01 Sep 2007
Riding It Outby Julia HannaTopics:
An ailing horse and an overweight Labrador retriever provided the inspiration for Becky Minard and Paal Gisholt (both MBA ’93) to launch SmartPak, a business that provides nutritional supplements, dog food, and supplies to customers devoted to their four-footed friends. Since its founding in 1999, the company’s revenues have increased by leaps and bounds. But the melamine pet food scare last spring could have ruined everything.
The bad news came to a place it shouldn’t: Disney World. It was during one of the few vacations that Paal Gisholt and Becky Minard (both MBA ’93) had taken with their children since 1999, the year the couple had launched SmartPak Equine, a horse supplement and vitamin business. SmartPak eventually branched out to include nutritional care for dogs and other supplies and became a $40 million company. But trouble arrived at around eleven o’clock the morning of April 20, 2007, while Gisholt, Minard, and their three young daughters were waiting in line for Test Track, an auto-testing simulation that advises riders to “Strap yourself in to race up bumpy terrain, roar through hairpin turns, speed into freezing cold chambers, and rush on to fifty-degree banked curves at sixty miles an hour!”
Any entrepreneur can tell you how well the same description suits the wild ride of a start-up, and the e-mail coming through on Gisholt’s Trio promised a perilous turn of its own. Back at company headquarters in Plymouth, Massachusetts, Melissa Hamlet, vice president of purchasing, had just been notified by the contract manufacturer of SmartPak’s dog food that the weight-control formula might contain melamine. The substance, which has been used by Chinese manufacturers to spike protein levels in certain pet food ingredients, was suspected in the sickness and deaths of hundreds and perhaps thousands of dogs and cats (the numbers remain unclear, as there is no centralized database of such information). While the situation was uncertain, there was some concern that a production run of SmartPak’s LiveSmart Weight Management Chicken and Brown Rice Dog Food had been contaminated.
“We had been following the dog food recall, which centered around contaminated wheat gluten, a cheap dog food ingredient used primarily in supermarket brands,” explains Gisholt. “But we were totally shocked to discover that rice protein concentrate — an expensive ingredient we use to avoid allergic reactions — had been spiked with the same chemical. Our contract manufacturer told us that his supplier wasn’t sure if the rice protein concentrate used in our batch of food had been affected, and test results were at least a few days away.” But there was never any question whether the company would wait for the test results. “We’ve always followed a ‘Do what’s right and take your lumps’ approach to business. We had to execute the recall.”
You can probably picture what happened next: the hasty return trip to SmartPak’s offices and the tears and bad feelings that come from cutting short a visit to the Magic Kingdom when you have three children under the age of 12. Worse, you can guess the general chaos, damage to customer relations, and harm to the brand that swirl around any product recall.
By five o’clock that afternoon, the SmartPak customers who had purchased the batch of the product in question had received either a phone call or an e-mail that described the problem, credited the order, and promised a free replacement shipment of a similar product. Gisholt and Minard stayed in Florida to enjoy the rest of their family vacation, although Gisholt admits he probably spent more time on the phone that day than he did whizzing along on Test Track or any other Disney attraction.
“We have a strong team and had already developed a recall procedure in the event that something like the melamine incident happened,” says Gisholt. “It’s one of those instances that’s challenging as a parent and as an entrepreneur — you don’t always want your business to trump family needs.”
After Gisholt gave the go-ahead, the recall came off without a hitch and garnered a warm customer response. “Thank you for your diligence in keeping us informed during this stressful time,” read one e-mail. “It reinforces the wisdom of our decision to feed our beloved pet SmartPak products. There is no way we could track this by ourselves.” “SmartPak Canine, thanks for being so proactive at a time when all pet owners should be alert,” read another. “Not every pet food company has been as helpful.”
The positive reviews continued even after a second recall came a few weeks later as a result of independent testing conducted by SmartPak. Laboratory results showed that the subject of the original recall — the chicken and rice dog food — did not contain melamine — but its Adult Lamb and Brown Rice Dog Food did, perhaps due to cross-contamination from other batches of food manufactured at its contract supplier, New York’s Chenango Valley Pet Foods.
