The cofounder of Nantucket Nectars recounts how he and his partner, Tom First, started their business almost unintentionally and soon found themselves running a fast-growth start-up.
The origins of $50-million-a-year Nantucket Nectars were like those of most fast-growth start-ups: sloppy, unintentional, vaguely ridiculous, and brilliant
When Tom Scott and Tom First--both 23, fresh from Brown University, and possessed of no particular aim in life--started a come-what-may odd-jobs business from a 19-foot Boston whaler in Nantucket Harbor, they couldn't have imagined what it would lead to. Despite both having flunked the only business-related course they'd ever taken (accounting), they built their eventual company--juice maker Nantucket Allserve Inc.--into a $50-million-a-year enterprise by 1997. Ocean Spray Cranberries Inc. bought a substantial chunk of the company early in 1998, but founders Scott and First retain about half the company's ownership and remain active in its management. That they began with no such grandiose end in mind makes them anything but unique. From the simple early questions (Let's see, do we set the blender on chop or liquefy?), to the weightier later ones (This Florida guy wants to lock out other investors; should we take his half million?), they progressed through a series of challenges that almost any growth-company founder could relate to. Or would sure like to relate to, in any case. Tom Scott tells the story:
Our company really started as a boat business. In 1988, before my last year of college, I was living on Nantucket, an island off Massachusetts, driving a taxi. It was my way of getting away for the summer. The money was excellent, but I hated it, frankly. I hated working for other people. Not that I liked the prospect of working for myself, but it seemed it might be better. So I started a business, called Allserve, that involved going boat to boat in Nantucket Harbor, selling muffins and newspapers, taking trash, doing laundry. You name it, I was doing it. It was like a floating 7-Eleven.
As Allserve grew I fell in love with both the business and the lifestyle. What better life? I was outside, on a boat, making money. I was a junior in college. Until that time, I didn't know what passion was. My father had always given me the line everybody's father gives: "You're lazy; when I was your age I worked 15 hours a day." Well, one day that first July, I realized I was working all the time! Seven days a week, 16 to 18 hours a day. Not only was I doing way more than my father expected, I was enjoying it. I wasn't paying a price.
The next summer, after our senior year, Tom First joined me, and the business grew. We did towing and rescue, and we fixed boats. I got my captain's license. We became a legitimate business--though we still didn't have a lot of money to show for it at season's end. That winter we stayed on the island, trying to squeak by until the following season. We were out there with a bunch of friends, and on Nantucket winter is cold and slow. We made dinner for one another; it was a competition. This was 1989. One night Tom made this juice for dinner, peach juice made fresh in the blender. Within five minutes we were saying, "Let's sell this off the boat next summer. We'll call it Nantucket Nectars."
That's basically how we got into the juice business. We started making it fresh and sold it off our boat and out of a little storefront we'd opened. We figured out a way to get the product into recycled wine bottles. Through this period we made money off everything but our boat business. We were doing anything else on the side: painting houses, bartending. Sometimes I lived in my car; other times I lived in a group house where the heat was never turned on. In terms of making the business work financially, what we did was pay our bills slowly, collect our receivables as fast as possible, and pay ourselves nothing. That's how you finance a business. Eventually, though, we came to the realization that the boat business would always be too seasonal and too small to allow us to live on Nantucket. But the juice was a ray of hope.
I had no idea what numbers were involved in juice. I'd never heard of Snapple at the time. To us, juice was a generically packaged product--not very good. Very Fine. Lipton Tea in a can. Hood juices in cartons. Not quality. But ours was good. We were juice freaks, always drinking it because we worked outside and were hot, and you can't keep drinking Coke. So we asked the question: Why don't other companies' juices taste like this? And what is fructose syrup? I didn't know what pasteurization was and what it could do to products, or what aging could do to break down products. We didn't know any of that, but we both knew what we wanted. That was an advantage. We found that being young was an advantage, too: no wives, no kids, no mortgages, no responsibilities. If we wanted to work 14 hours a day, we did; if we didn't have money for clothes, it was OK--we didn't need clothes. We didn't need a car. Also, when we went into the factories, when we met with distributors, there was definitely a sense that, Hey, here's a couple of young kids--give 'em a break.
