'DTC is a lot easier when money is free': Somos Foods CEO Miguel Leal on pivoting to wholesale

0:03Hello, everyone, and welcome to the Modern Retail Podcast.

0:30how he got to where he is now, what he's doing, and also just the state of being a CPG startup, because it's a really interesting time to be trying to get traction in the grocery space. And I'm sure Miguel has a lot of insight into that. But Miguel, how are you doing? Thanks for joining. Cale, thank you for having me. It is a pleasure to be here. Love your podcast. And thanks for allowing me the time to tell the Somo story. Absolutely. So first, you have a really, really amazing food background. Some of my favorite foods, I'm sure some of our listeners' favorite foods, you worked at Kind. I know that Daniel Lubetzky is a co-founder also of SOMO, if that's correct.

1:08But you also used to be the CMO of Cholula, is that correct? That is correct. You've been, like, Cholula, one of my favorite hot sauces in the world. Well, why don't you just give a brief background of your journey up until here? Yeah. So I have always been interested in food. When I was a kid, I grew up close to the border in Mexico and was always fascinated by grocery stores in the U.S. My mom used to take me to see my grandma in Nuevo Laredo, which is a border town south of Texas. And I will always cross over to the H-E-V and Walmart just on the other side of the border and spend hours just looking at things we didn't have in Mexico.

1:48So fast forward, I ended up working in food. I started my career in big food companies like Pepsi and Danone. And there I was able to learn how to be a marketer and how to work in this industry. I think it was my second MBA. And like you mentioned, I was lucky enough after that part to first work for three great, scaling beautiful food brands, Kettle Chips, Kind Bars, and Cholula Hot Sauce, in the three of them as the head of marketing. But also I was able to meet Daniel Lubetzky and Rodrigo Zuluaga at Kind, who are now my co-founders at Somos. So like you said, Somos makes convenient, delicious Mexican food.

2:38And yeah, I think since a young age, I was kind of destined to do this. How did the idea first come about? Was you and Daniel and Rodrigo, like, what were you talking about? Was this always the plan? What's the story? Yeah, Daniel and I used to have dinner together when we were first friends. And then when we, you know, worked together at Kind. And we saw in New York how much Mexican food changed in restaurants. In the last 10 years, you know, just taquerias, you know, started to pop out and food trucks and, you know, anywhere from, you know, cheap Mexican food to super expensive Mexican food.

3:23Everything just became more like the food we used to eat at home. But as people that do retail food for a living, it was the same, you know, canned beans and, you know, fluorescent yellow, you know, hard shell tacos at grocery stores. And we just were fascinated in this category by how modern Mexican food had become in restaurants and how lack of innovation we saw on the Mexican shelf. So that was always kind of like in the back of our head. There wasn't no business plan, but we would talk about it constantly. During the pandemic, Rodrigo started sending, Rodrigo was living in Guadalajara, and he would send samples to Daniel and I and our families and friends just look forward to those samples on foods coming to the house.

4:18And that's when we realized there is something here. You know, there is certain magic. It can be like all these people so excited. We should probably put together a business plan and explore if there is something here. And a year and a half later, we are very happy that we did. I think you're totally right in terms of the grocery offerings. Like growing up, I feel like the Mexican food offerings were like old El Paso or like Goya canned beans. or on the other side, there were more health food, like Green Mountain. I feel like there were like a different type of thing that were more American focused, but not necessarily Mexican focused, if that makes any sense.

4:55That makes 100 % sense. And to add to what you were saying there, Cale, Mexican food is as big as Italian food in America. It's the number one ethnic food. But Mexican food, over 80 % comes from restaurant. While Italian food is very popular to eat at home. And when you walk the aisle, it's very easy to see why. Everybody cooks Italian food at home because there are solutions. You buy pasta, you buy sauce, and in 10 minutes, you have something. Mexican recipes are very complicated. When you walk the aisle, there are spices, there are tortillas, there are salsas. It seems like you need 12 ingredients and an hour of your time to cook a Mexican food.

