Tom King, CEO of Jo's Candies, sells almost exclusively to huge companies like Starbucks and Borders. He offers four rules for doing business with giants who could easily wipe you out.
To the outside world, Tom King is just a maker of chocolate-covered graham crackers. But his real expertise is knowing how to manage the big companies that buy from him
About a year ago, while he was in San Francisco calling on Williams-Sonoma, candy manufacturer Tom King met one of his longtime mail-order customers. Louise Groper, a self-confessed "foodie," had been buying candy from King ever since she'd read about his chocolate-covered peppermint crunch in Food & Wine magazine three years earlier. As he'd done with so many of his customers, King had struck up a phone relationship with Groper. Over time he had begun to confide in her some of his more vexing business issues.
Groper's more than 20 years of experience as a buyer for Boston Bed & Bath made her a particularly helpful sounding board for King, who was expanding by selling his products to large and powerful companies. "I'd tell her about my deal du jour," recalls King, and Groper would, as she says, "walk him through the mechanics of the deal."
Since 1991, King had been transforming Manhattan Confectioners Inc., doing business as Jo's Candies, from a tiny storefront chocolate shop in a Southern California beach community to a rapidly growing wholesaler of chocolate-covered graham crackers, available in upscale retail and coffee chains like Nordstrom, Williams-Sonoma, Seattle's Best Coffee, and Starbucks. Revenues had been doubling every year, and King's grahams were carried in some 3,000 locations.
King loves to proclaim, "I built this business on one product, a bulk product at that, with no packaging." But his boast obscures the quandary underlying his growth: although the majority of his $2.6 million in revenues last year did indeed come from a single product--graham crackers that were typically displayed in that most valuable of countertop real estate, near the cash register--the few owners of this real estate played an all-too-crucial role in pushing the company's growth upward. Jo's Candies has a customer list that anyone would envy (see "Sweet on Jo's Candies," below), and it's no coincidence that the candy maker's five-year growth rate of 1,064% (1993 revenues: $221,000) has coincided with the healthy growth rates of many of those customers.
But those blue-chip accounts constitute 75% of the company's revenues--meaning that King had better be as much in the business of managing those relationships as he is in the business of dipping grahams in chocolate. He's in a delicate position. It's one he shares with just about any entrepreneurial company competing for consumers' share of mind in today's economic climate, in which rampant consolidation has made mass marketing prohibitively expensive for the lone bootstrapper. "It's incredibly hard to go it alone and build your own brand. For the capital-constrained entrepreneur, leveraging the distribution channels of large customers is a great way to launch a business," observes Amar BhidÉ, who has taught entrepreneurship at Harvard Business School and is writing a book on new businesses.
But what if one of King's biggest customers decides to make its own chocolate-covered graham crackers tomorrow? Nice as it is to piggyback onto the growth rates of the big players, isn't Jo's Candies at their mercy? "I frequently wonder why people go into such businesses," muses BhidÉ. "Unless you're in a high-margin business where you have customers hostage to the same extent that they have you"--he cites information-systems provider EDS as an example--relying on a few large customers can be risky over the long term. Even King's banker, Barbara Van Wormer, vice-president at City National Bank in Beverly Hills, keeps a watchful eye on his predicament. "The fact that large customers are attracted to his products gives him some clout," she says, "but at the same time, his dependency is something we will keep very close track of as we go along, so that if one falls out, it won't cause a great problem."
King is hardly oblivious to the inherent precariousness of his strategy. "Big guys will always dictate to little guys," he flatly states. "I'm not going to say I don't have any worries, because I do. But you can't put a patent on food, and I can't worry about things beyond my control." Besides, King isn't so sure that his big-company customers are as out of his control as even they might think. Other entrepreneurs may deride Jo's Candies as a captive supplier, but King doesn't consider himself anybody's hostage.
Not that he doesn't sometimes feel worn down by all the haggling involved--something that came across to Groper when he met with her last year. "When these large companies were beating me up, I felt increasingly cynical, bitter, and frustrated," says King. The 48-year-old Southern California native, who still relishes the perfect wave, was working seven days a week. As he discussed his growing dissatisfaction, he began to envision a role that Groper could play in helping him take his strategy of managing big-company customers to the next level. Since winning his first account, in 1991, King has managed his company according to a handful of rules that any entrepreneur doing business with much-larger entities would do well to keep in mind:
It's Your Job to Help Them Feel Special
R.J. Selfridge was in a bind. for the opening of Nordstrom's South Bay location, in 1986, the head of the retailer's restaurant division needed 2,000 giant Driscoll strawberries dipped in both light and dark chocolate within two days. (The chocolatier he'd signed up with had disappeared.) At the suggestion of a coworker, Selfridge called King. "He just said, 'OK," recalls a somewhat-incredulous Selfridge.
