For an update on this company, see Anatomy of a Start-Up Revisited: Snack Attack
Research assistance was provided by Leslie Brokaw.
EXECUTIVE SUMMARY
THE COMPANY
R. W. Frookies Inc., Englewood Cliffs, N.J.
Concept: Launch an all-natural "good for you cookie" sweetened with fruit juice, not sugar, in national, mainstream cookie market. Stay lean; operate only as marketing organization; outsource all manufacturing, packaging, product handling, distribution, and direct sales
Projections: First-year revenues of $944,000; more than $10 million in year five, with 14.2% pretax net. Eventual size of $100 million
Hurdles: Unknown consumer demand; getting and keeping shelf space in market dominated by big players; stimulating demand despite marketing expenditures drastically less than competitors'
THE FOUNDER
Richard S. Worth, 39, CEO
"What if Nabisco responds tomorrow; what happens if we have problems lining up distribution; what if we outstrip capital?" asks Richard Worth, as he anticipates a visitor's questions. "A company should be judged by how it has thought about the 'what ifs.' "
Worth has been thinking about them since college. Having decided there that he wanted to become a farmer, Worth worried he might run out of money while doing so. The solution? He first spent three years working. His résumé boasts that he increased sales by 100% in his four months as a bread salesman in upstate New York. He then started an underground-sprinkler company that quickly became "second in residential sales" in the Boston area.
All that time, Worth saved every cent he could, and it paid off. His eventual move to Canada led to a $10-million jam company. You can see the juxtaposition of struggling young man and successful businessman everywhere you look. While Worth is in the process of building an $800,000 house in Long Island's swank Amagansett, his office has a ragged couch and a gaping hole in the wall.
The ambivalence remains today. Worth refers to his company as a form of "social capitalism," with 35% of the stock being held by "partners in crime" -- the bakers, distributors, and professional-service providers who are helping launch Frookies.
After spending some time with Worth, you get the feeling that he is only partly joking.
FINANCIALS
R. W. Frookies Inc. projected operating statement
Year one Year five
Cases sold (@$11.80/case) 80,000 891,000
Sales $944,000 $10,513,800
Cost of Sales (@$7.08/case) 566,400 6,308,280
Gross Profit 377,600 4,205,520
% gross profit 40% 40%
Expenses
Start-up costs 53,750 0
Advertising & promotion (non-TV) 325,684 792,914
TV advertising 0 800,000
Product demonstration 47,184 262,756
Broker commissions 23,592 262,756
Payroll 53,400 205,800
Administration & miscellaneous 74,220 394,075
Interest expense (3,990) (7,011)
Total expenses 573,840 2,711,290
Net Profit Before Taxes (196,240) 1,494,230
% net profit (20.8%) 14.2%
WHAT THE EXPERTS SAY
CONSULTANT
CATHY ORR
Vice-president and founder of Shelf Watchers Inc., Orange, Calif., which verifies grocery product placement and inventory for manufacturers and brokers
Including the distributor in the profits of the company as a shareholder is interesting; it may help solve some of the basic problems that come up with distributors. But it won't work on a large scale. There are too many distributors. In Los Angeles alone, there are at least four or five that Worth would need. To get national distribution, Worth would have to include each one. I don't think a distributor is going to be too thrilled when he finds out somebody else got a cut and he didn't.
I'm also worried about Worth's marketing funds. If he selected 20 markets in the United States that he really wanted to cover -- the minimum for a national product -- then according to his year-five financials he'd be spending only $80,000 per market for advertising and promotion, including TV. That's way low. Manufacturers figure on spending $1 million per market to bring out a new product. That's a minimum.
But even with promotion like that, Worth could end up spinning his wheels. The name of the game is to be on the shelf, and shelf presence has to be constantly monitored and supported. Brokers and distributors won't do that, even if they tell you they will. How can they? They have far too many clients and products to look after. Keebler has its own salespeople and merchandising people -- they're trying to persuade store personnel to give them your space. And of course, because they're so big, they're getting more distributor/broker attention than Frookies to begin with. As far as store people are concerned, it's "out of sight, out of mind," and since Worth won't have his own people in the field, Frookies will be out of sight.
FINANCIER
DON STROBEN
Managing general partner, Princeton/Montrose Partners, Montrose, Calif., a $17-million venture fund with positions in consumer food products
I like Worth's experience. He's already had one success, and he stuck with it even after he sold it. So he has some idea of the continuing problems of growth and development. That experience is very meaningful.
If I were Worth, I wouldn't go national. I would pick New England or the mid-Atlantic region, stay in that area, and work to develop a very strong local and then regional brand. In absolute dollars, if you could build up a business doing between $5 million and $8 million in sales, you could then sell that business to somebody else who was more able financially to carry on the marketing effort. As people who invest in the field have seen, the grocery trade is now renting space -- and that means you have to have financial resources. Launching a new food product when you're also a new company -- such as Frookies -- is not quite impossible, but it's extremely difficult. There may be a slice of the market for a specialty cookie, but I don't think I would ever finance a cookie company.
