FIND YOUR BEACHHEAD
Now that I would soon be freed from my corporate job (along with its reliable paycheck), Maura and I started to debate where we should move to in order to launch Zico. Major corporations often choose smallish markets, such as Columbus, Ohio, or Indianapolis, Indiana, to soft-launch their new products and test consumer reactions to refine their strategy before launching nationally. We didn’t have the money for a soft launch and the idea didn’t appeal to me anyway. I wanted a big market that had dozens of diverse consumer groups so we could experiment with multiple tactics and figure out who our core consumers and retailers would be. I’d likely only have one shot at this, so there was no point in succeeding in a market with limited growth potential.
We also wanted to launch somewhere we wanted to live. We needed to find something that was right for the business but also fit into our life plans. Three cities met the criteria: New York, Los Angeles, and Miami. Though Maura greatly preferred L.A. or Miami strictly based on warmer weather, I argued that we should spend a few years in New York first and then move to one of the other cities. Although she didn’t like the cold or the bustle of New York, where she had grown up, it had the advantage of being close to her family so our daughters would log some quality grandparent time.
New York also offered a hugely diverse group of potential consumers and had the added advantage of being the media capital of the U.S., and arguably the world, so if we were successful it would hopefully echo everywhere. Jose and Roberto were based in New Jersey, just outside of New York, and they offered to lease us some of their office space. We’d have one office, share a conference room and a receptionist.
Next we dove into the tricky New York metro real estate market. Maura wanted a house, not an apartment, so Manhattan was out of the running. She had grown up in Westchester County but the prices there were too high for us, so we decided to focus on northern New Jersey. We found a house we liked and could afford in a lovely little town called Oradell and made an offer on it, all while visiting family in Rhode Island. I’ll admit I did some creative storytelling about our finances to get the loan. Fortunately, this was 2004, pre–mortgage crisis, and no one seemed to be very concerned about what people put on those financial forms at the time. We had put every free dollar we had into Zico, so we had to take a loan from both Maura’s and my parents to come up with the down payment but again, it felt like with home prices skyrocketing and Zico about to become huge, we’d pay them back in no time.
Good news was swirling around Zico the summer of 2004 after the Fancy Food Show. The brand was featured in the New York Sun, the Journal News, Food & Wine, Jane magazine, Better Homes and Gardens, and dozens of health and wellness blogs and websites. The Cascadia branding and marketing group voted Zico the hottest new beverage of 2004. I was sure this was the sort of momentum that would just keep building.
While I was winding down my work at IP, I asked Jose and Roberto to hire a small team of two to three salespeople, open bank accounts, rent a van, conduct some demos and marketing on the side, and start generating some sales. I’d complete my move from El Salvador by late October and jump into the day-to-day. I thought we’d receive our first full container load of product by July and have it on shelves around New York by August. I hoped we’d be able to do $400,000 in sales by the end of the year, generating enough margin to cover most of our expenses. In early 2005, we would have made enough of a splash to make a deal with a major distributor, and then we would be off to the races. I figured from there we could do $2 million in sales for 2005. In five years, I planned to be in six major cities with—and let’s just pick a nice round number—$10 million in annual sales. From there, we’d introduce other coconut-related products, expand nationwide, then go global, and finally take over the universe. It all seemed so achievable.
SLOW OUT OF THE GATE
But no, it wasn’t meant to be that easy. The main problem was that our sales projections for the first couple of months were proving to have no relationship with reality. On the positive side, we did start out with some remarkably prestigious accounts. The Beverly Hills Four Seasons bought twenty cases and paid for them to be shipped to Los Angeles, as did Las Ventanas, a super-high-end resort in Los Cabos, Mexico. By the end of September 2004, we had about eighty accounts across New York City, including multiple locations for Better Burger, Health Nuts, Garden of Eden, and the Amish Market. We had a few small natural foods stores, cafes and delis, the two new Equinox gyms, and six Bikram yoga studios. Fairway, the account I had nearly fumbled at the Fancy Food Show when I met Brian, the buyer, was our biggest account ordering regularly, sometimes fifty or one hundred cases at a time.
