Misfits Market COO Corey Farrell on growth plans post-Imperfect Foods acquisition

0:28Hello, everyone, and welcome to the Modern Retail Podcast. it's been on a big growth spurt. I believe last year, or it's been maybe a little over a year now, it acquired Imperfect Foods. I just want to talk about first the digital grocery space. Misfits is in a really interesting spot because it has a very interesting value proposition. I believe maybe Corey will be saying this, but I was listening to an interview and I think the fact was a third of the produce that is made by farmers, agriculture in general, does not actually get sold to end consumers. And that's where Misfits is trying to find its niche.

1:00Anyway, I'll stop talking now. But Corey, I'm really excited to chat with you. How are you doing? I'm doing well. It's great. Great to meet you, Kale. Look forward to the discussion. Absolutely. So first, let's start with you. I was doing some research about you because before Misfits, you were you're at a pretty big company. Am I wrong? No, yeah, pretty big company. Yes, I worked at I worked at Amazon for close to 16 years. Wow. What were you doing at Amazon? And then why did you decide to go to you know, a considerably smaller company, I would say. Yeah, yeah. So I held a lot of different roles at Amazon.

1:36Probably most recently, I was leading Amazon's private label business in the consumables grocery space. And, you know, after 16 years at a very large company, and Amazon is, you know, is known for a lot of a lot of things, but it's a it's a hard company to work for. It is a lot of hours. There's I learned a ton, have a ton of respect and really appreciate everything that I got out of Amazon. But it was time for something new for me. And I really wanted to kind of take the next step in my career to a smaller private company where I felt like I could deliver an impact beyond just the P &L, managing a business.

2:21And whether that was a, you know, a social impact, an environmental impact, but Imperfect Foods and Misfits Market. So I joined Imperfect Foods after I left Amazon. Imperfect Foods was acquired by Misfits Market, which I think you alluded to, Cale. But the mission for the company is to reduce food waste. and ideally we can eliminate food waste over time. That's a big ambitious goal, but that's our mission. And that really attracted me to Misfits Market and Imperfect Foods. And so I joined a couple of years ago and it's been a great experience. Got it. And so your title is Chief Operating Officer.

3:02What is that entire mandate and how has that manifested in the day-to-day? So I oversee merchandising, which is what products do we sell to the consumers, the supply chain, the full supply chain. So when we procure the product, we inbound that product into one of our five fulfillment centers. And so we have fulfillment center operations. And then we have a combination of first party and third party logistics that deliver the food to the consumer. So I oversee that. And then I oversee customer service and sustainability for the company. Got it. That's a lot of various things. Yeah, it is. Hopefully we'll be able to hit them all, but I'm not so sure.

3:48Yeah, yeah. If you think about my role, maybe in summary is I kind of own the experience that the consumer sees and kind of how we deliver that experience to the customer. But I don't own kind of the digital aspects of that experience. Got it, got it. It makes a lot of sense. Can you just give a brief sort of abridged history of the company? I feel like people have probably heard of Misfits Market or Imperfect Foods or maybe seen an ad for them. But what was the initial proposition? Has that changed? And what is the strategy now going forward? Yeah. So Misfits Market was founded in 2018. The original offering to the consumer was a box of fruits and vegetables.

4:34And the company was really founded on the idea of taking advantage of these products, produce in particular, that is cosmetically challenged, that farmers couldn't find a retail outlet for. And so Misfits Market would come, buy that produce, fruits and vegetables from these farmers, and then would sell an online subscription to a weekly box, a mystery box, because the supply was constantly changing to the consumer. And it would, you know, add a great value. So the farmers couldn't find outlets for this product through traditional retail channels. And so Misfits is able to procure that product at a lower cost and then pass those savings on to the consumer through these through these weekly kind of subscription deliveries.

5:31And so that was kind of the founding of Misfits Market on the East Coast. Imperfect Foods was founded on the West Coast a little bit earlier, but with the same premise. And then both companies kind of expanded the offering beyond produce and into shelf-stable grocery, meat and seafood, and dairy. And the idea behind that expansion was there are also opportunities to reduce food waste in those categories. But also, we wanted to be able to offer the consumer more complete shopping experience to help us ultimately reduce more food waste. And so both the companies were kind of on their trajectory.

6:16And then Misfits acquired Imperfect Foods in November of 2022. Yeah, a little over a year ago. And for the past year, we've been able to kind of bring the two companies together, taking advantage of some of the capabilities that each company had to bolster the consumer offering. Is the brunt of the offering still the mystery box? Is it that you pay a fee and then you get the box? Or how does that work? What do customers still get? Yeah. So the way that the customer offering works today is the customer signs up for the service and we pre-populate a customer's cart. And what we try to do is we try to identify what the customer wants based on if we know shopping behavior that we've already observed or what they tell us when they're signing up for the subscription.

