supermarket
Analysis
Organics & the Direct SelLing Market
January 9, 2008
To increase margins grocers often purchase farms, processing plants, business operations or compete in various ways in the supply chain cutting out middlemen. Whether large or small, organic suppliers, and all suppliers for that matter, seek barriers to entry against competing products offered by super-grocers at 30% less than their own SRP.
There are only a few obvious directions a small business can safely move in the competitive jungle. Most commonly, they seek out a strong brand name for their farm, working locally to build a reputation, and get great write ups in industry publications, selling quality and excellence. This converts to a value proposition, popularity and high prices on the shelf. And there you have the vast bulk of the green supermarket business.
Rarely is the retail chain store the only means of distribution green suppliers turn to on their way up from small to mid or big business. If you are considering starting a green business and hope to sell through any big grocer name, be aware of the facts. Purchase managers are trained to look for financial stability, longevity and strong brand recognition, as well as large mark ups as they select their products. You may have your books reviewed.
The reason is simple. Your product has to move from day one. Grocers need you to prove you will do it. It's sound fiscal policy.
As an example, Walmart and Cosco recently took up distribution of Island Way Sorbet. It would never have happend for this South Africa based supplier of natural sorbet in actual fruit half-shells if Island Way hadn't first demonstrated strong financials. Assisted by AGOA, (the African Growth and Opportunity Act), which eliminated tarrifs on product from South Africa to the US. According to Island way CEO, Adrian Vardy, making their product duty free to the US helped them reduce their retail price by at least 20%.
Island Way Sorbet is just one of 6400 products exported from 37 African countries that will benefit from the 2003 AGOA legislation, which is certainly a breakthrough. But without the strong financial backbone of its parent company, Gulf Pacific, Inc., a worldwide importer of gourmet foods, working in joint venture with Dynamic Commodities, Island Way's processor and aggregator, their success would have been doubtful. AGOA, although it is a relief from the age of appartheid embargoes, is still a difficult bureaucratic process.
Despite their success with a handful of superchains, Island Way undestands the continued need for branding through direct mareting channels. The backbone of their business in the US to this day is still mom and pop retailers and mobile vending carts.
Not just green but all gormet foods find ways to distribute products through direct sales as they negotiate with large chains. This same principal holds particularly true for the vitamin and supplement market. Health and wellness and green go hand in hand, creating a cross-over and a challenge for green supergrocers. You can purchase or imitate a manufacturing process and probably find cheaper sources for ingredients by volume negotiation, but you may have to work through complex patenting laws, as well.
An excellent example of this is Stem Tech Health Sciences. Launched on a wave of controversy fueled by politics and misunderstanding, Stem Tech offers products which increase the natural production of adult stem cells within the body by 20-30% within 30 to 60 minutes of use.
Studies have shown that adult stem cells are effective in the treatment of many diseases and for the rapid healing of injuries to the heart and liver, the skin and even the neural system, including the brain, for the healing of Alzheimers and Parkinson's Disease, made famous by Nancy Reagan, Christopher Reeve, Michael J. Fox and others. The controversy has centered on the use of human embryos as a source of farming for the DNA that is rich in stem cells ,which all of these figures and the Democratic party generally support. But despite billions of dollars of research directed toward embryonic stem cell research, the results have been dubious, because without an exact DNA match between the recipient and the donor, we are getting tumors and cancers if we get any results at all.
Adult stem cell therapy stands in stark contrast to embryonic cell therapy. Not only is there no ethical issue involved since no human embryo has to be "killed" in order to extract adult stem cells, but also, since donor cells come from the recipient's own body, always resulting in an exact DNA match, results are consistently better. Adult cells are not only an alternative stem cell rich source, though lesser known, but a superior one.