Although I had confidence in our product regardless, these first sales were psychologically huge. I would see every order that came through and share it with Maura immediately. Who cares if it was only five cases for a Bikram yoga studio on the Upper West Side, and billed out less than seventy-five dollars? It was another order! With this first set of customers, Roberto, Jose, and I were not only just trying to move cases but also to discern patterns. Who was buying and why? With what frequency?
As exciting and interesting as all this was, the problem was that there just weren’t nearly enough sales coming in. Given that we were self-distributing to learn the market, it took more time than we had expected to find the right accounts, call on them, get them to buy, and return with a delivery. Zico’s monthly burn rate was exacerbated by line items I hadn’t even considered putting in the financial model. Parking tickets for instance, which for some months were more expensive than the lease on our delivery van. One depressing week, the cost of the parking tickets even outpaced our sales revenue. Also, slow sales meant carrying more inventory than expected. Our warehouse costs were killing us.
Even if we were lucky enough to get Zico into an account, we had to follow up to see if it sold or not. The Bikram studio owners or managers would call when they were low but not the Korean deli owner down the street. They expected us to magically appear at just the point they were out of stock.
Chain stores posed their own set of problems and arcane and seemingly endless lists of rules and restrictions. It often took weeks just to get a meeting. When we finally met with the Whole Foods buyer for the northeast region, we learned we had just missed the beginning of a quarterly purchasing process but could probably make the next one in three months. We ran into similar issues with other chains like Gristedes, Food Emporium, Associated, and Duane Reade with the added complication of being asked to pay upward of $50,000 in so-called slotting fees if we wanted to get on the shelf. The way these stores had set up their supply chains certainly wasn’t built for the little guy to break in easily.
Of course, if we didn’t show up at just the right time, we left an opening all too easy for our new competitor Vita Coco to exploit. I had begun to see Vita Coco showing up in more and more accounts.
As the weather started to turn in late September, I knew we were in trouble. We were selling less than $10,000 each month when I expected to be closer to $100,000. We just weren’t going to get there fast enough, and now we were facing the winter months when, I had learned, beverage sales fall by 30 percent or more.
GIVE UNTIL IT HURTS
Though we had interest from major distributors like United Natural Foods (UNFI), KeHE, and local beverage distributors in New Jersey, Texas, and Massachusetts as well as importers in the UK, Japan, Korea, and Barbados, I remained committed to the idea that we had to prove our concept in New York before we expanded. Roberto had identified the leading distributors in New York, and we had conversations with Steiner Foods, Boylan, Dora’s Naturals, Island Natural, and a group of Korean distributors. While we were evaluating all these options, one distributor’s name kept coming up: Big Geyser.
Big Geyser was the beverage kingmaker in New York City and, arguably, the country. They were (and still are) the dominant player for independent (basically non-Coke or -Pepsi)
, nonalcoholic beverage distribution in New York and one of the most important and influential distributors in the industry. The company had a network of over one hundred route owners who served in excess of twenty thousand accounts. They delivered beverages to the big chains as well as convenience stores, gas stations, restaurants, hotels, colleges, hospitals, corporate cafeterias, drugstores, ethnic markets, delis, bodegas, and natural food stores. Big Geyser had been credited with being integral to the success of the hottest upstart brands in the industry including: Vitaminwater, Smartwater, Nantucket Nectars, Fuze, Mistic, and Apple & Eve.
Geyser also had a reputation for being tough and demanding. While they had made some brands a mega-success, many brand owners feared that dealing with Big Geyser only had two outcomes: either you became a huge success or you died on the vine under their exclusivity clause, never able to get their attention while contractually restricted from putting your product on New York shelves in any other way. I figured we would sign one of the other distributors first, build the business, gain strength and resources, and then go to Big Geyser when we were ready to scale.
