Scaling Ops from $5M to $150M | Sean Campbell, Semifreddi's

Speaker 1: 00:00
Welcome to Shelf Help. Today we're speaking with Sean Campbell, who is the COO of Semi Freddy's Artisan Bakery that serves all the wider SF Bay Area, which is my hometown. So definitely excited to dive into it. Prior to um Semi Freddy's, Sean ran ops for uh what I believe is still the number one cannabis edibles company in the US, as well as other companies like San Francisco Salt Company, Double Rainbow Ice Cream, which is another favorite of mine from the Bay Area. So yeah, excited to get into it. So yeah, Sean, maybe just for first off, for the listeners that aren't that familiar with Semi Freddy's, just give us a quick lay of the land in terms of origin story, why behind the brand, core products you guys offer, maybe just a key places people can get their hands on them, and then uh we'll go from there. Sure.

Speaker: 00:50
Yeah, semi Freddy's is a Bay Area staple since 1984. It was founded in a 400 square foot kitchen over in Kensington, which is around Berkeley area. Um, and it's just, it is like it's kind of part of the fabric of the San Francisco Bay Area. So Tom, Mike, and then Mike's uh uh wife Barbara, who is actually Tom's sister, founded Sammy Freddy's in 1984. Uh kind of the part of the Alice Waters kind of gourmet ghetto scene. And that's kind of where it started. Acme baking is another big staple here in the Bay Area. And so they launched it about the same time. It's grown to the point that today it's about 20 million in revenue, roughly. We currently occupy a 30,000 square foot bakery over in Alameda, which, if you know your Bay Area is sort of just down the street from uh Berkeley. And the core tenants are really, it's just it's rooted in the community. The business historically has given back about a million dollars a year to over 200 community organizations that address food insecurity, education, and life transitions. And it's just part and parcel of who Sammy Freddy's is. So that it's sort of two core tenants, community first, but also taste first is kind of the way we think about it. Fresh baked daily delivery, all around to about 400 different accounts in the San Francisco Bay Area. Uh, 70 plus products, all fresh baked, artisan breads, baguettes, deck breads, rolls, pastries, cookies, et cetera. In terms of where you can find them, uh, if you're if you're lucky enough to be in the Bay, uh, they're all over. So Costco is a big one. We're actually doing a series of roadshows right now at a bunch of Bay Area Costco's. You can find it at Safeway, Lucky, Whole Foods, and tons of independence. And some good news for us, we're sort of making a push into broader distribution outside the Bay Area. Um, we just got our first repeat purchase order for a distributor out in Ohio. So you can actually find Sammy Freddy's Cross Dini out in the Midwest, which is great. So, yeah. So that is sort of where we're at and where you can find us.

Speaker 1: 02:51
Starting on some of the cannabis stuff, ELED ops is I think the company scaled from something like 20 million in revenue to 150 plus. So it's safe to assume the supply chain evolved quite a bit and all the stuff that you own. So I'm I'm just kind of curious, what did that supply chain look like at, you know, 20 million versus 150 million? I'm talking about both, you know, on the plant touching side, you know, as well as the non-plant touching side. And maybe as you went from 20 to 150, what were some of the biggest supply chain unlocks along the way?

Speaker: 03:23
Yeah. So I mean, I think first for your listeners that aren't in cannabis, and you and I are both from cannabis, let's paint a little picture. Cannabis became legal in California in 2018, and it was kind of like the gold brush meets the dot com bubble. And it was, you know, it was strap it in and do more than you've ever done with less than you've ever had to work with. And so it was pretty nuts. I'm sure you remember there were CEOs, not of Kiva or of your company, CEOs running meetings, super tripped out on ayahuasca. I heard stories of Barefoot. There were, and it was kind of this weird mixture where you had a ton of people that came from other industries, you had a ton of VCs getting into the space, a ton of really smart people, MBAs, and they're all kind of mixing together at the same time with these folks who were kind of coming out of the shadows. And I sure, you know, so cannabis was illegal in 2018. You passed the point where it became legal, and there was this weird mixture of all of these people sort of at one time, and it kind of made for some strange bedfellas, is what I did. Yeah, totally. So we were the leader in the space, Kiba was the leader in the space. But just to give you a matter of, you know, kind of a perspective, we were making about 40,000 units a month. Now, kind of my background and experience, I've seen plants that do 40,000 units an hour, right? And so it seems like a big number, but it's not a super massive number. We were out of a 10,000 square foot warehouse over in Oakland. And so, not the best part of Oakland, I'll add. And sort of the the um, yeah, so most of my team, it was it was kind of funny. Most of the team that I inherited, they were in the business because they loved the product. But we were paid in cash every two weeks, which I'm sure you were f familiar with because banking was illegal at this point. And you kind of had to watch your back pretty frequently because in Oakland, we often had people tailing our trucks back to the plant and sort of, you know, looking for what, you know, because the trucks had cash in them, they're tailing the trucks back to the plant. And so you you you kind of had to look over your shoulder every time the door opened to make sure somebody wasn't coming in the front door. So nutty days. In terms of the supply chain, so we made 14 skews at that point. Uh we made two panned MM products, eight chocolate bars, and two types of mints. And we also co-packed a beverage for I'm sure you remember, what's the beverage company out of Colorado? Do you remember the name of that?

Speaker 1: 05:40
Yeah, it was for like the main one back in the day. And I can't remember the name, but I know you're talking about.

Speaker: 05:45
Yeah. Anyways, so 14 skews. Is that what it was? I can't remember.