If you are at the forefront of a medical breakthrough as significant as Stem Enhance, your first objective will be to patent your product and seek barriers to competitive entry, which is what StemTech did in 2004 when they had isolated two components in Aphanizomenon flos-aquae (AFA), which triggered the migration of stem cells from their sources in the bones and skin where they are stored to any place in the body that has need of them. In a sense, Stem Enhance was the fountain of youth. Patent that and you have something truly amazing. These two components, L-selectin ligand and a polysacharide rich fraction they call "Migratose" (tm) are at the heart of patent 6,814,961, among others.
Barriers to entry are built on strong patents. Next component is manufacturing and raw materials supply. Understanding the tie between the natural food and health and wellness markets, the inventors, Christian Drapeau and Gitte S. Jensen, turned to Desert Lake Technologies of Klamath Falls, Oregon, way back in 2000, for support in R&D. DLT, which had successfully brought other blue green algae products to market, had the needed experience in aquaculture and harvesting of aqua-botanical raw material.
But even with triple blind studies and patent in hand, material source and manufacturing issues settled, distribution is the bottom line. How does a company move from concept stage, production and ultimately to maximum returns? Counting on major retailers to present the value proposition to the public was not an option. The company moved forward under the consult of a top industry professional, an MBA with a 17 year track record of success, to help guide them in the strategic planning process. After many months of analysis, Ray Carter recommended, and the team decided to form StemTech HealthSciences with Carter as CEO, in order to launch the product through the power of the network marketing industry, of all things.
Outside of the typical reasons underlying the decision to be on top of pyramid schemes, Carter's recommendation was based on the belief that conveying a value as complex as Stem Enhance in the context of a polarized political climate would require education one person at a time. Retailers are not educators. And with the exception of expensive infomercials, neither is there any other channel of mass communication that would serve their purpose. Network marketing served to convey the value of natural versus synthetically produced (read cheaper) vitamins in the 1970s, herbs in the 1980s, antioxideants in the 1990s and would do the same for stem cell therapies in the 2000s. For all of its faults, there are few who are unaware of names like Shaklee, Herbalife or Usana, companies that have withstood the test of time thanks to network marketing.
The difference is that there are many sources of vitamins, minerals, herbs and antioxidents, where competition is fierce and barriers to competition have been penetrated. Stem enhancers are largely a scientific breakthrough. StemTech hopes that its continued patenting will serve to push the company forward not just as a first mover but as the dominant force and brand name for stem cell production enhancement for years to come.
That brings us to today. The decision to distrubte by MLM now made, in the case of StemTech retail is still not entirely out of the question. In fact, a hybrid between retail and network marketing is ideal. From StemTech's perspective, Mom and Pop natural stores make great distributors since some are not automatically opposed to multi-level marketing. Carter offerrs discount start up pricing to small businesses. But there is no effort being made to court GNC, much less Walmart. As is typically the case even for those who do reach big retailers, direct sales will constitute the bulk of sales.
The world of network marketing has also undergone some improvement since Al Gore "invented the internet." The company provides web sites to network marketers which takes the fear of sales out of the equation and enables accurate duplication of marketing information at the same time, via streaming video. The individual acts as one providing a guided tour, reducing about 90% of the failure factor among non-professionals.
But for mom and pop retailers who feature certain wellness products, StemTech's hope is that the product will be introduced with some accuracy by word of mouth and through company supplied promotional materials, while they direct ship on an auto-ship plan to their customers. It provides the retailer with a low level of labor and inventory. They can place the product on the shelf at retail, but let the customer know they can get it drop shipped monthly at the wholesale price by becoming a distributor.
Mom and Pops can hold occassional business presentation meetings and get regular customers into their door to sell their other products to at full retail.
Finally, believe it or not, recognizing that a large segment of mom and pop stores is in pet supply, the company has also developed its own Stem Pet brand. This may well prove to be its best seller in 2008. We'll see.
But speaking to you organic farmers out there, SMGN is not suggesting by profiling StemTech that you start selling goat's cheeze via MLM. What we are saying is expect to continue production and distribution outside of the big retail sector for a long long time. Dedicated green grocers such as Whole Foods are subject to the same financial principles as conventional retailers. Profits and risks are always on their mind. s
By Jeff Overbeck, Freelance Reporter