662: I Bet Everything On Sugar Free Candy — Now It Brings In $100 Million A Year

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0:39Just head to OmniSend.com forward slash founder without the E to get started. All right, now let's jump back into the show. so what happens when you bet everything on a container ship full of gummy lollies from switzerland get hit with a 250 000 shipping bill and realize you're either about to build a 100 million dollar confectionery empire or lose absolutely everything well today's guest is daniel kate he's the founder of funday sweets the sugar-free confectionery brand that now does over 100 million in retail sales across 8 000 stores in just five years in australia alone after After struggling with his weight throughout childhood and cutting out all sugar, Daniel spotted a massive gap in the market.

1:19And today they sell a fun day product every second. So in this conversation, you're gonna discover how Daniel convinced Chemist Warehouse to submit a purchase order before he even had funding, the$50 ,000 stock mistake that accidentally taught him the power of limited edition drops, and his brutally honest take on retail. Why it's not for everyone and how it can destroy your DTC margins, but why it's the only way to unlock TrueScale. This is a true masterclass in building a CPG brand that plays in both D2C and retail and why sometimes the biggest bets pay off when you have no other option but to make them work.

1:57Hear the stories, learn the proven methods, and accelerate your growth and future through entrepreneurship. Welcome to the Founder Podcast with Nathan Chan.

2:11Daniel Kite, welcome to the show. So you run a company called Funday Natural Sweets. I'm a massive fan. My brother told me about your company, I'd say about two years ago, and we started to go to the local IGA, always looking for Funday Sweets. I'm allergic to chocolate, dairy, peanuts. So I've always ate a lot of lollies, but I've become more health conscious. These days I'm getting close to 40. So I always buy your sweets. I'm a massive fan. So congratulations on all your success, man. Tell me, how did you start this business just before COVID? Thank you. Great introduction. I'm glad you're a huge fan.

2:54Shame about the chocolate though, because we've just released a new chocolate product. so I'll have to keep you on the lollies.

3:02So I'm from Perth originally, but was always sort of on the larger side. I was a pretty big kid, struggled with my weight all through school, got to sort of uni. This was probably like 2005, 2006 or about the same age, I suspect. And I just, I guess I started socializing more within uni and friends and started dating a lot more. And the weight was becoming a bigger issue. and so I guess what I did I started exercising which was great I hadn't really been doing that that much but I also cut out made a decision to cut out a lot of the sugars that I was eating and I was eating a lot of it I was eating chocolate I was eating lollies my parents there's always a story my parents will tell every time I see them it's they used to come into my room as a kid and there was just lolly wrappers and chocolate wrappers like in the cupboard behind the bed just sort of mischievously eating these sort of products where I wasn't really allowed to.

3:55So cut out all the sugar, got through uni, moved to Melbourne, still really wasn't eating much confectionery at all, and started a career as a lawyer working for sort of e-com businesses, what's now Luxury Escape, so pretty big sort of D2C sort of e-com business. And then make my way into the world of vitamin supplements, which was the business I was at just before Funday and I think partly it's a personal motivation it was a concept or a type of product that I needed to create for myself to enjoy that feeling of eating confectionery again which I had sort of not had for so long and it was also in combination with my professional experience being well I understand that world of health and wellness a bit more now.

4:44I'm working with the likes of Chemist Warehouse. I understand retail a bit more and all sort of the fusion of the two loves of business and retail, but also creating a product that would solve an issue for me. And that issue was on the one hand, you've got full sugar confectionery, which tastes typically really good, but I had really strong associations of guilt after. On the other end, there's always been sugar-free products in category. But the way that they produce those sugar-free or make that claim is by including sugar alcohol, so polyols, maltitol, sorbitol, xylitol, erythritol. And sometimes in a beverage or in a snacking product, they don't use that much, but in confectionery, use a lot.