Speaker 1: 05:50
But anyways, whatever.

Speaker: 05:51
Yeah. Um, so revenue was about 90% of our revenue was from California. And then I'd say 10% was from what we called partner states, which were Michigan, Hawaii, Illinois, Nevada, and Arizona. So on that side of things, when you look at the partner states, they kind of ran the gamut from people who had a ton of experience, like true operators, all the way down to people who had no idea that what they were doing, like complete novices. And so on top of that, we did distribution out of this same 10,000 square foot warehouse, if you can imagine. So we had two pallet racks in the back and a fleet of Priuses, which was pretty awesome. Kiva used to rock the Prius. So the Prius would go all the way up to Humboldt and then all the way down to do a transfer where a lot of product was then taken to Southern California. And so this was kind of what I inherited when I walked into this company. Um, and there was a huge appetite for growth, as you described. Essentially, we went from maybe 15 million to 150 million in about five and a half years, which was pretty nuts. Um, a lot of innovation. Um in the next three years, we launched about 70 different SKUs. Our part count went from probably 150. Well, maybe that's a little low. By the end of that time, it was up to 1500 discrete parts, which is pretty nuts. And so by the end of it, we have two distinct lines of gummies, Camino and Lost Farm. We've got a Starber's type of chew and tons of limited time offers, seasonal initiatives. And we were kind of at the forefront, as you know, of every sort of trend. Live resin, we did it, live rosin, we did it, beverage, we did it, gummies, we did it. We did everything, we did it super fast. And so, one kind of anecdote that I'll share, one of my favorites was Scott, who is the CEO of Kiva in 2019, came up with the idea of edible gold on the Terra product, which is a pan product. So you could actually, you could buy edible gold. And as a St. Patrick's Day kind of initiative, he decided he wanted to do a limited time offer where if you found the Terra that was coated in edible gold, you would be, you know, as part of the marketing thing. So we went from that product being an idea to it actually being in market in six weeks, which was something I've never seen. And you probably coming from traditional food or in your background, just that pace of innovation is absolutely nuts. So supply chain is interesting because on the plant touching side, really what it was, and I'm sure you experienced this, it kind of happens in every state. Cannabis is not legal in every in every state, it's not legally federally. And so at the inception, what ends up happening is there's no, there's no plant touch. There's no plant, right? And so there's nothing to be had, and it's scarce. We were looking at about back in the early days, we were probably paying about $10 a gram for actives. And by the end of my time there, it was a commodity. It was 50 cents. And so on the plant touching side, it's sort of you early days, we had to have somebody whose job it was to go out and find that material and find clean material. And by the end, they were knocking on our door trying to get us to buy it. And so that that pattern kind of repeated in every state. So every state that came online, early days there would be no capacity. And then sort of as you move forward, there'd be just a surplus of supply. And so that was on the plant touching side. The other thing that was funny about the packaging side was um the same rules kind of applied. Like you couldn't necessarily get an economy of scale because the regulations were different per state, as you well know. So you're running a business right now that that turns around packaging requests. I think you said 50% of your business is cannabis related. Every state has its own unique set of regulations for packaging. At the least, what you ended up running into was the fact that the artwork and the call outs and all the verbiage have to be different by state. And then on the other hand, you might run into a situation early days, especially where the form factor itself didn't meet the requirements. And so you might have, if you're in 25 states, you might have 25 different packaged designs, both on the artwork side and the actual form factor itself. And so, fast forward to today, early days it was like that, right? And so early days it was a little crazy. We ended up partnering with a few different companies that really helped us. 14th round was one. Um, and then the big one, the big unlock, trying to remember the name. These guys are gonna kill me because they're like good friends. I'll remember. But, anyways, I'll be sure to give them a shout-out in a minute. But um, yeah. So, yeah, the unlock for us was once we got economy of scale, we could buy in bulk. And once sort of the system normalized, we were able to, you know, we weren't locked into trying to buy one unique item for each state. We could actually buy, you know, uh pallets of items, containers of items. And so that's where the it kind of lives today. But but you had to surf that wave, right? And see good partners who work with you along the way. 14th round was really good. We couldn't buy uh a million parts in order to get the best price per unit, but they would sort of flex on pricing in order to get us to a place where we could launch a product on time, hit the price point that we needed, get the margin that we needed with a line of sight to the business down the road. And so that was sort of, I think it really comes down to partnering with companies that will help you grow and with, you know, the sort of think of the big picture. So that's that's key.

Speaker 1: 11:32
So one thing, unique thing about cannabis, I think you briefly touched on it, is that I think traditional food and beverage, traditional CPG is, you know, as you grow, economies of scale, there's opportunities to improve margins. But in in cannabis, there's kind of the market dynamics that seem to overpower that in the sense where both markets are scenes where there's inevitably at some point, whether it's just a matter of how quickly it happens, there's margin compression, basically, you know, price compression in every state. So I'm curious as you guys grew, but at the same time, California market is an example, other markets you're the longer you're in them. Yeah, you know, margins started getting tighter and tighter. I'm kind of curious, what were some of like the key levers that you had to play around with or you remember focusing on as margins got tighter across the board?

