DW8 Growth, page-15294

The vision was always to serve the entire beverage industry, but it started on the wine end by circumstance with the idea of using the marketplace to attract other beverage segments to service the entire industry eventually. No need to worry about what we have today deviating from DT’s original vision and his commitment to it -- he remains fully committed. Also, the firm has just gotten financing (with more on tap, if needed), so implying it may close down in 12 months when we still need to see what the post FY23 Q1 Project One cost savings will be and impact on the post adjustment run rate is premature. A lot can happen and straight-line assumptions aren’t always playing out as we've seen.

Your comment re Market vs. Kaddy completely misses the mark as we paid a substantial amount for Kaddy’s existing business with the explicit expectation of their team's ability to scale up with the support of DW8. In that sense keeping legacy infrastructure doesn’t make sense operationally and financially when everything shifted to Kaddy as a result of the acquisition. If anything, I think investors and the board alike should have expectations that Mike and Rich work their ****s off to justify the purchase price we paid for their venture, their equity stake, and roles they received as part of the deal. You heard their reasoning why they sold to DW8 and now that they have access to logistics and our financial backing to grow the platform’s GMV aggressively it is squarely on them do to so -- that’s their job. Mike is head of platforms and Rich is head of commercial. I don’t think it gets any clearer what their responsibility is based on job titles, areas they manage, and what’s expected of them. Sorry to be so blunt, but they are not playing at an entry-level either. When you show up to work at that level you get comp’d to perform from day 1; they’ve gotten a massive share stake and substantial salaries – so really and truly the ball on scaling up is with those guys who are being given all the support by DT and the board they said they needed to take the business to the next level when they agreed to be bought out and join DW8.

The seemingly premature comment about a large 1M case producer was unfortunate and too much expectation has been built around this by investors, no doubt about it, and no need to sweep that under the carpet. Whatever the reason for this not coming to fruition (yet?), I believe DT realizes that this was a preventable faux pas and that he learned a valuable lesson from it. Sh*t happens and while that was one mistake we could have done without, none outside of the firm knows for sure the entire story and if it’s concluded yet. The additional context he offered around that on the last call seems to indicate that to me. I don’t believe that he made the prospect up and trust he had reason to believe this was further down the pipeline without it transpiring so far. (The board would be all over that if the CEO made up stuff during an investor call just to cover themselves which should give you some context for the rampant speculation of some on this topic.)

The focus on HC so far has been mainly on DT jumping the gun, rather than asking more questions about what could have happened on the other end of that event which resulted in the outcome (either because onboarding slowed down massively for the said prospect, or coming to a halt). Not saying the below is the answer, but it certainly offers another reasonable perspective for broader consideration. I don’t think it’s because sellers are worried the firm’s going under as you said, otherwise we wouldn’t continue to sign up more brands/SKUs. I think it has more to do with some structural and pollical considerations at the very big brands that impact their willingness/ability to assume risk at this still early stage of the disruption process. Remember, this is a new model introduced alongside components that have been in place for decades. Disruption doesn't happen overnight or over only 24 months, but it’s a gradual process and we are still in the early stages.

I’ve yet to see anyone (to my recollection) focus on industry sales models, conflicts of interest management across models and stakeholders, barriers of entry, etc., and how these may impact industry adoption rates of the marketplace model across different beverage industry participant types (e.g. large producers, small producers, distributors, agents, secondary wholesalers, etc.). Many on HC seems so hell-bent on the need for a big brand name to join as proof of concept/savior of the firm as if that’s the only solution to get more traffic through the platform when thinking through industry sales models and how the largest producers manage their sales channels serves up a number of reasons why the very large producers that everyone knows may not move so quickly. And why bringing distributors (rather than the brands themselves) onto the platform may be a much faster and also a much better (i.e. more profitable) way to increase/force industry adoption by peers.

Depending on participants' POV/perspective and sales model, the marketplace proposition could be considered disintermediary or (re)intermediary in nature, and where the marketplace sits relative to the other parts of the supply chain its role could be seen as an outright benefit or threat, or an indirect threat to the existing chain components or possibly critical relationship not to be upset. That perception and how it's managed is critical. As an example, without going through all possible sales models and providing a specific SWOT analysis for each, consider a sales model (A) where a producer leverages a direct sales model employing an in-house sales & RM force. Their job is to source clients, sell the firm’s product and manage any issues with the relationships and order flow with responsibility for one brand (for simplicity). A second model (B) could be one where a producer leverages a select number of distributors to manage sales and distribution, who also do the same for other brands under non-exclusive agreements. For either one of these models, the Kaddy model is a potential threat and opportunity, although to different degrees. The producer’s decision to allocate potential volume (at a certain price) to Kaddy would constitute a direct threat to the in-house sales team in model A, while under model B it would be introducing a direct competitor to the distributors who likely would lobby against allocating volume to a new competitor. Naturally, under both models, the threat to the incumbent stakeholders raises the hurdles of entry for Kaddy and requires the assessment and management of implicit risks required by the brand/producer. This simplistic example illustrates the balancing act channel management has to consider and how wide-ranging the impact considerations related to introducing new sales channels can be. The more complex the portfolio of brands/products and sales model, the more complex the implications, unless the firm has experience with similar models from other markets.

