BRAND SECRETS AND STRATEGIES

PODCAST #59

Hello and thank you for joining us today. This is the Brand Secrets and Strategies Podcast #59

Welcome to the Brand Secrets and Strategies podcast where the focus is on empowering brands and raising the bar.

I’m your host Dan Lohman. This weekly show is dedicated to getting your brand on the shelf and keeping it there.

Get ready to learn actionable insights and strategic solutions to grow your brand and save you valuable time and money.

LETS ROLL UP OUR SLEEVES AND GET STARTED!

Dan: Welcome. If you've been listening to this podcast for a while, consuming any of the articles that I write, or if you've taken my free Turnkey Sales Stories Strategies course, you've heard me continually talk about the importance of strategies. Solid business strategies to help your brand grow sales by getting on more retailers' shelves, and into the hands of more shoppers. Properly executing these strategies is like pouring rocket fuel on your growth. It can give you a significant competitive advantage in any economy, and in any channel.

Today's story is proof that these advanced strategies work, and that they can help you, too. Today, I'm thrilled to have Steve Hughes on the podcast to share with you his stories about the education he received in traditional CPG. And how he leveraged that education to help him build brands in natural. Steve has an impressive background, and he truly is an inspirational leader.

You've heard me interview a couple of the people that worked for him in the past, TJ McIntyre and Alex Hannifen, both from previous podcasts. They both shared their insights and how the mentoring and the coaching and the guidance that Steve gave them helped them get to the positions that they're in today as industry leaders.

You probably know Steve from his success at Boulder Brands, how he grew that brand and turned it into a major success. How he was able to compete head to head, toe to toe with the most sophisticated brands by using these strategies that we've been talking about.

Today, Steve and I have a great conversation about how he leveraged these strategies, strategies that any brand can use, and should use. We also share tips and tricks as well as insights into what we believe the future of natural CPG is going to look like.

Here’s Steve.

Steve, thank you so much for coming on today. Could you begin by telling us a little bit about yourself and how you got to where you are today, and some of the brands you've worked with? Some of the positions you've held?

Steve: Sure Dan. It's great to talk to you. I've been at this for about 40 years. And I spent the first half of my career kind of in the large cap world. I spent 10 years moving up through the ranks at McCormick. And then in 1988, I got the chance to go out and run a new product project for ConAgra, that turned out to be Healthy Choice. And so, I led the team that launched Healthy Choice in '88, and we scaled that to a billion dollars in four years. And what beats skill all the time, we just kinda hit low fat at the right inflection point. And then I took six people from Healthy Choice down to Tropicana, and we turned Tropicana around in the early '90s that led up to the sale to Pepsi.

Then I said, "you know boys, the good news is we had some great success, created a lot of market value. The bad news was I wasn't holding Healthy Choice or Tropicana stock options. I was holding ConAgra and Seagram's stock options at the wrong time." And really hadn't made a lot of, you know, created a lot of value for myself.

So, I came to Boulder in '97 to become CEO of Celestial, and we had a great run. We took the business, over three years, scaled it to $125 million dollars. The stock went from seven to 34, and it was a public company. And Hain bought us. I didn't really want to sell it but the board did, so we sold it. And then I was in Boulder, and so I was looking to become a CEO again. I was offered the CEO job at Church and Dwight, and my wife Grace said, "What part of we're not moving didn't you get?"

Dan: Uh-huh.

Steve: So, I've been chained to the zip code here for the last 18 years, and now have been in Boulder for 20 years but I was able to be in the natural foods industry, you know, kind of at a remarkable time. The first generation of founders, Steve Demos, Mark Retzlof, and the like, their companies were coming to full power. And so, being in the zip code, I ended up doing a couple different things. I was CEO of Frontier Natural Products for a couple years. We launched Simply Organic, really tooled up Arcacia.

And then in 2002, I went over and teamed up with Steve Demos, the founder of Silk, during the window between when he sold to Dean and during their renowned period. And we had a wild ride. You know, it was 2002 to 2004. We went from 150 to 400 million dollars.

Dan: Wow.

Steve: Yeah, it was right there at the cornerstone of the plant-based explosion.

And then, I wanted to get back to running my own company so I spent a couple of years trying to figure out how to do that, and went to Wall Street and raised a hundred million dollars essentially with my resume to found Boulder Brands. And from 2005 to 2015, we built that up to about 500 million dollars in sales and ultimately sold it to Pinnacle for around a billion.

And then, this is in 2015, then I'm kinda sitting there going, "I don't want to miss the next 10 years of this industry." So, I founded Sunrise Strategic Partners, partnered up with Trilantic Capital and we've been at this for a little over two years. We've made eight investments and invested about 150 million dollars. And so, I'm doing what I love to do which is build brands but doing that full-time and not running a public company.

Dan: Impressive resume. I've had the privilege of listening to you speak several times in the past and very inspirational. Can you go back to your time at Boulder Brands? And I think what's interesting about Boulder Brands is how you took a lot of different companies, from my perspective, brought them together under a single roof, and tapped into the synergies and then gave them what I would call rocket fuel in terms of really being able to leverage all the capabilities of all the brands, and yet be able to focus on the category management, the sales marketing, et cetera.

Steve: Yeah. I mean it was a great run. We had, you know, for the window of time there, it was probably the most special place in the food industry. And we took, for example, Earth Balance from five to 60 million dollars. We kind of got lucky and figured out gluten-free. And we took Glutino from 40 to 80; Udi's from 60 to 220 million dollars.

