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STRATEGY

No Experience Required

By surrounding herself with experts, can this business owner write a success story with her obscure tea drink?
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By surrounding herself with experts, can novice founder Heather Howitt hook coffee fanatics on an obscure East Indian drink before the Starbucks of the world do?

Executive Summary

COMPANY: Oregon Chai Inc., Portland, Oreg.

CONCEPT: Introduce a tea-based beverage into the rapidly growing specialty-coffee market

PROJECTIONS: Revenues will grow from $190,150 in 1995 to $5.4 million in 1998

COMPETITIVE ADVANTAGE: Savvy advisory board experienced in national product rollouts

HURDLES: Familiarizing consumers with chai; overcoming company management's inexperience


The Founder

NAME: Heather Howitt

AGE: 29

PERSONAL FUNDS INVESTED: $3,000

EQUITY HELD: 22%

SALARY: $30,000

FORMER LIFE: Graduated from University of California at Santa Cruz in 1992; discovered chai by stumbling upon a shack where it was served while she was skiing through fog in the Himalayas. Pursued an environmental career in recycling and a graduate degree in urban studies until her mother persuaded her to drop everything to launch a chai company

On a sparkling fall morning in downtown portland, Oreg., the eight employees of Oregon Chai Inc. sit around a table at a prominent law firm, contemplating the difference between "efficiency" and "effectiveness." To illustrate the distinction, Oregon Chai's chairman, Rex Bird, shares a parable about two people sawing wood. The first saws furiously, never taking a break. The second pauses every 10 minutes or so to sharpen his blade. "If we don't take time out to sharpen the saw, we can't cut as much wood," observes Bird. The young Oregon Chai team listens, rapt. Then its members spend two hours in an exercise to determine their respective personality types (controller, persuader, analyzer, or organizer). Finally, they soak up a pep talk from Bird, which he peppers liberally with quotes from sources as varied as W. Edwards Deming, Carl Jung, F. Scott Fitzgerald, and Bob Dylan.

The team-building exercise is one facet of Oregon Chai's chief advantage over competitors in this still-tiny niche market. The company's founder and president, Heather Howitt, and her colleagues are eager to draw from others' experience and expertise--specifically, from people who have been down the company-building road before. "Strategically, they're one of the strongest groups I've seen for a small company," observes Dwight Sinclair, an Oregon Chai investor and board member, who puts his 11-year food-service background to work advising the company.

Because they harbor no illusions about their business sagacity, Howitt and company always have their feelers out. Howitt recalls that the local paper ran a story about Rex Bird's departure from a Mexican-food chain, which he'd helped take public. "We've got to get this guy," she told her colleagues. And they did.

Howitt and her eight employees possess a rare quality. "We know what we don't know," she observes, "and we're not afraid to ask for help." Since its inception, in October 1994, Oregon Chai has assembled a board of directors that any corporation could covet. Joel Lewis, the advertising exec who was responsible for putting Lipton iced tea into a can, and who currently counts Nestlé and Carnation as clients, handles branding and advises Oregon Chai's marketing director. Sinclair, a broker responsible for the California rollout of Wholesome and Hearty's Gardenburger, oversees sales and distribution. Bird, a 21-year food-service-industry vet, directs operations. A partner at a prominent Portland law firm handles the start-up's legal affairs. A boutique investment firm arranges its financing.

THE PRODUCT. The Pacific Northwest spawns trends. First it was coffee. Next came Microsoft and microbreweries. Then grunge. The next trend?

Chai.

Chai? Well, maybe.

Chai rhymes with high, and the ch is pronounced like the ch in chair. Chai is the generic word for tea throughout parts of the Middle East, Asia, and Africa. In this country it refers to a sweet, spicy, milky beverage that combines black tea, honey, vanilla, and spices such as cinnamon, cardamom, ginger, and even pepper. Though it's been sipped hot and cold for centuries in India and Nepal, chai first appeared here during the 1960s and survived as a local phenomenon in crunchy communities like Boulder and Portland. Now Howitt and company intend to make the drink as ubiquitous as caffè latte.

THE MARKET. "Every year there's a product of the show. A couple of years ago it was syrups, in 1995 it was baked goods, and in 1996 it was chai." Colin Campbell, editor of the trade magazine World Coffee & Tea, was making the rounds at the annual trade klatch known as Coffee Fest, in Seattle. Four chai companies bought booths here in 1996, and they spent most of their time defining the product for quizzical visitors. "We don't consider ourselves a tea or a coffee. But we do contain tea, and we're kind of like a latte," explains Oregon Chai chief operating officer Brian Ross for the umpteenth time.

