The Great Sriracha Feud | Showdown | 2

0:07It's late fall 2016 in Irwindale, California, 20 miles east of Los Angeles. Farmer Craig Underwood follows an assistant into the office of Donna Lamb. Lam is the chief operations officer of Huifong Foods. Underwood strides right in. He's been to her office dozens of times before. Lam's assistant gives him a tight-lipped smile. She'll be right with you. Underwood nods and takes a seat. The collar of his shirt is soaked with sweat, betraying how nervous he is about this meeting. For nearly 30 years, Underwood has grown the vast majority of chili peppers that Huifang Foods uses in its signature sriracha.

0:48And as their sriracha has grown in popularity, Underwood has upped his chili production for Huifang. Thanks to their partnership, Underwood Ranches has become one of the largest jalapeno growers in the country. But while he was on vacation, Underwood got word from his COO, Jim Roberts, that Huifang wanted to change the terms of their arrangement. Their new request didn't make sense, But Underwood is certain they can work it out in person. They have to. Approximately 80 % of Underwood Ranch's revenue comes from Huifong Foods. If he loses that income, Underwood's not sure his farm will survive. Lamb walks in, taking a seat behind her desk.

1:34Underwood greets her with a smile, hoping she doesn't notice that his hands are trembling. Donna, it's so good to see you. Hi, thanks for coming in. Of course. I think there must have been some kind of misunderstanding about our arrangement for the next year. Obviously, this relationship is important to me, so I just wanted to come by and work this thing out. I appreciate it. And yes, maybe some wire has crossed. The thing is, we just can't pay the same prices we've been paying for the Chili's. Okay, but I thought before I left for Hawaii, we'd settled on a price of$13 ,000 per acre for 1 ,700 acres.

2:14Maybe I'm misremembering. What are you thinking? We can't justify going over$500 per ton. Underwood feels like he's been punched in the stomach. I'm sorry, what? Underwood's mind races. Ten years ago, when Hui Fong wanted to boost production, he told David Tran and Donna Lam that he couldn't plant the amount of chilies they wanted. It was too great a risk. If he had a bad year and the chili yield was less than he'd expected, he'd be in trouble. So they'd agreed to a compromise, to pay him per acre planted rather than per ton of chilies produced. Look, we can get pepper mash for$300 per ton from China.

2:59So$500 is a fair price. Pepper mash is a fermented chili paste that has a long shelf life. Historically, Huifang has opted not to use it because Tran feels that fresh chilies are essential to his sriracha's distinct flavor. Underwood takes a deep breath, trying to stay calm. Be that as it may, it costs us on average$610 a ton to grow chilies. You're asking us to operate at a loss. Lamb shrugs. This is what we can afford. You've been resourceful in the past in cutting your costs. I'm sorry, I'm still confused. We had a deal. What changed? Well, Huifang is no longer purchasing the chilies directly.

3:43We have a new company called Chilico, which is purchasing the chilies for Huifang. Okay, well, even if we accepted the$500 per ton offer, that's still a lot of money at the number of tons we typically provide. Does Chili Co. have the assets to ensure we would get our full payment? Have we ever missed a payment in the past? Hui Fong hasn't. Then you can trust us. So, would Hui Fong guarantee a Chili Co. contract? That's not Hui Fong's intention at this time. So, do we have a deal? Underwood stares back at her, in shock. He came here confident he'd get this deal back on track. but now he's certain this decades-long relationship is over.

4:32Underwood stands up. No, Underwood ranches will not accept$500 per ton. Good luck with your pepper mash. As he walks out, Underwood's heart hounds. He's just broken off the most important business relationship he's ever had, and now he has no idea how he's going to keep his farm alive.

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7:10From Wondery, I'm David Brown, and this is Business Wars.