Dan: Wow.

Steve: And then Evol from 17 to 70 in two years. And it was taking that large CPG playbook that I developed through my 20 years in large cap, and people around me who knew how to do that, and applying that to brands that had really strong proof of concepts in natural and were ready to cross over, and be able to do that very quickly, very efficiently.

But the other thing was really neat. Back in the day, and we had such a great relationship with the key people at Whole Foods, you know, Al Schweitzer, David Lafferty, Dwight Richmond ... they would come to Boulder a couple times a year, and really they helped us in many ways craft the innovation platform for Earth Balance and Evol, particularly. 2005 to 2015 was really… the world's changed a lot in the last two years, and it's gonna change a hell of a lot more in the next five to ten, but that window of time was kind of a really neat window. You had Target with the Made to Matter program. You had Whole Foods really driving innovation, and so, it was just a fun place. And I always used to say at Boulder Brands ... when I left Boulder Brands, it's not going to be like what the stock price is the day I leave; it's going to be what the people do there over the next 20 years. I think the thing that's so much fun to see is how many of the people who were on that team have gone on to become CEOs and started their own businesses, and that's kind of the most enjoyable thing for me is just watching them. You know, I'm a coach at heart and I think I now have 40 people that have worked for me that have gone onto become CEOs.

Dan: Wow.

Steve: And it's a lot of fun to see how that's unfolded.

Dan: That's impressive. In fact, actually on the podcast, I've already interviewed TJ McIntyre and Alex Hannifen who just went on and on talking about how great their experience was with you, and how much they learned. And if you've had a chance to listen to the podcast with TJ, he talks about how people would walk through walls for you. And the whole idea behind that was that you were someone who had very high standards, and at the same time, were a mentor. You were teaching them how to do things and letting them alone to be able to solve their problem, but yet standing there ready to help them at any time. And where I'm going with this is that what TJ's been able to do with Bobo's Oat Bar is phenomenal. The growth that he's experiencing is practically unheard of, and yet, you're talking about how were able to do that with the various brands of Boulder Brands.

Actually, the first time I met TJ was when he was working for you. So, can you talk a little bit about that intersection between mainstream brands and natural brands? And where I'm going with this is I had a good conversation with Kyle Gardner of Organic India just a couple days ago, and we were talking about how a lot of companies are demonifying the brands that "sell out to the big brands." So, here is my take. If a brand goes to a venture capitalist to get money, to get runway to grow sales, that's okay. But if a brand goes to a bigger brand, a small brand goes to a bigger brand, then sometimes they sell it, they're the devil, you know, it's all that rhetoric we hear.

Steve: Yeah.

Dan: But when you think about it, would you rather go to someone who knows nothing about the business, who only has a checkbook, whose going to expect a super high rate of return and doesn't really understand the variables or what you're going through? Or, would you rather go through, like you said, an organization that has the capability to give you not only the runway but to be able to help you strategically in a lot of the areas that you need help with?

Steve: Yeah, I mean it's certainly interesting. Capital's a commodity in this space.

Dan: It is.

Steve: And what we're doing here at Sunrise…I think it's an off leading proposition because, you know, you do have right now people that have been very successful providing capital and some level of expertise to BMGs, the Encores, the Boulder Food Group. And then you have all the large caps starting up their venture funds. So, those are the two kind of options today.

Sunrise kind of is the best of both worlds. We have capital, and we like to have friendly capital. We want the cleanest term sheets. We want to be as founder friendly as possible. And, on the other hand, we have a team now ... and there are only seven of us, but there are five of us on the commercial side, myself, Bill Hooper I've worked with for 38 years; Bill Atchison I've worked with for 30 years; Steve Young, who's got 20 years of experience from General Mills. He was intricately involved with Annie's and Epic and their whole natural portfolio. Pat Matthews, who's had five years. And myself. So, we've got like 160 years of brand building experience.

And I've personally probably been involved in launching four to five billion dollars of new products over the last 40 years.

Dan: Impressive.

Steve: And, so, what we're able to do is take that skill set and we shake it down to what's really essential. And we have a toolbox of 12 tools that a company between 15 to 20 million dollars needs. We have been very efficient in getting them to kind of lean into them. So we give them a set of guardrails and a GPS system to scale. I’m shocked about how many businesses get to the 10 to 20 million dollars, and how few businesses get to 100 million dollars. And I've done that a number of times, and I've stepped on every rake between 10 and 100 million dollars.

And knowing that and having that scar tissue enables us ... you know, it doesn't mean we're going miss all the rakes, but even when we step on a rake, it's typically one we've seen before, and we help the founder get over it. In our current portfolio, we've got, I think seven of the biggest ideas. And the other thing we're trying to do is we're not just looking to invest a big return. We're looking for the 2.0s. We're looking for the big ideas on top of big categories but done right, over the next 20 years will be what we call magnets for M to the third power. And that's millennial moms with money.

So, if you go through our portfolio, PACT is like Fruit of the Loom, Hanes 2.0. Perky Jerky is Jack Links 2.0. Maple Hill is Horizon 2.0. Teton is Applegate 2.0. Kodiak is everything in the center of the store 2.0. That is just blowing up. But it's Betty Crocker, it's Aunt Jemima, it's Eggo 2.0. And then Kill Cliff is gonna be Red Bull and Gatorade 2.0 and Vital Farms is Eggland's Best 2.0.