5:40And we wanted to present something that would be as delicious, but a lot more convenient than what exists today. What was the first product or products that you came out with? Because you have a lot now, right? Yeah. And part of it is we started the business in D2C. And to make a complete solution in D2C, we had to start with a couple of rices, a couple of beans, a few salsas, and a few antres. And we started that business in the middle of the pandemic. And by the time the pandemic ended, there was really no D2C business for us. So we had to, last year at Expo West, make a hard pivot into retail and take a D2C portfolio into the retail space.

6:27And you can appreciate the challenges that that presents. You have a rice aisle with 200 SKUs, and we only had two. But what that year allowed us is to see which ranges and which products were more popular. And this year, we're, as you mentioned, just experiencing explosive growth is because we've been able to figure out that, you know, our rices and our beans are some of our best sellers, followed by our salsas. and what shelf in the retail, what price point, and what kind of formulas really have caught up with our consumers. So with the DTC, was it that the margin structure didn't work, the logistics didn't work, or that you just didn't want to pay for your own demand with digital advertising and all that?

7:18Honestly, it's a mix of those three and more. I would actually say that, you know, from the time that we did our beta test back in September of 21st to the time that we launched it in January of 22, our fulfillment costs were higher. Shipping was higher. There was a lot less demand. Maybe we should have done, you know, better execution. but definitely like Meida and Google rates were a lot more expensive and a lot less efficient because of the iOS changes that had happened. So I think live was a little bit, it's easy to see it now. I don't think I appreciate it at the time, but live was definitely pointing us into retail.

8:03And on our first year, we launched in 6 ,000 stores, which is, you know, kind of like unheard of. But I think a lot of it was retailers just realizing the same thing, that there was this huge opportunity that they could come in and kind of like source share from all the delivery and restaurant in Mexican food. So, you know, we just took it from there. What have you found is in most demand for customers? Like, is it all ready to eat? Is it rice that's pre-made and you put in the microwave? Or like, you know, because rice and all of these foods comes in many different forms and have a variety of different steps in order for them to become dinner.

8:46So what have you found is working the best? Yeah, the easiest for consumer to understand, the one that needs the least explaining, is Rises. Our Rises are fantastic. You know, blind test, we are constantly beating the big incumbents on the category. We got great ingredients. We got great formulas. I would put Somos against any competitor on the set. But also for consumer adoption, consumers are used to hitting Rises for 90 seconds in the microwave. So we see the path to adoption of SOMOS typically starting from rices and some of our salsas, which I think is the most intuitive. Where we really see loyalty go up tremendously and repeat rates is when we can get a consumer to match a rice, a bean and something else.

9:36When consumers can cook under 10 minutes a complete meal from just three pouches, that's our pasta and sauce. That's really where consumers realize what Somos is bringing to the table because it takes significantly less ingredients. We do all the slow cooking from them. It takes significantly less time to clean. You put three pouches in the microwave and then you assemble a burrito, a burrito ball, some tacos, and then it leaves them tons of time to spend in what we call sobremesa, which is the time after dinner, after lunch, where you can just hang out with your loved ones versus spending it cleaning up the kitchen.

10:20Awesome. Can you talk about the pivot you made when you realized you had to go from DTC to predominantly retail? What exactly did you change? Did you have to change all of your packaging? Did you change some of the products? What was the shift? So yes, we had to change all of that. So a part of it was the nomenclature. In a digital space, you get a lot of time to explain things and maybe be a little bit more nuanced on the names. when you're on the retail shelf, you have to be super telegraphic. So while we were calling our plant-based taco filling, we call it picadillo, which is one of my mom's recipes, we realized that maybe we were being a little too cute.

11:07And when we move that to plant-based taco filling, all of a sudden the item is twice as productive. And that is the difference between a D2C space and a retail space. price points, promotion points, where do you merchandise it? When we started selling on D2C, all the products came with recipes and came in packs. They were meant to build together. So we have to find a way to bundle them in store. So which category do you go to is incredibly important because I know I've listened to a few of your podcasts. the ethnic aisle, for example, has less traffic, but has more space and more opportunity to create that experience versus putting rices on the rice aisle is going to give you a lot more traffic and a lot more productivity, but it's not going to get you the loyalty that the brand can get in the other aisle.