Speaker: 12:20
Yeah, it's funny. What you're describing is sort of the existential crisis of cannabis today, especially in California, which is that the illicit market has thrived. And Kiva, as you know, is a branded product that, you know, carries all this cachet and it's a premium product. But it is competing with not just other brands that might be a few bucks less, which in this day and age of inflation and price sensitivity is meaningful, right? So that's happening to Kiva, but in addition, they're competing with the illicit market. And so that's sort of California, especially, you're just seeing margins compress, you know, like massively. And I'm sure you live through that back when you're in Flokana. And so it's really tough. So, in terms of the levers, you know, Kiva, Kiva's interesting because there's a lot of really savvy marketing folks and sales folks, but in a lot of ways, they're sort of locked into this system that they can't escape, which is that everyone is doing buy one, get one, everyone is doing free fill, and they're sort of at the mercy of this. What I would think sadly is kind of a race to the bottom, right? Which is that if you keep competing on price for products, eventually everyone's gonna lose. There are some people that have a lot of room for margin to do that kind of stuff. But for us, being a premium product, we needed to command a premium price point. And so they're they're busy working on that. And, you know, kind of the biggest part of that is what you alluded to, which is cost takeout, right? So if you're gonna have to move on price downward, how do you make the product more efficient, more efficiently, I should say? How do you do cost takeout? So for us, it was really a couple of different things. Manufacturing that many SKUs in that small of a space, you had to be super efficient. And capital was not exactly, there wasn't a ton of it around. And so you have to make super targeted investments, right? And what I mean by that is when you look at your line, first you have to understand what is your heaviest hitter, right? And so for us, it was Camino. Camino is a product that we needed to be able to make the most efficient way we could in order to generate the most gross profit. And so if you're going to look at which product and which place to invest, you have to think about what is going to drive the most crop gross profit with that investment. The other thing to think about is, and this is something that kind of gets into lean manufacturing and it's a little technical. So a lot of folks, when you look at your line, and this is manufacturing specific, the the pieces flow through and inevitably there's a bottleneck. So everybody understands that concept, right? I'm working, uh, I can see where the bottleneck is because the inventory piles up at that point, right? So I'm going to relieve the bottleneck by spending, call it a million bucks, right? A big key for us in terms of investment was that the ROI had to be less than a year, right? Because capital was that scarce. You can't be looking at a five-year project like you could in traditional industry. It has to return on that investment in less than a year. And so you're looking at your line, kind of a classic mistake that people make is I found the bottleneck, I'm going to upgrade the crap out of it, right? I'm going to spend it does 100 units per minute, and the rest of the line is doing 200 units per minute. I am going to spend a bunch of money and upgrade it to 500 units per minute. Well, the problem with that is you just move the bottleneck, right? So now the bottleneck moves upstream. And so the strategy has to be I have a million dollars. Excuse me, how do I spread it across the line in a meaningful fashion where every part of the line moves at the same speed? And that kind of creates the best throughput. So that is kind of very specific to manufacturing, which was a big part of what I did.

Speaker 1: 16:04
Yeah.

Speaker: 16:05
But then in terms of compressed margins, obviously you have to look everywhere. And so the benefit of a kind of CapEx investment is that you might save on the labor side, right? When you're looking at a manufacturing PL, your biggest components are labor and then raw materials, right? Overhead is there, but that's kind of a separate bucket. So you start with the manufacturing piece, which is improving the throughput with investment. Hopefully, you take out cost in the form of labor, right? And then from there, you scrub the raw materials, you shop it around, you're looking for the best price, and you have to be aggressive with that. You can't sit on your laurels and wait and hope that the vendor is going to come to you and say, hey, you know what? It went down two bucks. We'd like to give it to you. No, that doesn't happen. And then on the overhead side, you have to be super aggressive. And all of this stuff takes people, it takes headcount. But, you know, kind of startup life, you know, startup life, you're doing a lot of those things yourself. But as you grow and progress like Kiva did, you hire really smart people to be able to do those things for you. And so that is kind of when I think of margin compression, you have to take out cost. I mean, obviously it's best if you grow revenue. That's that's the easiest way to solve the problem, but you kind of have to be doing both at the same time. Yeah. And so, and keeping the ship tight is so that when something happens, as you and I both know in business, things that are unexpected are gonna come your way, right? So I remember a big one for us was um during COVID. This is a hilarious story. During COVID, supply chain just stopped. I don't know if you remember, you couldn't get anything out of China, right? Yep.

unknown: 17:44
Yep.

Speaker: 17:44
Many of our many of our packaging components were were made in China. Um and a big component of what we used to make the gummies was tapioca syrup. And tapioca syrup comes from Thailand, if if you buy tapioca syrup, and every container in the world of tapioca syrup was stuck in Thailand. And so we were looking at, we were looking dead in the eye of air freighting pallets of tapioca out of Thailand to get it to Oakland so they wouldn't, we wouldn't have a disruption in supply, which, as you remember, cannabis at that time took off like a rocket because people were stuck in essential service and everyone was sitting in the house. Essential service, yes. We went from, oh crap, are we gonna lose our jobs to holy crap, we're doing two X, two and a half X volume, right? So, but yeah, so stuff like that is gonna happen. So as an operator, it's incumbent upon you, not just when the market starts to change and margins starts to come down, you need to be on top of your stuff every single day, every single month, and make sure that your margins are optimized in an ongoing fashion.

Speaker 1: 18:50
Yeah. As someone that's leading ops at a company, how do you how do you feel like a head of ops skill set really needs to evolve as it as a brand or company goes from that example of 15 million to 150 million?