Different chais have different tastes. "Mine's more peppery, gingery," says Jan Drabek, whose company, the Chai Guy, also exhibited at Coffee Fest. But the most significant difference between Oregon Chai and its competitors is the company's strategic approach to winning a piece of the projected $3-billion specialty-coffee market (and $2.7-billion tea market). "These guys," says J.B. Groh, associate director at Crown Point Group Ltd., the Portland investment firm that has helped Oregon Chai raise $450,000 to date, "are more aggressive from a marketing standpoint than their competitors, many of whom seem content to remain backwoods mom-and-pops selling chai out of the back of a VW bus."

"We are definitely a culture unto ourselves," concedes Claudia Murray, who has been brewing her LiveChai product in Boulder, Colo., since 1990. The six principals of another competitor, Sattwa Chai, who live and work together in Oregon Chai's backyard in the wine country outside Portland, describe their foray into chai in spiritual terms. "What's important to us is not being entrepreneurs but living a healthy life. We have a purpose and are involved in a healing journey, but we have no idea where it will lead," explains Sattwa's Faye Fields.

THE STRATEGY. The willingness of Oregon Chai's founder and her employees to seek the advice of experienced professionals has already paid off. For instance, Sinclair taught the first-timers the merits of using contact-management software and schooled them in distribution practices. "We had no clue about these things," recalls Ross. Since Sinclair's arrival, in September 1995, the company's distributor list has swelled from 6 to 130, and Oregon Chai picks up new accounts daily. The company's polished marketing and point-of-purchase material--designed by board member and 40-year ad veteran Lewis--has attracted some of those accounts. "I like the way they put their program and packaging together," explains San Francisco distributor Norm Weil of Gourmet Express about his decision to carry Oregon Chai. "Their competitors are not as professionally handled--a bunch of folks stuck in the '60s."

The veterans who are approached for advice say it's hard to turn down bright young people with passion and a high-quality product who ask for help. "There are two types of people who start companies: people who know it all, and people who seek out information. The folks at Oregon Chai are an excellent example of the latter," remarks ad man Lewis. "The Oregon Chai people are open-minded about where they should be and how they should get there. To me, that's evidence of a company that wants to do it right," he says.

Oregon Chai's advice-seeking attitude has also served it well in the marketplace; distributors and retailers have provided the start-up with some invaluable suggestions. Early on, Howitt decided she would sell Oregon Chai in liquid-concentrate form in the interest of product consistency and simplicity, but her choice came at a price: unlike Snapple or Earl Grey, Oregon Chai (which is made by mixing together equal parts concentrate and milk) is a completely novel tea product, unfamiliar to most consumers. To compensate, the start-up relies heavily on in-store demos and free samples, and Oregon Chai's packaging even depicts milk and concentrate being poured together. Still, it was one of Oregon Chai's distributors, Sunshine Dairy Foods, in Portland, that came up with one of the start-up's most effective chai edification strategies: "Show up in the morning with some chai before our teamster drivers head out," sales rep Doug Warrick recalls suggesting to Howitt. "Morning" to Sunshine meant between 1 a.m. and 5 a.m., but nevertheless, Howitt dutifully set up a sample table and passed out chai in the dark to truckers. Now when milk accounts ask if Sunshine has chai, the drivers know exactly what they're talking about.

Howitt has another distributor to thank for Oregon Chai's pricing strategy. After researching competitors' prices, she initially charged direct customers--cafés, for example--$2.50 per quart of Oregon Chai. Then a distributor tactfully pointed out that that price would undercut his business to similar accounts and didn't allow enough of a margin to make carrying Oregon Chai worth his while. "We totally overlooked the distributor's markup--typically 25% to 30%," Howitt concedes. Today Oregon Chai moves 90% of its product through distributors, for $3 a quart (or $16 for a 1.5-gallon food-service size), whereas direct accounts are charged $5 a quart, prices that are roughly comparable to those of Oregon Chai's competitors. While it would be prohibitively expensive for Oregon Chai's small staff to ship the liquid chai to individual consumers, the company's Web site (www.oregonchai.com) has a map to steer interested folks toward a local distributor or retailer. It also solicits recommendations from those who live in areas where Oregon Chai has yet to sign up distributors.

