In the first part of our interview, we started talking with CEO Bob Yates and Exec VP Paddy Shea of The Pulse Beverage Company to discuss the amazing national expansion success of Pulse's Cabana 100% Natural Lemonades. We discussed the current market strategy, the opportunities from the Anheuser-Bush's problems and more. Here is part 2 of our exclusive interview.
NBT: And the Whole Foods you are doing, they buy on a regional basis?
Bob: Yes they do. And right now currently we are just getting into the Whole Foods in Colorado as we speak. It's about a three month process to get your product approved with them. They analyze everything about your brand, and we have been accepted in Canada, and in Colorado, the Rocky Mountain Division, I'm expecting an email today to allow us to go into those stores. We've gone through everything that you have to go through which is very cumbersome, but the result is that Whole Foods would be cracked in Colorado, and we expect the Western part of the United States to be cracked within the next 30 days such as California, Oregon, Washington, so we are just making our inroads into Whole Foods that's a major focus point for us. Obviously that’s a big focus point for us because falling behind it will be Pulse. And Pulse is a perfect product for the natural foods category, and that's what we want to do. We want to make our inroads with the Lemonade falling up right behind with the Pulse.
NBT: So in the Whole Foods when you open them up how much will you spend per store?
Bob: It varies from market to market. We will start off with sampling programs. They normally run about $90 for a four hour sampling. We are going to hit hard with the sampling. We are going to hit hard with the TPRs (Temporary Price Reductions). We are going to be at $1.99 in that store, and that's a good price for Whole Foods on our frontline. So, we are doing TPR samplings to help support it and I'm very anxious to get this Rocky Mountain Division as well. This is again just like Kroger's, this is a storytelling, so that we can show the rest of the divisions what's taking place. We are also working on the Whole Foods distribution in the East coast and we feel good about that as well. We are on our second month there, so it ranges anywhere from three to four months before the Whole Foods would give you authorization to the role of formalities you have to go through.
NBT: Well, get them back in Maryland because I'll tell you -- in my travels etcetera, I go into a lot of supermarkets. I'm blown away by how many varieties there are except lemonade. I mean in tea its mind boggling to me looking at the tea choices in the Whole Foods or AJs, the higher end stuff. There literally are 12 to 15 choices on teas.
Paddy: Well, let me tell you a little story about the teas. The teas were a product that Bob and I both lived through. The teas were the Lemonades of the 90s. Back when teas were just coming out, really coming out, the buyers had this thought in their mind in the cold weather states, you know this is the summertime drink. That has already changed dramatically. In fact when we do our presentations we bring that up to the buyers to let them know the Lemonades are no longer just the summer time drink. They have gone into a mainstream beverage, and that's the way we present it as well.
We see Lemonades doing the exact same thing as teas. We see them selling in the cold weather states, even in the winter, and so that's a big focus point for us as well, and like I said, we are really ahead of the game with the Lemonade category right now. We have two major competitors out there that we are battling with. One of them, Hubert’s, has a lot of money behind them. There will be other lemonades coming as well. That's why it's important that we establish this distribution system ASAP. That’s the most important thing for us is to build our distribution while at the same time adding manpower on behind us to make sure that we secure the chains, and secure the strength of our brand with our distributor.
Bob: We have a point of difference between us and competitors (and Calypso is not a national product). We are not heavily laden with sugar. And as you know the news has been all over the sugar topic lately against processed sugar. We reduced the sugar by using pure stevia extract, a natural product, which cuts the calorie count by more than half and cuts the sugar amount. We know that we are more on the cutting edge than they are. Hubert's is more like we are except that we have two distinct advantages: they use a smaller package for the same price, and they don’t taste very good, which is what other people tell us. We've tasted it, but we have people tell us all the time that Hubert's is a very weak tasting product, and so we think that we have a taste advantage. We certainly have a marketing advantage: we are an all natural product that tastes great, and I think that's a huge advantage for us right now.
NBT: Who is the big money behind Hubert's?
Bob: Hansen's, the people that own Monster.