By late 2004, we knew we were getting some attention from Big Geyser, at least at the street level. Two Bikram studio owners in Manhattan told me their Big Geyser sales rep was pissed that they weren’t reordering as much Vitaminwater as usual. “What is all this Zico crap stacked in the hallway and who the hell is selling it to you?” he wanted to know.
In October, I was talking with a beverage industry person about our distribution quandary when she said she knew Irving “Hal” Hershkowitz, the owner of Big Geyser, well enough to make an introduction. Did I want to meet him? I said I wasn’t sure and that it seemed too early. “Take the meeting,” she urged. “What can it hurt?”
Big H, as he was known, was a legend in the beverage industry. He was supposedly the highest-volume liquor salesman in the world in the early 1980s working for a local distributor. In the mid-eighties he saw bottled water becoming popular in high-end New York restaurants and decided to start distributing them and other natural beverages and juices, believing they were the future. His insight and timing were perfect. He was also brilliant about the way he organized his business. Rather than have all the cost and hassle of employing hundreds of drivers and salespeople, he “sold” the rights to individuals and small operators to distribute his brands in a given territory. These independent distributors bought from Big Geyser and resold to the retailers in their territory that might only be a forty-square-block area of Manhattan. Hal was supposed to be shrewd and tough as nails, but his drivers, who could make solid six figures working their areas, were the real hard-core street operators.
I met Hershkowitz in a nice Upper East Side diner. He was a big man who radiated power and confidence. He didn’t stand up and, except for shaking my hand, kept eating his breakfast as I sat down and put a carton of Zico on the table. “So tell me about it,” he said with a mouthful of eggs. I went into my sales pitch: the benefits of coconut water, the potential market, and our expansion plans.
When I hit the end of my sales pitch he looked at me and thought for a moment. “I like it,” he said in a heavy New York accent. “My guys need something ethnic. I hear you’re making some noise in some yoga studios, too. Good to cross over. Few brands can do that. We’ll take it in and roll it out in the spring. One thing you gotta know, though. This is a tough business. You gotta be ready to give until it hurts and then give some more. Once everyone makes money on it, then maybe you’ll make some money.”
I have to admit it was a heart-pounding moment: a cross between getting drafted into the big leagues and getting sentenced to jail time.
“One more thing,” he said, “only thing I don’t like about it is that you got no patent or trademark on coconut water. In five years there might be a dozen brands selling basically the same thing. You better move fast if you want to still be around.” Five years? I thought. I’ll be lucky to be around in five months.
THEIR WAY OR THE HIGHWAY
As Big H had instructed, I shipped his son Lewis some cases of Zico, a presentation overview, and samples of all our promotional material, and showed up for a meeting with him and some other Big Geyser executives the following week. No sooner had I sat down in their clean, modern, but not too ostentatious conference room than Lewis launched into me.
“Look. We got your samples and presentation,” he said without preamble. “We’ve talked to some people about it and I gotta tell ya, I don’t like it. I don’t get it. It tastes like dirty socks and I don’t know who’s gonna buy it. But you’re in luck. My father and my brother like it. I’m still known around here as the guy who hated Vitaminwater. Apparently, if I think it’s crap it’s going to do great. Plus my father says we’re taking it in, so we’ll take it in.
“Harold will send you the contract,” he said. “When you are ready to sign, tell him. But let me tell you one thing: People will tell you that we build brands. We don’t build brands. At least not at the beginning. You do. You do the work. Get my guys excited. Build some momentum, and then we’ll take it from there. But you gotta be ready to do the dirty work for as long as it takes.”
The next day I received the contract via e-mail from Harold. When I started through it I could hardly believe what I was reading. Every section, every term, every condition benefited them. They had multiple ways to arbitrarily drop Zico, for instance, while my only exit was after three years to buy them out by paying them the equivalent of their gross profit for the previous eighteen months. I had seen and signed a fair number of contracts in my career, and had never seen anything like this.
I switched to “track changes” mode in Word and started to go to town with changes that I thought were reasonable. I then sent it to my lawyer, who inserted a couple dozen more. A few days later I sent it back to Harold with a nice note saying we were excited to work together as long as we could work through some of the contract issues. I got a call within an hour from Harold. “Mark, I got your e-mail and I don’t think you understand. The contract I sent you is the contract. Period. There will be no changes. That’s it.”