And so, we're trying to do things that are really game changing ideas. And boy, I tell you, some of those have been like…Vital Farms and Kodiak have just taken right off. Others took time... there's about a year of triage, where we really had to help and work and really kind of ... you know, they had the big idea but not the big category but there were some disconnects that fortunately working with the founders and the CEOs, we were able to help them retool on the fly. And now, all those businesses are making massive pivots. I think our portfolio was up 50% in the first half of the year.

Dan: Congratulations.

Steve: And I kinda suspect it'll be up 70% in the second half because a couple of these business, particularly Kill Cliff and Teton kind of hit their inflection points.

Dan: I appreciate your saying that. In fact, one of the things that I was looking at during Expo West, a lot of the companies, as you mentioned, are coming up with their own accelerator type programs. And yet, they look like an opportunity for a larger brand to kick the tires and test drive a company before they decide to buy them, more than really trying as a program to really drive the sales of the brand. I'm not trying to pick on any of the big brand that do this.

But my point is, when you're talking about, like you said, founder friendly and friendly term sheets, your focus is on the brand as opposed to whether or not the brand will fit into your existing portfolio as I understand. Would you agree with that? And then, why does that matter?

Steve: Yeah, I've learned a lot about private equity the past two years. And it is a bit of a rigged game in terms of the private equity funds. I mean, the private equity funds are very sophisticated. The founders, you know, when it comes to raising capital and how you structure term sheets, they're kind of babes in the woods. Our point of view is the value is going to be created on these businesses. 99.9% of it's going to be done by the founder and the management team. And we want to make sure that at the final closing dinner, if the happiest person at the table isn't the founder and the management team, then we haven't done our job.

So, we really try. We also aren't going to make our money by outsmarting somebody on a term sheet and protecting ourselves on the downside. We don't invest in a business unless we have conviction it can go to 100 million dollars in three to five years. And once we have that conviction, then we have the toolbox to use. And so, I think it's really different. Now if you're one of the large caps that has your venture fund, they're kind of conflicted because you're investing in a brand that's in your current category, but you have a minority interest in it. So, you know, you can help them on the R and D side and on the supply chain side. But do you really want to help them on the sales side? Because if you help with the sales side, A, you might be cannibalizing some of your own business, and you don't really know if you're going to end up growing the business.

So, I think 301's done a nice job. John Hogan's a great guy. I think he's been very constructive in the space but it's a little bit different than what we're doing. My point of view is the natural organic channel, it's not natural organic anymore. This is the greenhouse for millennial brands. And it's a greenhouse because the millennial consumer values the attributes of these brands.

Dan: Exactly.

Steve: So, what we're looking for is to create massive millennial magnet brands. And ultimately, they'll grow up and they'll be at first a cute little brand, then maybe a little bit of an irritation for a large cap, and then finally a big strategic problem or a big strategic solution. I'll give you an example. Kodiak Cakes ... Joel Clark and Cameron are really two of the greatest people I've ever met in business, and it's good to see good karma's alive and well. So, we invested in Kodiak two years ago. It was doing 15 million dollars. And Joel had been doing this for 20 years. Up until, you know, it took him like 17 years to get to a million dollars.

And then, about three or four years ago, he went on Shark Tank, and they offered him a half a million dollars for half the business, and he said no. And then, about that time, Costco Northwest said, "Hey, can you put protein in that pancake mix?" And he did that. That worked well. He then went into Target. When we talked to him, he was doing 15 million dollars. Well, in Target, he was doing like 30 share with no marketing support. And I looked at this, and I said, "Joel, you know, you've got ... this is Udi's."

Udi's is a different flour structure that allows you to deliver all these tried and true products gluten-free. What you're going to do is bring protein to all these categories. And so, what's happened there, and this year he will be over 100 million dollars, and is growing at around 100%. I don't think there's any end in sight. He's now at Target, he's 52 share of the pancake mixes, but more impressively, the category that had been down 5% forever is now up 40% over the last three years because of Kodiak Cakes. And the reason is, he's bringing millennials back to the pancake category.

He just launched a frozen waffle and pancake mix, but within four weeks they're the number one selling SKU on a velocity per score basis in the category, ahead of Eggo's. He's now launched in the baking mixes, brownies. So, what we're looking for, you know, if I fast forward 10 years from now, with Sunrise's vision, the house we're building…I want to do 25 Kodiaks. And it's a hell of a lot of fun because, you know, when I left Boulder Brands, I sat down and I reflected on I'd been a public company CEO and a CEO for most of 20 years.

I sat back and said, "You know, 95% of that job, I really didn't like. I wasn't really unique at it. And some of it, I wasn't really good at it. The 5% that I love is building brands ... finding the next new big thing, developing brands, and coaching teams." And the beautiful thing about Sunrise is it gives me a platform to be able to do that every day, all day. And we've learned a lot the last two years, and bringing Steve Young in has been really, really massively helpful because Steve is me 15 years ago. And he can actually go in and drop into the companies that need the most help.

Vince has been a phenomenal partner. I mean he's, you know, I always say, "Vince, your job is doing what I don't want to do and doing it a lot better than I would ever possibly conceive of doing it." And he's been fabulous on working with the companies, negotiating the deals, finalizing the term sheets, and more importantly, as we get into it, making sure these companies have the capital they need to do the right thing.

