Monday, August 15, 2011

The Business of Tea: The Challenge and Struggle.

You usually don't hear about the business of the tea industry or the challenges that require creative solutions in order to stay relevant and top of mind. Tea is a $9 Billion industry and deserves some attention. As a result, today we'll take a snapshot of what it's like in the Tea Biz.

Here is a common misconception: once you have a product line and find a customer you start making money and ultimately over time you'll succeed if they keep buying. Sadly, that couldn't be further from the truth. Here is the make money you need money. This is a poor capital market where angel investors are acting like private equity companies and private equity companies are acting like venture capitalists. It's a true bane on many small companies that need constant cash infusions to remain competitive. There are even greater challenges with banks and their ability to lend. Small businesses are not seen as good opportunities for investment by traditional financial institutions anymore.

Small business owners make very difficult decisions based on a desire to want to see the business succeed. The typical capital infusion decision tree is either to give up a large percent of equity to support the vision or depend on an organic but slow growth in an industry where innovation is the differentiator. Village Tea has been fortunate that we're still new, unique and have a national foot print but there is always an opportunity for growth.

The challenge: Long lead times on product development combined with short retail delivery times. Depending on the product line and time of year, the lead times on production could be as far as 60 days. However, retailers ask for 30 day delivery and with long lead times you can imagine where you spend a majority on your money - inventory. A quarter or more of your cash is usually invested in inventory.

The struggle: Keeping the consumer engaged. As a new brand, no one knows who you are and people buy items in 3 ways:

1) what they are familiar with
2) what their friends tell them to buy
3) new and shiny things.

Unfortunately, the volume generated by #3 is about 1/16 of the total which means that "new" isn't sustainable long term. What is sustainable is a forced exposure that generates trial at the store level. However, demo's are expensive.

I write this to encourage the angle investors, who sit on the side lines looking to jump in but at a price where the business owner has to give up his life's work, to be kind. I write this to encourage, the private equity group that always "likes" the business but wants to see $1M in EBITDA before they jump in, to simply jump in. I also write this for my entrepreneur colleagues. Keep your chin up. It'll get better for all of us. Maybe you'll get a bunch of dedicated consumers like this young tea lover below and capital won't even be an issue anymore.

- Posted using BlogPress from my iPad

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