7:10And then we offer the customer the ability to customize what's in their cart. And so we still offer kind of weekly delivery, but we're offering customers more choice and flexibility than the original offering. And customers don't pay any fees other than the fees to the price of the grocery items that are in their cart, plus any shipping or delivery fees that we have on top of it. What is the average size of the farmers that you generally work with or the workers? So I imagine there are a lot of smaller farmers who want to sell off their waste, but that's a very difficult business to scale. So is it all sizes?

7:54Are you usually focusing more on the bigger big ag types of players or how does that work and how do you make that work with the business model? Yeah, it's a great question. We do have large farm kind of conglomerate farms that we work with. We also do have smaller farms that we work with. As you can imagine, the economics for freight are like inbound logistics costs are a big component of our overall cost structure. And so we do want to make sure that as we're procuring the goods from the farms, that we do have a low cost means of getting them to our fulfillment centers. But we do have a wide variety of sizes of farmers that we do work with.

8:41Got it. And when you talk about, because you mentioned earlier that you have both first party and third party logistics, I imagine that's only outbound to customers, but is that also inbound? It is outbound to customers. Okay, got it. All right, that makes sense. Can you talk about just who the target demographic like I it might maybe an obvious question and it's very clear in my head. But like I imagine either it's people who live in urban locations who, you know, maybe don't have access to as much produce as they would like or families that are looking for, you know, more affordable groceries.

9:09But has it changed who is generally buying the service? Yeah, I think the the customer who really values the experience that we offer is somebody who's looking for healthy, high quality food. and values a company that operates sustainability or wants to contribute to reducing food waste. And so it's kind of this intersection of high quality sustainability with the convenience of online grocery delivery. And we think it's a pretty large segment of customers that find that value proposition attractive. Are they mostly in cities? Are they mostly suburban? Are there any general areas where you're finding the most sort of heat in terms of demand?

9:56Yeah, it's a good mix, actually. Surprisingly, so we cover about 98 % of the zip codes in the lower 48. And we do have probably, I'd say, two-thirds of our business operates in more of the larger, I wouldn't say kind of metropolitan areas, but more kind of dense locations. But that still means a third of our business comes in locations that are more rural than, you know. And we think that, you know, a part of that is that we are delivering fresh, high quality groceries to customers who may not have access to that in the more rural locations. Got it. Got it. Makes sense. I mentioned this before, but I want to get more into it.

10:47That first party logistics sides, how long has that been part of it? How many of your customers are getting it directly from you based on that you're using third party? How much are you investing in that? How does it all work? Yeah. So this is one of the things that Misfits acquired when they acquired Imperfect Foods. So when Misfits acquired Imperfect Foods, Imperfect Foods operated in, I'm going to probably get this not quite right, but about 50 regional markets across the U.S. These are more of the larger cities in the U.S. that Imperfect Foods had a first-party delivery network that delivered packages directly to the consumers with vans and with middle-mile large trucks that would drive to hubs, and then those hubs would then break the boxes down into vans and then make the deliveries to the consumer.

11:38So there's about around 50 markets in the US today that we're doing first party delivery to. The rest of our deliveries go via third parties. And we have both regional as well as national third parties that we use to make those deliveries. Is it your ambition that ideally, a good majority of deliveries in the future will be done by your logistics? I think, look, the cost and the quality of our first-party delivery is superior to the cost and quality of third-party delivery. So now that is true because we've chosen areas where we have a lot of density that allows us to get the last mile delivery routes dense enough that the cost structure works for us.

12:24And so in an ideal world, if we have enough volume, I think we would love to transition to first party. It gives us more control. It gives a better customer experience. We also offer with our first party delivery to those customers who we actually make deliveries first party. We offer packaging pickup. So, you know, part of our sustainability mission, reduce waste. We will pick up gel packs. We'll pick up the freezer liners and we'll recycle them or we'll actually reuse them in our operation. Got it. And are you finding people are doing that who are given that option? Yes, yes. We see about, I think it's around a quarter of our customers who we deliver to take advantage of returning the gel packs and liners to us.

13:18We think more people have an appetite for it and we just have a awareness challenge with that offering, which we're working on. But it is something that I don't see a lot of other companies doing. And so we're pretty proud that we're able to offer that as an additional perk or benefit. We'll be right back after this message from our sponsor. Please stay with us. I wanted to stay on this theme, but zoom out a little bit. I was listening to this interview with Misfit's CEO, and he was talking specifically about the merger. And pretty much he said that it was a scale play. You had two companies that were essentially doing the same thing, bring them together.

