Scary to Scalable — A Self-Manufacturing Discussion

0:00What Alt Dairy brand is embracing consumer criticism, why you might see sesame listed as an ingredient in more products than you expect? And when does it make sense to self-manufacture? Find out this week on The Nosh Podcast.

0:24Hi, everyone. I'm your host, Carol Lordenberg. On The Nosh Podcast, we go inside the business of natural, organic, sustainable, and healthy food. Today, the team discusses a marketing campaign that captivated our attention. Then we'll turn to what seems to be the theme of the week, manufacturing. First, discussing a problem brands are facing when complying with updated FDA allergen laws, and then a change to Hershey's manufacturing strategy. Finally, in our featured interview, I chatted with Coconut Cult CEO Ari Raz about how he's become a self-manufacturing convert. Joining us today are reporters, Adrian DeLuca.

1:04Good morning, Carol. Morning. And Lucas Southard. Oh, I don't have a good hello. Hello. The panic in your voice. That was a letdown, Lucas. I know. I just realized at the last minute I hadn't prepared. Lucas, I gave you one job. I've used Heidi Ho. I've used Howdy. I've used salutations. You know, I'm just I'm running out until I start delving into other languages. which will be interesting for my pronunciation. Hola, hola. Well, I'm eagerly awaiting that. But Adrian, in the meantime, I know you were taken by a certain marketing campaign last week. I'll admit it was hard to top Kraft Heinz's Date of Farmer ad a few weeks ago, but this was pretty good.

1:50What did Oatly launch? And for listeners, before Warrant, we're going to have to swear here. So if you're listening to this with the kids during Carpool, turn off the podcast. Well, Carol, I'm going to say that this campaign or ad topped the data farmer in my book. Oatly launched a new website called fckoatly.com. So use your imagination there. And it's basically a timeline of all their major PR crises. In Oatly's words, it's super convenient to have the latest boycotts and criticisms all in one place. The brand is basically, you know, poking fun about all of the criticisms it's garnered over the years.

2:35It's basically put together this interactive feed featuring, you know, tweets from people who were not too pleased with something Oatly has done, like, you know, take on a new investor or change up some things in their supply chain. And you can scroll for days and days. I'm a little like I liked it as well but I'm a little confused of like why like what like was it just is it just a PR stunt like it just draws people's attention to the brand it's kind of like one of those tongue in cheek like all all publicity is good publicity like I feel like it wasn't linked to April fools like I just I kind of I don't I don't get the strategy other than just like hey let's just do it because it's a fun idea.

3:19I think it's all kind of in that realm of, you know, authenticity and transparency are resonating with consumers these days. So I think in my mind, that's what this aims to hit on in the most outward way possible. But they do address these complaints, right, Adrienne? It's not just everything they've ever done wrong. Totally. Yeah. It shows, you know, the complaints from the consumers and then Oatly's exact response as to, you know, their reasoning for why they made whatever respective decision. Still not sure if it's better than Data Farmer, but I do love a brand that can poke fun at itself. But I think it's time to swap to our theme of the episode, manufacturing.

4:00If this was Sesame Street, I think I'd have to say this episode is brought to you by the letter M. Ironic since, Lucas, you spotted some interesting news surrounding the company's ninth allergen, sesame. Yes, Carol. So there has been some news around the illustrious sesame seed recently. So as been kind of expected by the allergen community for about two years now, sesame seeds officially went into effect as the ninth top allergen by the FDA at the beginning of the year. And last week, there was an article in the Washington Post about how to comply with the new sesame allergen law as at the beginning of the year.

4:43Some companies have been kind of adding small amounts of sesame flour, unbeknownst to their consumers, to some products, which has caused some trouble for people who have sesame allergies. It's kind of an interesting story. And I don't know, I thought the story that was put out by The Washington Post kind of yields to some big questions about what this means for people who deal with allergies and for some of them can be pretty life-threatening. To be clear, they are declaring on the back panel that they've added sesame. However, what's happening is that consumers have become conditioned that, okay, this is a safe product for me to eat or someone in my family who has an allergen sensitivity to sesame to eat.