And the beautiful thing about this versus a public company? You're always thinking about what the right thing to do and making the right decisions to do it as opposed to worrying about your quarterly report card to Wall Street.

Dan: And that's exactly what I was getting at. Focusing on the right thing to do. Well said. And I appreciate the fact that you said you're focused on the value, must have conviction. That's one of the comments you made. That's one of the things I love about natural, and one of the things I think makes natural natural. The point being the natural companies that stay, as you said, within the guardrails, who focus on the end consumers as opposed to the balance sheet, as opposed to Wall Street, I think that's where a lot of companies get lost.

I've done a lot of work in, for example, the pancake category. I did a, well actually a big project about three, four years ago, and it was just dead space to your point. There was really nothing going on. There were no drivers. There were brands that were actually pulling sales out of private label products. And now, I look at it and see what it's done, and it's impressive. And the fact that, like you said putting protein in the pancake mix ... I was actually working with a brand that was going to start doing that, unfortunately they didn't get there but ... I'm just thrilled that you're able to do so much for that brand.

One of the things you talked about were the brands that are going to be the new future, the 2.0. I've had the privilege of knowing Tim Joseph for quite a while, and he’s been on my show. His passion for what he's doing and why he's doing it is humbling. It really is neat to see how he's so focused on giving back to the community, focusing on local, grass-fed, and why it's important and then supporting that cause.

When we talked, Steve, you were talking about one of the biggest trends that you see is grass-fed, and I agree with you completely. Can you talk a little bit about what you think, what you expect to see, and within that segment, and why you think it's going to be a big trend?

Steve: I think it's going to be the most disruptive trend I've seen in my career, and I think it's Back to the Future. If you really think about it, 100 years ago, everything was grass-fed. You know, we hadn't really industrialized. But after the Second World War, we went to factory dairy farms. We went to factory feed lots. We went to factory chicken coops. So, we have three direct investments in pasture raised: Vital Farms, which has I think 70, 80% of the pasture raised egg business; Maple Hill, who is the only pure play in pasture raised dairy. I mean you've got Horizon, Stonyfield, and Organic Valley doing it as a flanker, but this is the only thing that that company's ever done. Then Teton, which is really basically doing grass-fed packaged meats.

The thing about this is if you look at it, is it astonishing the difference for the animal, the difference for the environment, and the difference for the quality of product. The nutritional profile of a glass of milk that's grass-fed versus conventional grain fed. Cows are not wired to eat grain.

Dan: Exactly.

Steve: I think organic dairy might be one of the biggest pieces of marketing BS of all time. You basically have taken cows and put them on industrial farm, and they may have access to the outside but there's no grass there, it's all mud. And they're eating organic grain. They're not eating grass. They're eating organic grain. Where grass-fed is exclusively a grass diet. You go to one of these dairy farms, which you really probably should do some time, Dan. Go see one of these farms, it's really unbelievable. They have typical average farm for Maple Hill has 45 cows on it. They rotate the cows every three days around the barn, so they get the weight, like the herds of buffalo in the Old West, they get the weight and the manure concentration.

So, the grass looks like you haven't cut Augusta in three years. The cows are productive for 14 years, versus organic farm cow is productive for seven. The cows look like models. Tim incentivizes the farmer to keep the calf with the mom until it weans. On an organic farm, the calf never gets an ounce of mother's milk. They go right on formula. It is just incredible. You look at eggs. I follow a lot of things closely in the food industry. Cage-free and free-range are two of the biggest pieces of marketing BS I've ever seen. A caged bird gets like one square foot, right? A cage-free bird gets two square feet, no door, and their beak cut off because they'll kill each other.

A free-range bird gets two feet, no door, no beak, and the door opened. A Vital Farms bird, there are no cages. They are on a house on 35 acres. They rotate the birds around outside. Each bird has 108 square feet. Their eggs are different. I mean, the chemistry of the eggs are different. The chemistry of the milk's different. The chemistry of the meat's different.

So, you think about this in terms of the millennial who have 100% perfect information in the palm of their hand with their phone? One of the biggest challenges that we have at Vital Farms, Maple Hill, and Teton is there are so many benefits to what you're doing, it's actually sorting out the ones that really call out to the consumer. But if you drill down, every layer of this onion, it's just an incredibly impressive story.

So, I think as that story gets out, you're going to see ... and right now the reality is it's Vital Farms is now over 100 million dollars, but they average like one item in 50% ACV. What happens when they have six items and 100% ACV? Teton, Maple Hill is just really pivoting. We were fortunate enough to partner Tim up with a fellow named Carl Gerlach, who has really done one of the best pieces of work I've ever seen in my career over the last 12 months. Working with Tim, he's pivoted that brand from a cream on top yogurt product that really wasn't ready for the mainstream consumer. They’ve launched milk, which is doing extraordinarily well, off to a fabulous start. And then now we've launched a blended yogurt product, along with our kefir and really it's kind of the cornerstone product categories.

But that brand, Maple Hill will be up 100, 150% this year. Teton will be up 50% this year. Vital Farms will be up 50% this year. And it's just starting. I mean, I take this as a good microcosm. I think, if you look over the last couple of years, 16 CEOs of large strategic CPG companies have been fired. I call this the first pitch of the first inning of the bottom of the game because it's only gonna get worse. It tells the story that yeah, we loved it too much, Healthy Choice. It put my kids through college. It bought some nice houses. It paid for some nice vacations. I don't care what you put on a plate of Healthy Choice, my kids are never gonna buy it.

