Case Study: How Timing Is Everything
Eric Heinbockel couldn't believe his good luck. Just a year after launching his chocolate company, Chocomize, with two friends in late 2009, he received an e-mail from a large European luxury retailer. The brief message held out an offer that might launch the little chocolate company into orbit. The retailer wanted Chocomize to make 15,000 bars, which the retailer would give to its customers in high-end stores in New York City, Miami, and Los Angeles during the Christmas shopping season. The deal would be huge for the Cherry Hill, New Jersey-based Chocomize, which at the time was selling fewer than 150 candy bars a day.
The offer certainly seemed enticing. Getting Chocomize candy bars in front of thousands of affluent customers around the country would be a huge marketing coup. But Heinbockel, 25, along with co-founders Fabian Kaempfer and Nick LaCava, both 24, knew the company would have to scramble to fill such a massive order in time for the fast-approaching holiday season. And they worried about the financial fallout, as well as the possible damage to the company's reputation, if they botched the order. "We lost a lot of sleep," Heinbockel recalls. "The fear was we'd commit and it would turn out to be an absolute disaster."
Heinbockel and his partners met while they were students at Columbia University. They often talked about starting a business and were struck by the mass-customization movement that was sweeping industries from cereal makers to sneaker manufacturers. Why not apply the same concept to chocolate? Customers could choose their own combination of ingredients and toppings, like marshmallows, raisins, or coconut bits, to be mixed into candy bars. They knew that Chocri, a Berlin-based customized-chocolate maker, was already doing just that in Europe, and Kaempfer approached the company about bringing the concept to the U.S. Chocri, though, had already begun plans for its U.S. rollout. So the three decided to launch a customized-chocolate operation on their own.
With $80,000 in start-up capital from friends and family, Heinbockel and team got off to a solid start, thanks to coverage in food blogs and a mention in O, The Oprah Magazine. (LaCava left the business in hopes of making the 2012 U.S. Olympic rowing team but still owns a stake in the company.) The summer of 2010 was slow, but Chocomize was hanging on. Then the e-mail arrived from the luxury retailer, whose marketing managers had read about Chocomize.
The offer was tantalizing. But the big prize, Heinbockel and Kaempfer soon realized, would come at a price. The prospective client, it turned out, wanted the candy bars at cost, figuring the PR value of the deal made such an arrangement worthwhile. That might be true, Heinbockel and Kaempfer thought, but there was also the question of just how many chocolate bars the company's tiny 1,500-square-foot production space, with its three chocolate machines, could churn out. After crunching the numbers, Heinbockel estimated that Chocomize could, at most, handle an order for 10,000 customized bars—not 15,000.
Though the retailer was fine with 10,000 bars, Heinbockel and Kaempfer fretted that somehow they had miscalculated and feared they would discover the deal would wind up a money loser. They also discussed what would happen if they failed to produce the full 10,000 bars. "At that point, it wouldn't have been unreasonable for them not to accept the smaller amount we did produce," says Heinbockel. The sheer volume of the order, moreover, meant the company might also have to shut down its online sales during the holiday shopping season, thus alienating its fledgling base of online customers. By the time Heinbockel and Kaempfer ran through all the scenarios of what could go wrong, their heads were spinning.
Even so, they weren't ready to pass up such a rare opportunity. The pair figured the deal might be a lot more palatable if they could find a subcontractor to produce the bars. Kaempfer spent two days searching the Web and his own contacts for contract manufacturers. But it soon became clear that finding the right partner on such a tight schedule would be impossible. "A couple of them only did solid chocolate bars, and another company only did bars with fillings," Kaempfer says. No one, moreover, had experience making bars with the type of melted toppings that Chocomize used. A week after receiving the offer, the co-founders were once again leaning toward taking a pass on the contract.
There was just one nagging problem: Online orders had been decidedly sluggish in recent months. At the end of each day, Heinbockel checked his e-mail to see how many customers had placed orders. The pace wasn't picking up, as Heinbockel and Kaempfer had hoped. Would the Christmas season bring the burst of sales they needed? Maybe taking the plunge and going for a do-or-die marketing deal wasn't such a crazy idea.