Paddy: The way Hansen’s has secured a lot of distribution for Hubert’s is hanging that hammer over the distributors head. But the fact of the matter is we just hired one of their top people to come over to our team, and he told us a lot of the information about how that's going. They are very unfriendly distributor wise on this product. Hansen’s basically sell direct to a lot of chains. They don’t care about the distributors, and that's a huge advantage to us.
Paddy: The other thing we are doing is we are doing this correctly. We are building the DSD (Direct Store Delivery) system in most markets so that the distributor is motivated as well to push our brand. That’s an important factor. There has been a lot of brands that have come in the last decade that have basically screwed over their distributors.
NBT: What other chain stores or grocery stores outside of Whole Foods and Kroger that you are currently working in?
Paddy: Well, right now, in the Utah market, we are in the Associated Groceries division. They have four different chains that are underneath that umbrella. We currently just launched Hy-Vee for the Midwest, very excited about the response we are getting with Hy-Vee. We are going to put a major impact into that category, and into that chain. We are getting displays in Hy-Vee’s as we speak. The reception by the managers has been overwhelmingly good, so we expect to do quite well. We have United Foods in West Texas, which should be coming on in May. Roundy's Grocery in Wisconsin which also includes a division in that goes into the Minnesota market approximately 140 stores. We've also coming up shortly we will up into the Lunds & Byerly's, and also the Colborn's were into Bruno's Grocery in Alabama. Festival Foods is another one we are into the west, into Wisconsin. The HEB chain (315 stores throughout Texas and Northern Mexico), based out of San Antonio has been worked on for three months. The buyer wants to meet with us to put Cabana into their stores sometime in the first part of June. We secured Woodman's Grocery, 13 warehouse stores in Wisconsin. We also have some smaller chains. Sprouts is another chain that we will be securing shortly as well. We are calling on many other chains as we speak in several other markets, so we are really just starting to make an impact in the grocery channel.
NBT: Any interest in being Costco or Sam’s?
Bob: We actually had an opportunity to be in Costco if we wanted to sell our product at basically a bastardized price which would destroy our pricing throughout the rest of the market. They wanted us to fill it out at $11.99 meaning we would have to sell it to them for about $9.90 a case, and at $11.99 what happens there is that pricing goes all over the place. The distributors cannot keep their price point and we destroy our system. This is exactly what Hubert's has been doing.
NBT: I know you have some of the international deals as well. You had a large one in the Philippines you were working on as I remember.
Bob: Yes. the Philippines wants to start with our Pulse product. They have 5,100 stores. We can discuss that when we get into the Pulse end. We are negotiating with a large distributor in Mexico right now to put together a deal for Mexico. Mexico moves a little slower than us and you go through the health department and things like that, but we are going through that process right now. It’s a good market. We can meet the price points. Mexico has a lot of good retailers, and we can be effective in the ones for the middle class and above. They have a whole different method of marketing to the lower end people. Those types of stores we won't penetrate, but we will penetrate more middle market, upper market stores there will eventually do business and Wal-Mart is there because Wal-Mart is more of a retailer in Mexico than it is here in the sense here it’s a price cutter. In Mexico, it's not necessarily a price cutter. It's more of a mainstream retailer. Obviously we are in Canada; we shipped our first product to Panama through Rey Trading which is a large exporter. Rey owns a lot of grocery stores in Panama, and they have offices in Miami, and in Chicago, and they take a lot of American products to Panama. We are in discussions with South Korea right now and we have a couple of offers come our way on China which is because of some of our ties with people in China. We are getting Bermuda approved for the Cabana product through a Coke distributor. We are doing some work in the Islands right now, but there are bigger markets out there. I'm a little hesitant on the European market right now because a lot of the problems that they are going through, so we are going to take it kind of slow in Europe. We have good connections there and we are reaching out to those people right now, but I think that will be a two year process on Europe because we are going to have to secure really strong distributors there because there is a lot of things going on. We had good associations with Costco in Europe before, so we are going to see if we can renew those. We are renewing our old contracts in Western Africa, specifically Nigeria. We have always sold a lot of products in Nigeria in the past because of all the oil business they do with the U.S. There is a lot of American products there. We are talking to Brazil and others, but we expect to bring Mexico on before the end of the year. We will be in the Philippines before the end of the year. I hope to have a decision from other people as to what direction they want us to go in China. We can go into China but its just a case of what avenue we want to use, and which distributors we want to use, so the international is starting to come together pretty well that's an area that our competitors are not going to go into. Hubert's not going into international nor is Calypso so that will be competing with domestic products in those markets, but we should do fairly well on that.