The other advantage we had is that we didn't know how to do cost accounting and that type of analysis. So we made the juice the way we liked it, and we didn't worry about the other stuff. We just sold it. Then we started considering mass production, and the factories told us, "You can't use that bottle. You're going to have to use high-fructose corn syrup, not cane sugar," and on and on. Now I see why the other juice companies are the way they are--the factories don't want to handle the business differently. Thankfully, we were stubborn. We didn't want to compromise our product just because the factory said so.
Anybody who knew something we didn't know about the juice or beverage business, we studied like a hawk. The business isn't high tech, although it's more complicated than people realize--or than we realized at the time. But it's learnable. People always ask, "How did you learn about those factories and all that?" You just do it. You make a lot of mistakes in the process. Nantucket Nectars is one big collection of mistakes. The fear of production, the fear of getting things mass-produced, is unfounded. Ultimately, Tom and I just operated from the shared belief that there are no rules in life; there are laws, there are ethics, but there aren't any rules. You don't have to make juice with high-fructose corn syrups, no matter how many people say that you do.
Our bottle is an another example of our approach. We started with an odd-sized bottle: 17.5 ounces. We've stayed with that same size. It was what we wanted because that seemed to be how much you want to drink when you're thirsty. It's kind of big, frankly. We started making juice when we were 23, and when you're 23 you drink a lot. Now we don't drink as much, but that size works and we've stuck with it. It amazes me that other companies all use the same bottle. Just amazes me! It wouldn't cost them anything to make their own mold. It would cost them 100 grand, and they could amortize it over 10 years. I just don't get it, but that's what they do.
Now, to any businessperson looking in, it was obvious that if a factory put in a tank just for us, it would have to charge us for it. As a result, our costs would most likely be driven up, and our retail price wouldn't be competitive. But there were advantages to our ignorance. Not knowing accounting, we didn't know how big a margin we needed. So we basically had a crummy one. We were grossing about 5%--around a dollar a case! Which is pathetic, but we didn't know it. Fortunately, our volume grew to the point where we could get more competitive, and the success of our company was based not on our margin but instead on the quality of our product. And there's plenty of evidence that people will pay for quality.
In our industry we look at Tropicana orange juice, for instance, which is number one by a mile. The 64-ounce carton of Tropicana Pure Premium is the sixth-highest-selling SKU nationally in supermarkets. It's the highest-priced item, and it's the highest-quality item--and everyone in the country is buying it. The masses, not just the affluent. That should be a lesson to everybody: people are willing to pay for quality. Not that there isn't a line you can't cross. We definitely get higher prices than most, but even with our higher-quality product we have to fight every day to keep our costs and prices as low as we can get them.
By 1993 we were up to about $400,000 a year in sales. That's when our investor, Michael Egan, came in. His yacht was one of the boats we serviced. We used to clean it. It was docked right next to our store. He happened to be the head of Alamo Rent-a-Car, which was the largest independently owned and operated car-rental company in the United States. He owned 94% of it. There aren't many half-billion-dollar companies owned by one person. So he was in a position to do what he wanted. When we decided to look for money, we contacted him.
Our idea was to get 10 investors at $25,000 and raise $250,000, selling 25% of the company. We asked Egan, who was in Florida at the time, if that was in his league, and he said, "Yeah, FedEx me the details in Florida." He had respect for a couple of hardworking young guys, but he didn't know anything else about us. The next day, though, he called and said, "I've got a plane and a hotel; you guys come down here." We'd never been on a business trip in our lives! We met with him for two days, and at the end of it he said he wanted to own more than 25% and didn't want other investors involved. "You don't need 10 investors-- you just need one," he told us. We said, OK, good. He put in half a million on the first go-round. The year following his investment, we lost $2 million because we tried to run our own distribution network--a huge mistake. Egan put in another $1.5 million after that.
The next year, 1995, we turned it around. We sold our two distribution companies and hired outside distributors. By that time, distributors saw that there was a demand for our product, and they were willing to do the right thing to help it move. We were finally in a position of strength, and that year we made a profit of $850,000. We were a $15-million company and on our way.