That serendipitous strawberry assignment proved to be critical five years later. In 1991 prolonged city street construction hampered customers' access to King's store, and he also went through a life-threatening bout with peritonitis. Business at Jo's Candies was suffering to the point that King was advised by his accountant at the time to file for bankruptcy. "I was too proud or too vain to do it," he recalls. "I felt that the stigma would be horrible." At the time, King had a minuscule mail-order business for his chocolates. He decided he would try to expand it and add wholesale distribution.
His first call was to Selfridge, whom he began plying with samples of the graham crackers. "I'm a sucker for chocolate anyway, but Tom elevated this rather basic relic of my childhood to a new level," says Selfridge. (Unlike most versions of the sweet, King's is made up of three parts chocolate to one part graham cracker.)
Within a year and a half, King's cookies were carried in 77 Nordstrom espresso bars, and the candy entrepreneur started making the rounds at coffee trade shows. King, who feels his stout physique only lends credibility to the quality of his product--"Never buy chocolates from a skinny guy," he cautions--offered generous samples of his wares to all comers, maxing out 12 credit cards to their $10,000 limits to finance his marketing efforts.
While the Nordstrom seal of approval initially lent him visibility and credibility--coffee chain Gloria Jean's signed on after one of its buyers sampled King's product at a Nordstrom in Chicago, for example--King learned that he had to play that card carefully. He discovered that most companies he dealt with, large as well as small, wanted to avoid having a "me-too" product. "There's a strange subconscious impulse to always seek out the most unique thing," notes King. The candy maker learned never to volunteer his customer list unless a buyer specifically asked.
He also learned how to make customers feel unique, even though they were each buying essentially the same product. One company might want its grahams in a special-sized acrylic case; another might want the grahams completely unwrapped and unpackaged. That's fine by King, who goes to great lengths to accommodate requests. When retailer Borders Group Inc. wanted a custom-label three-pack of the grahams for its bookstores, and Williams-Sonoma and Starbucks wanted specially prepared products for their direct-response catalogs, King went along with their wishes. "I will compromise as much as possible," he says.
You Must Make It Easy for Them to Work with You
Another key part of King's strategy is giving each customer close, personal attention. "I always try to communicate with major customers once a week--by fax, phone, or E-mail--and try to meet with my largest accounts face-to-face every four to six weeks," King explains. In meetings, he always relies on a written agenda, which he edits down to be as short as possible (never more than two pages) and from which he rarely deviates. "You have only a finite amount of time before your customer gets distracted with other items," he cautions. "Get to the point." King describes himself as "very anal" about keeping track of the birthdays and anniversaries of his customers and distributors (he has 11 sales reps spread around the country) and hopping on a plane when something goes wrong to "make nice" and rectify the situation. That might involve sharing an anecdote to break up a tense negotiation or working out some sort of compromise when a customer wants an exclusive deal--agreeing to the exclusive for a three-month trial period, for example, before shopping his grahams to a competing chain. (In some cases he'll grant exclusives for longer periods but with volume guarantees attached. "Usually, they can't make the guarantee, so they back down," notes King.)
King frequently recommends price points for the grahams, for example, and he always guarantees each sale. If after three months a retailer is dissatisfied in any way, King will buy back the product--in six years, he's had to do it just once, from a retailer who left a case of the chocolate-covered crackers in the sun.
When very large customers are being particularly sticky or recalcitrant about contract specifics, King has gone so far as to casually mention to them that if they're not happy with his terms, they could always buy him out. "I use it like a chip," he says, while noting that to date, no customer has made such an offer. Of the possibility, he says, "if the numbers were right, I'd go work for one of them--running it like my own company but with their best interest at heart."
King's personal touch makes particular sense, given the discrepancy in size between Jo's Candies and its customers. "In business-to-business transactions, the size of the company does not matter as much if the process is honest, straightforward, and full of value," notes Kash Rangan, professor of business administration at Harvard Business School. He adds that "once a large company trusts that the small one is a good supplier, it will likely relent some of its power--by not browbeating on price," for example. "That trust and commitment play out over time to a more equitable relationship," Rangan notes.
Usually, anyway. But King has felt at least once the crushing strength of a big company bearing down on him. Looking back, he likens the incident to "seeing your spouse cheat on you through a two-way mirror."
You Can Never Forget: They Could Wipe You Out
In 1994, King began to hear alarming rumors that his precious Nordstrom account might be in jeopardy.