And so, the legacy brands of these large CPG companies, consolidators of legacy brands, baby boomer brands, well they're on the outs. And we had this issue at Boulder Brands. I probably was the first CEO that saw this in person. We were very big. Smart Balance was a cornerstone brand with us, and it was a great product. Well, after about 2010, it flattened out and then it started to decline. Two things happened: butter was on the front page of Time Magazine. Butter was back. Spreads, margarines, were seen as one of the most processed categories. But if you looked at the numbers underneath, Smart Balance indexed at 165 over 65 and 40 under 40, which meant that every year, 3% of consumers were dying, and the young consumers ... they would buy Earth Balance, but they were more likely to buy butter.

And so, that's a reflection of what's happening to Cheerios, Gatorade, Coke ... I mean, name all the iconic brands. The young consumers just are not going to buy those. And I think that that's where, going back to one of your original comments about the authenticity of the natural channel and the mission of that channel, that's why I call it the greenhouse for millennial brands of the future because of those are the values that that consumer values and embraces.

Dan: Well, that's exactly why this podcast exists. I'm focusing on these, what I would call the ripple in the pond, and what I like in it too, Steve, if you pay attention to the ripple in the pond, back before it becomes a tidal wave or it ends up on a Walmart shelf, you know, a tsunami, that's the intersection that we're talking about. Grass-fed. Some of the other products that we're talking about. Protein in the pancakes, et cetera.

The point being is this: I believe that the small natural brands are going to replace the larger CPG brands, kind of essentially what you just said. I had a great conversation with Phil Lempert about this, and he agrees as well. True innovation is not just changing the label, or putting a new slogan on the package, or sprinkling a different flavor on it. True innovation is giving the consumer exactly what they want.

As I've shared with you, I've got a strategy that actually identifies and focuses in on those key attributes that are driving sales. And so, while I didn't have an opportunity to drill down that far for this particular project ... I've done it in other projects, but I think I shared with you that I wrote a feature article for the 2016 Category Management Handbook, where Nielsen gave me access to a lot of data. And so, the gist of it is this: dairy was up 1.5%; organic dairy was up 12%. If you remove organic dairy, which was at that point 9.8% of that pie, multi billion dollar pie, then total dairy would only be up .5%.

And if you focus on gluten-free and some of those other drivers, non-GMO, et cetera, then sales were up even more, even in plant-based. My point is this: I don't think companies are really aware of or paying attention to what we're talking about in terms of grass-fed. And so when you talk about someone like Maple Hill, whose cows live longer, they're healthier, they're stronger, they produce tremendously and have a really high quality product, that's where the future is.

And I want to go one step further. I was actually talking about this with Gary Hirshberg, John Foraker and other thought leaders in our industry. We were talking about the fact that we don't remember people having food allergies when we were younger like they have today. And so, I would liken that to better living through chemistry. So, I always say, "If you are what you eat, then what you eat matters." And what I mean by that is that from a nutritional standpoint, as you were saying, if I eat something that's processed or that's not authentic, that's not transparent, I'm not getting the nutrients that my body needs.

So, if I'm drinking grass-fed milk, I'm getting what Mother Nature intended me to have and therefore, it's fueling my body, giving my body more of the nutritional requirements that it needs. And I agree with you 100%. That's what's fueling this ripple, which is aligning nicely with that millennial consumer who reads labels and goes beyond the four corners of the package. They look at the label, but they also do the research. And they want to know what's going on in the package, and they probably know better from a nutritional standpoint what they're putting in their mouth than even the nutritionist and the other people at the store because they're so laser-focused on what makes the most sense for them.

Any thoughts around that?

Steve: Yeah, well, again, I think you go back to the macro issue here. When the human species has been around for 30,000 years ... I think I'm right on that… So, for 30,000 years we ate really naturally produced products. Then over the last 100 years, we changed all the inputs. We ate high fructose corn syrup, it replaced sugar, all the things ... and sugar levels at obscene levels. I mean, we have sugars and then tobacco. But you basically changed all those and then you walk around and you go, "Well gosh, why's everybody obese?" Well, we changed all the inputs. And we're calorie consuming furnaces. And we changed all the calories. So, that's one level.

The second level is you think large caps have got a problem today. Think about the next five years. In the next five years, millennial purchasing power in the US is going to go up 1.5 trillion dollars. Baby boomer purchasing power is going to go down 400 billion dollars. So, you have a two trillion dollar change in demand coming. If 10% of that is retail food products, right, that is 200 billion dollars of demand shift.

Dan: Yes.

Steve: To these products. That's why I think we're only in the first pitch of the first inning of Armageddon for the large caps because their brands are obsolete, and their consumers are going to die. And the next generation of consumers are never going to embrace those. And they might do some stuff short term like take sugar down, but they're not going to attract new users. One of the beautiful things about the Evol product line? You know, Phil Anson did a terrific job on that business, and he got a phenomenal relationship with Target. So, we invested ... he was doing $17 million dollars, four was at Target but he had a big Made to Matter launch coming. The next year he did like $40 million dollars, and 20 was at Target. The next year he did $70 million dollars and there was like $30 million at Target.

Target was actually taking a higher percent margin, like a 35% margin, and they were only taking a 22% margin on Lean Cuisine. He was generating as much gross margin at Target as Lean Cuisine was. And that was three years ago.