There’s a much higher risk at the producer level to introducing a new channel and in their eyes potentially untested channel that could disrupt longstanding relationships they have with their distribution network. The risk of introducing a new distribution/sales channel is much lower at a distributor level who can access a new channel without substantially risking upsetting their entire sales/distribution network – for them, it is simply tapping another potential sales channel. For a distributor it’s thus a lot easier to allocate a certain sales/volume target to Kaddy and try to push it through that channel. They could even use that channel to test new initiatives, product ranges, limited offers, etc. in a fairly controlled and monitored way. Once that happens, and assume they can leverage the channel to reach a wider audience and do so cheaper than a sales exec could, there’s little to prevent them from allocating more volume to the channel, assuming there’s demand for their products at their pricing of course. Again, much lower risk for a distributor than a brand as the complexity and potential risk are different. I wouldn’t be surprised if some brands got massive internal pushback from their in-house sales teams and RMs and thus are taking a wait-and-see approach. But is that bad?

Other industry models have had similar experiences/growing pains and I don’t think it’s a problem if there’s growing demand from buyers that use the platform and they get good deals from sellers on the platform --- key part of the targeted value proposition. There’s a higher probability of early-stage adoption among users to whom this model presents a lower risk (or cost) than to those where it could upend more of their established modus operandi, or where the risk of introducing a new component is higher (relatively speaking). That’s why there’s such a quick uptake with smaller players where the disruption risk is lower and more manageable. Getting a number of distributors onto the platform is a lower hurdle and also a more appropriate goal for Kaddy which is also going to provide access to the brands that don’t solely rely on in-house direct sales models. On average distributors are going to bring more SKUs to the table on a like-for-like comparison vs (most) producers, unless you talk about massive brand conglomerates like Diageo (who btw also use 3rd party distributors!). So access to brands isn’t limited to access via the brand producer itself, so the requirement for a massive brand name is simply overstated as long as product access via distributors is available.

The more distributors join the platform the more likely there will be price competition to push volume through this channel, thereby increasing relative pricing competitiveness on the platform and there's a benefit for buyers to stay on the platform. One of Kaddy’s key objectives in my opinion should be to position themselves as a new channel to buyers and sellers and offer sellers the tools to market and distribute their products in more cost-effective manners leveraging the tech they have, down to using the channel for special sales the way other platforms offer to their suppliers. That beats using emails and phone calls to push big or seasonal offers and promotions for example and frees up sales guys to focus on the areas where person-to-person is (for the time being) still required.

Most of the brands/distributors probably face the same 80/20 experience most other industries have where 80% of sales is attributable to 20% of the product/service offering. This is likely the same so while Kaddy will eventually get to 30, 40, 50, and 60k products listed, the vast majority of flow will be concentrated amongst a predictable stable of products. Get a few distributors that provide some product overlap (and access to volume) that realize the cost and resource-effective nature of this distribution channel and have to offer competitive pricing to move stock and the platform is off to the races with both sides winning. It’s easier to get other middlemen like distributors to compete on price in a channel than the brand owner to compete vs. their distributors on price vs another channel. And price is critical to buyers and should keep them on the platform, especially once some of the reasons that made it attractive to move offline have been addressed. So watch for more distributors joining the fold which would bring a much higher number of SKUs to the table than a standards producer will. Operating alongside other channels and demonstrating Kaddy's relative value proposition over time will imo accelerate industry adoption in the intermediary segment as it engrains itself into the industry's sales/purchase process. In the meantime, I'm sure Kaddy founders Rich and Mike are focused on addressing the leakage challenge that other industries' marketplaces also encountered and identify suitable solutions addressing our industry's unique needs. Encountering challenges in new industries or new products/services is natural, especially in tech, and you want the team to fail fast and learn fast to move forward with solutions that fix the problem. They are being provided with the resources to fix the issue, so let's see how they get on with it.