14:00Now that we're over a year out, how is that going? Is this going to plan, this attempt at scale? Yes, it is. And you're right. You take two companies who are offering a very similar value proposition to the consumer and you put them together. you immediately get volume through your fulfillment center network and through your logistics network, which is incredibly important to online grocery. Cost structure, delivering fresh grocery to customers is really challenging. It's challenging from a quality perspective. It's challenging from a cost perspective. And it really requires volume in order to get your cost structure low and to be able to offer good competitive prices to the consumer.

14:48And so as part of the acquisition, we were able to combine our full supply chain. I'd say probably within three to four months, we had combined our end-to-end supply chain. So put all of the deliveries on our first-party network, combined our third-party network. We were able to consolidate our fulfillment center network, get all of our inbound logistics consolidated. and that allowed us to pass some of those cost savings on to the consumer through lower shipping fees or free shipping in some cases as well. So you actually did lower your shipping fees? We were able to in a lot of the regions that I mentioned where we're delivering first party, we were able to offer free shipping that just wasn't feasible when you have a third party company delivering at a high cost.

15:41So how difficult was it to combine those operations? Like three to four months seems pretty quick, in my opinion, especially, you know, you do a similar thing. But making those types of operations, for lack of a better word, interoperable, I imagine is very difficult. So, like, how did that work out? Yeah, yeah, it was. The team did an amazing job. We were, you know, when we made the acquisition, I think one of the things that helped us move really fast is we identified three things, three or four things that were mission critical that we needed to do as soon as possible. And we communicated that very clearly across the organization.

16:18These are our top priorities. Here's what we're going to prioritize. Here's a rough timeline for when we're targeting implementing each of these. and they were very focused on how do we realize as much cost synergy as we can as quickly as possible. And so a lot of that meant let's focus on the physical consolidation of our supply chain and let's delay some of the technology consolidation that came a little bit later. So we were able to combine all of our technology systems and our tech stack and have one kind of cohesive customer experience until a little bit later in the year. So we were able to complete that in July, but all the physical consolidation happened pretty quickly.

17:02Got it. Keeping with that theme of cost savings, I was reading an article from, I think it was a few months ago, saying that private labels are a big focus. Can you, given that that's, correct me if I'm wrong, your background at Amazon, how is that working at Misfits? And what are you private labeling? How's that been going? All that. Yes, we have a brand called Odds and Ends. It's our private label offering. It's a combination of, you know, traditional private label, which is offering high quality, but more value oriented assortment. along with, so it's a combination of that plus differentiated upcycled products that are unique to Misfits.

17:51So one example that I like to give is like, what is upcycled? What does that mean? So we have pretzels. So companies make pretzels, they package them in bags and sell them to consumers, sometimes those pretzels break during the manufacturing process. And there's a tolerance in any given bag that a pretzel manufacturer makes of how many of them can be broken. And so we take the excess broken pretzels, we dip them in chocolate, and we sell broken pretzel chocolate pieces under our private label brand. So we're taking what is waste from a manufacturing process and we're upcycling it into a food that we can sell to consumers.

18:41So that's an example of part of what we're trying to do with our private label assortment that's very aligned with our mission. And then we also want to make sure that we have value-oriented assortment for consumers as well. Just making sure I understand, private label, it's still sold only exclusively on your own platform, correct? That's correct. I guess my question is, is that for a company like yours where I imagine name brands don't play as big of a role as it does with the normal grocery process? How do you differentiate, or is it even important to differentiate that this is a private label compared to something else?

19:14Yeah, it's a good question. Our assortment is limited. So right now we offer around 700 SKUs to the customer. Traditional grocery stores have 20 ,000, Walmart, Supercenter, 40 ,000. And so what we're trying to do is we're trying to curate our assortment to offer really high quality product that meet our sustainability ethos, that our mission aligned. In many cases, we can find upcycled products that are aligned with our mission. And so we're trying to find the balance. I'm not saying we're perfect at it, but we're trying to find the balance of, hey, where do we think we can offer, where do we think we need to offer the consumer good value with a private label product versus a branded assortment that we think meets a good price point and meets a good high quality?

20:11You know, and you kind of do that across all the categories and we've arrived at something that we think works for us. But having said that, I do think we are going to want to expand our private label assortment over the coming years. It's going to be one of the big initiatives that we undertake. Got it. And what areas is it mostly in? Is it mostly in like snacks and things like that? Or like where would I most see an odds and ends product on the website? Yeah, you'll see it. We certainly snacks is one of the larger categories. I mentioned the broken pretzel, chocolate covered pretzels. We do offer dairy, so whether it's kind of cheeses or – and then I'd say kind of dry pantry.