The Chocomize co-founders were about to find out what a lot of others thought of the idea. Anita Tucker, a professor at Harvard Business School, had contacted the co-founders after reading a magazine story about them. She was teaching a course on product customization and asked if Heinbockel and Kaempfer would speak in front of her class. They figured such an exercise would be a great way to gauge whether they had missed anything in thinking about the big order. "It was an opportunity to take another look," Heinbockel says.
In late October 2010, the pair presented their company and its challenges to two classes of about 90 M.B.A. students each and laid out their dilemma on the big order. They were nervous about looking like novices in front of the B-school crowd, recalls Heinbockel. The presentation went well, but the response from many students was that doing the deal with the luxury retailer would be a mistake for all the reasons that had concerned Heinbockel from the start.
The Decision Still, it was almost as if the Chocomize team was looking for reasons to ignore its better judgment. After the class, Heinbockel and Kaempfer chatted with an M.B.A. student who had worked as a candy buyer at Walmart. The student gave them the name of two contract manufacturers that might be a good fit for the job.
Kaempfer called the subcontractors the day after he got back to New Jersey. One subcontractor was out of the question, because it required a minimum order of 50,000 bars. The other would do a 10,000-bar order, but there were difficult logistical issues to be worked out, such as how to use Chocomize's imported Belgian chocolate with the subcontractor's machines and faithfully reproduce the brand's packaging. "They needed a lot more lead time" to make it work, Kaempfer says. The pair sent an e-mail to the retailer: They reluctantly would have to decline taking on the order. "You don't get an opportunity like this every day," Kaempfer says. "But we finally realized we couldn't do it."
Fortunately, online sales picked up, and holiday sales were strong. In November, moreover, Heinbockel and Kaempfer got calls to appear on three morning network-TV shows, spots that came through a combination of pitches by the co-founders to one of the shows and mentions in The New York Times and USA Today. The TV appearances set off a wave of orders. Sales from Thanksgiving to New Year's accounted for nearly 40 percent of 2010's $400,000 revenue. Best of all, the deal with the big retailer may be back on for this year. Kaempfer has sorted through most of the details with the contract manufacturer so Chocomize will have a ready supplier for future bulk orders. And executives at the retailer have signaled to Heinbockel and Kaempfer that they would like to talk later this year about an order for the 2011 holiday season.
As for 2010, Heinbockel says, he and Kaempfer have no regrets over turning down the offer. "We don't want angry customers who, at best, are lost to us and, at worst, destroy us on Facebook and Twitter," Heinbockel says. "We would rather be safe than sorry."
The Experts Weigh In
Focus on Quality
The co-founders of Chocomize were smart about assessing the risk. Going forward, they need to decide whether they want to be in the business of filling those bulk orders. There is probably good opportunity with large organizations like hotels and airlines. But they need to look at the margins on those deals to see if it makes sense. If they do decide to pursue those customers, they should build a relationship with a contract manufacturer and do a small test run. That will allow them to be sure the product looks the same and tastes the same as their own bars.
David Hennessey | Marketing Professor | Babson College, Wellesley, Massachusetts
Build the Brand
Turning down this contract was a mistake. Heinbockel and Kaempfer need to build a brand and get their product into the hands of consumers. I think they gave up too easily. Worldwide demand, especially for discretionary products, remains low right now, so there is a lot of manufacturing capacity out there. I think they should have been more aggressive in finding a contract manufacturer to do this for them. They weren't aggressive enough in finding a way to say yes.
Dave Gardner | Founder | Mass-customization-expert.com, San Jose, California
Heinbockel and Kaempfer made the right call. One of the easiest ways to screw up a small company is to get too successful too soon and fail to execute. The co-founders risked ticking off loyal customers if they took the order and couldn't service those existing loyal clients. But one thing they need to keep in mind is that mass-customization businesses need to have excess capacity built into their manufacturing system to meet spikes in demand like this. Ideally, Chocomize wants to invest in its own operations to be able to fill these types of orders.
Joe Pine | Co-founder | Strategic Horizons, Aurora, Ohio