12:04So all of these things had to be changed from year one to year two. Yeah. When I I was researching you. You mentioned specifically that, the ethnic aisle thing, a Forbes profile of you. And I wanted to, can you just go a little bit more into that? When you're talking with a grocer, do you say all of our products are in the ethnic aisle and that's where we do the best? And that's what you found works? Well, when I go and I pitch to retailers, I am not a merchandiser. So I don't like to say here is where the product is going to be. because Whole Foods is a very different shopping environment than a Kroger, and no one understands it better than our buyer partners.

12:43What I do say is what I was answering in the previous questions, which is I want to bring in the mainstream consumer into the ethnic aisle. And in order to do that, we need to create the portfolio solutions. This is what we're seeing with the data. And I use a lot of the comparison between other ethnic foods, Italian, Asian, Mexican. And I show the billion-dollar opportunity that we have in helping the mainstream consumer cook a delicious but convenient and foolproof recipe at home. And that typically yields getting into the international food set. Got it, got it. Can you talk about this first year where you said 6 ,000 retail locations?

13:34What were they? You mentioned, I think HEB is one that I read. Are you in Kroger? And have they performed differently or have they had to be merchandised differently depending on those stores? Yeah, because, you know, an HEB doesn't need an international aisle because an HEB is mostly an international store. You know, you find a lot of Mexican recipes across the aisle. I think part of it is a success that they found, and part of it is also the demographic in that part of Texas, right? We started, so HEB, Sprouts, Meijer, Kroger, Food Lion, and Hungry Root were our first six customers. last year.

14:21Albertsons was the first company to take us nationally, and that opened an opportunity to go into a lot of CAE independence. And that's kind of what got us to the$6 ,000 in the first year. We'll be right back after this message from our sponsor. Please stay with us. You know, you're a marketer by trade. What has been the marketing strategy? Has it just been focused after the DTC pivot into getting into these stores and going from there? Or have you been doing other things? You know, we've really come full circle. I think our original idea of creating these beautiful boxes that you could bring home on a Taco Tuesday and all of a sudden have a meal for your family, you know, call it under 15 minutes for under 15 bucks, was really right.

15:08Somewhere along the way, we pivoted and we tried different things. And now we've come 360 60 degrees into what would be the way to build that experience, but do it in a retail environment. So doing things to answer your questions, you know, instead of just sending influencers a few of our new products is really about sending them a recipe and a way to explain how this product react together. And it's really about pivoting from marketing a product into marketing a system for the consumers. And we see that in many other categories, but we don't see it a ton in food. Even the example that I gave you of like pasta and sauce, there aren't really brands in the Italian aisle that have both, right?

16:01So we think this is pretty, what we're finding out, it's hard to find other examples. and we're just trying to be like very innovative. And I think our next step of the journey is how do we leverage technology in store, through chat, to really bring that digital experience in the real world. Got it. So to be clear, pretty much what you're saying is you're trying to, if you're doing say influencer outreach, you're not just having them talk about your product, but you're having them do the whole experience, make a recipe with it. And you think that will be a better way of messaging what Somos is about.

16:41Yeah. And the same thing with our chippers. You know, instead of having like three rices on promotion at a single price point, we need to have three ingredients, a rice, a beans, and a veggie that together can make a veggie ball in under 10 minutes for one price point, the three of them together. And then how do you take that example across the whole path of purchase all the way? because we know when we really bring that convenience together and people have this food and they can't believe they did it in less than 10 minutes, that's really what drives loyalty for us. Got it. Got it. And so how many SKUs do you have right now?

17:21So right now we have 19 SKUs. And are they all available in all of the locations you're in? Or how does that work? So they are not. We definitely have realized that we have some SKUs. that are ready to be taken out nationally. Like the rice example that I gave you, we have a product we just launched called Mexican Street Corn Rice. The moment that we launched it at Expo, it became like our number one item on TDPs. The moment we put it in the stores, it had twice the velocity in the first week of all of our ordered items. So we have that product and that range that is ready to be taken everywhere.