5:30And then you sort of see those warning statements on the back of the pack, excess consumption may have a laxative effect. And I was, that was what was happening to me. So I sort of set off on a way to solve the problem of there has to be a middle ground. There has to be a solution here. How do I do it? How do I create an awesome brand, get into retail and sort of pursue this product and concept that would absolutely satisfy what I wanted. And I was hoping at the time, other people were also sort of having that same dilemma. And then that's what's now Funday. So talk me through. So you had this idea for the brand.

6:08Fast forward to now, I read that you guys are selling a million lollipops a month. Is that correct? Like talk me through the scale of where it is like six years later. Yeah. So we're just about five years in market next month. So we launched in Chemist Warehouse in April of 21. Sorry. No, five years. You're right. April 21. And at the time, I remember even just our D2C business, I think we did like$500 in the first month. And I was like, that's awesome. Like, this is so cool. Like people are buying lollies. I still remember the first customer. I know exactly what her name was and where she lives.

6:44And she still buyers from us, by the way. But in terms of the scale of the business now, last 12 months, we've done over 100 mil in retail sales. So across our e-com business and our retail business, primarily driven by sales in Australia and New Zealand, and we've got some other markets globally, but quite small. We sell a funday product. So between gummy, lollipop, chew, chocolate, every second. Yeah. Wow. So insane growth, right? Like insane growth, very, very, very impressive growth. So talk me through, like most people would look at starting a brand in the confectionery space, very capital intensive, a CPG like product.

7:28How did you bring this to life? It's really hard. So you've cited the obvious, like this is a fiercely competitive category. so you've got the likes of Nestle, Mondelez, Mars sort of three major brands that sort of lock up almost all of confectionery I don't know if you're familiar with like the midday squares in the US sort of a also launched a couple of years ago chocolate product but launched not in the aisle because of the competition launched actually in the fridge and I guess it was a similar concept it was this is Funday is a confectionery product but it also straddles healthy snacking.

8:07It's like a healthier version of confectionery ultimately. And so I guess the first consideration is where do we want to play? Like is this truly in confectionery? Is it truly in health? The first customer, and I'd been working with them before, so I had a relationship with Chemist Warehouse, and I essentially took the product to them and said, you know, this is after hundreds of rounds of samples and testing, if I could actually commercialize this, like if I can get it off the ground, there's a big chance that I won't be able to because there's so many factors against me like COVID and a million other things at the time.

8:45Would you actually range this? Is it something that you'd find interesting? And the answer was yes. So I said, well, that's great, but I've got to go and place an order for a couple hundred thousand dollars because minimum orders in the gummy world are really extreme. At that time, I'd also been trying to speak to manufacturers in Australia. And Australia was a very unfriendly place for manufacturing and brands trying to get it started. It's changing slowly, but particularly in confectionery, there's very few manufacturers that can assist. And so I ended up speaking to at least I think it's probably close to 100 globally and connected with a Swiss manufacturer.

9:26And I never dreamed that the product would be made in Switzerland, but it was just the only option for Funday at the time. and I'd been dealing with them. And I essentially was in this scenario where I was like, I'd have to go and spend a few hundred thousand dollars, but I don't have a guarantee of an order. That's highly risky. Like, what do I do? I don't even have an e-com business at this point or a brand. So I suppose I convinced the team at Chemist Warehouse to submit a purchase order and say, well, like, if I'm going to go and do this, I would love your support to put in an initial purchase order and I recall it being about 10 % of the overall volume I had to order so it still risks 90 % of it but it gave me the confidence that they were serious about it and I essentially took that purchase order mentally underwrote then an order to the Swiss manufacturer and raised a family friends around to sort of get some some some capital and don't forget at the time it's covered so a container it's refrigerated containers they were at the best case maybe eight ten thousand dollars from switzerland they went up to 25 30k and i remember the first lot of orders i had eight containers on the water because we were finished we were importing finished stock it was made way more sense for them to produce it and packers but it meant that you can only fit so few into a container so i remember getting a bill for 250k for the eight containers and being like holy shit like that's before any investment in brand retail e-com staff anything so i quickly realized that is not a good way to run a business and we essentially very quickly moved to a bulk importation local copac model um but really it was the chemist warehouse sort of convincing them to do it that allowed that first sort of thing to happen.