Dan: Impressive.

Steve: So, you know, this is not ... what you're having is, these have been cute, interesting brands for the large caps to watch and say but oh, it's just too small for me. Well, with that amount of purchasing power shifting away from baby boomers to millennials, you're going to see brands you and I have never heard of. In five years, they'll be 500 million dollar brands. It'll be epic.

Dan: Oh sure.

Steve: And, you know, that's why I'm so excited to be involved in it because it's gone from being natural organic in and of itself to becoming really brands that can be ... our objective is if we find the right 2.0 idea on top of big category, and do it right for millennial moms with money. Our mission is to make sure that those brands are market share leaders with millennials. And that's one of the things about how we look at the category management piece, and you're the expert in this ... but we look at it horizontally, right? My share is, you know, share is Kodiak at Target is 62%. What we need to do is look at it vertically. What is Kodiak's share of the millennial shopper at Target? We don't have those numbers because that is not cut that way. My hunch is Kodiak is doing like 85 to 90 share of millennial pancake share at Target.

And I think as people start looking at the world under that kind of lens, that is really where the power is because as these millennials move into forming families and start going up the earning curve, they're going to reshape the retail landscape. And I don't think anybody appreciates how fast, how fundamentally, and how catastrophic ... because also if you are a large cap, these big baby boomer brands you've been running on really sophisticated equipment for 30 years, so you've got your gross margins dialed into the fifth decimal point. By nature, these new emerging brands are going to be subscale, so they're gonna be 10, 15, 20 points lower gross margin.

So, in the short term world of the public space, a CEO of a large strategic ... these emerging brands really can't solve the growth ... forget the growth of top line ... my growth at top margin problem in the near term. Longterm they will, but I think there's going to be a lot ... I think it's gonna be ... you know, I get called ... of those 16 jobs, I've probably been called by a recruiter on four or five of those companies. And I always say, "Why are you talking to me? I'm a brand builder. You need to call Freddy Krueger because you're gonna be cutting plants and cutting people kind of nonstop because you’ve got to maintain your dividend, you’ve got to maintain your cashflow, and the odds of it just doesn't work."

Even for a company like General Mills who's been probably the most successful and aggressive, I bet their natural portfolio of brands is still like 10 or 15% of their total company. So, I got 80, 85% of their company that's declining, but that's the higher margin piece. The natural business is growing nicely, but it's a lower gross margin model and so you know, the math just doesn't work. And so it's going to be fascinating to see what happens.

And what we want to do at Sunrise, we're basically going to be creating the solutions for if not a large strategic, for some of our companies, basically independent. I mean we talked to a couple of the founders all the time, and you know, Kodiak's a good example. I said to Joel, "nobody in front of you is going to stop you. Nobody behind you is going to catch you. So, as long as you have a disciplined strategy and you're executing, and more importantly, Joel, you're having fun doing it, why would you want to stop?" It's great ... once you get these to the tipping point and they start moving and they get cashflow positive, it's going to be hard for somebody who's a large baby boomer incumbent in the category to have any impact on you.

And then, you know, who's the next guy behind you? Who's going to try to chase you? In pancakes, you've got a great combination of Kodiak and Birch Benders. Together, they're having great success and making good noise in their own right, but they're not really negatively impacting each other. They're basically bringing millennials back to that category.

Dan: Sure and I couldn't agree with you more. And so, to go back to what you said, in episode number four, I talked about how category management is broken. Now, being the first person certified at the highest level of category management proficiency, Certified Professional Strategic Advisor (CPSA), that's sort of a harsh thing to say. But what I mean by that, and I agree with you completely, is that I think a lot of people have put category management on autopilot, and they're not thinking about how do you really drive sales, one. And then two, to your point, they're focused on growing margin within a brand within a category but not thinking about the overall store.

So, the reason I exist, the reason this podcast exists, and the reason we're having this conversation is that I'm trying to educate brands how to take a dramatic and really revolutionary shift in terms of the way they think about the way they work with retailers. So, instead of going to the retailer and saying, "I'm a nice guy. I've got a great product. Please put it on my shelf." And then focusing on how do you grow margin on that product? Instead, go to the retailer with a solid selling story. "I sell grass=fed milk, et cetera. Protein pancakes. Why that's important, who buys it, and oh, by the way, when that consumer buys my product, here are the other things that they buy."

So, focusing on, as you said, the market basket, what's going through the register at the end of the day, that's where the fundamental shift is. So, you're gonna love this, the Category Management Association, who does the certifying for category management, and FMI, Food Marketing Institute, both have reached out to me to ask me to help educate their brands on what makes natural, natural. And you'll get a kick out of this.

I received an invitation to speak at Harvard Medical School yesterday. So, I'm thinking about that. About teaching people about nutrition and how to leverage these nutritious healthy brands that are on shelf, and how to radically change the way that companies are going about thinking about how they work with retailers because to your point, and I love the way you put this, there is a dramatic shift coming. And those companies that aren't paying attention are going to be left in the dirt.

Like you said, it's ... Armageddon's coming. These fundamentally small brands that used to be under the radar of these big brands, are the ones that are taking sustainable market share away. So, going back to organic, the 2016 Category Management Handbook, I agree with you. Organic is a good thing. But now that, okay organic dairy, now that we're beginning to understand that that's not enough, and we're taking a look at now all these companies that say grass-fed, but these companies that are giving back, making a difference ... Rebel, GoodSpread, Numi Tea ... all these other companies, Climate Collaborative ... those companies that are really doing things to provide value beyond the four corners of their package.