18:03So it's proven it can stand in any shelf and be in the first or second quartile of velocities. And then we know we can build a business from there. So that's what we've learned on our group of customers today. And that's the way that we are pivoting. And then once we establish that product in set, that's when we can bring the rest of the portfolio to create that system magic that I was telling you about. How are you, like as you expand more products or add new SKUs, new flavors, how are you figuring out what works? Is it all about authenticity? Are you going to, you know, are there going to be more types of products like, say, for example, a Mole or something like that, that maybe hasn't been on the American palate before, but you think could do well?

18:49Or what do you see in terms of national appeal that will really work with expanding this brand? Yeah, I think you're going to find this interesting, but that is another pivot that I forgot to mention. We have a team of chefs in Mexico that develop products for us. We have a network of chefs and they are all in Mexico. And our marketing team is here in the US. And I feel that has created a great balance for us between what is really culinary forward in Mexico, but meeting consumers where they are. Sometimes we've launched items that we feel are a little bit ahead of their time. So going on with the mall example that you mentioned, you know, that is something that we're constantly talking to retailers and seeing, you know, where is a place and what would be the right timing and the right format to bring a product like that to market.

19:49What we found a lot of success, to specifically answer your question, is when we find an item that has gone broad appeal, like Mexican street corn. And then we can bring that recipe to market, but we can also explain how that product fits with our system portfolio. So it's not only about launching the best Mexican street corn rice that we can make, but how would that make matter the rest of our recipes? The enchiladas, the burrito bowls, the Taco Tuesday that you are making at home with rice and beans. So that is where we can check all the boxes. When it's something that has already had broad appeal, we're meeting consumers where they are.

20:37We can create a product that tastes better than the competition. and then the third leg of the stool is it can make the rest of our recipes better. Got it. Got it. Makes sense. I wanted to zoom out a little bit just because you have a really interesting perspective on this. But, you know, DTC, you made a very hard pivot. You started digital. Then you said, no, we're going to stores. Do you think it's pretty much impossible for a CPG or a food brand to start out as DTC now? It seems like everybody's trying to get their foot in the door and wholesale. Do you think that's the ultimate lesson here?

21:08Well, it is. But But it is also a sign of times. Like you say, if we step back a little bit and we look, you know, just at the tea leaves on how this whole thing has changed, building a brand on D2C is incredible because you get to control your narrative. You can be a lot more flexible on your drops. You get first party data. But the environment is a lot easier when money is free. When money, you know, becomes expensive, like it is, you know, in the environment today, you need to be a little bit more omnichannel and maybe, you know, sacrifice a little bit of that beauty and lose a little bit of that control by partnering with someone that can help you bring that story to life on the shelf.

22:01So can you talk a little bit about what your expansion strategy is this year? Is it just about getting into more shelves, having more retailers give you national distribution? What are the big retailers you really want to plant your flag in? Yeah, I mean, without revealing too much on the places that we haven't launched, we made a list of retailers where we want to be this year. And we're very lucky. We are four out of five of the places that we want to take it. And it is exactly that. It's places where we are going to show up. I'll tell you, the most recent one, we just got national distribution on Whole Foods for 11 of our items.

22:46We launched them last month. We launched a product that we co-developed together called Salsa Matcha, which is a Mexican chili crisp. And those are the kind of partnerships. What we really want is retailers that we see eye to eye on this opportunity of closing the gap between Mexican food at a restaurant and convenient Mexican food at home. And with them, you know, we have a portfolio that is ready to go, that is proven in$6 ,000. And we would like to get that into as many doors possible where, you know, merchandisers and retailers are willing to share this vision with us. Then we have other partners where we are playing with different formulations, where we give ourselves the opportunity to maybe, you know, with the Mollie example from before, be a little bit more aggressive to see what makes sense for the consumer.

23:50What is the right, you know, level of heat? What is the right level of taste? How much chocolate? How much spices to put in? And as you know, there are probably 25 different mole recipes of Mexico. If you're from Puebla or if you're from Oaxaca, like a mole rojo from Jalisco is completely different from the mole with cacao from Puebla. And all of these, you know, development places where we can play prove that it works before we, you know, put the, you know, the time and effort into getting it into national distribution. So I think, you know, we now know some of our items that are ready to be taken everywhere, mass, club, natural, food, etc.