Speaker: 19:05
Yeah, I mean, early days. So what I described to you in that 10,000 square foot warehouse, the org was super flat. I was driving a forklift, I was doing the supply and demand planning, I was doing the production planning, and essentially you're the hub, right? So at 15 million, it's you, in my case, it was me, some shift managers, and then the line workers, right? And so you're a key contributor and you do everything, right? As it grows, you very you have to be really smart about hiring the right people, right? And so cannabis especially was super capital constrained, as you know. Most people were taking investment in order to continue to grow because the tax in cannabis was so onerous with Prop 280E that essentially everybody was losing money and they're funding those losses by taking investment. Um, as it goes from 15 to 150, unlike other businesses where you might be able to do something like, you know, A, you're profitable. So you might be sitting on a pile of cash that you can leverage, or B, uh you can go to the bank and say, hey, you know, we're doing really well. You know, here's our PL for last five years. We like to borrow a million dollars and, you know, pay whatever 5% on it and make some key hires. In cannabis, you're literally selling part of your future in order to fund the growth of the present. And so you better be selective about what you're hiring. And so your mindset really has to be sharp, right? And I sort of alluded to it in the way that we talk about managing a PL. So early days, you're the hub, you're the person that everything is flowing through. As it starts to grow, you really need to think about what's happening now and then what's going to happen in the next six to 12 months. And who do I have to add to support the plan that's coming my way? Cannabis, super aggressive. I think I mentioned 70 innovations in five years. So today I'm driving the forklift, I'm doing the production planning. When I talked to the CEO, he says, Hey, you know, we're not getting this out on time. The marketing guy is in my ear saying we've got 40 plus innovations we want to do next year. Me being the production planner and the forklift driver is not going to work. And so it's all about targeted sort of hiring for that three to six to 12 month window. And that's the way I thought about it was get me out of the key contributor role. And my job now is to be a team builder. So, and that's something I think I definitely want to share with your audience is all of us, probably you included, when we start doing our jobs early in our careers, we get recognized for what we do, obviously, as individual contributors, right? And we're good at it. And so in my case, I was a production manager. I worked on the floor, I made product, et cetera. I ran shifts and I was really good at it. And so, but when you move up, you have to make this transition from contributor to team builder. And the credit goes essentially stops being about what you're doing and goes into what your team is doing. And so Your mindset as the company grows has to be how do I find the most incredible people to put into these roles that I know are headed my way to facilitate the growth? Or in some cases, you know, might be something else. We're looking to cut, we're looking to shrink. But essentially, how do I add the right people in the right places that create value? And my job goes from being individual contributor to being the best team builder that anyone's ever seen. And in my experience, and I'm sure you've experienced this too, like just that moment when you get the right kind of person in the right spot, all of a sudden they unlock things that you didn't even know were possible, right? And your limitation is you've done everything the way you've ever done it. Hiring somebody who's dynamite, essentially, they do things in a way and they create value and they direct process upward to you and the rest of the organization in a way that you never could on your own. And so your job goes from being individual contributor, superstar to down the line, your job is hiring the best people and then celebrating the heck out of them in front of everyone, letting everybody know what a kick-ass person, what a kick-ass contributor they are.

Speaker 1: 23:13
So yep. For someone with a similar background to yours, where you went from traditional CBG, let's call it the cannabis back to traditional CPG again. For someone that's uh similar place, they were in traditional CPG, they're considering making a pivot from traditional CPG to to cannabis ops. What was the biggest surprise after making that ship that you remember and kind of what should they expect? And then second part of the question is how can they set themselves up for success in the first few weeks and months?

Speaker: 23:45
Yeah, I mean, I think you know the pace. The pace is incredible. It's like being uh strapped to a rocket. And so I think it's slowed down to in some ways, it's slowed down to a degree. And Kiva was very unique because it's so product and innovation focused, but probably not. Like a company like Wild, they don't have a ton of products, but their pace of innovation is just off the charts, right? I'm sorry, not pace, their growth is off the charts, their expansion into different states. And so the pace is something coming from traditional CPG that was shocking in terms of how fast things move, how fast things get have to get done. Um, and I think on top of that, the constraints. So, like I mentioned, capital is hard to come by. And if you're gonna spend it, you're literally selling part of your company, right? And that's the most expensive form of capital that you can fund a hire. And so that hire, whatever it is, or that what that piece of equipment really better be worth it. And so it's just uh kind of fundamentally different. They look the same in terms, oh, we're making products, but they're fundamentally different. So I think how do you set yourself up for success if you're gonna make the leap? Talk to people in the industry. You obviously have been in it, get the real skinny in terms of what you're dropping into. Um, and in the same vein, talk to people in the specific company that you're looking to get into, right? So the culture of the company, I just listed for you all of the nutty constraints that are cannabis and the pace and all that jazz. If you step on top of it into a company with a culture is suspect, it's almost impossible to get anything done. So, yeah. And so those are the two things really that I would do in terms of the first months. You can imagine, I just described the pace and sort of the expectation you have to deliver. And so, as an operator, I think first set yourself up with a 30, 60, 90 that's super aggressive. Don't wait to be asked or told what you should be working on. You have to be super self-starting, you have to be super aggressive about it. And so, first 30 days, you're looking, what I would think of and what I did, identify the biggest problem that's currently on fire that's impacting the team. Do we have a fulfillment problem? Do we have a, you know, getting it to market problem, whatever it is? And so, first 30 days, you're assessing what you have, which is your team, the equipment, et cetera, and you're building a plan, right? And so by the end of the 30 days, you should have a formulated plan as an operator. And again, I'm speaking like a director of ops level. Here's what our biggest problem is, rest of the team. Here's what I intend to do about it. Hey, marketing guy, you might be low on or sales, you guys might be low on units for a little while. Finance guy, here's what it's gonna cost you, but here's what it's gonna unlock for the business. And I'm shopping that around 30 to 60 days, I'm shopping and I'm executing. And then 60 to 90, I'm delivering, right? And delivering means reporting out. Delivering means letting people know the progress that we've made on this key initiative. And by the end of those 90 days, again, if you're at the director of ops level, you have done a bunch of things. You've solidified relationships with your immediate team, right? You've essentially, my group has been through an initiative and a project that has made things better, right? And so you've solidified that. You've delivered something that's gonna impact either innovation, margin, or revenue, right? And those are the three components in any business that you have to hit in addition to cash. And essentially, by the end of those 90 days, you've accomplished something. It doesn't have to be the biggest thing, but it's an impactful thing. And that's what I'd say. I think those are all really endpoint.