And those are the consumers that I believe are really going to make the tremendous shift in terms of the way that people buy products. So, educating, and that's why I'm glad you're on today Steve, educating the retailers, educating first of all the brands to help the retailers leverage this selling story to help the retailers compete more effectively, and help those retailers better meet the needs of the consumers, whether they're online or offline, that's the focus, that’s why I wanted to have you on the show. So, thank you for sharing that.

Steve: Yeah, that's where the win is. Given your expertise in category management, and the reality is Kroger has the data. If they were ... and they may already be doing this, but they are slicing the categories by age group and doing brand share by age group. And list the millennials and understood the reason those small emerging brands are getting sustainable share growth is, you know, they may have 3% share of the category, but they might have in the category that the millennials walked away from, they might have 15% of the millennial share. Or in the case of Kodiak, I think it might be 90 share at Target.

And the second thing that makes that important, what we saw at the Boulder Brands brands, the brands we had there, the brands we have here, we have the shopping basket because the millennials take their food very seriously.

Dan: They do.

Steve: And if they're buying Maple Hill, then they're buying a lot of organic vegetables. It’s really understanding ... and that's the other point, which is really fascinating, it's like a Rubik's cube that's spinning. For 35 years of my career, the world was in status quo. You know, you had big barriers to entry, and if you didn't have a 15, 20, 30 million dollar marketing budget, if you couldn't write a big slotting check, you know, you couldn't get in the door of the Kroger.

Now, Kroger knows they have to have that consumer in there, and they have to find those brands. But that consumer ... you basically have a Rubik's cube that's spinning for the millennial. The brands they're buying are changing. Where they're getting their information to buy them is changing. And, where they're buying is changing.

Dan: Yes.

Steve: And the thing that we're really trying to figure out at Sunrise, there are a lot of brands that we've never heard of that are blowing up on e-Commerce. And they're, you know, if I was going to launch a new food brand today, I would lead with e-Commerce mainly because we've seen businesses that I've never heard of that are 20 million dollar brands on e-Commerce, and they're just now starting to crossover into mainstream. And they already have a built-in following.

Dan: Yes.

Steve: And so, it's like pre-wired demand. There are times I say, "Gosh, I wish I was 20 years younger." But being 20 years younger kinda scares the hell out of me because the world is changing so much and it's going to continue to change so much that you're going to have to stay very current with how that millennial is getting their information, where they're buying, and what they want to buy. It's not going to be like selling Cheerios for 75 years at Kroger. It's going to be very different.

Dan: It is. In fact, kind of similar to you, I'm classically trained. I worked for a big companies, Unilever and Kimberly Clark. We didn't pay slotting for everything. We provided value. All companies provide value, but the reality is, that because we were such a valuable partner, we could "trade that for incremental merchandising opportunities". And it was all about driving the sales, and I hate that argument about price is the only driver at shelf. And I keep telling people if that were true, then luxury and decadent items wouldn't be popular.

I was talking to John Sebastiani with Sonoma Brands about what is the difference between a $2 and a $2,000 bottle of wine? And we were talking about the story behind it, and why the grapes are different, the vintage, and all the stuff that goes behind there. And in fact, you're gonna love this. Tuesday's podcast was with Mathis Martinez, formerly of Kroger. We talk exactly about this and we drill into this, all of these different points. In fact actually, he wants to interview me in a future podcast. I'm looking forward to that.

But, to your point, there's so much value in these small brands, and so what I'm trying to do ... and thank you for coming on today because the reason I wanted to have you on today was that talking about this changing intersection. A good friend of mine, Bill Bishop of Brick Meets Click, formerly Willard Bishop Consulting. He’s the guy that formed the Coca-Cola Ad Council. We have these conversations all the time, and we are spending a lot of time talking about the intersection between online and traditional brick and mortar.

And to your point, it's these small brands that gain runway and traction online that gives them more runway to grow in traditional brick and mortar. So, it's not the old this is what your grandfather did to be successful. And one of the brands I want you to take a look at is Good Spread. I was talking to Robbie Vitrano about that, and he's got a tremendous platform and he's got a really great product and a great mission behind that. The reason I mentioned him specifically is because he and I have been talking about this intersection too, and how do brands capitalize on an online strategy and then tie that into their traditional brick and mortar strategy? Because like you said, that's what's growing sales.

And going back to another comment you said, you know, the consumers that we're talking about, that ripple in the pond, like your kids. They're not going to eat something that just has the word healthy printed on the box. They want to know what's in the package. They look beyond the four corners. They want to make sure that it's transparent, authentic et cetera, and so by helping brands like Maple Hill better communicate the value of their product to help the consumer understand why they're different and why they're unique, to me, that's the holy grail.

And so, I think you're in a tremendous position, in terms of what you're doing. The brands you've built, the business that you've built, to really accelerate the growth of these key trends. Thank you so much for sharing that.

Steve: Yeah, I think the one thing, Dan, that's interesting about what we're doing is ... and hopefully we'll be able to prove this over time, I think we're going to be able to, for our founders, massively derisk and fast track their growth. We have a sister company called Sunset. We have no economic involvement but Ken Messick, who was my chief customer officer at Boulder Brands, he's taken eight of the best top people from the Boulder Brands sales team, and basically taken the toolbox that they use to build Smart Balance, Evol, Udi's, and Glutino. And they are basically the sales team for Perky Jerky, Kill Cliff, and Maple Hill.