11:24Yeah, there you go. And did you speak to prospective customers, market research? Like, how deep did you go there? Or you just kind of knew from your own personal experiences? In hindsight, I should have spoken to other people, but I validated in some ways. So, there are competitive brands in Australia that have always been inside like classic sugar-free and you just had to do a quick Google to see the reviews. So, even like Haribo have these hilarious, it's sort of funny but it's scary on youtube you can just go like sugar-free haribo reactions and it's people just talking through their experience of consuming all this maltitol and these sugar alcohols and comments like do not eat these 30 000 feet up in the air and you know people getting caught out in scenarios where they're eating sugar-free candies and then having to run to the toilet.

12:13So I knew just by desktop research, it was a bigger issue. Did I know anything really about the texture people were looking for, the branding people were looking for, the price point people would be willing to pay? No, I think I took a lot of inspiration from the US at the time. And the sort of the origin story is really, I flew to the US and to the UK months preceding making the decision to enter and start this business. And I started noticing brands taking out the refined sugars and putting in ingredients like chicory fiber, tapioca fiber, which is what Funday uses today. And those brands were going phenomenally well.

12:57They were getting to a hundred million dollars in three, four years in the US. And I was like, different market, different consumer, same problem and so it was a bit of intuition largely intuition largely uh success in other markets and then some desktop research that sort of enabled me to feel pretty confident about it but it's safe to say i was shitting myself the first couple of months when i was sitting in retail and i was like holy shit like this is a big thing this has to work otherwise like i got nothing like i'm screwed did you put everything you had into this yes and what was the fifty thousand dollar mistake in the early days that you made um yes that's the one that gets talked about a lot and there's been other mistakes by the way that's not just the one that was probably just the early the early stages we have to order in i can't remember a couple hundred thousand bags at a time and very early on when d2c was pretty small retail was pretty small you don't really know what's going to move fast, what's going to move slow, how things are going to go, how viral something might go on social media, which would have a huge impact on units.

14:06And I basically made a mistake and just bought too much of one product, which is our frogs. And they have a shelf life, which is the terrible thing about food. As a business owner, it's like always weighing up how much stock you hold. And then on the other side, you don't want too little because then you you can't supply and you can't grow. You don't want too much because then the stock goes off. But you also have to balance it out with each retailer has strict requirements, what they call MLOR, which is minimum life and receipt. So let's say for argument's sake, it's six months and you're coming with a product with 12 months shelf life.

14:45You have six months to sell that stock to them. Otherwise, they won't take it. And that was largely the decision behind DTC. It was like, we need an outlet in case we're doing this. And there's a whole other sort of benefits to DTC. But out of those red frogs, I honestly didn't know what to do. Like I'd seen brands popping up. Now collaborations are very common. Five, six years ago, collabs were pretty infrequent, but I saw the merging of an existing product and they would add like an ingredient of the other brand. And I thought, could we take our frogs? We have a sour product could we coat it in our sour coating and sell it and create a bit of buzz and hype and so the decision I made at the time was let's create a limited edition product let's just coat it because we have access to that the manufacturer is really helpful about around that and you know coincidentally we launched a limited edition sour frog which everyone loved and it was a great use of stock that otherwise would have gone off and written off but at the same time was a really good lesson that people want the excitement they want the hype and sometimes people need a break from the core and they just want to eat something different and then they'll come back so really valuable lesson in that and we've rolled out collaborations and new products and stuff ever since that point because we know that's what people want all right so talk me through so you had the purchase order for chemist warehouse then you had your first d2c sale what happened next like Like how did this thing go and become a rocket ship?