Howitt's instincts led her to coffee bars, universities, ski resorts, and upscale restaurants to sell chai; the product ended up on retail shelves a little more serendipitously. Oregon Chai was selling so well at the espresso counters of Nature's Fresh Northwest, a Portland-area chain of natural-foods stores and one of the start-up's early accounts, that the chain's buyer virtually insisted that Howitt put chai into a retail package. The start-up hastily slapped a bar code and an ingredients label on its bottles; today, thanks to ad guru Lewis, Oregon Chai boasts a comprehensive point-of-sale program--complete with posters, stickers, table tents, menu strips, and shelf talkers, "all these things I'd never heard of," Howitt confesses. While food-service operations are still Oregon Chai's leading vendors (constituting 55% to 65% of its accounts), specialty and natural-foods stores are second (representing 35%).

FINANCIALS. To date, Oregon Chai has funded itself with what it calls "smart money"--the $450,000 of equity financing raised through Crown Point and an additional $200,000 from outside private sources. The boutique investment firm and several of its backers agreed to help the start-up largely on the strength of its board. Currently, the company is debt-free, having retired a $50,000 Small Business Administration loan last year. It recently secured a bank credit line of $150,000 to finance its growth.

Unlike most of its small competitors, Oregon Chai has turned a profit, as of last March. Howitt pours every available penny into marketing, distribution, and production. There's no money to waste. Oregon Chai's packaging, point-of-purchase material, business cards, and stationery are attractive and slick. Its 1,056-square-foot headquarters, on the other hand, are dingy, but at $885 a month, the price is right. Until recently, the company couldn't afford a receptionist or a cleaning service, but at one point it spent $250,000 to get into aseptic packaging.

Before they fortified themselves with the counsel of their experienced board members, the novices at Oregon Chai made some costly gaffes, and the start-up's bottom line has felt the precipitous steepness of their learning curve. They've flushed at least $40,000 worth of product down the toilet or dumped it in a cow pasture--that's the price paid in production casualties of botched batches. Early on, the company also forked over $25,000 to escape an exclusive three-year relationship with one distributor.

But the company has been rewarded for its efforts with impressive revenue growth. Annual sales climbed from $20,000 in 1994, to $190,150 in 1995, to $963,984 last year. Available in all 50 states and in 3,500 locations, Oregon Chai is now the most widely distributed chai in the U.S. market and the number-one-selling tea in natural-foods stores, according to Mountain People's Warehouse.

OUTLOOK. Still, mention chai and you mostly draw blank stares, even in the coffee-crazed communities of the West and Pacific Northwest, where the drink has its greatest following. But familiarity with it is growing. Chai companies are popping up in Vermont. There are chai chat rooms on the World Wide Web. And even LiveChai's Murray is appreciative of Howitt's role in boosting chai's popularity. "I feel that Oregon Chai is doing a great job of getting the word out," she says.

Oregon Chai lands ever-larger national accounts, like Nordstrom, Seattle's Best Coffee Inc. (SBC), Trader Joe's, and Whole Foods Market. While Howitt still fantasizes about the future--"There's so much we can do!" she says with a sigh, going on to tick off possibilities ranging from chai cheesecake to a national chain of chai houses--her advisers insist that she concentrate on building sales of the company's current product: the liquid concentrate. "We have a winner and need to focus on it right now. Rex taught me that," Howitt says. "It would be great to be a $100-million company," she muses. Her conservative business plan, however, projects a different goal: revenues this year of just $2.8 million.

Sources: Oregon Chai and Specialty Coffee Association of America

*Above estimates are for a hot steamed chai. A cold chai takes considerably less time to prepare, and unlike a latte, doesn't incur any capitalization costs on the espresso equipment.
Chai Versus Latte
More Net Profit Cup for Cup
10-OUNCE CHAI 10-OUNCE LATTE
Cost of raw materials
Chai $.32
Milk $.08

Total: $.40
Beans $.10
Milk $.08

Total: $.18
Average preparation time
15 seconds* 30 seconds
Average sale price
$2.25 $1.75
Net profit
$1.85 $1.57

Feedback: What the Experts Say

Is there room for yet another specialty drink?
Opinions are mixed. While few dispute tea's rising popularity, purists like Frank Miller of Blue Willow Tea Co., in Seattle, look down on chai as faux tea. "I don't get excited about highly processed foods. What's so sensual about opening a bottle of concentrate?" But, notes Seattle's Best Coffee's director of quality assurance Dave Wickberg, citing the popularity of sweet novelty coffee drinks, "Chai has what people go for in coffee drinks." Proponents also cite chai's larger profit margin. (See "Chai Versus Latte: More Net Profit Cup for Cup.")