I tried to explain my concerns but he wouldn’t budge. It was literally their way or the highway, as in: me getting on the highway to continue to deliver my own product.
Still optimistic that there was at least some room to negotiate, I whittled down the changes to just a few I thought were critical and a few days later sent it again. Another call from Harold followed: “Look, Mark, you can do this a hundred times and the answer is the same. The contract is the contract. Brands much larger than yours have signed the exact same contract.” He added, “And by the way, I assume you know Vita Coco? Nice guys. Little aggressive but that’s not such a bad thing. They’ve been hounding us to carry their brand and make a pretty good case and say they’re willing to accept any conditions we give them.” I asked if we could arrange a meeting with him and Lewis again. “Sure,” he said, “but let’s not waste too much time here.”
Roberto and I met with Lewis and Harold a few days later. It was pretty clear that Big Geyser thought they had us in a corner. To drive the point home, on a side table sat a case of Vita Coco right next to a case of Zico. The message was obvious: they had options and we did not. “Coconut water is coconut water, right?” Lewis said as he pulled out samples of Zico and Vita Coco from their cases. “I like your packaging better but what’s the real difference?”
While I talked through the differences—the brand, our strategy, taste profile—Roberto picked up the case of Vita Coco and inspected it and took one package out. He then took two glasses set out on the conference table and poured Zico into one and Vita Coco into the other. The Zico was clear and translucent. The Vita Coco came out with a slight brownish hue.
“Which one do you want to drink?” Roberto said simply.
“Okay, that’s disgusting,” Lewis said, examining the Vita Coco. “Who would drink that?” I jumped in t
o explain that coconut water was very sensitive and there were many challenges to getting it right. How we had carefully selected our Brazilian supplier for their ability to produce a consistent, light, clean product and taste. Our supplier wasn’t perfect but they were the best out there today. How Vita Coco was using another producer that we had eliminated because our research with the University of Florida beverage center discovered problems with consistency and quality control. “Looks like Vita might be running into those, um, challenges,” I added.
With the two glasses on the table giving me some leverage, I changed the topic. “Look, I understand your position on the contract. I’m ready to sign,” I told him. “I only want one concession. I want Zico to be your exclusive coconut water. That would allow us to know you’re committed and help us justify putting most of our marketing and brand-building efforts in New York.”
“I figured you’d ask for that,” Lewis said. “We’ve talked about it. No problem. But you better be ready for a fight. Those Vita guys are aggressive and in this business, aggressive is good.”
Once out of their office building, I stopped Roberto in the parking lot. “How the hell did you know that that package of Vita Coco was a bad one?” I asked. He explained that a manager at a bodega on the Upper West Side had recently pulled some Vita off his shelves because a customer complained. “He showed it to me and I remembered the expiration date,” he said. “It was the same on the packages they had on the table, so I figured there was a good chance.”
“Bold,” I said. “Fucking bold.”
One bright spot that fall was Fairway Market. Fairway’s Upper West Side location was a New York institution since the 1950s. I’m sure the fact that Zico was in their stores and doing well was one of the reasons we’d caught the attention of Big Geyser. I made an at-least-twice-weekly pilgrimage to their Upper West Side store to personally check in and chat up the store manager Jose, who had given us a display at the head of an aisle (a coveted spot called an “endcap display” in the business). Walking into the store in early December, just as I was negotiating with Big Geyser, I was distressed to find that our endcap display had been replaced with mulled wine and kosher apple sauce. The beginning of Hanukkah had bumped Zico to the back of the store, and I knew that was going to kill our sales. Jose was apologetic but had more bad news. After the Hanukkah products the space would be reserved for sparkling cider for Christmas and then panettone for New Year’s. “You can probably get the display back in late January,” he told me, “definitely by March.” It was going to be a long, lean winter.
High-Hanging Fruit Page 10
