01 Jun 2015
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Case Study: Sneak Peak

A beverage company in need of a shakeup
Re: Karen Barth (MBA 1986); Peter Warner (MBA 1988); Ariel Galinsky (MBA 1997); Stefano Falconi (MBA 1987); Mike Tully (AMP 173); Sergio Rattner (MBA 2001); Soura Bhattacharyya (MBA 2007)

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Case Study features alumni and faculty offering advice on strategy to alumni who are leading businesses at a crossroads.

Charles Philp (MBA 2006) started Colorado-based Sneakz Organic with his business partner in 2012 after a lightbulb moment in his kitchen. While making a juice blend, Philp found that mixing one full serving of vegetables with chocolate milk could disguise the vegetable taste, creating a creamy chocolate milk shake that could offer parents a sneaky way to deliver vegetable nutrition to their kids. Sneakz Organic was born.

The Sneakz team turned to friends and angel investors to help launch the product once they created a commercially viable recipe. In January 2013, they debuted their chocolate milk shake in the natural grocery channel (including Whole Foods Market and Sprouts Farmers Market). Over the course of two years, the team expanded distribution to more than 1,000 retail outlets, including Target and Toys “R” Us.

Revenue has grown rapidly with just one flavor, but after multiple discussions with venture capital groups, it became clear that investors were looking for companies that had reached $1 million in revenue. This presented a catch-22 for Sneakz: The company needed to launch a second flavor to expand its market and cross this threshold, but the capital required to scale-up a second product would challenge the team’s financial resources. The cofounders decided that to make money, you need to spend money, and launched their second product, a vanilla milk shake.

The Question:

With the second product en route to market, the team has decided all funding options are on the table and has considered bridge loans, another round of angel financing, bringing on a new partner willing to invest capital, or even partnering with another brand. How should Sneakz fund operations while pushing the business to hit the critical million-dollar mark?

The Answers:

I have been in this exact situation with an innovative family beverage product. If the product is in 1,000-plus outlets including high-volume places like Target and Toys “R” Us, and it isn’t moving off the shelf fast enough to yield $1 million, you probably have a consumer-marketing problem more than a financing problem. Do you know how well your product is moving off the shelf? It is easy to think you are succeeding based on just filling up shelves, but if you aren’t receiving data on the sell-through, then you may not fully understand the situation you are in.

If you are really getting great sell-through and your margins are strong, the angels should be lining up to invest. There are plenty of people out there, both large funds and individuals, who are looking to invest in high-growth beverage startups.

Also, it is not clear to me why you are launching another product. Why not invest whatever capital you can get in driving amazing sell-through in one or two chains with some creative consumer marketing? And at the same time, broaden your distribution to a few more chains. That would cost less and would be a faster, healthier way to get to the $1 million mark.
—Karen Barth (MBA 1986)

They should grow the old-fashioned way: hold back enough cash to grow in a controlled manner. Borrowing money to double in size instantly is extremely risky. Best case [it works], all the growth proceeds will go to the lenders, leaving the owners with more stress, work, [and] risk—and probably no more income. Worst case, the launch fails and takes the company with it.
—Peter Warner (MBA 1988)

The best option would be funding via a partner that has execution-related added value and that is willing to come in with capital. Other funding options add risk or represent extra dilution over the synergetic partner alternative.
—Ariel Galinsky (MBA 1997)

Whole Foods alone is not enough for a single-flavor product aiming to surpass $1 million in sales. It is bound to disappear in their well-stocked shelves, especially in the larger stores. I suggest trying to add Trader Joe’s: great locations in affluent zip codes, more value-oriented, and lower price points, but still very focused on healthy foods, so a good fit with this product. Also look at Aldi: impressive growth and very good locations in the Midwest and Mid-Atlantic, a focus on price-sensitive customers, and a much narrower range of healthy beverages, so this product could stand out more. This might provide a good test of the product’s appeal to a different customer base.

You could also consider teaming up with public school districts and vending machine operators to reclaim vending space made vacant by the new federal guidelines against unhealthy, sugary beverages. The profit margin may be slimmer, but it could be made up by volume.
—Stefano Falconi (MBA 1987)

Most beverage companies (non-alcoholic) run in the low 50s for product margins. Assuming they have gotten this right, they have a marketing/distribution problem. They need to prove that they can grow either in product per location or in total number of locations. The product sounds like it would have appeal to a larger audience than just the high-end natural grocery business.
—Michael Tully (AMP 173, 2007)

I suggest the partners go back to their growth strategy for product no. 1 and try to grow it beyond $1 million in revenue. There is no point in adding a second product until that happens. Also consider that any decent VC investor will judge future growth prospects based on revenue per product.
—Sergio Rattner (MBA 2001)

The appeal of the product to young parents seems apparent. Thisappeal can be better monetized on a social platform rather than a conventional distribution channel. I would suggest a Kickstarter program to fund growth and explore the non-retail channel. The tangible nature of the product makes it ideally suited for such a platform.
—Soura Bhattacharyya (MBA 2007)

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