Dogswell's ambitious plans had flopped. Would its new investors give the company another chance?
For Marco Giannini, it was a no-brainer, the next logical move. His five-year-old company, Dogswell, a marketer of natural dog treats, had seen annual sales of items such as Happy Hips and Mellow Mut swell to $17 million. It was time to take Dogswell into the much bigger market for natural pet food.
For years, Giannini had been itching to compete with big players such as Purina and Iams. But by late 2008, just months after launching the expansion, Dogswell seemed pinned under the weight of its ambitions. Anticipated orders weren't materializing. And thanks to an unexpectedly pricey coupon campaign, the dog-food initiative was on its way to costing the company $1 million -- four times what Giannini had estimated. Dogswell was in the midst of its first unprofitable quarter ever -- and it was on its way to another. "I felt like I was losing control of the company," Giannini says. "I felt like I was losing control of everything."
Complicating the situation even more, Dogswell was scheduled to have its first board meeting with its brand-new private equity investors in March. The investors knew that the dog-food rollout had been troubled. Soon, they were going to want to know how Giannini intended to fix things. He had three months to come up with a plan.
Giannini, 34, was no stranger to the high-stress, high-stakes gamble. His previous business, a natural-beverage company called Clear Day, had gone bust in 2003 -- the victim of overspending on an unproven concept -- forcing the entrepreneur to give up his apartment and seek temporary refuge on his father's couch. That was his headquarters when he decided to launch Dogswell later that year. The idea was to create healthy dog treats enhanced with supplements to help fight conditions such as arthritis and hip dysplasia -- something Giannini's childhood dog, Emily, had suffered from.
Giannini found a manufacturer to make the treats and then set about building his brand on the cheap. He personally drove to see some 200 pet-store owners in California, imploring them to give Dogswell's debut product, Happy Hips, a chance. Within a year, revenue hit $500,000 -- all by word of mouth. In 2008, Dogswell debuted on the Inc. 500 at No. 101, with a three-year growth rate of more than 1,800 percent. The company had 21 employees, 60 varieties of treats, and revenue of $17 million.
But Giannini was feeling claustrophobic in his dog-treats niche. "I wanted to become a household name, and I figured, food was the way to get us there," he says. Many of Dogswell's customers had the same idea: For years, they had sent the company's Los Angeles offices e-mails asking when Dogswell was going to introduce a line of dog food.
In the spring of 2008, Giannini looked at his balance sheet and decided he had enough cash on hand to take the plunge. He tapped a couple of food scientists and began working on recipes for kibble, and after settling on one that seemed right, he contracted with a food manufacturer. He sent the kibble to a testing facility to stage a series of canine "focus groups."
The result: Dogs preferred Dogswell kibble 15 to 1 over the leading natural-food brand. "That's what made us press the Go button," Giannini says. Meanwhile, his sales team hit the dog parks and retail stores to quiz people about packaging.
Product in hand, Giannini had to figure out how to introduce it. Obviously, he couldn't personally drive his product to customers, as he had in 2003. Dogswell was a national brand now, with successful accounts at retailers such as Whole Foods and Target. He would need national distribution and a full-blown marketing plan from the outset.
Dogswell invested in an East Coast warehouse and hired 15 new staff members, most of them in sales. Finally, in September Dogswell shipped its first bags of Happy Hips kibble to about 1,000 stores nationwide. To entice customers, the company offered coupons for a free $10.99 bag of kibble with every purchase of a 15-ounce bag of treats, which retails for $16 to $20.
It didn't take long for the rollout strategy to begin straining at the seams. Members of the beefed-up sales force complained that their take-home pay wasn't what they had been promised. Credit memos from stores looking for their rebates from those free $10.99 bags of food were starting to pile up.
Unfortunately, Giannini wasn't around much to deal with these problems. He and Berenice Officer, Dogswell's chief financial officer, were busy making the rounds of private equity firms, in a drive to raise capital to finance the company's brand-building efforts. At least things had been going well in that arena -- especially with TSG Consumer Partners in San Francisco. Most private equity investors had grown cautious, but TSG was continuing to invest and liked Dogswell's track record of rapid growth. By late November, TSG appeared close to signing a deal.