5:29They're not checking to see if sesame has been added, and that's where the problem lies. This also ties back to the fact that you can't say may contain sesame or contain sesame if you don't put it in there. So they're literally being forced to add it. And Lucas, as you mentioned or alluded to, allergy advocates are saying, well, are people just going to start adding every allergen to every food in order to protect themselves basically against mishaps of, oh, we accidentally put nuts in a nut-free product. We've talked about how the FDA is trying to modernize itself and its rules a lot. And I think this was part of that attempt to embrace a new allergen.

6:16Well, not a new allergen, but a very common allergen that previously wasn't on the list. And make sure that those shoppers' voices were being heard with the, I think it's the big nine allergens now. The problem is it's apparently really hard to adhere to this. I've seen sesame compared to glitter and that once you spill it in a facility, it's really hard to clean it up. When they say clean up, physically it's hard to clean up because they're so small they get into things? Or is it like the residue of sesame gets on a surface and it's hard to rid that of the surface? I'm picturing a hazmat crew coming into these manufacturing facilities.

7:02Just picturing people walking around with bags of sesame and just like throwing it at people's faces, you know, like a glitter bomb. I'm not a manufacturing expert, so I'm not sure. Another analogy I saw was it would be like going to the beach and asking someone to pick all the sand off the ground. So I think it's just incredibly hard to clean up. And once you've used it in your manufacturing facility, like you said, it's just so pervasive that it's just everywhere. Yeah. And well, the beach analogy makes even less sense than the glitter analogy to me, but I guess it just makes it harder and harder for food manufacturers.

7:41And I can understand the argument on both sides that we need to be aware of these allergens, but at the same time, you know, maybe it's next year, we'll have a big 10. And then, you know, five years from now, these allergens are, it's not like they're going anywhere. And there is a segment of the population that's allergic to all kinds of different things. So I just don't know where you draw the line, I guess. I think it is impacting bakers the most as well. I've heard cookies and buns and breads are the brands that are struggling the most to comply with this new regulation. Apparently, sesame is used in a wide range of products.

8:25But it's also, I think, speaks to advice I always give to brands, which is to be really careful with statements you make on your packaging saying contains no or does not contain. You really need to vet those by a lawyer and make sure you're not inadvertently saying something that's going to get you into trouble. I've seen people say completely allergen free. Well, Lucas, to your point, They're someone who's allergic to everything. So what risk does that put you at? Always check with a lawyer first and make sure your claims are by the book. Do we want to start a betting pool of what the next big allergen is going to be?

9:09I don't know. I got my money on bananas. I think it would be whatever the 10th is. They are, to a degree, ordered. I will say that. The FDA and USDA have a hundred-something. ingredient list. Yeah, they're all ranked. How did they determine that? Is that just like studies of like the proportion of the population that is allergic to this? You nailed it. Adrienne, speaking of manufacturing though, there was some news around the Hershey company as well regarding their Skinny Pop brand. What did they announce last week? Hershey's announced last week that they had purchased two Skinny Pop popcorn facilities from their co-packer Weaver Popcorn Manufacturing.

9:54It was an interesting move because Weaver, you know, it's a pretty well-established co-popper, if I may, in the space. Boom. Nailed it. Boom. Thank you. How long did it take you to think about that? It took me a while to think about if I was going to say it or not. Okay. The facilities are located in Pennsylvania and Indiana, and Hershey's hopes that acquiring these two new facilities will help them win in popcorn, pretzels, and puffs. They're really doubling down on snacks. In Q4 last year, their snack portfolio saw 71 % increase in net sales. that's compared to 12 % growth that they saw in confection, which is more of a well-established set for them, but just really speaks to where they see opportunity.

10:44So by bringing these facilities in-house, they think they'll just have a better ability to innovate and grow that aspect of their business. I talked to Jeff Lila, who's the VP of sales for salty snacks at Hershey's. at Expo West, what, like a month ago? When was Expo West? God, it's been a while. And he was, you know, he was really talking about how Hershey's is devoting a lot of resources to their Salty Snacks portfolio. Not only do they cover the Skinny Pop brand or have the Skinny Pop brand, but, you know, Pirate's Booties under that, Dots Pretzels, and they've just, you know, they've been putting a lot of resources towards that and they want to increase their market share with the kind of healthy snacks that they have.