7:36In 1980, Vietnamese refugee David Tran started Huy Phong Foods in Los Angeles, California. him. At first, he sold his homemade hot sauce around the city's Chinatown. But in the mid-80s, he developed a sauce he called sriracha, a spicy, garlicky blend that became a mainstream hit, garnering devoted fans around the country. By the mid-2000s, Weifong's sriracha was on its way to becoming the third most popular hot sauce in the United States. The key ingredient to the condiment is red jalapenos. For years, Tran struggled to find a reliable supplier of these delicate peppers. But in the late 80s, he received a letter from Craig Underwood, the owner of Underwood Ranches, offering to grow the jalapenos for Huifang.

8:23Tran took Underwood up on the offer, and for over 20 years, Underwood supplied more and more of Huifang's peppers. As sriracha became a sensation, Underwood upped his pepper production again. Both companies were raking in millions every year and continuing to grow. But in late 2016, the relationship ruptured. And now, without a reliable supplier and with its products soaring in popularity, Weifong Foods finds itself facing pressure from all sides. This is Episode 2, Showdown.

9:06It's early 2017 in Ventura County, California. Craig Underwood stares at his computer screen, his eyes bloodshot. His chief operations officer, Jim Roberts, sits next to him. Roberts' face is pale. They've both been staring at this screen for hours, but they can't make the numbers work. A few weeks ago, Underwood officially turned down Hui Feng's offer to grow chili peppers for$500 per ton. He stands by the decision. He can't operate at a loss like that. But now, he's on the hook for 1 ,700 acres of leased land, with nothing to plant on it. Underwood rubs his eyes. I think we just have to accept that no matter how we move the numbers around, we just don't have the money in the bank to grow a new crop on spec.

9:55Well, maybe you should talk to the owner of the land again. There has to be a way we can get out of that lease. They are very clear they wouldn't let us out of the contract, not on such short notice. And I don't really have a leg to stand on either. I committed to a 25-year lease because David and Donna always said that as long as I grew chilies, they'd buy them. Underwood stands and paces his office. You know, that's what pisses me off about this whole thing. If David and Donna wanted to change the deal, you know, that's their right. But why couldn't they do it with a little bit of lead time?

10:29We've already prepped the soil. Yeah, we could have ramped down the amount of acreage we were growing peppers on, made supply deals with other companies, subcontracted out some of our leases, anything but this. Yeah, leave us high and dry this late in the season. Even if we had the cash to plant a different crop, there's not much we can do starting this late in the year. Underwood looks out the window. I went to Hawaii thinking we had over$22 million in revenue coming in. And now we're going to lose around$8 million. I don't know how we're going to get through this. I don't know either. But we will.

11:10It might take some time, but we can still try to sublease the land. Underwood nods. Yeah, but that still won't be enough. No, it won't. you know what we have to do. Underwood sits back in his chair. I don't want to do it, but I don't see a way around it. Roberts nods. So what's your math say? How many people do you think? Well, I hate to say it, but I don't see how it can be less than 45 people. So we're going to have to lay off half our staff. Underwood nods. The two men are quiet for a moment. Underwood sighs. I just don't understand. Everything was going so good. Wee Fong was making money. We were making money.

12:00Why did they do this? I don't know. I don't know and maybe we'll never know. We just need to figure out how to move forward. Yeah, I know you're right. Yes, I better figure out how to tell 45 people they're losing their jobs. Underwood turns back to his computer and starts prepping to lay off half of Underwood Ranch's staff. The worst part is he's not sure it'll be enough. The farm could still go under if they don't figure out how to pivot fast.

12:39Roughly 75 miles away in Irwindale, Hui Fong is also struggling. They're producing sriracha using leftover pepper mash from the previous year and importing chilies from Mexico. It's working, for now. But both David Tran and Donna Lamb know that could change. Even if they're buying chilies from multiple farms in Mexico, if something impacts the chili crop, they'll be without their most essential ingredient. They need to make sure they have a steady supply of peppers going into this next year. And they're hurt that Craig Underwood refused to negotiate with them. They feel like they showed him goodwill for years by taking on all the risk.

13:22They paid top dollar for his chilies, and they'd paid by the acreage planted, not the yield-grown. So if there was a bad crop one year, it was Huifong that ate the loss, not Underwood Ranches. But when they wanted to shift some of the risk, Underwood balked. It felt to them like he didn't even try to understand where Tran and Lam were coming from. There was a reason they were asking to change the way they did business. Tran set up Chili Co. as a way to give Donna Lam, a longtime loyal employee, a salary increase. But Tran's family, who sit on the board, objected to raising her pay. So, Tran started Chili Co.