NBT: How are things going on the cost side of the business?
Bob: When we started out on Lemonade we basically were around a $7.50 cost per case. Where we have reduced that cost of production, and we just secured a new glass manufacturer, Anchor Glass out of Minnesota, through our glass supplier, Zuckerman Honickman that will reduce our cost by $0.40 per case. We just reduced our cost in lemon juice, as good as if not better lemon juice, by $0.25 per case. We have reduced our sugar cost by $0.10 per case, so we believe that by the summer we are going to be in the $6.60 range which reduces the cost of our product by almost $0.90, and our target by the end of September is to be at $6.50, and then we will look at what we can save above that looking at our price points on it. If we save a $1.00 in cost, that makes us a lot more competitive in the market price, and we've really worked hard to do that. We've brought about a lot of cost reductions by volume discount, by getting better label deals. We are buying all of our glass in the United States right now. We had a nice write-up in the Denver Post which said that we were basically bringing our business back from China into the U.S. and it creates more U.S. jobs, and its more goodwill. We have steadily been decreasing our cost for this product. We now have two operating plants, one in Portland and one in Pittsburgh and within 30 days another operating plant in Texas. Geographically that will put us in a position where we will be able to equalize our freight, and god willing and the creek don’t rise on diesel fuel, freight will average $0.70 a case, and that's extremely important to us to have an average freight of $0.70 a case to maintain the profitability that we want to maintain on this product. We are really proud of the fact that we have cut a lot of costs.
NBT: How much of that are you going to keep and how much are you going to pass through to distributors for the lower prices?
Bob: We are not going to pass through any of it through the distributor's lower prices. We will use it for promotion. If we have additional funds, and we have additional promotions that become available, and that's where we can spend the money. It's like two linear graphs. On one side you have the case driven part of the graph which really drives the value of your company if you take for example Vitamin water which didn’t make a lot of profit until later years, but they drove cases which makes their company worth more money because anybody is looking to buying them is obviously going to look at the number of cases and the profit per case, and they are not going to have the infrastructure cost because they are already in place for them. They just look at additional business. On the other graph you have the profitability side which we expect to be profitable in June or July this year on a monthly basis, and should be profitable for the year. You are torn between two graphs. You want to be profitable because you know that that's important, and that builds equity for you and you can grow the business internally vs raising capital externally, reducing dilution to shareholders. On the other graph you are building case sales so what you are trying to do is find a good intersect for those two lines where you are building maximum cases and still be profitable. And where those two lines cross, of course, is a big impact in what the total value of your company is going to be. Some shareholders are looking at your net profit while others are looking at your total case sales and equity. We are approaching where these graphs intersect logically where you try to pick your point where you are getting maximum number of cases at a profit. It's intersected at some point, and you have to consider both sides.
NBT: From the shareholders standpoint the game is to build as fast and big as possible because the liquidity event for the shareholders at sale is THE moment.
Bob: I appreciate that because it’s sometimes you are torn between the two. At the same time as driving case sales you can reduce costs and watch your expenses and turn profitable. But what's more important to drive? More cases or showing more bottom-line profits, and like you said the metrics is sometimes a tough decision, but I think in the particular arena that we play in the case volume is more important.
This wraps up part 2 of our exclusive interview. Come back tomorrow for our conclusion of this exclusive interview with CEO Bob Yates and Exec VP Paddy Shea of The Pulse Beverage Company.
About the Author
Founder and Editor-in-Chief NBTEquitiesResearch.com. Contributor and Anchor Fox News Channel and Fox Business Network. Chairman & CEO NBT Group,Inc., a boutique private capital investment bank and investor relations organization.
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