16:18Was it like that off the gate or did it take a while to get going? And what were the levers that drove it in that first couple of years? Yeah. Well, the mindset was it has to work. Like I have no option. I've got all this stock. I've bet everything on it. Like I'm going into this with if this fails, like what the hell am I going to do? My wife is working as like a junior doctor at the time or she might have been finishing starting essentially making like very little money and i was like we have a mortgage we were two months away from having our first child and it was like pressure was on i was like this better work um so i think that's important it was the mindset it was like at all costs this thing has to has to get going the d2c i can't remember the numbers but it sort of grew from a couple hundred dollars and then you know within a few months maybe we're doing 15k or 20k and i was only in 450 chemist warehouse stores.

17:14COVID was happening. People weren't going out as much. Ecom was pumping. And how many people walk into a pharmacy every week? Maybe a portion of the population. And then you think about frequency, not that much compared to say Coles and Woolies IGAs where people are walking potentially multiple times a week. So D2C was critical in reaching people that would otherwise not see the brand. So from an awareness point of view, that was important. Interestingly, which I never thought about at the time, retail being at the front of the store in Chemist Warehouse was an amazing discovery piece for people.

17:50And they were like, oh, I've seen it at Chemist Warehouse. I bought a packet. It was$4.50 because I didn't want to buy a 12-pack online. So it became a discovery piece, a way to de-risk their purchase and then feel comfortable to buy online. So super amazing symbiotic relationship between retail and e-com and I think the best businesses have both because e-com is fiercely competitive retail sort of demands like you can't get away from product like you can't just close a tab or move a browser like it doesn't work like that so e-com started doing really nicely at the same time chemist warehouse I was all in I was the one messaging influencers and content creators at the time on Instagram.

18:35I don't think TikTok was really around, not in Australia. And I actually called myself Danny, like D-A-N-I, because I was like, I think people might respond to me better if I'm female. And so I had this like little alias and it worked, like whether or not it would have worked otherwise, I don't know. But it was, I was so sort of insecure about this like male founder thing. That was what was the decision I made. And I put a bunch of money into creating these amazing influencer kits. They were bounce back offers to Chemist Warehouse. It was very much driven about making retail successful because I knew that if we could succeed in Chemist Warehouse and we could get the runs on the board, not only would they be more confident and start putting more purchase orders, retailers would also be looking at the numbers and that would then open us up.

19:27So within about three months of launching Chemist Warehouse, I started working with a friend of mine who had started a brokerage agency in retail and we pitched the product to the health food aisle at Woolies. And that sort of goes back to the initial point of we never actually went into the battleground with the multinationals. We went into an aisle where we knew health conscious consumers were already shopping. We knew that they are used to paying a premium because typically it's better ingredients in that aisle. And we knew a lot of those consumers are currently not eating confectionery because they had the same problem that I was having.

20:03So that was probably the most imperative decision that was made. Where do you sit? You sort of unequivocally think, well, if I'm selling confectionery, it sits in that aisle. But most people do not sit back and be like, well, hold on. What are the pros and cons? Where could I sit? Where could I not? You go to the US, you go into a fridge and you're like, this product doesn't really belong there, but it's so smart that it's there because it's not crowded with all the other snacks. So that buyer who interestingly and coincidentally now works for the broker and we work with her all the time, like almost every week and every day, she accepted four products in the top 250 stores in their sort of premium cluster.

20:44and it was like this has never been done before at this price point with these ingredients I know you're doing well but we don't know for sure so we'll start you off here and then if it succeeds we'll basically scale into the next 500 and the next 200 stores and that point in which we launched in October 21 opened the floodgates really to say we can now prove in grocery setting that we can do really well. Three months later, Ampol reached out to us because they had an affiliation with Woolies through a wholesale agreement that doesn't exist anymore. But Ampol was like, well, the products are arranged at Woolworths, let's put into Ampol, which had like 600 sites.

