? Is there a perceived need for your product or are you driving something that your mind is telling you needs to be into the market?’ So the perception versus reality issue has to be answered first. If you perceive the need and you can get others to say yeah, I can verify that there is a need in the marketplace, you’ve got a lot more out of the chute than you do if you’re working out of your own domicile.

QUESTION: I’m curious about the opinion on Tetra-Pak in the U.S. Do you think it’s going to grow? What do you think the consumer response is now? Do you think that will change? And also the fact that the recyclability is technically there, but the reclamation centers aren’t?

FIRST: My instincts tell me that there’s a big opportunity in Tetra-Pak, but it kind of depends on what the product is and whether it fits that and whether a consumer wants to drink that product. I look at it from the water category. Is the consumer going to drink an enhanced water out of the Tetra-Pak, I don’t know. But in terms of recyclability, again something can be recyclable as you say, but it actually has to get into the stream and get recycled and get reused. I think it was Biota that had a biodegradable bottle. One of the issues was that if someone took that bottle and put it into the recycle bin, it actually screwed up the recycling stream. So you had something that was well intentioned, yet it was actually causing negative problems in the recycling stream for PET1. So again you have the industry trying to be proactive, but there are other issues you’ve got to deal with and it is really complicated.

DONHOWE: We see already aseptic interest coming to the U.S. Its prevalent in Europe, it has been for years. Tetrapack’s just one form of it. We see a lot more innovation coming. The limiting factor right now is the number of co-pack plants that can do it. I think the key thing here again is focus. If you have too many SKUs, you’re not going to get the case volume to merit a cost reduction at a co-pack plant. Again this is another symptom.If you have too many launches of different SKUs in the beginning you’re not going to be cost effective. You’ll be unfocused, you’ll be handling things too expensively.

QUESTION: I would love to hear, since you guys have really seen this industry change so much over the past 20 years, and the ridiculous proliferation of brands that has taken place over the past five, any sort of forward-looking statements. If you had to look five years from now in terms of the roles that DSD plays, in going direct with retailers, just any kind of thoughts on forward looking statements of how this industry’s going to change over the next five years?

FIRST: In terms of products, I think we’re going to continue to go towards things that are healthy and more natural, or things that are more technical. Those are the two directions I think that industry is going. I think DSD is vital. I think it’s critical to our businesses and ultimately if you don’t have that partner DSD in a market it’s very hard to be a major strong and powerful brand.

SIPPER: I hope I’ll still be around in five years, but I think there’s going to continue to be brand consolidation. I think Coke and Pepsi are going to be… more aggressive than they are today, as well as Nestle, by the way. In acquiring brands, even smaller brands, they’ll make investments that are not majority-controlled and the distribution will continue to consolidate and it will even get harder to get your products into different markets.

WEINSTEIN: The trend is going to be that the few remaining independent distributors will not economically sustain themselves and will probably go out of business. So you’re going to be left with a Pepsi, Coke, and Dr Pepper/Snapple independent system. They’re going take on a lot more brands. The consumer demands a lot of variety. So the need will still be there… you’ve got to figure out how you manage that brand within a distributorship that’s carrying 1000 SKUs. You won’t have what you had better five years ago, [and what you have] a little bit now, the small independent distributor who’ll pick up your product and sell it for you, be focused on it, cause he’s only got a handful of things. You’re going to be with a much bigger guy and you’re going to be much less important to him.