11:36He gave me some numbers that it's, you know, their snacking portfolio is worth over a billion dollars in volume, but they want it to be at like three billion in the next 10 years. So they have some ambitious goals for their salty snacks. Certainly Hershey's has tried a variety of ways to get into the snacking subsegment. Try saying that three times quickly. Some have performed better than others. They acquired Omega as part of their Amplify deal. That brand no longer exists. Crave, they ended up selling back to its founder, John Sebastiani, and his Sonoma Brands group. It seems like they've really coalesced around this idea of salty snacks.

12:25One thing I thought was also interesting was they said, Certainly this helps with margin and a lot of the financial goals that they have promised their investors. But at the same time, it gives them more freedom to kind of marry the confection side of their business with the salty snack side. So they didn't comment specifically in their last investor presentation about what that meant. But the image was popcorn drizzled and chocolate. And to me, this is a way that they could start to bring the two halves of the business together. You know, I'm imagining Dot's chocolate-covered pretzels. I don't know about a chocolate-covered pirate's booty, but maybe there's a sweet flavor they could explore.

13:11Have you ever had the bombas at Trader Joe's? It's basically, you know, chocolate-covered. It's not cheese. Yeah, but they're chocolate-covered puffs, you know. Yeah. Yeah, it's the same texture idea. Just maybe without the cheese, I get it. Yeah, it's the cheese part that kind of throws me off. Well, you guys all yucked my yum, but peanut butter and cheese toast is a staple of my household. I can't go back here, Lucas. I can't. It is interesting, though, Carol, because Hershey's brands such as Reese's and their chocolate and M &M, they've licensed those brands and ingredients out so many times over the years.

13:46And they have shown up in salty snack concoctions in some form. So maybe this is their way of looking to bring those innovations under their own brand name and not have to be licensing out the manufacturing. That makes a lot of sense about licensing. Certainly we haven't heard anything yet, but it also speaks to a theme we've heard from a lot of our podcast guests like TJ from Bobo's, which is really think about innovation in incremental ways. It doesn't have to be relaunching a brand new snack brand. It can be, hey, let's do chocolate-covered popcorn. You know, how much more can that add in revenue?

14:25How many new consumers can that bring in? If you make something really awesome like a Reese's chocolate-covered popcorn as an LTO, how much buzz can you get around that? And if you own the manufacturing, you can run a small batch of that a lot easier, though. With Hershey, you know, they're pretty much probably running pretty big batches to begin with. I'd say well they already have one customer Because I don't I will admit I do not love popcorn as Regular popcorn but with Chocolate on it like I'm sold I would buy that that's the line That divides if you'll eat it or not I like the the Chicago pop The like the cheese popcorn With the caramel popcorn Mixed up together wait is that called Chicago popcorn I thought it was just I thought it's just when you get a tub for Christmas And you know the dividers and shake it up Well, I mean, yes, I think that's where the idea derived from.

15:17But for a while, Trader Joe's was running what they called Chicago Pop. And that was it was a it was a bag that was mixed of and then they stopped running. I don't know what happened. Maybe somebody was probably the leftover stuff from Christmas that Trader Joe's got in a bag. I'd buy three bags at a time. You know, it's called Chicago Pop. Give me some Chicago. And now forever it will be Chicago Pop in my head. And probably all of our Chicago listeners are like, what the heck are you talking about? We don't do that there. I could keep discussing our favorite snack foods for a while, but I think we need to get to our featured interview today with Ari Raz, the CEO of yogurt brand, The Coconut Cult.

15:56I wanted to talk to Ari because he actually shared on LinkedIn that when he joined The Coconut Cult, he was positive that the company had to move to a co-packer. And he listed out on LinkedIn all the reasons why he did not want to self-manufacture the product anymore. But after several weeks in the role, he not only decided that continuing to self-manufacture was the way to go, but he decided to double down on this strategy. We have some news around that that we discuss in the interview. And in our chat, Ari talked about not only what caused this change of heart, but how self-manufacturing has led to and will continue to lead to greater financial success for the brand.