21:24So suddenly we're in pharmacy, grocery, petrol and convenience. And the objective was we need to succeed in all. Each channel operates separately, the consumer is separately. And the focus was then around driving velocity in store and proving it out in that channel so we could then expand into more retailers in each of those channels. Yeah, you've done an exceptional job with retail. I do want to ask you about that. But before we get to retail, talk me through about the DTC side, because there'll be many people listening, watching this, where they've launched their brand they might not be at a stage where retail is is the go they're bootstrapping they might be doing 20 30 000 a month for a d2c you're not going to have that much buying negotiation power with a retailer po's all the stuff that you know very well what did you do from a d to c start to get the engine going on what would you do now take chemist warehouse out of or retail out of the question i'm just curious um it's a i think the answer is very specific to the product and the category that you're shopping so at the core of it if you look at confectionery 90 of consumers are buying it in store so there you go like if you're not in retail, you're not winning.

22:50That doesn't mean you can have a successful D2C business, but it means customers are attuned and expecting to pick it up in retail. So that was the number one, but it was like 10 % of 27 million people is nearly 3 million people. We have to be speaking to those people. There's other benefits that e-com can provide, subscription loyalty education creating your own database and being able to get first party data and hear from the customer about what they want which you do not access in retail or you can but at an extreme cost so the way that we set up D2C the intention wasn't about creating the biggest D2C business it was being able to actually have all Australians have access to fundate no matter where you live.

23:41So it was actually an accessibility play. The unit economics were incredibly important, you know, and so we decided to sell bags of like lots of 12 because you start dealing with cubic and shipping and Australia Post and everything. And you think everyone tells you DTC margins are really good. And then you start to really drill into it and you're like, well, what's your acquisition costs? What's your shipping cost? What's all your subscriptions costing you that you go on Shopify and you add this, add this, next minute you're paying three grand US a month and currency is changing. So I built it super scrappy.

24:17We used, and I don't think it exists really in mainstream, but we use Shopify as the key sort of back engine. But I wanted full flexibility. What I didn't want is to go to an agency and say, build me a website. And then next minute, I wanted to change the header and the image and the copy and put in a stockist page. And then I'd be up for like two, three, four, five K every time I wanted to do anything. So that was the mentality. We use the program called Shogun. If you know Shogun. Of course. I know there's been a huge evolution in that space and it's way easy to create websites now, but that was pretty innovative at the time and essentially drag and drop.

24:55So I designed the website with our graphic designer and that website was very blocky but perfectly fine it got us to probably up to 100k a month sort of in sales and I was pretty happy with that we only made the decision to shift away from that once the business started getting a bit more traction and we sort of had the belief in it but for someone sort of starting a business and they're going well on D2C and And I still think D2C is a fantastic avenue. It depends on the product, depends on the category. The smaller the product is, the better it is. A small product with high value is like the dream D2C.

25:38I also think there's an amazing opportunity now that wasn't necessarily even around five years ago, which is around things like TikTok Shop, Amazon, which has taken off significantly in Australia, but also sending your product into Amazon, FBA and other countries. TikTok shop in the US is just going bananas, as everyone knows. So you can have a thrivingly successful e-com business and never touch retail if your view is to take it global. And so depending on regulations like food, we can't just put our product into the US. It's FDA requirements or if you're doing electrical or DG. there's all these sort of parameters around it so it's sort of i don't know i think i would do the same thing again but it was specific to what we sell how we sell and what the customer is expecting and they were not at the time i don't believe really anyone in their mind thought buying a lolly online was like a normal thing to do yeah what you're saying makes so much sense to me because i look at my own purchase behavior i have bought your product hundreds of times and only in a supermarket.

26:48I didn't even really know you do that much DTC. So when you said to me you started like making$500 on your first day DTC you pumped like your first month it's like yeah okay wow I didn't realize. Most people didn't believe that it would go well. Really? Just in general but also online specifically. Why? It hadn't been done. It was like what do you mean you're going to sell a bag of lollies for$4.50? Like you can buy Allen's a natural confectionery 200 grand bag for like$2.50. That's like a huge a huge premium um people don't know what sugar alcohols are um 50 grams one serve like what are you talking about that's never been done before like there were so many firsts that everyone's like like the branding but don't know don't know how it's going to go so what did you do on pricing pricing is always an interesting one right like it's such a massive lever to grow a business often not talked about nowhere near enough smart people look at it play with it i'm not one of them but i'm curious what did you do well i set up a business plan right that was the first thing i did i just got it off google now you go to chat and make a ripper one for you but um part of that was pricing strategy so i remember looking at two brands one was halo top which was massive five years ago, massive, number one pint-sized ice cream in retail, and remedy kombucha, which is pumping kombucha five years ago.