Speaker 1: 27:27
Yeah. Expanding the the conversation beyond cannabis, reflecting on your old semi-freddy's, as well as those passports, FFSF Salt Company, Double Rainbow, et cetera. Yeah. Talking about cogs and margins for a second. Where do most brands really go wrong when it comes to forecasting cogs and margins from your ops perspective?

Speaker: 27:48
Yeah, as the ops person, I think it comes down what I two things. I call it magical thinking. That's one of them, which is unicorns and rainbows. And then Adam Graebelik, who is a great partner over at uh Kiva, he is a marketing chief marketing officer. He used that phrase a lot and always made me laugh. But essentially, if I think two things, like I said, one would be magical thinking. And the second is sort of creating a margin expectation that is a top-down one versus a bottom-up, right? You got to do your homework. So unicorns and rainbows, what I mean by that is we're going to have, so we're looking at the PL for the next year and we're thinking about what our margin is going to be. And we're going, we're looking at it. We say, oh, well, we're going to add this piece of equipment that we're going to install in six months, and it's going to deliver five margin points. Um, and so we should book that into the PL, right? And so what ends up happening is, of course, as you go through that, the mistake you make is six months and five margin points. So the rule of thumb is cut the margin gain in half and double the time, right? And I'm not saying the sandbag. I'm saying if you're gonna put it into the PL forward looking that obviously has components of cash flow, right? What we're gonna generate, it has to be discounted for risk, right? And beyond that, the unknown, it has to be discounted because human beings, you're taking something and you're putting it in a system that is comprised of human beings, they need time to be able to adapt, right? And so, kind of the rule of thumb is don't think magically, right? Nope, it's not all gonna be ponies and unicorns and and rainbows. We're gonna hit some headwinds. So, what we're gonna do is discount what we're gonna put in the PL so that we don't have to go to the board of the directors, we don't have to go to the investors, the stockholders, and say, oops, we missed our target, right? And I don't mean to sandbag, you don't sandbag internally. What you do instead is you keep the internal target, whatever it is, six months, five margin points, but the external target, what goes into the PL is discounted for risk. And that is a key component that I learned the hard way. And that's so, um, and then beyond that, so top down versus bottom up. And what I mean by that, uh, I worked with a gentleman who came into a company uh that I was at, and he came in at a at a senior level. And um, I was earlier in my career, he came in and he kind of looked at the PL and he held it up. And he said, and and you know, he had been, he looked at a ton of PLs, he'd been in a ton of companies, and he said, you know what? He's like, I think we're gonna be able to take out $2 million of cost in the first six months, you know? And I said, How? And he said, Well, he said, you know, I just know. He said, I've done this enough, I've seen enough PNLs, blah, blah, blah. Well, six months later, he missed his target and he was shown the door, right? And so if you as an operator and as a business, like essentially you're owning part of the business, build your PL from the bottom up. And if you have a margin expectation about what something is going to cost, my when I was in charge of building the PL at different companies, I would have tabs for every expense line, sometimes 300 different tabs. And essentially what I would do is build up the cost with risk sort of factored in so that when it fed up into the PL and the margin expectation for the year, I knew what was going to happen within a reasonable degree of certainty with a risk calculation built in. And that's probably, you know, when you're that is where people go wrong, is A, they're kind of guessing from the top down, or B, they're hoping. And, you know, as you know, hope is not a strategy.

Speaker 1: 31:29
Nope, sure isn't. In terms of suppliers and partners, how important is redundancy and supplier diversity, let's say, especially maybe I'm not sure how much the tariff stuff is impacting semi-freddy's right now, but maybe reflecting on that if that's a factor too.

Speaker: 31:46
Yeah, so redundancy is always important because of what we talked about before, which is if I'm doing a good job managing my part of the business, I am constantly thinking about cost and optimizing cost. So supplier redundancy obviously is fairly basic. If I have two suppliers and they're competing for my business, I'm gonna get the best price, right? So that's kind of the basic tenant, is that I am constantly making them compete. I'm constantly shopping my business. In terms of making sure that I don't run out of things, it kind of depends on your size, right? Uh, that's that would be my answer. Sammy Freddy's, as you mentioned, we're at 20 million. We're not buying a ton of stuff direct outside of flour, right? And so flour, we buy a ton of flour. We go straight over to the uh to the mill over there in Oakland and we buy it from them, we get a really great price. Um, we don't necessarily shop that business because we know, A, we've been working with that company for like 30 years, and B, we we keep an eye on sort of where the market is at the commodity level to make sure we're getting the best price. But as you grow, you can really leverage your buying power to be able to get to really extract a lot out of people. So I think early days, you're kind of limited to distributors. You're buying a lot of stuff from somebody that warehouses who buys it from somebody else. Still a really good idea to shop that business constantly. Not every distributor is, you know, is is necessarily giving you the best deal. Um, in terms of tariffs, tariffs are tricky because, you know, if you look at what's happening, larger firms, many firms, even smaller ones, I imagine, what they're doing is they're buying forward to protect against what's going to happen, which is that it's gonna go up 50% or whatever the number is, right? And so the problem is you're taking cash out of your business that you could be using to market, to grow, to sell, to innovate, and you're plowing it into a bunch of tapioca or cardboard and it's sitting in a warehouse, which isn't the best use of your capital. So it's tough. I mean, I think people are in a really tough spot right now, especially if you're small or you're cash constrained. You're taking money that you could be using and should be using to grow, and you're putting it into inventory so that your margin doesn't compress to the point where you're looking at going out of business. Right. So yeah. So yeah, I think it's always a good idea to be shopping. When you're small, you're somewhat limited, and as you grow, you definitely can do more. But yeah, it's it's definitely best practice.