The fact that Dogswell's numbers were slipping wasn't immediately apparent to either party. "They asked for updates, but it was hard to detect what was different," says Officer. Indeed, Dogswell closed a deal with TSG on December 31.
But when Giannini and Officer sat down a few days later with the fourth-quarter results, the damage was clear. They had less than three months to stop the food line from siphoning off the profits from the next quarter. And they had to figure out what they were going to tell their new investors at TSG.
The Decision Giannini, Officer, and other managers regrouped to determine where exactly they had gone wrong. The biggest culprit seemed to be the coupon program, which was costing the company $100,000 a month but wasn't generating repeat buyers fast enough. The company had also been neglecting its core business. In its rush to market dog food, Dogswell had stopped offering samples of treats, which turned out to have been a big mistake. Pet food was a bigger ring at the register, but there were fewer sales, and those sales were less profitable. Officer went back to her distributors to see where, if anywhere, the food launch had been successful. It turned out that sales had actually been growing in Southern California, New England, and Washington. "I think we were pushing when we should have let customers find it themselves," says Natalie Gershon, the company's marketing director.
Giannini, for his part, dug up Dogswell's numbers from 2003. It led to a sobering realization. "I had forgotten where we came from," he says. "Yes, we did $500,000 in revenue in the first year, but revenue in our fourth month was only $9,000, and I thought we were going to have to close our doors."
Throughout the process, Giannini and Officer were in near-daily contact with Jenny Baxter, TSG's vice president. She helped match them up with analysts to mine marketing data, and she shared tactics that other companies in TSG's stable had used.
Giannini and Officer spent a week preparing their PowerPoint presentation for the board meeting with TSG. They rented a conference room in downtown Los Angeles rather than host it at Dogswell's offices, where quarters were cramped and the walls were thin. They had little idea of how the meeting would go. "We just didn't know what their reactions were going to be," says Officer. "They could have said, 'You idiots. You're out of here.' "
But the new investors were surprisingly understanding. "The food category is really difficult to enter," says Baxter. "You have a lot of deep pockets with the incumbent brands. It's a challenge to get consumers to switch from one to another." TSG gave Dogswell the green light to try a more organic approach to rolling out the new products. "It was very clear that the path for us was to grow a strong treat brand, with food second," Giannini says.
Dogswell ditched the coupon program and focused heavily on the most promising markets. "By June we were breathing happily, and by July it felt like the old Dogswell," says Officer. Sure, the company would have had more money in the bank if Giannini had behaved more like the young entrepreneur who founded Dogswell. But he seems almost grateful -- almost -- for the reminder. "With all the success, I had gotten cocky. It's like peer pressure from society that makes you feel like you have to have a cigarette or a drink. The same thing happens when you run a company."
Be More Disciplined
Dogswell put a lot of effort into making its food superior to the leading brands'. But it didn't build a comparable level of discipline about testing how it would reach the people who were going to make the purchases. The company could have made a deal, even with a single store, to do a market test, in which it tested bags on the shelf. That would have generated a learning feedback loop that could have been used to gradually, organically build up the volume -- just like Dogswell did with treats. Once you fill out all the unknowns in the business model, then you can launch big, because at that point, you actually know how consumers will behave.
StartupLessonsLearned.com, San Francisco
Don't Lose Focus
It's human nature to chase great ideas, and it's especially natural for entrepreneurs who eat, sleep, and breathe their initial product line and want to get to the next big idea. But Dogswell treats have demonstrated the potential to be a giant business in their own right. Only a small percentage of dog owners are now customers, which gives the company room to grow in terms of market penetration, diversifying the treats line, and increasing distribution. Doing fewer things -- for example, treats only -- and doing them exceedingly well can be a winning formula.
2x Consumer Products Growth Partners, Chicago
Beware the Freebies
The coupon campaign didn't push people to purchase the new food. Rather, it was a "gift with purchase" -- which is inherently less valuable than something a consumer actually pays for. A buy-one-get-one-free offer or sample offer probably would have been a stronger and less expensive tool to introduce consumers to the new brand. After all, sampling has always been a powerful marketing tool for Dogswell.
Fetching Communications, Tarpon Springs, Florida