28:15And I looked at the multiple on a, call it like a non-healthy version or a standard version in that category and what they were doing. And I thought, well, that gives me a bit of a guide of what consumers will pay as a premium to the comparison product that they're used to. and I took that as a guide for what I think is reasonable. So let's say a Coke was like$2.50 and Remedy was selling for, I remember at the time in Indies about five bucks. So I was like, you can have a hundred percent markup. Halo Top was I think 10 or$11 for a pint compared to like Peter's ice cream that was four. And I was like, okay, I'm seeing this, but also those brands are smashing it.

29:00there is a customer there that's willing to pay more for better ingredients and a better product. So the key thing to note around pricing is it's only more expensive because it contains good ingredients. Sugar is incredibly cheap. Things like fiber of tapioca and chicory root are super expensive. The ingredients we're using, the manufacturing process, it's all just more expensive and the test is will someone pay more for a better product and how do they know it's a better product where does education come in but fundamentally it was what's reasonable like how much is a cup of coffee a cup of coffee what do i feel is not taking the piss and also at the same time what are our unit economics like this business needs to be profitable otherwise we won't be here in a year or two years or three years?

29:55And that was the hardest question to answer because there are so many unknowns and uncertainties. For example, we were mid-COVID, like, is the container pricing going to continue to increase? Are there going to be raw material surcharges? And we were getting them all the time. Like, in the first year, I reckon we got four raw material increases where we're paying three times the price. And I remember looking, I set up an inventory management system in the early days, which is one of the best things we did. So I could see landed cogs coming in every time. And I was like, this business is not going to last long.

30:27But luckily by that point, COVID had subsided. A lot of those freight issues had resolved and the scale of the business was a bit bigger where we could then lean on suppliers and manufacturers to help us out with extending terms and even just getting economies of scale. Okay. So from a unit economic standpoint, you were able to get to a hundred grand a month and be profitable on your first purchase yep okay great and when it comes to building your website you recommend to founders working out how to do all that yourself that's i believe i i believe that's a core competency you're running ads yourself as well or use an agency agency okay and it was a we still use an agency and i think it depends on the business and it depends on the product and it depends on what the customer they're buying patterns are for us digi direct to consumer is critical like we've got around a thousand subscribers monthly subscribers to our business which is like unheard of to get lollies to your door every month which is insignificant to some other brands like toilet paper and other bits and pieces but there's a lot of power in that but for us it was like we are not necessarily a natively digital business we need to be at the forefront of social influencer content marketing we need to have those direct relationships with the customer but we know nine-tenths of purchases are not happening online so when we start to think about where we invest in terms of team it's like we need the best offline retail business and team possible in saying that the e-com business is a couple million dollars like it's not nothing it's just in comparison to the rest of the business it's a smaller pie so you can't be good at everything and my view is like we can double down on team which we have done on the retail side or we can lean on expertise of agencies to help us i would caveat that by saying as the business grows we will likely have to bring more people on in-house and I've been speaking to amazing businesses.

32:38I got off the phone with the guys from High Smile yesterday and they're unbelievable business, sort of like under the radar, I would say, Australian business. In the Gold Coast of all places. In the Gold Coast, 100 staff, like killing it in global retail, not just Australia. And they do everything in-house. And so I can see the benefit in doing that, but you've got to be really clear. and he said like they're a natively digital business first retail comes after conscious decision backed up by the fact that their team validates that and the size of their team validates that my approach is digi allows us to get one-on-one contact and allows us to reach people that otherwise would not be able to and for those convenience occasions but it is not the core reason people want to buy or where to buy.