Speaker 1: 34:10
Yeah. Thinking about the trade-off between in-house manufacturing, like Sammy Freddy's is doing versus working with copackers. I know there's a lot of different variables that come into play here, but maybe what are some of the less obvious pros and cons of of in-house manufacturing versus working with copackers?

Speaker: 34:31
Yeah, I did consulting for a while for smaller food companies. My kind of my wheelhouse is anywhere from, you know, like 15 up to 100. And so I would talk to a lot of folks who are getting off the ground, and their biggest question to me was always, how do I find a copacker? Right. And the problem was they're small. And so when you think about what a copacker wants, a copacker operates on a pretty small margin per unit. And so they make their money by running a bazillion units, right? And so understanding fundamentally that you have to be big enough from where you are today, which a lot of people are producing out of a commercial kitchen or out of their home, you have to be attractive to them, which is a lot of units at an attractive price, minimal changeovers, right? Copackers don't want changeovers. Another big one, and kind of the hidden ones, like you're alluding to, is copackers in general do not like innovation, right? They don't like change. What they want to do is make their manufacturers. They want to make this, they're kind of like the most stodgy subset of operations is the people in the plant. And they're like, if it weren't for these damn people that that, you know, if it weren't for these people buying our products, we could just make the same thing for, you know, 24 hours a day and never have to do line changeovers. And so as a operator and a small operator, if you understand how they work and what they want, you will be able to position yourself to be attractive. And so, in terms of the watchouts that I've seen, so like I said, in general, copackers don't love innovation, right? And so you have to find somebody. And generally the bigger you get, the better that gets, of course, right? If I can sort of dangle a carrot out there as a copacker to you and say, hey, I'm gonna ask you to do all these line trials and do all this behind the scenes work to scale up this product, but it's gonna make you $15 million next year in projected revenue. They're like, okay, we'll play, right? So that's um, that's one of the things that you want to get is somebody that is amenable to innovation, I would say. Another big component that kind of hides in the weeds is quality control, which is you may think you're handing something off and they're gonna treat it the way you treat it, which is your baby, right? You've invested your life savings into this thing. You've been doing it out of your kitchen and it's grandma's recipe and all that kind of stuff. And then you hand it off to the co-packer, and they think about it very differently, which is your product is one of 50 that they make, one of 250 that they make. And so quality control and that expectation has to be hammered out ahead of time.

Speaker 1: 37:06
Yeah.

Speaker: 37:07
So invariably, the best contracts and the best agreements uh between the operator or the business owner and the co-packer define all of those things ahead of time. It's clear what the expectation is, all the way down to the line level. Here's what I expect in terms of quality, et cetera. And there's penalties if the copacker doesn't meet what is required. And so any good copacker that's worth its salt is going to, they they know all these things and they're not going to incur penalties because they know what the heck they're doing, right? But for you, some of your folks are probably early stage, some of your folks are mid-stage. If you're going to hand over your business, I would strongly advise that they speak to somebody that understands copacking, understands those levers, understands how to create an agreement that protects you and your brand. And so, and then the last two are inventory accuracy and control. I was once at a business that farmed out something to a copacker, and the copacker was great on paper. They knew what they were doing, uh, but they were just starting. And so it was like, oh, well, we're gonna, we're gonna take our business, we're gonna put it out there, they're gonna give us a great price per unit. They're just spooling up, but we're gonna, you know, we know what we're doing, and we're gonna enter an agreement with them and we're gonna kind of navigate this together. And what ended up happening was, you know, essentially with no experience doing what we were asking them to do, but all the greatest intentions in the world, um inventory accuracy went out the window, right? And many millions of dollars were left unaccounted for. So, and on top of that, you can you're, you know, some agreements, you own the inventory and you ship it to them. Some agreements they buy their own inventory. That's definitely what I recommend because they're more incentivized to improve margin when they're on the hook for the cash, right? For the outlay. But you may say, hey, you know, we would like to, and this happened to me a few times, we were working with a co-packer in the Midwest. I would have an inventory sheet that they would send to me, which based on that inventory sheet, I could run, you know, this number of units. I would reach out to them and I'd say, okay, I want to run this number of units. They'd go to check the inventory and it wasn't there, right? And so we would be out of market in a key market because the inventory control at the co-packer wasn't even close to what it should be. So, yep. And then the last one would be planning and schedule flexibility, which, you know, like I mentioned, co-packers are incentivized to have long runs with minimal changeovers. And so oftentimes they will schedule out an entire quarter, right? And you'll say, I'd like to get in and and make a change based on what's happening in sales. And they'll say, kick rocks, go pound sand, right? And so having all of those trade-offs defined ahead of time in the contractual agreement is absolutely key.