“That’s the reality of modern food manufacturing,” Gisholt remarks. “Food for people is also made without a complete wet cleaning in between productions, which is why you will see a nut allergy warning on foods that are made in a facility where nuts are used.”
SmartPak’s experience and that of other pet food manufacturers raises an uncomfortable question in the age of globalization. At a time when the ingredients of our foods and medicines, parts for our cars, and toys for our children come from countries around the world, who is minding the store? What is the best way to ensure quality and safety?
“It certainly looks like China is beginning to understand the importance of the issue,” says Gisholt. The country’s former head of the State Food and Drug Administration, Zheng Xiaoyu, was executed for corruption in early July. He was convicted of taking approximately $850,000 in bribes from drug companies, but the sentence has been widely interpreted as a way to signal China’s stance on safety issues in the wake of the melamine contamination and other lapses, such as the deaths in 2004 of thirteen babies in rural Anhui Province from malnutrition after being fed fake milk powder. An episode last year led to the poisoning of at least 51 people in Panama after they ingested medicine made with diethylene glycol, an industrial chemical similar to antifreeze that a Chinese company used as a substitute for pharmaceutical-grade syrup. In June, officials at the National Highway Transportation Safety Administration ordered a recall of 450,000 tires missing a key safety feature that a U.S. importer had purchased from a Chinese manufacturer and distributed to retail outlets.
“I don’t think there is a strong culture of adherence to regulations in China right now,” Gisholt observes, noting that Chenango Valley no longer sources any of its major ingredients from China and must now notify SmartPak if it changes ingredient suppliers. For its part, SmartPak also tests every batch of dog food for melamine and cyanuric acid, two substances found in all the dogs and cats that died as a result of eating contaminated food (in combination, the two chemicals can form kidney-blocking crystals that cause renal failure).
“I think it would be hard to make a blanket statement about all Chinese companies,” continues Gisholt. “There are some good facilities and companies that have standards and integrity, and some that don’t. The whole episode has certainly highlighted the manufacturer’s duty to validate the quality of suppliers.”
For the full story of how SmartPak got its start, years before this bump in the start-up road, you’d want to meet Westley, the Thoroughbred-quarter horse cross that Becky Minard bought to show as a jumper in 1997. A rider since the age of 10 (“I blame my mother for getting me into it”), Minard saw great potential in Westley. But the horse suffered from a degenerative eye disease that could lead to blindness. The vet advised Minard to supplement his food with daily high doses of vitamin E. But Westley was just one horse in a stable full of horses, each with its own nutritional needs. Sometimes he got his vitamins, sometimes he didn’t. After talking to the barn’s owner, Minard began to appreciate how complicated it can be to keep track of multiple supplements for each horse and came up with the idea for the SmartPak — a custom-packed, multi-compartment package containing the exact amount of nutritional supplements needed for each feeding.
The idea for SmartPak Canine came along in 2006 when “we noticed that people were buying the horse vitamins and giving it to their dogs in dog-sized doses,” says Minard. Going beyond supplements, SmartPak Canine introduced high-quality, premeasured dog food, inspired by Tally, Minard’s lovable but extremely overweight (94-pound) Lab. Including high-protein dry food in one of the SmartPak compartments introduced a degree of portion control that brought Tally back down to a healthier 60 pounds.
“There’s the potential to add two years to your dog’s life if you manage its weight properly,” says Gisholt. “That’s a lot of ‘found time’ with a beloved extended family member.” A monthly shipment of SmartPak’s LiveSmart dog food with two, one-cup feedings per day costs $20.95 — more than most grocery brands but a manageable sum for customers who value the convenience of automatic shipments that make taking care of the family dog as easy as peeling the top off a SmartPak. Gisholt notes that this last benefit is a key selling point for mothers who suddenly find themselves, not their kids, taking care of feeding and the associated hassles of lugging home huge bags of kibble. “Customers have told us that SmartPaks help them to realize their lofty visions of pet ownership, with the child feeding the dog, and the dog bonding with her new feeder,” he says.
“Our customers are the same sort of people who have ZOOTS do their dry cleaning and who get their DVDs through Netflix,” Gisholt remarks. “It’s another way to put something else in your life on autopilot.”