And, what we're able to do is, with their relationships, their ability to know how to get most efficiently and effectively work with Acosta. They’re walking in making sales presentations on a $15 million dollar business. They're the same sales presentations with the same insights that you would expect from a hundred million dollar business.

Dan: Good.

Steve: And I think, you know, with most of the founders we work with have done, they've figured out to make something really hard to make. You know, Brian Levin at Perky Jerky, he's made the best jerky in the marketplace. It melts in your mouth. You don't need a toothpick. Tim at Maple Hill. So, 95% of their effort was kind of focused on making it. Where they really need help is on how to commercialize it and scale it.

Dan: Exactly.

Steve: And that's having the consumer insights and the customer insights. So, it's been fun.

Dan: And that goes back to what I was talking about with Mathis. You're right. To have all that information at his fingertips, he was sharing some things with us, so you have to go back and listen to that episode. But I agree with you.

Steve: I will.

Dan: So this shift to focus on what's in the basket at the end of the day is really where category management needs to go, and to be able to focus on the attributes, grass-fed, et cetera, and be able to understand that. And the sad reality is that not only are the big brands skipping that, missing that, but the syndicated data providers don't provide that deep of insight. None of them. And so, I've got some strategies around that as well. But the point is if you focus on what's really driving sales, the key drivers, and again, at the end of the day, it's market basket, that's really what's going to help brands understand why they're relevant, why they're important.

While talking with Ben Friedland, Lucky's Market, he was talking about how he works with brands. That is another really great model that brands should look at in terms of really providing tremendous value to the retailer, and not going to the retailer and saying, "I'm a nice guy. Please put me on your shelf." And hope that they don't put you in the backroom. And you know, I'm just kidding. But my point is brands need to step up. Brands need to provide more value to the retailer. Brands need to partner with the retailer.

Retailers are hungry for real actionable insights. They don't want a canned ranking report that says, "Look, you're number three in the category." They want to know who your consumer is; how they buy your product; and when they buy your product, what else do they buy? So, I really appreciate your sharing all these great insights. Thank you. Any suggestions or recommendations for budding entrepreneur? Any brands?

Steve: You know, you really should get Joel Clark from Kodiak on the show.

Dan: Please introduce us. I'd love to.

Steve: Yeah. And I'm trying to think who else. Any one of our founders, really interesting CEOs. We just made a CEO switch at Teton Waters Ranch, Mike Murray. And he's off to a terrific start and has some fresh perspectives.

Dan: I tell people this is a natural products incubator of sorts, but yet, I'm not going to teach you what your grandfather would. I'm going to teach you new strategies like how to focus on the market basket, how to leverage your selling story. So, thank you for that. And I appreciate your time.

Steve: Great stuff.

Dan: Thank you so much, and I really appreciate you making time for me. I'm thrilled that you guys are doing as well as you are. I think you guys have got a tremendous model, one that should be paid attention to.

Steve: Yeah, we'll let our results speak for themselves.

Dan: They do.

Steve: Yeah, good stuff.

Dan: So, thanks.

Steve: Yep, bye-bye.

Dan: Appreciate it.

Dan: I want to thank Steve for coming on today, for sharing his time, his valuable insights and his passion for this industry. I'll be sure to include a link to Sunrise Strategic Partners on the webpage, and on this podcast show notes. You can download them at brandsecretsandstrategies.com/session59.

Today's freebie, in honor of my conversation with Steve is 11 Key Strategies to Increase Your Market Basket Size and Grow Sales.

We talked a lot about this during the podcast. This is the future of CPGs as I believe it, and as Steve does too. The point is this: small natural brands are relevant. They're responsible for all this sustainable growth across every category in every channel. They are the future of CPG. Retailers need to rethink the way they go to market. Instead of looking at penny profit by item, they need to start thinking about the market basket. This is where you come in. Where your penny profit per item may not necessary be as good, you're far more valuable to the retailer in terms of who shops your product.

This is also the focus of my free course. You can download this free resource on this podcast webpage along with the show notes. If you like the podcast, please subscribe, leave a review, and share it with your friends. As always, this podcast is about you and it's for you. Thank you for listening today. I really appreciate you making time for me. I look forward to seeing you in the next show.

Sunrise Strategic Partners www.sunrisestrategicpartners.com

This episode's FREE downloadable guide

Your market basket includes all items shoppers purchase on each shopping trip. Health conscious shoppers spend more than regular shoppers. Learn how to leverage the importance of your shopper to drive sustainable sales and increase shopper loyalty.

CLICK HERE TO DOWNLOAD YOUR FREE STRATEGIC GUIDE: 11 Key Strategies To Increase Market Basket Size

Thanks again for joining us today. Make sure to stop over at brandsecretsandstrategies.com for the show notes along with more great brand building articles and resources. Check out my free course Turnkey Sales Story Strategies, your roadmap to success. You can find that on my website or at TurnkeySalesStoryStrategies.com/growsales. Please subscribe to the podcast, leave a review, and recommend it to your friends and colleagues.

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Until next time, this is Dan Lohman with Brand Secrets and Strategies where the focus is on empowering brands and raising the bar.