How to sell a billion dollars of snacks, with the founders of Chomps

0:00Scaling a business in the US can feel like a maze. Each state has its own payroll, benefits, and compliance rules, pulling your focus away from growth, which is why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert, plus Fortune 500-level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one. So, if you're scaling, make it simple with Deal. Go to deel.com. slash MOS and get up to three months free. My dad always kind of gave me a hard time saying, you know, you're the only son that doesn't have a master's degree.

0:42I never saw a point to get an MBA. And so this to me was like a living case study. Like, let's do this. Let's see if I can get it off the ground. That business Rashid Ali wanted to use as a living case study? Chomps, the wildly popular meat sticks that live in my and countless other travelers' snack bags. It's safe to say the company has paid off more than an MBA for Rashid at this point. He'll sell about a billion dollars of chomps just this year. But it hasn't always been that easy. It was a bad situation, but we could always see on the other side. Pete and I do our best work when stress is high, when our back's against the wall.

1:23Like, we both kind of have a bit of a chip on our shoulder where if you want to see us work really hard, tell us something's not possible.

2:00You've got to have incredible talent at every position. This is Masters of Scale.

2:31tough times.

2:36Rashid, Pete, welcome to Masters of Scale. Thanks for having us. Good morning. Thanks for having us. It's thrilled to have you guys. So saying as we were about to start rolling, I have 100 % net promoter score of your product. So super excited to talk to you guys. I understand you guys have quite a founder meet cute. How did you guys get to know each other? Pete and I met through mutual friends. It was a poker game. We were all playing cards and he had mentioned that he had started a company to compete with Omos Stakes, right? To offer grass-fed, grass-finished, like a healthier version. And it was just interesting because like, I always felt that people would eat healthier if it was convenient, right?

3:11And what he was doing was effectively offering a convenient option. And then the next day I texted him and said, hey, would you ever want some help? I talked about my background in ops and finance. And we met at that diner in the South Loop. And my wife was an attorney at the time. So she like drafted a partnership agreement. And that's ultimately how it started. Guys went from poker game to hang in a diner to let's do this. The speed, I would put it on peak. He runs pretty quickly. I'm a little bit more thoughtful, but I think he kind of pulled me forward and it was awesome the way it worked out.

3:40Pete, this was not your first foray into consumer products. Is that right? No, I had a frozen food company in my early 20s. It's called Frozen Fitness. Entire meals. And so we were selling them out of glass top ice cream freezers. And then the goal from there was to start selling online. And that's kind of when it all fell apart. What happened? Why did it fall apart? Well, for one, kind of going too big, too fast, but then also raising money from the wrong person, I think was probably one of the bigger mistakes that we made, which kind of influenced the way that we built Chomps going forward. We wanted to make sure we could do this all on our own, grow a self-sufficient business that wasn't relying on outside capital.

4:17What does it mean to have raised money from the wrong person? What happened there? he really had unrealistic expectations. Let's put it that way. He thought he was going to cut a check and get a quick return, which is not how it works. I think anybody knows that. Definitely not if you're in venture. Right. He was supposed to give about$250 ,000 to buy into the company. Gave me about 80, 60 of that went into frozen meals. So it was an inventory. And then the rest of it was to be for marketing, building a website and all of that. I spent the money. I was ready to go. I need to get another check now because it's really to get to a launch.

4:47And he cut me off. So he said, no, I need that money back. Because this was actually when the real estate market was melting down. Late 2000s. Late 2000s. Yeah, it was like 2008, 2009. And so we were right in the epicenter of it all. Naples, Florida got rocked. And so he decided he wanted his money back. And I'm like, that's not possible. It's an inventory. I ended up actually just handing the company over to him and his attorney. And I decided I was moving to Chicago with my wife and I was going to start over. And for a lot of people, that would be a turnoff to pursue an entrepreneurial life.

5:19Why did you decide to start another company? I can never imagine myself having a real job and a boss and all that. I've never had a real job in my life, a corporate job. So where did the idea for Chomps come from? I was a personal trainer throughout college. I spent a lot of time making these elaborate meal plans and grocery lists and trying to get them to stick with it. I mean, it just never worked. Back then, I think the options for good quality protein and easy meals were just few and far between. They just, they didn't really exist at the time. So it's kind of like influenced all of my CPG ideas going forward.

