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Crossing the chasm

What is the best way to scale a young consumer goods business? We've been selling our product, Lava Lunch, successfully in smaller markets to boutiques and small chains. However, it is difficult to scale as most retailers in this space buy very close to their required delivery dates, forcing us to produce ahead and stock inventory. For this reason it seems that approaching mass market retailers is the only way to truly attain scale. Do you agree and do you have any advice on doing so?

12 Replies

Mike Stewart
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Mike Stewart Entrepreneur
Business Development ★ Market Development ★ Technology Commercialization ★ Business Law
I don't know what your next move should be but your title made me think of Moore's book and that maybe you are indeed crossing the chasm as you move away from boutiques. With that in mind, assuming that you are making the leap, then you need a targeted marketing plan. You need to identify your market segment, remembering the requirements of a segment: like minded buyers, with a similar pain that are able to self-reference other members of the group. You probably have some specific mass market retailers in mind, so all I am saying here is make sure they are actually in the same segment, otherwise you're spreading yourself too thin.
Greg McClement
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Greg McClement Entrepreneur
VP Business Development at Equel
Melissa, larger retailers can be demanding in so many ways: return policy is the first thing that comes to mind. When I first started in the computer business, there was only one time that I ever saw my boss (best sale person I have ever known) say no to a PO. It was Walmart. He knew that if we took their order, their return policy (at the time) could have put us out of business. In fact the competitor that did accept Walmart's terms was bankrupt within 6 months.

Mass marketers probably won't know better than you how much of your stuff they will sell, but they do know how to protect their own interests. What will happen to your company if you have to accept X units back?

Also, if they don't sell enough of your bags, then they may not want to restock next year/season. How will this affect your existing partners? Would they be upset if you signed up a larger retailer (who presumably) would buy and sell your stuff for less than them?

It's been a LONG, LONG time since I was in the market for a lunch box/bag, but at a list price of $35, I don't think you guys are at a "mass market" price point. I am in Canada, but if I were shopping US retail, I would expect to see your product in an outfit like William Sonoma much more so than Walmart or Target.

Although I may sound anti-retail, I am not... I am "pro fit". As a premium priced (and I am sure great value) solution, look for a retail partner who can help sell your value proposition, who has the profile of customer that will pay a premium for value/quality and who will work with you (on reasonable terms) to help sell that value proposition to their customers.

As generic as it may be, I hope my 2 cents (Cnd$) is worth at least 1.40 (US$) for you!




Bora Karamustafa
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Consultant, Advisor, Managing Director - Sales & Marketing
Melissa, as Greg highlighted, I would be careful with it and review your existing business through a different lens. Scaling-up through larger retailers is of course very good, but only if you are prepared to deliver against a new set of success criteria. You might even consider to test your idea with a relatively smaller retailer and see how you perform. If you have done these exercises already, you can go ahead.
Melissa Maklan-Zimberg
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Melissa Maklan-Zimberg Entrepreneur
Founder, Elements Accessories Inc.
Thank you everyone. I appreciate your advice. I am aware of (most, I'm sure not all) of the risks and new terms larger retailers would require. Most, it seems, require an "exit strategy" to mitigate their own risk.

However, if one doesn't approach mass marketers (who purchase well in advance of delivery), it seems almost impossible to scale. For example, if you sell 1,000 $1 units for $2 - Even with no/low expenses your net profit is $1,000 and you're back where you started from, with no growth. Without a huge line of credit, how can you scale?
Peter Weiss
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Peter Weiss Entrepreneur
President at American Outlook, Inc.
Melissa, I think you're aware the economics and capital needs of tangible products companies are profoundly different than those of software and SaaS businesses. Rapid growth without substantial cash resources is where consumer product companies go to die.

Greg's observations about Walmart are on Target (pardon the mass merchandising pun). Once you move to the BIG players you need to fund their inventory needs; you drop your margins; you often need to pay for position, POP, and marketing support; you are agree to their EDI, insurance and product testing policies and incur the expenses that come with those commitments; you often commit to substantial back-up inventory, delivery and labeling requirements (many of them backcharge you if the case packs or pallets do not match their distribution center requirements) and then you have to collect. When most big chains tell my clients they will pay in thirty days I build my models assuming sixty; when we're told forty-five to sixty I assume ninety.

Lava Lunch is an interesting product but it is in a brutally competitive segment. Whether or not your product is demonstrably better you're competing for shelf space and attention with some gigantic competitors who, if they start losing position in the big chains, will respond aggressively. Assuming you have limited resources, you need to be creative. Here are some ideas:

1. Be visible but hard to hit. Focus on PR, use guerrilla marketing tactics and exploit the internet to build volume and visibility. Make sure you understand your logistics and fulfillment costs. For less than pallet delivery you may be surprised to find your best shipping option is probably the Post Office.

2. Use the alternative selling channels such as QVC and its cousins - they move volume at predictable times. You can negotiate limited inventory tests and if they work you can move forward with more and more confidence.

3. Pick the retail chains you choose carefully. A few a substantially better partners than others. You are looking for outlets who honor their commitments, pay their bills as agreed and make the rules you'll need to play by clear. None of them are easy but there are some who are tough but fair; there are many others who exploit smaller companies ruthlessly.

4. Give careful consideration to working with brokers and distributors. While many companies like yours consider them expensive and an added layer between you and the customer, the good ones understand the customer much better than you do, know what will appeal to or put off the buyers, and how to handle the paperwork, detailing, logistics requirements, etc. of the big chains. It can be the least expensive 5 to 30% you ever give up. Before you sign up with someone interview other businesses who have worked with them to figure out if they are really a good match for you.

Coming back to capital: you will need cash to fund your inventory (if you are producing in China you have a long logistics chain which eats capital because the product spends time on the water, clearing customs, getting into your warehouse and then moving the customers) and you need to carry receivables. At lower volumes paying a higher price per unit to produce domestically or in Mexico is probably less expensive all in than manufacturing in China, largely because of the shorter transport chain, your physical proximityand fewer issues of language and time zones. If you need large inventories for the fourth quarter you need to figure out how early you need to bring in your product - if the big chains decide they are having a big yearandneed to move more goods from Asia the shipping companies will hold your containers and give the space on their ships to Target, Costco, Amazon andWalmart. Small companies need to bring in product early to offset this risk.

It is very expensive to fund working capital with equity so you need to begin looking for non-equity financing soon. In the early stages this can seem very expensive but as you grow, show profitability and learn your way around the financing world the price will drop substantially.

Good luck.
Melissa Maklan-Zimberg
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Melissa Maklan-Zimberg Entrepreneur
Founder, Elements Accessories Inc.
Peter, Thank you so much for your detailed advice.

At this point, I feel that we have a solid proof of concept with almost 4,000 unit sold, a very positive focus group, and even an on-air test. You can see the video here http://bit.ly/Lava_Lunch, (and I'd love opinions). According to Google Trends, our test happened to run at the lowest point of the year for searches for lunch boxes as a product category, and came in roughly at break-even.

The business as a whole, has moved from the red, completed R & D, secured supply chain (albeit in China), and is now in the black. I'm not opposed to sourcing closer to home at all, and actually tried it a while back, but had a very hard time finding partners to work with.

While I have 15 yrs in product development and apparel, the financial end is new to me. What type of non-equity financing is available? It seems to me that as a small fish in a big pond, equity financing would be my only option. But like I said, I am new to this end of things....
It also seems to me, like an equity partner who could help navigate growth, might be worthwhile in the long run. Thoughts?
Peter Weiss
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Peter Weiss Entrepreneur
President at American Outlook, Inc.
The apparel industry has very well-established financing channels which have their parallels in other consumer products. The most obvious but nearly impossible to obtain is a working capital line from a bank - it will take several years of profitability and a strong guarantor to get there.

Very broadly speaking you have trade finance, asset-based lending and mezzanine lenders. The first are very expensive (the fees can overwhelm the high interest rates) and lots of compliance work and expense but it is a source of capital many companies use. There are big and small players. Asset-based lending looks mainly at the inventory and A/R, is easier on compliance and cost than trade finance and is often connected with leasing companies. Mezzanine lenders are the stop before you may be bank eligible.

Best way to find them is to do some searching on terms like "consumer product credit lines" or "consumer product trade finance". These businesses (or at least each department) tend to be highly specific about the segments and business characteristics they finance so you will need to spend time on the phone figuring out who is a good match. It's a lot of work but probably easier and cheaper than raising equity and your capital structure can keep evolving as the business changes.

Start asking everyone you know - introductions matter.

There is another path to finding financing - if you are working with a broker or a distributor you will eventually have the opportunity to ask them if they know financing sources. You'll be working with them because they carry similar lines and there is a good chance they know where some of their other vendors found capital. I've also known companies who are offered the big order from the retail chain who, at the right moment, say something along the lines of "we'd love to do business with you but we can't finance the order - do you have sources who will finance your purchase orders?" Many of the big players can help if they want your product.

And, of course, the right equity partners are worth far more than capital. The problem is finding them and make sure your longer term goals are aligned. Remember, anyone owning 20% or more of the business will be asked to sign guarantees when you borrow.
Rob Gropper
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Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
Melissa, what is your domain name? a google search yields: http://dpnbu.mkwmu.servertrust.com/default.asp
Angelo Santinelli
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Angelo Santinelli Entrepreneur
Start Up Advisor and Adjunct Lecturer
Try TheGromet.com. Sent from my iPhone Angelo Santinelli
Melissa Maklan-Zimberg
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Melissa Maklan-Zimberg Entrepreneur
Founder, Elements Accessories Inc.
Rob, the domain name is LavaLunch.com - not sure why it's coming up as it is. I'll be sure to look into that!
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