16:35So let's hear from him now. Hi, Ari. How's everything going? Everything's going great. Thank you. I'm excited to hear what's up with the Coconut Cult. I know today we're going to talk about production and how you've become a convert to self-manufacturing. You joined the company from Once Upon a Farm, which you co-founded. What was your prior experience at Once Upon a Farm when it came to manufacturing? Were you using co-packers? Were you self-manufacturing? I mean, And you started off very small, I know, but that scaled dramatically over time. So in the early days, my co-founder, Cassandra Curtis, really handled a lot of the operations because prior to us coming together, she had already started working with this co-packer on developing an HPP baby food product.

17:23So I kind of left that in her department because at the time when I met her, I really didn't totally understand what a co-packer was or how they work. And just knowing that she'd already figured out that relationship was enough for me, you know, at the time, but there was this period of time when she was having her, when Cassandra was having her second child and had to take some time off where I really had to step in and manage operations. Even though at the time we were very small, I got this really in-depth look at how insane it is to manage, even when you have a co-packer on board that's doing most of the work, right?

18:07There's still so many other pieces to the puzzle to make product, to create smoothly running manufacturing runs on a regular basis. When John Foraker became our CEO, when Jennifer Garner joined the brand, for those who know the story, and we were really preparing to scale the brand in a much bigger way, we brought on a much larger operations team. And there were positions that were brought in that at the time, I didn't fully understand why we were making those decisions, right? Because again, when you're new to all of this, everything is a lesson really. But again, going through that process with the company and watching how that team really became the anchor for the whole company, where you couldn't really grow the brand unless the operations team could support that growth.

19:02I just saw how everything was so important and core to the rest of the operation. So that being said, early days, I got a little taste of it. I learned a lot along the way through Once Upon a Farm's growth. But again, at the time, always working with co-packers, never being the company that made the product. And I thought that was, from what I could tell, the most efficient, effective way to run an operation for any CPG brand based on that experience. You posted on LinkedIn last week, you went to Coconut Cult and you absolutely thought you were going to move from a self-manufacturing model to a co-packer.

19:46walking in the door on that first day. Why did you think that was the right path for Coconut Cult? I thought that going to a co-packer would save us a lot of headache and pain and capital that we would need to spend to scale. I also thought that the way we were making our yogurt was inefficient and it wasn't cost effective. And I thought we could make margin points on moving to a co-packer over time. I think that most of the investors that I was speaking to at the time, just to get advice and hear their thoughts on where they could see me going and some trusted advisors, a lot of them told me the same thing.

20:38They said, Ari, if you can get into a co-packer to really scale this brand, you're doing the right thing. And that's where I came from. I came into the company with that mindset. I'm going to do everything I can to find the right co-packer that can help me scale this product supply and manufacturing so that my team and I can really focus on more of the marketing and the sales end of the business and let another company deal with the manufacturing. And, you know, for me personally, I was afraid of the idea of being the CEO of a company that had to figure out how to scale manufacturing and how to make its own product.

21:20It was a very real fear for me. How did you face those fears? Because I follow you on Instagram and TikTok and you clearly are still making your own products. I didn't face those fears alone. One of the first hires that I was able to make, at least on a consulting basis, was the longtime supply chain director at Once Upon a Farm. And it's a funny thing that one of the first hires I would make would be a supply chain director, because in a previous life, that would have never occurred to me as like a critical hire, you know, but it is such an important hire. I can't even begin to describe how important that position is for any CPG brand.

22:04And she had a son who she sold me on and said, my son would make a great COO for this company because he has operations experience building his own warehouses for 3PL fulfillment. And I got to meet him at a conference that we both happened to be at. And he struck me as extremely intelligent, very hardworking, and just kind of straight to the point, straight shooter type. So no Nepo baby situation going on. No Nepo baby at all. And I met him and basically from the moment I met him, I really got to like him. And I initially hired him on as a contractor just to help me kind of sort out some immediate concerns that I had with our operations.

23:01But over time, he became our full-time COO. So, and what I would say is that, you know, if you ask, how did I face my fear? And this is, again, a very long answer to your question. I faced my fear by bringing on great people who I knew that I could trust to help me figure this out. But it's also, when did I decide to face the fear, right? Like, when did I decide this was the path? So for me, the day that I knew that we had to keep self-manufacturing and not compromise on our production process was the day we had a call with a co-packer. And I'd say we found the best possible co-packer out there to make our product.