5:51And Chomps was actually one of them. I grew up eating more Slim Jims than I'd ever like to admit nowadays. But I liked meat snacks in general, but I liked the sticks better because I could chew them and my jaw wouldn't kill me after. And I feel like I would eat a bag of jerky and get a headache. So that's kind of where the idea came from. Like, why is there not a better free version? Any meat product is going to have a USDA legend printed right on it. And so we went to every C store, anywhere we could find meat sticks, bought all of them and found every single USDA legend we could find, looked up every one of those plants and called them.

6:22And then we've stumbled on Kevin Western from Western Smokehouse, which is our first co-packer. But now we have, was it four plants now with them? And we're doing the big JV in Mexico, Missouri on a pretty massive plant, a 300 ,000 square foot facility. Rashid, where was the business when you all sat at the diner and started talking about this? So at that point, it was really just like a website and it was the frozen steak business, right? So when we were doing the steaks, the co-packer we worked with also made a refrigerated multi-pack snack stick pack, right? So effectively, we were selling steak and ground trim, but there's still excess trim.

7:03And so he was like, well, why don't I make it into a snack stick? We wanted to build a profitable business and we didn't want to have to raise money. And we also wanted to present a more convenient option to our consumers. We did all the legwork and we found this co-backer in Greentop that was able to work with us on a sugar-free, grass-fed version of what we wanted to bring to the market. I want to just dial in on this diner conversation because your background, Rashid, is more corporate consulting. This is a startup. This is a person you don't know particularly well yet. What was it that made you say, I want to jump into this with you and do this?

7:40It's interesting. So Pete and I both come from immigrant families, right? We were both born here, but my dad was always an entrepreneur and he just always had his hands in these things. So like I saw that and I think kind of in the back of my mind, there was always this desire. And while I was consulting the firm I was at, it was an eat what you kill shop where I had a good salary, but my bonus was tied directly to billables and if I sold work. And so it had a very entrepreneurial spirit. So it was there. But the honest reason that kind of got me excited is I went to a public school. I got a whatever degree.

8:15But my brothers, amazing private schools, they all had master's degrees or doctorates. And my dad always kind of gave me a hard time saying, you know, you're the only son that doesn't have a master's degree. He's like, I just say you all have master's because it's easier, like almost downplaying it. So for me, you know, I studied business in college. I never saw a point to get an MBA. And so this to me was like a living case study. Like, let's do this. Let's see if I can get it off the ground. And it's not like I had extra time. My full-time role was quite demanding. I traveled 100 % of the time.

8:43You didn't give up your day job when you started doing this. I mean, we did both for quite some time, me longer than Pete. But it truly was a side hustle. We purposely designed the company to be D2C, to be e-commerce, so we could support it on night and weekends. That was the original premise. but you know the company took a life of its own grew a lot faster than what we could have expected and at some point we had to lean in and pivot how did you build a plan that let you scale efficiently and make sure that you could do this without overexposing yourself and without needing to take on outside capital when we built the model like we were able to find little working capital games that allowed us to do it i mean if we were in early days to 10x the business no we would have definitely required more cash to be able to fund the inventory.

9:28But we did more gradual growth, like doubled or tripled year over year, and it allowed us to build it. What I'm hearing is that you were willing to throttle the growth potential to control your own destiny, to not be in a position where you had to take on the outside capital and expose yourself. And I think it was actually smart because in early days, people get so excited and they just want to go all out. They have a huge opportunity to go national with a partner, but it's like you haven't tested the product. You haven't pressured your infrastructure to see if you can scale. In retrospect, it was the exact right thing to do to grow gradually as we were trying to figure out who we actually are.

10:02But that's also why we're so successful in retail is all of that foundation that we laid in the D2C world, building that community, building a loyal following brick by brick, one person at a time, one email list at a time. That's why when we came out of the gate at Trader Joe's, our velocities were insane and they still are insane. You referenced Trader Joe's, which was your first retail partner. When did that deal happen? How far into the company were you? And how did that change the company for you guys? Yeah. So I was walking my dog early 2016. I get a phone call on my cell phone from some random number.

10:36And it's a very high up person at Trader Joe's and introduced herself and said, we want to put chomps in the store. This is a cold call from one of the largest grocery chains in America. Just saying we have my favorite store like in the world. And I was like, yeah, no, this is totally, I'm not getting punked here. And I thought it was a prank for sure. So first initial questions were like, could you support this type of volume? And do you have the funding to do this? And I'm just like, of course we do. And we got this. And the other thing was like, you know, they wanted to discuss private label.