Before starting SmartPak, Minard held positions in marketing, while Gisholt spent about ten years in venture capital, working with various companies involved with health care, plastics, and packaging — all very useful experiences for running SmartPak. While they received their initial infusion of cash from various angel investors, two rounds of VC funding provided the necessary capital to launch and expand the business, with the first (raised during the Internet’s heyday) coming much more easily than the second.
“When we launched the product, we were operating at a negative gross profit margin,” Gisholt recalls. “The hardest thing we had to do was figure out how to produce an infinite variety of possible SmartPak combinations in a cost-effective way and get orders out the door in a timely manner. Our economic model had some great features — customized products, continuity sales, limited working capital — and we were growing fast. But we had to articulate a plan to reduce our costs through lean manufacturing and automation so we could get investors to buy into the business. It also required salesmanship to get people interested in the equine business, which is not at the top of everyone’s list as an investment opportunity. It required a leap of faith on their part.”
“Our biggest challenge when we started the business was we were doing something that nobody had done before,” adds Minard. “It was a completely blank sheet of paper in terms of figuring out what we wanted the production system to look like and then backing that up with an IT system — that’s an area where neither Paal nor I have any background experience.”
Ten employees now staff the IT department, a “hefty investment” by Gisholt’s admission but a necessary one in a business that relies so heavily on accuracy in its customization and shipping of orders. “Many catalog companies will buy an off-the-shelf software system that will work for most of their purposes,” he says. “In our case, we had to design one from the ground up.” The customized system allows SmartPak to adapt its process on an as-needed basis. For example, when a customer received the correct SmartPak shipment with incorrect paperwork, the IT team programmed an electronic “poka-yoke” (a term from lean manufacturing in which an engineering solution prevents a mistake) that keeps a mailing label from being printed unless the bar codes on the SmartPak and paperwork match up. The system can also store monthly orders from multiple accounts that are being sent to the same address (a barn, for instance) and pass on the savings to the customer, shipping out any order received by 2 p.m. that same day.
The investors who did take a chance on SmartPak have watched it mature into a $40 million company with nearly 200 employees. In 2005 and 2006 it made the Inc. 500 list as one the country’s fastest-growing private companies, with revenues increasing by 46 percent just last year. The company’s expansion into horse-related products like halters, blankets, fly spray, and riding apparel in 2003 was a customer-driven development, much like the move into dog food and supplements. Non-nutritional products are growing at a very high rate and now account for roughly half of SmartPak’s revenues. A retail location in Natick, Massachusetts, doubles as a kind of test lab to assess customer reaction to new products and offers a venue for the company’s on-staff veterinarian to speak on various topics related to equine health.
“The introduction of non-nutritional products happened very organically,” Gisholt says. “Some of our customers told us, ‘We love that you ship so regularly to us, we love the service, and we wish we could buy more stuff from you.’ As so often happens with a start-up, you have one idea, which is enough to get a business going, and then other ideas come to you. In this case the idea came from our customers, which is a good way for it to happen.”
In the future, Gisholt and Minard expect SmartPak to offer additional horse and dog products, with continued focus on a high level of customer service. “On the equine side, we have a great bunch of customers who are totally passionate about their sport — and it’s a very gear-oriented sport,” notes Gisholt. “It’s a market where people appreciate a certain level of service, and you can afford to provide it, which is fun. You want to be able to train people extensively, pay them well, and have your customers really value the results.”
SmartPak’s road to the future will no doubt hold further twists and turns, beyond the pet food recall of last spring. But for Gisholt and Minard, the satisfaction of running a business continues to be worth it, despite the logistical complications that can arise around raising a family when long hours are more the norm than the exception. They acknowledge that it can be challenging to work together (a set of ground rules limit the discussion of work matters at home) but claim their experience attending HBS as a married couple prepared them well: During their time at Soldiers Field, they had a “no discussing cases in bed” mandate.
“One of the best things about being self-employed is that you get to handpick a team to work with,” Minard remarks. “It makes coming to the office fun, because you’re working with people who you’re excited to see.”
“What I like about running a business versus being in venture capital is that you feel more like the quarterback than the coach,” Gisholt says. “It’s less comfortable, and you take the hits, but you also get a bit more satisfaction when you make a good play or win a game.”
Photos by Mark Alcarez
Class of MBA 1993, Section F
Class of MBA 1993, Section I