23:50We jumped on a call with them and they ran through their process with us. and immediately identified things that would have to change from our process to how they made their product. He said, well, first of all, we're not going to be able to make your product in glass jars. You're going to have to move to plastic. Second of all, yeah, after you guys make the yogurt, we're going to put it through a pasteurization process and then we'll add some probiotics back. So you'll have a probiotic yogurt. And third of all, in terms of minimum order runs, your limited edition flavors that you make and sell on your website, we're not going to be able to make a thousand, two thousand, five thousand jars of a flavor.

24:30Like that's just not happening. And the three compromises he wants us to make are compromises that would completely destroy everything that makes our brand cool. Like everything that makes our brand unique, everything that makes us different, everything that makes people love us, working with a co-packer would immediately take away. So I realized that, wait a minute, if I really think about this in a very holistic way, right? What does self-manufacturing give us above all else? It gives us the ability to develop a brand. We're building our whole brand around the fact that we can make limited edition flavors in small runs.

25:12We do bottle and package and glass. We don't pasteurize our yogurt after fermentation. Like what you eat is a truly fermented product. Like these are things that we can only do because we're manufacturing the product. And that's part of our story. That's part of our brand. That's what makes people love us. If we stop doing that and take it all away, what do we become? You know, we become something that is, I mean, I hate to say it, but generic, right? We become a generic product and that would absolutely change the nature of our brand. And we would lose so much of the passion from our customers who would learn about this, that it just wouldn't be worth doing.

25:54So after that conversation, I essentially turned to my CEO and said, okay, we're self-manufacturing. That's the goal. We're not changing this. The question is, how do you get from self-manufacturing the way that we do it today to something that will actually, A, scale as we want this business to scale, and B, how do we do it in a way where we can actually make some money at the end of the day? Making money is always good. I know that much. Well, when I joined the business, our margin structure was really poor. So as an example, this is actually a really funny story for, well, for me, at least I think it's funny.

26:37First day I arrived at Coconut Cult manufacturing plant, I saw a pallet stacked in the warehouse and it was filled with bottles, like those, you know, those Tetra Pak bottles of 365 coconut water, the 365 brand from Whole Foods. And I turned to James, who was one of the co-founders. And I said, James, like, what's this coconut water doing here? Did you guys buy a bunch of coconut water for like a party or something? Were you really thirsty? Yeah, yeah. And he said, no, no, no, this is what we use for production. And I was like, wait a minute, you guys are literally opening up bottles of 365 Whole Foods coconut water to make the yogurt?

27:22And he said, yeah, Yeah. We, you know, we love this coconut water. It tastes the best. And, you know, we couldn't find any supplier that could make this coconut water and supply it to us in bulk. So we buy it by the pallet from Whole Foods. And I was like, and what are we paying for a bottle? I was like thinking about the margins, of course, but also just the efficiency, right? Like you think about somebody having to stand there and dump bottles of coconut water into a vat. It makes no sense. So what I'm trying to say here is that when you self-manufacture, there's a lot of opportunity for, if you don't know what you're doing, of course, there's a lot of opportunity to overspend to be really inefficient, right?

28:05But if they hadn't done it the way they started doing it with all the inefficiencies, with all the additional cost, then we would have never gotten the business to a point where somebody with experience could come in and make the right changes. And basically, there was a lot of low-hanging fruit to improve. And I'm really proud of the fact that my team, from the day that I joined, when margins were under 35 % on our top selling product in retail, now our average gross margin in retail is over 50%. You know, and that's not from changing the recipe or the formulation. It's not from changing ingredients.

28:51It's really just from creating the right efficiencies, getting the right products in the right configurations, doing the work to source the right ingredients, and then giving yourself the opportunity to build additional efficiencies like you saw in that video that we posted on Instagram, where we now have automated filling equipment and automated litting equipment. All these changes, you know, again, lead to massive, massive results, because when you start from a place of such inefficiency, such high cost, that just gives you so much more room for improvement. So the process of being a self-manufacturer, at least from my experience, it went from being very scary to extremely exciting.