11:07But for us, it was me and Rashid. Neither of us were full time at the time. Like I was still doing some real estate deals to pay bills and he was flying around the world. and so it was like you could barely support what we're doing one single brand like if you do a private label you're essentially running a second brand so i said you know we just don't have the bandwidth to do that so um i said no we could do it as a chomps branded item back and forth a few phone calls like that and then she decided she wanted to put us in and give us a shot they were specifically looking for whole 30 approved items at the time they put us us in i think it was rx bar there were a couple other ones their buyers and their category managers are so in tune of like what's trending before the trend actually happens.

11:48We always thought we had the ability to grow into something big, but they saw it even before we did, I think. How big was that initial order? 1.1 million sticks, I believe. It was big. And they don't pay in advance for that, right? No, they don't. They have great terms though. They pay like net three half the time. They're good to work with in that way. But yeah, we needed the upfront capital to produce. Now we know now Trader Joe's is really the unicorn retailer where the way they operate is quite unique. Do we say more about that? 90 % plus of the items are private labels. So they're Trader Joe's branded products.

12:21So for you to actually get a branded product within Trader Joe's, it's like it's extremely rare. They say, give us the product for your best price and we deal with the rest. They don't even let you. You can't you can't go in there in the store and go merchandise like it's all on them. And so that for us, it was great because one, we didn't have a team. It was the two of us. And two, we had no idea what the hell we were doing. We just were able to focus on creating great product, a quality product, and deliver it to them. And then they took it from there. That doesn't happen at any other retailer that we work with.

12:53So that was incredibly blessed and fortunate to have that as our very first retailer to work with. From a revenue perspective, how big were you when the Trader Joe's deal came in? Yeah, so I think we had finished the prior year at about$400. And I think after we got the Trader Joe's order, we did about$4 million that year. Wow. Yeah. Incredibly backloaded, by the way. But the bulk of that was between August 8th and the end of the year. So, I mean, you're talking about 10x growth in a few month period here. And it's still just the two of you guys? How do you manage that? When the purchase orders came in, I remember I'm at home.

13:26My family was in town. We're playing spades. And like Trader Joe's would fax the POs. And so we would get like a text or email of the fax. And so it was like one, two, three. I think there were seven for each of their DCs. And like I'm doing math in my head. And I'm like, I told my family, I was like, I got to go pull up my Excel. And I call Pete. I'm like, dude, this is like 1.1 million sticks. And he's like, he's so excited. We'll figure it out. For me, I'm like, well, this is not what we discussed. Like I had to do the math to say like, what would it cost us to even fund this order? And it was just over a million.

13:57This was like a Thursday, Friday. Over the weekend, we had to figure out how are we going to raise a million to fund this order? Where does it come from? We did friends and family. we did debt only and we were able to find the right folks that would trust i mean we were transparent too because we were like look at this is backed by a purchase order but at the end of the day i'm like we've all cooked steaks we've all screwed something up and and we're going to do this at significant scale but we can we we can tell you that we're going to do everything we can to make sure that we can operate as well as possible and avoid any issues but like to be fully transparent like there's risk here so in exchange for the risk we gave a really healthy interest rate.

14:36My brother was one of the individuals that came in and he made me do a personal guarantee. I mean, understandably and no equity. This is all debt. Why not do equity, right? You're taking on risk, bringing that debt on. You're giving a personal guarantee to a family member. Why not sell equity? Doing what we were doing was already stressful enough. And if we can find a way to not take on equity, why do we need to? Like, again, like I always thought this is like, it was me and Pete were doing this. We were going to figure this out. And you want to hold off as long as possible, right? Because then you just get a better valuation down the road.

15:07Still ahead, how Chumps totally overhauled its brand strategy when it realized something surprising about its customers.

15:26Real leaders don't back down when the stakes are high. They innovate, they push forward, and then they take the stage at the Masters of Scale Summit. Join us in San Francisco, October 7th to 9th, to hear from the CEO of the New York Times, scientists using cutting-edge technology to find cures, the leader of crypto powerhouse Coinbase, a retired four-star general, and many, many more. Apply now at mastersofscale.com slash apply25. That's mastersofscale.com slash apply25. If you're ready to take your startup from idea to impact, then AWS is your launchpad. From data storage to machine learning to secure app hosting, AWS gives you the tech trusted by the world's fastest scaling startups.

16:16And here's the best part. Join AWS Activate today and you could score up to$100 ,000 in AWS credits tailored to your stage and network. Go to aws.amazon.com slash activate and start building. Expanding your business in the U.S. can feel like a maze. Every state has its own payroll, benefits, and compliance rules, which can pull your focus away from growth. That's why founders use Deal. Deal is the professional employer organization, or PEO, that gives you a dedicated HR expert plus Fortune 500-level benefits for your team. The National Association of PEOs says businesses can grow twice as fast if they use one.