Speaker 1: 40:00
Yeah. These are all really helpful for brands or operators. I think semi-frides is probably a good example, really concentrated on the West Coast, specifically the Bay Area. You said you're starting to, you're just starting to uh start shipping over to Ohio. Yeah. Whether a brand is is in-house manufacturing or they work with a copacker. Let's just say semi-friendies was the same setup, still just focus on the Bay Area, but you were just working with a co-packer. And let's just say we'll use the Semi Freddy's as an example. You start selling in Ohio, or maybe it's even further. Let's just say it was New York to maybe go even further east. At what point, let's just say that market on the East Coast really started to take off, started to become really successful, volumes continue to grow.

unknown: 40:45
Yep.

Speaker 1: 40:45
Like at what point, what does like the math equation look like where at some point, at some point, probably those logistics cost shipping costs are get to the point where, okay, we it's getting to the point where we got to open our own facility on the East Coast. What does that math equation look like? Or how do you think about that? At what point where where the trigger needs to be pulled?

Speaker: 41:02
Yeah, that one's funny because in a lot of ways it's not up to you, right? And so I just mentioned sort of how copackers work. You have to hit a volume target that's attractive to them. And I've been in many situations where the math for me made sense. Hey, I could save 20 cents a unit, right? By making it with the co-packer in New York. And I go to the co-packer in New York, and at best, or kind of at worst, they they don't talk to you because they're like, no, you're not big enough. At best, then this is not necessarily best at all. They give you what I call the go away pricing, which is like, oh yeah, we'll make it for you, but it's gonna cost you five times what you and you sort of say, what the, you know, and you sit there scratching your head, like, wait a minute. And then you kind of get it. You're like, they don't really want to do this, right? And so it's kind of this tricky equation like you're talking about, where um, and at semi-freddy's it's interesting because we have a price that we can't exceed at the retail level, right? For a five-ounce bag of Crostini, once you get past six bucks in some of the places we're selling, uh, you're really not going to be attractive. And so we're selling this product, as you mentioned, that's made in California that has to get palletized uh and shipped across the United States. The cost per unit is probably like 30 cents, maybe 45 cents. And uh it's it's stretching the unit economics pretty significant, significantly. And so, but kind of to answer your question, long, long way around to get to it, is that unfortunately there isn't a math equation. You have to have sufficient volume and you have to have a product that will give you enough room to grow it to that point to where you can make the leap and be attractive to a copacker. There are people that do small runs, right? There are in the stratosphere of copackers, there are people down here who are flexible and do smaller runs. There was a group up in the Pacific Northwest, I can't remember their name now, but um they were really great and really kind of service-oriented, but they're rare, is what I'd say. People that want to take your nascent sort of fledgling brand and help you grow it and help you on unit economics at the expense of their PL and their bottom line, there's not many.

Speaker 1: 43:09
Right. And staying in-house, I imagine in the Sammy Freddie's case, if you wanted to continue to do anything house and you say, okay, volumes are getting high enough in New York, open our own facility where those copacker MOQs aren't as much of a factor, but there's obviously the CapEx factor. So I'm sure it's it's a similar challenge that you have to work against.

Speaker: 43:28
Yeah. No, I mean, you're you're sort of you're you're sort of transporting yourself into our internal discussions, which is how do we grow this to the point that it necessitates a copacker and what does that look like? Yeah. The good thing about bread, cannabis was interesting, and you know, you know this. Finding a copacker in cannabis is nearly impossible because there is no ecosystem. And so you may go you may jump into a state where there's nothing. And so you sort of feel somebody out, and then you know, you create a copacking arrangement or a job. Joint venture or whatever, and you build it from the ground up. Um, and cannabis was super spot spotty state by state because some people were pros. Like some people were kick-ass, they were pros because they came from other industries, whether it was CPG or something else, and they would dominate. Other people were like, cool, this looks fun. I've got $25 million. I want to make a lot of money. Um, and sort of the sort of like when you're talking to a co-packer, like the five worst words that you can hear is how hard could this be? Essentially. So yeah, you don't want to hear that from the co-packer. So um totally.

Speaker 1: 44:35
Yeah. Thinking about new product development, I think you guys launched those Dutch Crunch Hoagies earlier this year as an example. Yeah, yeah. You can use that one as an example if you want, or you can use something else. But I'm curious, what is a really just from an ops perspective? Oh, yeah, what does a good new product development process look like? You know, what are the keys to a successful new product launch in terms of hitting your budget, launch timeline goals, and like obviously you're adding a new product to the to the production cadence. How do you integrate that within the existing needs?