14:02and gave Lam 100 % ownership. But Chili Co. won't pay the same price for peppers that Hui Fong had. Still, Tran and Lam thought that after decades of working together, of paying millions of dollars every year in advance, Underwood would trust them. They thought he'd be willing to negotiate. His refusal felt like a slap in the face. The more Lam and Tran talked it over, the more they believed this wasn't a spontaneous decision. They start to think that Underwood wasn't content to grow alongside them. They think Underwood had been trying to drive them to bankruptcy and start his own rival hot sauce company.

14:44And that's why he walked away from negotiations just before the chili season was set to start, leaving them scrambling to find a new supplier. So now, as they begin to look back at their past dealings with Underwood, they audit every payment they've made to Underwood ranches over the years. And they discover that Weifong overpaid Underwood by$1.4 million for the 2016 harvest. They decide to take action.

15:17Craig Underwood paces his offices furiously. Underwood Ranches has just been served. Weifong Foods is suing them. Underwood COO Jim Roberts sits in a chair reading through the charges. Underwood fumes. This is complete and utter BS. We're on pace to lose$8.5 million because they decided to pull out of a deal they made and they have the audacity to come after us because they think they overpaid us last year. Not only that, I heard through the grapevine they've been showing that drone footage they shot of our mechanical harvester to some potential chili suppliers. Are you kidding me? we allowed them to shoot that with the express understanding it stayed internal to Weifong.

16:04Well, the more I think about it, I think this was their plan all along. What do you mean? We worked with them for decades and neither Donna nor David seem to have more than a passing interest in our operations. Come on, how many times did they come out here to visit the farm? I don't know, a handful? Exactly. I can count on one hand how many times I saw either of them at our fields. As long as the chilies were delivered on time and passed quality control, they didn't care how we grew them. Yeah, that's true. And then during the harvest, right before they decide to cut ties, they're suddenly so interested that they go to the trouble of hiring someone to come out and shoot drone footage just to have in their archives.

16:47Come on, I don't buy that one bit. You know, you're right. God, I was such a fool trusting them. I wonder how long they were planning this. Well, I can't get away with it. I know it was stupid I didn't get a written contract from them, but they made a deal. You can't just break your word. Roberts raises his eyebrows. Are you saying what I think you're saying? You want to countersuit? Underwood nods, slowly. A lawsuit is a big undertaking. It could last years. and if Underwood loses, he'll be out a lot of money in legal fees with nothing to show for it. And the farm is already struggling. He'll have to rely on his wife's money to pay for lawyers.

17:32But this situation feels so wrong. He doesn't think that Wee Fang should get to break their word and jeopardize Underwood's business with no consequences. And if he wins, well, the money he'd likely be awarded in damages could go a long way to stabilizing the farm's finances. Underwood believes he can win. To him, it's clear-cut. Wee Fong is to blame. All right, let's do it. Let's sue. Adrenaline courses through Underwood's body. By suing, he's ending any chance of ever mending the relationship with Wee Fong. He just hopes he's making the right decision.

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21:04In February 2018, Underwood Ranches countersues Weifong Foods. They claim that Weifong breached the contract and caused Underwood Ranches$20 million in damages. As the case moves through the court system, Underwood Ranches works to get their business back on track. They manage to secure subleases for some of the acreage they're no longer using to grow peppers. They also start growing other crops, including tomatoes, Brussels sprouts, and pumpkins. Despite these moves, the farm is on pace to lose$6 million in 2018. But Underwood pivoted in the past, and so he decides to pivot again. He's going to make his own sriracha sauce.

21:50You know, entrepreneurs often wait too long, hoping things will go back to normal. Underwood didn't wait for a miracle. When his primary customer disappeared, he started planting tomatoes and Brussels sprouts, then decided to roll out his own branded sriracha. That kind of agility separates the survivors from the casualties. The faster you move from reaction to reinvention, the more likely you are to stay in the game. It's a bigger undertaking than he initially realized. His company develops the recipe, designs the bottle, gets a canner's license, and goes through food safety training. But there's one aspect that's easier than he imagined.