16:59So if you're scaling, make it simple with Deal. Go to deel.com slash MOS and get up to three months free.

17:12Welcome back to Masters of Scale. You can find this conversation and more on our YouTube channel.

17:24What happens when you go into Trader Joe's? I would love to be in the store like demoing and stuff like it's like what we want to do but they don't let you do any of that stuff so it's literally just like you send it in and pray like that's literally what happened if it were me I'd be at Trader Joe's though walking the aisles oh look at this product I mean we were you know checking it out I was staying in touch with the buyer it was like two days in and she's like these numbers are really strong I was like okay but that's you guys are on these end caps where they do new item end caps and she's like, this happens all the time and you'll see like a big pop and then it bottoms off.

17:57I'm like, okay. And then like five days later, I keep touching base. I'm like, is it still going? Still going? So five days later, she's like, the numbers are growing. It should have been dying down by now because you're coming off these end caps. Actually, we're going to run out of inventory really soon. Wow. That first PO they gave to us, they gave us 17 weeks of lead time to deliver it because we needed it. We were bringing in beef from Tasmania and all this stuff. It was long lead time. So anyway, she goes, I need to get POs in now because you're going to go out of stock. This was supposed to last us five months and it's going to be gone in five weeks.

18:29Wow. This is from a sophisticated retailer. They've got a lot of data. They should have a pretty good idea of how a product's going to perform. I mean, that's an incredible five months to five weeks. You're flying off shelves. Flying. So let's put it into perspective. So like a good retailer would now like a health food store, like a Whole Foods or whoever might do like 15, 20, 30 units per store per week. we came out of the gates doing 360 units per store per week of this product that's massive like one stick at a time not selling multipacks it's single sticks and so that never slowed down and it still hasn't slowed down actually we continue selling that at that rate that was a single skew doing those types of numbers unheard of and so great relationship starter for us you know we're still working with them today so is this a moment where you say we really ought to quit our day jobs and do this full time.

19:18We ought to be pitching other retailers. We should be building teams out. Like, what does this do for you guys leading the company? Part of in the back of our minds, we're saying, okay, we just launched in this retailer, right? We have to figure out, like, does it have staying power? There's so many people in our ears saying it's Trader Joe's. They're going to private label you, right? There's not longevity. But we believe strongly that our performance will lead to staying power. Pete, thankfully, went full time to be able to, like, really man this. I still was like, let's wait and see this through.

19:49And so he went full-time in 2016. I didn't go full-time until 2018. And in 2018 is when we opened an office and we hired our first employee. But like that two years, when some brands may have said, okay, we have a window to grow into retail, we were gonna be the best Trader Joe's partner possible. What did that mean? That meant that was our only retailer. We focused on e-commerce, we focused on scaling, we focused on like branding and packaging and who our consumer was. At the end of this two-year stretch where, Pete, you're now full-time with the business, you are relentlessly focused on quality and on super-serving Trader Joe's, being the best vendor they could possibly ever dream of having.

20:25What flips? What gets to the point where you go, we need to start hiring and going into other retailers? And what's the inflection there? At the end of the day, concentration risk is real, right? And we knew we needed to continue to grow. I mean, there was still growth opportunities at Trader Joe's, but I think we started to learn who our consumer was and we knew that next channel we needed to go after was the natural channel. So in the natural channel, there's two major distributors and you have to be in those distributors to be able to service like the Whole Foods or Sprouts or Fresh Market.

20:57And so that kind of started our natural journey. And again, Pete and I still just kind of had to figure it out because again, Trader Joe's is clean. Single truckloads in. And so it's almost a blessing and a curse because we thought retail was gonna be that easy. We didn't even understand what trade spend meant. And so we had a crash course and we were able to figure it out pretty quickly. What did you learn about the customer? Well, I think we realized was most of our customers were female. So if you think about the legacy brands within Jerky, it's very masculine, right? It's serving a male demographic.

21:32I mean, Randy Macho Man Savage, right? I mean, one of the great spokespeople for the category. And like, it wasn't necessarily about our consumer. We call it the healthy achiever. It's someone who's health conscious, right? And so no one was speaking to that consumer. And so if you look at the original Chomps branding, the Chomps logo used to be like a cow brand. It kind of mimicked what all the other brands were, but we realized, no, no, we got to lean into this. We didn't want a feminine product, right? We wanted a product that was fun, approachable. And so like we worked with an amazing creative director at the time and she helped kind of bring this brand to life.