First one regional manager decided he could make his own chocolate-covered graham crackers more economically in Nordstrom's in-house commissary. Then others quickly followed suit. Before King knew it, he had lost all but six of his Nordstrom locations. John Clem, the general manager of Nordstrom's restaurant division, declined to comment about the lost Nordstrom accounts, citing the company's policy of rarely discussing its vendor relations. "To their credit, if Nordstrom sees a great product it can replicate, it will," says Selfridge, "but in this case I think they're being penny-wise and pound-foolish." (Selfridge left Nordstrom in 1993 to help launch Tully's, now a 70-unit specialty coffee chain--and a Jo's Candies customer--with headquarters in Seattle.)
"I was devastated when we lost Nordstrom," King remembers, and not just because of the fact that at the time the giant retail chain represented more than 50% of his then $440,000 business. For Nordstrom it was just a matter of economics, but King took the blow "very personally," he says. "I had a real attitude and asked myself, 'How could they do this to me?"
Though he began to worry that other customers might follow Nordstrom's lead, King concluded that "it didn't do any good to expend my energy lamenting lost business." He cites at least two valuable lessons learned from the debacle: the importance of expanding his customer base, and the dangers of being a one-product company. Today, no one customer of Jo's Candies can account for any more than 60% of its business (and he's trying to keep that percentage lower). "Whenever I get proud of myself and trot into my accountant's office like a lab retriever, saying, 'Look who I've landed,' he'll say, 'That's great, now go out and get three more," jokes King. King's CPA, Gordon Michie, a partner of Smith-Linden & Basso LLP, in Newport Beach, Calif., appears pleased with King's progress, describing him as "a chocolate guy who's becoming a very good businessman."
He needs to be. At least a half dozen companies, he estimates, have copied his confection since he began. "Yes, it hurts," King admits, "but it just challenges me to create new combinations to be one jump ahead of them."
Over the past four years, King has been gradually phasing in new products. (His first, Dr. Peter's Peppermint Crunch, is named after the doctor who pulled him through his peritonitis surgery.) So far, most of King's newer products are selling in gift baskets through Jo's Candies' mail-order business or to its small, upscale specialty-food retail customers, but King is beginning to focus on getting them into the hands of his large customers as well.
If Your Business Depends on Just a Few Customers, Take Them Very, Very Seriously
Diversifying enabled King to recover from the Nordstrom setback, but the company's rapid growth began to take its toll on him. The more negotiations King found himself in, the more he began to feel that he couldn't handle it all. While he could rationally tell himself that buyers were "just doing their job" when they asked for a better price, their requests felt like personal affronts to King every time. "It was the worst thing in the world," he recalls.
What's more, with just a part-time secretary until the middle of last year (in addition to his candy-making crew, which fluctuates between 10 and 25 people on an as-needed basis) to help out in the front office, King felt overextended. Then came that fateful dinner with Louise Groper last year.
They met at Draeger's, an upscale supermarket in San Mateo, which King was hoping to land as an account. (He since has.) Upstairs at Draeger's, Groper had heard, the chef from the San Francisco Ritz-Carlton had opened a restaurant.
Though King denies that he met with Groper expressly to hire her, after she so freely dispensed her opinions and advice, that's exactly what happened. "Why don't you do this for me if you have so many ideas?" King blurted out.
On January 5, 1998, Groper became national accounts/sales manager for Jo's Candies--for a whopping 40% cut in pay (and a potential bonus equal to her old salary). "I'd been a fabulous soldier all my life and thought it was time to take a risk," Groper says by way of explanation. In addition to overseeing the packaging and graphics for the new products, and keeping in touch with the company's distributors and brokers, Groper manages virtually all of Jo's Candies' key accounts--attending to the delicate negotiations. "All the gory details that get in the way of doing business," as she likes to say.
Hired along with two additional front-office people, Groper also frees King up to do what he loves--namely, play with chocolate. (The message on his voice-mail cheerily announces, "Hi, it's Tom, and I'm up to my elbows in chocolates.") "I've got at least three proven winners I will roll out in the next three years," he announces. His goal is to have Jo's Candies be a $15-million company by 2005.
King isn't worried about finding customers for the new products. (He won't say what they are, but think chocolate with lemon, cinnamon, or Oreos, for starters.) Plenty of his current blue-chip customers will be only too willing to increase their business with him. They know him, after all; they trust him. "You're selling a product, but you're also selling your reputation," says King. While he confesses that he once was "in fear" of his big-company customers, after nearly a decade of practice, calling on them now has become second nature. "I am never, ever intimidated," he says, "because I go in there prepared."
Alessandra Bianchi is a contributing writer at Inc.
SWEET on Jo's Candies
The following large customers (listed in no particular order) generate 75% of Jo's Candies' revenues: