Natural Products Expo West was back in full swing this year, shaking off any post-Covid jitters. More than 70,000 entrepreneurs, corporates, NGOs, investors and many other stakeholders came together for nearly a week of exhibitions, panels and related events in and around Anaheim.
It was exciting to be among such an energized crowd, meeting with our existing portfolio leaders as well as new startup founders. Some of the trends we observed last year at the Expo continued in 2023, including a variety of plant-based proteins, functional foods, collagen supplements and water brands (still, sparkling, flavored, caffeinated and vitamin-infused).
We also saw an increased presence of gut health products, ethnic food brands and companies promoting their environmentally conscious practices - with many displaying Carbon-Neutral or Regenerative Organic certification labels - which we anticipate seeing more frequently as producers and consumers build awareness of the climate impacts of food production.
Margin Matters
Amid the impressive volume of attendees were concerns of economic headwinds, a tighter funding environment and the unexpected Silicon Valley Bank news, which all percolated throughout this year’s Expo. To bring business leaders together to exchange ideas and best practices for the current environment, we were thrilled to once again host a special breakfast event for our portfolio and investor community.
The theme of the breakfast was Margin Matters, in which S2G’s Chuck Templeton illustrated the relationship between varying gross margins and monthly cash burn, emphasizing that managing gross margin is a mindset that all entrepreneurs must have to be successful.
S2G’s Walter Robb then kicked off a panel discussion featuring Elena Sukacheva (CEO, The UCAN Company), Laura Flanagan (CEO, Ripple Foods), Larry Waldman (President and COO, Once Upon A Farm) and Gary Duan (Senior Director of Operations, Back to the Roots). The panelists shared what gross margin means to them, with all of them suggesting there is no one-size-fits-all method, as cost of goods sold, freight-in expenses, trade discounts and distribution were all cited as factors. A company’s auditor and a focus on other ratios, such as contribution margin, also play a role in how business leaders approach gross margin. Each panelist had stories to share about how they have managed margins at their companies.
Tales of Margin Improvement
“Every line item of our cost structure is a tactic.” Flanagan addressed the importance of shifting budget to areas with higher return on investment and having a relentless focus on cost improvement. She pointed out that for companies with proprietary ingredients, like with Ripple, they should not feel bound by costs of that IP and instead can find ways to optimize their dollars for that product. “You attack the cost structure of that just like you attack the cost structure of everything else in your P&L,” she said.
“I need to be a partner with you, if you’re going to be my manufacturer.” Once Upon a Farm’s Waldman recollected about a series of events earlier in his career while working at a global CPG company. His business had spent a substantial amount of time and funds to consolidate its external co-packing operations to a single exclusive company. However, following a manufacturing price increase and lack of transparency at the co-packer, Waldman moved to a new manufacturer, saving close to $1 million per year and taking a product line that had no margin to highly profitable. His reasons for the switch were straightforward: “I need you [the original co-packer] to treat me as if I own the business. And if you're not going to do it, then you're not going to be my manufacturer.”
“It's a very systematic, long-term ground game that you constantly need to be on.” Sukacheva shared how she sees improving margin at UCAN as part of a manufacturing exercise as well as a pricing and marketing strategy. For example, she discussed how a recent UCAN price increase on Amazon yielded both higher revenue and visibility for its products. Sukacheva also noted that margin improvements are not just limited to the consumer sales, but everything that goes into production. “Manufacturing relationships, contracts, ingredients, labels – I think everything is always up for grabs,” she explained.
Margin Mindset
“Communication internally with the team is super important. And that's having that proper [sales and operations planning] process.” At Back to the Roots, Duan makes sure everyone is on the same page, and that starts with transparency between the sales and operations teams. He works closely with the sales teams and the understanding that changes in costs on one side can inadvertently impact the other, from production to merchandising. “I think it's really that keen interaction for us,” he said. “It's that communication between the different departments, because I think a lot of companies get siloed from out here.”
“We turned it into something fun and inspiring, but it keeps everybody laser-focused on what's really important.” Ripple’s Flanagan took a page from Marvel Comics to create a culture focused on gross margin and profitability. Playing on “Guardians of the Galaxy,” Flanagan implemented “Guardians of Gross Margin,” in which everyone at Ripple was either a Guardian of Gross Margin or a Protector of Profit, with all employees being Captains of Cash. The superhero theme resonated and contributed to cost savings at Ripple. “Particularly in this economic environment where it's not about hyper growth anymore, it's about profitability and getting everyone laser-focused on that in their everyday decisions,” she said.
Protecting the Margin
“You can make a lot of changes in the short term that affect you negatively in the long term.” At Once Upon a Farm, where there is a company-wide strategy mapped to OKR (objectives and key results) metrics, Waldman emphasized that taking the long view is critical. This involves building internal programs, working effectively with co-packers and suppliers and managing trade spend over time, so that the company is not caught off-guard when business turns negative following early wins. When times are tough, companies with sustainable business models will know when and where to look for things to improve, he said.
“There's a lot of focus on cost, but don't forget to look at the trendline.” Flanagan discussed how Ripple has improved its gross margin by 55 full points over the past three-plus years. While much of that gain came from improving costs of goods sold, the business became much smarter with its trade spending, as well. “Don't forget to look at product pricing in addition to attacking every line in your cost structure,” she said.
Advice on Margin
“Always negotiate.” The panel mentioned the importance of negotiation several times, and here, Sukacheva indicated that small business margins may suffer when leaders fail to counter an offer. She mentioned that many new companies have a fallacy in assuming they need to accept the price that manufacturers and suppliers quote them, but that is not the case in her experience. “I have found that negotiating always gets your number down.”
“Figure out who you can bring along for the ride.” Duan shared how long-term partnerships have played a significant role in Back to the Roots’ success. These relationships have created a win-win dynamic in which external players have bought into the company’s mission to have more people become at-home gardeners through Back to the Roots product purchases. “It’s finding those partners that have a mission aligned with what you want to do and fight the hard battle on the store shelf,” Duan said.
It is always a pleasure hearing insights from our portfolio leaders who are working hard to improve their businesses every day. With so many companies at Expo West, all of which are competing for market share, it is important for entrepreneurs to be cognizant of what is needed to establish sound business models and strong double-digit gross margins. As S2G’s Chuck Templeton has said, “To be a sustainable business, you have to stay in business.”
We look forward to many more conversations like these throughout the remainder of the year.