Is a single product enough to build the brand?
Experts disagree. "Oregon Chai should stick to its knitting," advises David BenDaniel, a professor of entrepreneurship at Cornell University's Johnson School. "Once the company dominates a niche, then it can gradually widen its beachhead by building contiguous products." On the other hand, to make a significant impact on the market, Oregon Chai "needs to develop a line of products fairly quickly," argues Gary A. Goldberg, director of culinary arts at the New School, in New York City. "When you have more than one product, you have more shelf space, and you increase your identity."

What about the big players?
"The chai market is embryonic but growing, and we're certainly keeping an eye on it," notes Peter Goggi, director of tea buying for the approximately $1.2-billion Lipton tea behemoth, which is now serving a chai product of its own at the Lipton Teahouse in Pasadena, Calif. Chai's Seattle neighbor Starbucks has been selling dry chai in a tea bag since early 1995. Starbucks even discussed buying Oregon Chai's concentrate recipe in September of that year. Howitt boasts, "We turned them down."

Isn't Oregon Chai a prime acquisition target?
Both BenDaniel and Goldberg agree that Oregon Chai's best chance for survival is to be acquired eventually by a strategic partner. "I don't think they want to build a diverse, general food company, even if they talk that way," says BenDaniel. "Oregon Chai will definitely be of interest to acquirers as it grows," agrees San Francisco­based investment banker Anne Vrolyk. "There will be companies that will want to knock the product off, but if Oregon Chai has successfully solidified its brand awareness, the brand will continue to build significant value and will be attractive for acquisition." But Sophia Collier, an entrepreneur who sold her own Soho Natural Soda beverage line to Seagram's after growing it to $25 million in retail sales, disagrees. "Oregon Chai is sustaining a high price point based on novelty," she says. "As the novelty wears off, its price premium over latte will erode, and with it, Oregon Chai's distribution. The company should concentrate on profitably delivering its product to retailers at the same cost as latte. It's unlikely that an unprofitable company making an unprofitable proposition to retailers will exist in the long term, much less be acquired by a major consumer-products company."

Alessandra Bianchi is a contributing writer at Inc.


Resources

The Specialty Coffee Association of America (SCAA) offers a variety of resources for lovers of coffee as well as tea, including books, training manuals, and conferences. The SCAA also runs the University of Specialty Coffee program, which features an extensive curriculum, complete with espresso labs and brewer-technician-certification training classes. You can contact the SCAA by phone (562-624-4100) or E-mail ( coffee@scaa.org), or visit its Web site.

The Republic of Tea: The Story of the Creation of a Business, As Told Through the Personal Letters of Its Founders, by Bill Rosenzweig and Mel and Patricia Ziegler (Doubleday, 800-223-6834, 1992, $15), chronicles the rise of one of the most successful new beverage companies of all time.

DAVID BENDANIEL, Johnson Graduate School of Management, Cornell University, Ithaca, NY 14853; 607-255-4220; djb16@cornell.edu 66

REX BIRD, Rex Bird Consulting, 6823 SE 32nd Ave., Portland, OR 97202; 503-788-5065; rexbird@aol.com 66

BLUE WILLOW TEA, Frank Miller, 911 E. Pike St., Seattle, WA 98122; 800-328-0353 66

CROWN POINT GROUP, 1099 SW Columbia, Suite 350, Portland, OR 97201; 503-241-0887 66

GARY A. GOLDBERG, Culinary Arts, The New School, 100 Greenwich Ave., New York, NY 10011; 212-255-4141 66

JOEL LEWIS, Lewis & Partners, 433 California St., Suite 200, San Francisco, CA 94104; 415-362-7511; jlewis@lewis-sf.com 66

LIVECHAI, Claudia Murray, P.O. Box 7329, Boulder, CO 80306; 888-548-3244; fax, 303-545-2485 66

OREGON CHAI, Heather Howitt, 725 SE 9th Ave., Portland, OR 97214; 888-874-2424; nirvana@oregonchai.com 66

SATTWA CHAI, P.O. Box 805, Newberg, OR 97132; 888-841-CHAI 66

DWIGHT SINCLAIR, Sinclair Group, 533 Airport Blvd., Suite 400, Burlingame, CA 94010; 415-579-0998; vegenarian@aol.com 66

ANNE VROLYK, Vrolyk & Co., 433 California St., San Francisco, CA 94104; 415-837-1000 66

WORLD COFFEE & TEA, Colin Campbell, 1801 Rockville Pike, Suite 330, Rockville, MD 20852; 703-750-3184; cac.inc@ix.netcom.com 66

Last updated: Sep 1, 1997




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