22:30Coming up with a name. David Tran named his sauce after a town in Thailand that inspired the flavor profile. But the United States makes it harder to trademark names with locations in it. And Tran never tried. In the past, as competitors began to make their own versions of sriracha, it didn't bother Tran that other companies also called their sauces Sriracha. He actually thought copycatting the name was essentially free advertising. And for years, none of those competitors made much of a dent in Huifong's market share. Their sauce was the Sriracha sauce of note. Customers looked for the rooster logo in the bright green cap on the bottle.

23:10But Underwood Ranches has a stronger pitch to customers about why theirs is the true rival to Huifong's Sriracha. They're the original source of its peppers. And they know chili peppers better than any other sauce maker out there. In 2019, Underwood starts selling its sriracha at farmer's markets alongside their vegetables. It's not an exact duplicate of Huy Fong's version. Underwood's version is less garlicky with more of an emphasis on the pepper and slightly darker in color. Off the bat, it gets mixed reviews. People complain that it's one note. It doesn't have the garlicky, vinegary, spicy blend of Huifong Sriracha.

23:51Instead, the taste of the peppers dominates. But Underwood's entry into the Sriracha market enrages Huifong Foods. And the feud spills over to social media. On Twitter, Huifong Foods accuses Underwood ranches of hypocrisy in suing Huifong for damages when they now have their own sauce. They tweet, Underwood expects HF to pay back the Golden Goose that they themselves killed. Underwood's case goes to trial in 2019. It lasts three weeks. When it's over, the jury sides with Underwood Ranches. Although the jury acknowledges that Underwood Ranches did receive roughly$1.5 million in overpayment from Hui Fong, they rule that Hui Fong breached their contract in November 2016.

24:39the jury awards Underwood Ranches$23.3 million. As the jury reads their findings, Craig Underwood gets emotional. He bet everything on this lawsuit. And he won. When the verdict came in, I had tears in my eyes. Huifong Foods appeals the decision, but the judgment is ultimately upheld. It's a setback for Huifong Foods, but it's not devastating. The company is doing quite well. Demand for sriracha sauce remains high. In 2019, Huifong's annual revenue surpasses$150 million, representing 10 % of the total hot sauce market in America. But there's trouble on the horizon. Just like in the 1980s, when Tran started Huifong, he's having difficulty sourcing peppers.

25:35Their new suppliers are primarily out of northern Mexico. It works well for a while, but then in 2021, the region experiences a severe drought. And in April 2022, Huifong Foods has to suspend production of the sauce for approximately four months. They simply don't have enough peppers to produce sriracha. It's a major blow to restaurants that have come to rely on the sauce for their signature dishes. In their letter to customers, Huifong Foods squarely places the blame on the drought. Unfortunately, the letter reads, this is out of our control. But Craig Underwood sets the record straight. He tells NBC Los Angeles that sriracha would be readily available if Wee Fong was still doing business with him, and that his plentiful chili crop is proof.

26:26During the shortage, chefs and home cooks ration out the bottles of sriracha already on their shelves. Some restaurants get creative, giving away free meals to customers who donate unopened bottles of sriracha. But the shortage drags on for several months. And this creates an opportunity for some of Huy Fong's biggest rivals to finally make their mark.

26:56It's 2022 on Avery Island, Louisiana. McElhenney Company's chief sales and marketing officer, Lee Susan, is holding a meeting. McElhenney is the maker of Tabasco, the best-selling hot sauce in the United States. Susan sits at the head of a board table, a legal pad in front of him. Well, by now we've all heard about Wee Fong's chili pepper problem. This is an opportunity for us, I think, and I don't want to waste it. McElhenney launched their own version of Sriracha back in 2014, but sales never really took off. But now, they have a key advantage over Huifong. McElhenney sources its peppers from multiple continents, so they're not as affected by the drought in Mexico.