20:54So those are a lot of the areas that you see traditional grocers offering private label. And so we're in a lot of those areas. And in many cases, we have a slight twist on it with some upcycling story that we can tell. Keeping with the subject of brands, one thing that I was reading and I wanted to get more information from you about is that I know you're focused on sort of smaller startup brand incubation. Is that correct? It is. Yeah. So can you talk about like, what does that mean? How does that work? When did that start? Yeah, it has been a part of, I think, both Misfits and Imperfect Foods kind of approach to merchandising and assortment planning is we like to offer our consumers something new, something exciting, something that they can't find necessarily at their local grocery store.

21:43And so that's a part of the value proposition. But we want that product to be high quality, to be affordable, and to the extent that we can to meet our sustainability ambitions as well. And so we are out there as we are kind of with our farmer network trying to find opportunities to rescue produce. We're also out there with the CPG and the food network trying to find opportunities to introduce customers to new products. And we have a suite of marketing collateral that can also help brands capitalize on brand building activities on our website as well. How does that work? Do you sell that to brands or is that just if they fit?

22:32There are a certain size that is in the startup phase and you say you want to get more visibility, we'll put this here. How do you do that? In general, we sell them. We sell slots on our website for brands. And oftentimes, like a traditional retail store, like an end cap at a traditional retail store, will also have the items on promotion at the same time. So the consumer sees, hey, this is a great new brand. Here's a little bit of the story around it. And then here's a discount to try it. Since this program began, has this been the same offering? Has it been evolving or getting a little bit more robust?

23:08It seems like a lot of, especially digital grocers, are trying to build out this type of advertising quasi-retail network thing. Is that the idea behind this? I think the idea with our limited assortment, like I said, we have around 700 SKUs. Advertising becomes really powerful when you have 20 ,000 SKUs and you're trying to help the consumer. As a retailer, you're trying to get some money to surface a particular product to the consumer. Our model is a little bit different, but we do want to introduce consumers to new brands. We do want to give some real estate on our website to that. And I think over time, we are looking to expand our assortment.

23:49So that's one of the forward-looking things that we're really focused on this year. Now that we've completed the integration, we're going to be close to doubling our assortment over the next year. And I think that will introduce some opportunities to maybe find ways to highlight products to consumers through search or through traditional kind of browse mechanisms that we may be able to monetize across our vendor base. Got it. And when you're talking about doubling your assortment, would this be more of the same types of products or will it be expanding the types of products you sell? It will be, I think, a little bit of both.

24:29So it will be kind of breadth expansion as well as depth expansion across the categories that we already offer. Got it. Got it. So can you talk, you know, we're getting close out of time. And so I always like to try to end on sort of what's ahead. I know that the integration has been the big focus for the last year. It sounds like, can we say that that's pretty much all done with and you're now just looking forward? Yes. All right. That's right. Yeah, it's done with we're looking forward. So you mentioned skew growth. What other things should we expect to see in terms of trying to bring the company to scale?

25:03Yeah. So SKU expansion is our big focus this year. And it's a big one because it requires, you know, when you operate a storefront that has 700 SKUs, it's very easy for customers to find those SKUs. When you double it, we have to make some changes to the digital shopping experience to support customers' discovery of the product that they're looking for. So it requires both digital as well as operational changes. We're going to have to make changes within our warehouse fulfillment model to support double the SKU count. Those are some of the big areas that we're investing in. As we expand our assortment, we want to make the shopping experience more seamless for consumers, easier for consumers.

25:50Those are the things that I'm most excited about. And when you're doubling all of your assortment and you're bringing them into your fulfillment center, should we expect to see more fulfillment centers down the line? Or are you good with, you said five, right? You have five now? Yes. I think we're good for the foreseeable future. Our fulfillment center network is large enough with enough capacity to support our growth for the next year or two. but you know it'd be a good problem to have to run out of capacity let me put it that way in which case we will we will be look we would be looking to expand yeah and one thing that i was hearing in interviews from last year was that sort of the plan for last year up until this year was to hit a billion in sales and to be profitable how's that going so far yeah we've made a lot of good progress in particular on the profitability side so with as we brought these the misfits and imperfect together, we've nearly doubled our profit per order.

26:43So that has been fantastic. So I think that's a really good, good progress that we're building upon. Got it. Well, Corey, this has been such a great conversation. Thank you so much for joining. Yeah, thanks a lot for having me, Cale. 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. See you next week. Thank you.