24:35And then there are some items that we need to be a little bit more playful, and that is exciting too. Got it. When you say be playful, does that mean that you have specific locations that you're testing them out? Or sort of how do you do that testing to make sure it's working? Yeah, probably the best example is enchilada sauce. So Whole Foods, you know, approached us about an opportunity to launch an enchilada sauce together. Rodrigo, my partner, his family, you know, makes enchilada sauce in Mexico. And they've been doing it for 20 and 30 years. And there is no product like that in the market.

25:10You know, the tomatillos are slow roasted on open flames, which give them, you know, a char and a sweetness that just doesn't exist in the market yet. So we were able to quickly bring those recipes, share them with the Whole Foods team, make a couple of arrangements and bring a product to market in six, seven months that wasn't on our pipeline. Launch them, you know, with them. And the product is turning tremendously. I got pictures this weekend of empty shelves of the product. We've been in market for a few weeks. And now, you know, we are like, OK, you know, it seems like this is not a product that we immediately would have thought of launching.

25:53But we are meeting consumers where they are. And they seem that consumers are ready for an upgrade to the enchilada sauce that they've had for the last 10 years. And we are happy to be the brand that brings it to life. Got it. I wanted to ask, just given your background that you worked for, you know, Cholula and now you're leading this company. How has the conversation with merchandisers at grocery stores changed? Like, are they much more open to new types of international foods than ever before? Are they asking the same questions? Like, what are you seeing in terms of the evolution? Well, I think, yes.

26:29So first of all, international foods is really having a moment, You know, through Cholula and, you know, the work that we did with Catterton and with McCormick, like clearly international frameworks is a big, big theme. I think it's driven by many different things. It's driven by a lot of, you know, households with different backgrounds. I am a Mexican immigrant in the U.S. My wife comes from an, you know, Irish and Italian family. and we both different spices into our households. But it's also driven a lot by social media, you know, the recipes, all the brands. And I'll tell you, brands that I really admire, like Fly by Gene or Onsom, just doing a tremendous job, you know, like revitalizing these, you know, categories and bringing in news.

27:22So that I feel is definitely there, particularly in international foods. I feel Mexican food is really having a moment. going into mainstream. So I think if we go back 10, 15 years ago, Kale, we can see started in beer and spirits, what happened with Corona, what Modelo is doing today, what the different tequilas, Clase Azul, Casamigos, just exploding in popularity. And it's not only cheap tequila, it's premium and super premium tequila. If you look at Cuervo earnings, just doing a tremendous job bringing good quality Mexican product to the mainstream market. And when I see that, especially in the last five years, things like Takis, things like Topo Chico, obviously I would put Cholula, I would put Tajin, I would put Electrolite there.

28:21Just completely having this adoption from products launched in Southern California and Austin and San Antonio to now being able to find them in Maine and Connecticut and North Carolina. And I feel like this is really the time to really close that gap. And why not? You know, why only have spirits and snacks and beverages? I think, you know, what's almost can be a small part of this momentum is by targeting Taco Tuesday and the center of the plate. Got it. Well, we're just about running out of time, but I wanted to just ask you about what you're seeing for the year to come. It sounds like we should expect to hear more announcements about retail expansion, I imagine.

29:06Yeah, we have some big retail announcements coming soon, over the summer, another big one in the fall, and then by the end of the year. But we also have some really exciting products coming into the market. I think the one that I'm the most excited about is the salsa matcha or Mexican chili crisp that we just launched nationally with Whole Foods. And we're getting 2 ,000 and more stores this year that we're going to be distributing it. It's a very unique recipe. It's very traditional, the way that it's made in Mexico through the process of the way the seeds and the nuts and the pepper come together.

29:46But we actually change it and do it with avocado oil, which has a really nice nutty taste at the end. And it is crunchy and delicious. And we have one of the formulas that is sweet. And it's already taken off significantly in places like Texas and California. And I think, you know, it's going to be a big, big deal in the balance of the year. Well, I'm excited to try it. Miguel, this has been such a great conversation. Thanks for joining. Cale, thank you so much for having me. A pleasure. And thank you for listening to this episode of the Modern Retail Podcast, a show by Digiday. If you haven't already, please do subscribe and send this podcast over to a friend who you know would enjoy it.