Speaker: 45:06
Yeah, the best thing that I've used in my life, having been from a company that innovated like crazy, the funny thing was Kiva was really known for and is known for its innovations into market. But I think behind the scenes, we weren't the best at the process of innovation, right? And so we did a lot of work internally to become world-class at that. And the best system that I ever used was StageGate. And so StageGate, for your listeners, if they're not familiar, StageGate is essentially breaking down the process of innovation from inception and ideation all the way through to fulfillment in market. And there's steps along the way. And what you do is you have a disciplined set of rules that sort of keep things from progressing to the next step before they're ready or if they're not viable. So the worst case sort of scenario is we have our friends in sales and marketing uh have a ton of great ideas and they're all good and they're all amazing and they're all on trend and they're all this stuff, and they're sort of going straight to the operation side, but the manufacturing side, and they are pushing stuff into the manufacturing environment. And it is, again, it's sort of impacting margin, right? Because we're not efficient, we're being disrupted, etc. And so, stage gate, the idea is up at the top at the headwaters, all those great ideas get to have their moment in the sun, but they get evaluated. What's the likelihood this is gonna be a winner? What's it gonna net us in terms of revenue? Are we competing against other people where actually there's probably not a great chance, right? And so, back to that hiring piece, I hired a dynamite project manager who was a process engineer. And so kind of put her in the middle of this internal process, which I just described. And she was able to line it out as stage gate. And stage gate doesn't have to be onerous. It can be light, it can be flexible. But what it does is essentially you slow down, you go slow to go fast. And our friends in sales and marketing, God bless them, are always, you know, everything is immediate, everything is now, we're gonna miss this. We want it all now. Not understanding, like we do as operators, that essentially if you want to get something from point A to point B, it's got to go through the process. And if we define the process, uh, you're gonna get a better result. Joanna, who is my project manager, we went from when she started, we were, I think we were launching 50% of our products on time in full. And within 12 months, she added to 95% across 60 initiatives. And so if you're going to do innovation and you're going to launch new things, I highly recommend a stage gay process, which, you know, sort of balances the needs of the organization. The organization needs revenue, it needs margin, it needs cash, and it needs innovation. But if any one of those four things becomes predominant or out of whack, you're gonna impact the others, which if you think about it as a CEO or kind of a, you know, like the big picture, you're gonna put your business at risk. And so you have to balance those things. That's not to say they don't flex, right? Early days at Kiva, sales and marketing focused, operations flex tremendously to be able to accommodate the growth and market, which then allowed us to invest in operations. But, you know, that's the balancing act. And I highly recommend StageGate to accomplish that.

Speaker 1: 48:32
Yeah, Sean, clearly you've got a lot of really great experience, a lot of wins under your belt. Obviously, some of the best learning experiences come from times where it didn't necessarily go your way. I'm curious, what's like one big strategy, initiative, something along those lines that you worked on that didn't necessarily go as planned, the one that let's just say jumps out the most. And yeah, looking back, anything you you kind of would have done differently.

Speaker: 48:58
Yeah, it's funny. I'm thinking. So I had an answer in mind, and I'm thinking if there's anything else that would be particularly entertaining. Because I feel like a lot of times, and instructive, a lot of times when things don't go wrong, that's when you build character and that's where you build capability that maybe you didn't have. I've had a few, trying to think. Yeah, I mean, I think uh there was a time, again, back to the Kiva days, where we launched a product, kind of, you know, this is kind of part of the answer that I just gave, where as the operator, I allowed our group to be pushed too hard by the needs of getting something out quickly. And what ended up happening was we launched the product and everything was fine, but it wasn't quite right, right? And so I had to have a meeting with my other, my other colleagues at the exec level. And we had what they had asked for, but again, it wasn't quite right. The quality wasn't where it needed to be. We had to do this last-minute workaround for packaging and we hit market, but we didn't hit market in time. And so what I realized in that moment was essentially um, as the head of operations, your job is to be flexible, right? So you have to, you have to you have to make sure that you can deliver the revenue and the innovation, but you also have to be very aggressive about protecting your part of the business, not in a way to, you know, at the detriment of the other folks around the table who are your colleagues, but essentially in your trust is something that delivers margin and keeps the business afloat and also delivers a product that's going to sustain the ongoing sort of, you know, the brand is built on the quality of the product. And if you, if you flex so far that essentially you've allowed margin to be compressed or the product isn't exactly the way it needs to be, you're sort of putting the core business at risk. And so that was a key learning moment for me, which is like I said, we were super flexible. We were super scrappy. We did so much with so little, you can push it too far. Sort of at that's at that point where I said, nope, we're gonna take, we're gonna take the innovation function and we're gonna, we're gonna define it. And that's, you know, that was that was a failure. It wasn't a catastrophic failure. It was a painful one, I can tell you that. But it led me to to take the matters into my own hands and essentially create a process. It was hard because you have to go to the marketing folks and say, you know what? I'm gonna ask you to slow down a little bit so that we can do this right.

Speaker 1: 51:25
Yeah.

Speaker: 51:25
And those are tough conversations. Sales never wants to hear that they're not gonna have a billion products in any given time. But you have to do a lot of selling and sort of advocating to make sure that you know they see that whole picture, those four things I've described revenue, innovation, cash, and margin, and that they buy into the fact that we are all trying to do take care of all those things so the business can be the best it can be.

Speaker 1: 51:49
Yeah. Yeah, I think that that healthy, healthy push and pull. When it when it's healthy, the push and pull between sales and ops is a good thing, you know. Yeah, 100%. Yep. Well, yeah, Sean, this has been awesome. Really appreciate the time. Shared some really, really valuable insights here. What's the best place for people to follow along with you? And then what's the best place for people to follow along with semi-freddies?

Speaker: 52:09
Yeah, semi Freddies. You can find us on Instagram. You can find us at www.semifreddies.com, LinkedIn. I don't have a huge presence. I do post occasionally, but you can find me. Perfect. And yeah, happy to I love sharing knowledge, so I really appreciate this opportunity. It's been it's been awesome. Yeah, it's been great.

Speaker 1: 52:26
Really great.

Speaker: 52:27
Awesome, Fan.

Speaker 1: 52:27
Appreciate the time.

Speaker: 52:28
Now that's the pod.

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