Candy Club in the media, page-13

Candy Club's Founder and CEO, Keith Cohn, runs through his candy-based subscription service and why people want to buy candy at the check-out counter of clothing stores, nail salons and hotels.

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Keith Cohn is the CEO and Founder of Candy Club. I’m talking to Keith from the Colorado mountains, the Rockies, where he lives. He’s working from home there and the company is based in Southern California, and it’s always been an American company but started in 2015, listed on the ASX, 2019. The reason it listed on the ASX is because he got some backing from Australian family offices, eventually in particular, James Baillieu, but also I think the Libermans and a few other family offices came in and so he had a big Australian connection and listed on the ASX.

The business basically started off as a candy subscription business, people were paying by the month and getting lollies sent to them and then a couple of years ago, 18 months ago, he pivoted the business towards selling candy at the checkouts of clothing stores and non-food stores like Macy’s and Bloomingdales and so on around America and that’s really where the growth of the business is now. He’s in 17,000 stores on checkouts and he reckons there’s an addressable market of three million stores that he can put candy at the checkouts on and he reckons he’s the only one doing this, so it’s potentially an interesting opportunity.

It’s not a health food, of course. Most of the investment in food categories these days is in organic and health foods and so on, but people eat candy and there it is and so there is clearly a market for it and he’s growing – just raised some money, he’s burning cash. At the moment, the business is still losing money but he has raised plenty of working capital, he’s got $20 million dollars he’s just raised, so he’s going to be okay for a while and he’s basically trying to grow, investing in the business, so kind of deliberately losing money I guess you’d say.

Here’s Keith Cohn, the CEO and Founder of Candy Club.



Table of contents:
Capital Raising
Garage-Based Candy Start-up
Candy Checkout Counters
42 Per Cent margin
Eat Less, Enjoy More
Aussie Listing
Casinos, Hotels, Nail Salons
Growth Strategy

Keith, I always start these interviews talking about cash. I see from your Appendix 4C quarterly at the end of March that in that quarter at least you’re burning about USD$500,000 a quarter and you got to the end of the month with almost no money, you had $1.5 million left, so that was enough for another quarter. Then you raised $20 million, you went into a trading halt on the 2nd of April for eight days and then at the end of that, announced a capital raising of $20 million, half of which is debt. Now, it just seems to me that it’s not usually seen to be a good idea to borrow money when you’re burning cash, so what do you say to that?

Yep, there is two different components to our cash flow, there’s the EBITDA and then there’s traditional cash flow. From a cash flow standpoint, we are burning about as much as you pointed out there, but really, a lot of that is going towards inventory and accounts receivable, so it’s less of a burn and it’s more of a reallocation, so there aren’t those outflows there. As the company’s scaling every month and we’re getting closer and closer to EBITDA breakeven, then the pressure on cash flow does become less, unless we continue to scale at this rate in which case we’re going to still have a lot of capital. We have an EBITDA burn, we have a cash flow burn, but at some point that number continues to go down as we scale.

To answer your question in terms of the debt component, we’re very confident that our growth is going to continue. We thought that doing a debt and equity raise that allows us to scale the business pretty dramatically if we’re able to hit our sales targets, was a good move from an investor standpoint as it just minimises dilution.

Did you make it half-debt, the capital raising, because you couldn’t do the full amount in equity? The shareholders wouldn’t supply the equity, is that what happened?

No, we actually did the debt component first. We were oversubscribed by about 40 per cent. We didn’t want to take that much equity so we ended up scaling everybody.

How much of the debt have you drawn?

The first tranche in US was $5 million. There’s another $2.5m we can draw if we hit certain KPI metrics, which the company’s on pace to hit that later this year. But we have no obligation to do that, so it’ll be a game time decision or we might even delay it once we’re eligible. Really, no visibility as to whether or not we’ll draw that down or not.

Can you tell us the terms of the debt?

Yes, a lot of this was in our disclosures. The terms were 12 per cent, which is quite good for US companies that are scaling but still losing money. Other than that, it’s covenant light to non-existent, we can use the money and to play it however we want to. It’s a 42-month term loan which we are paying back and the first 12 months is interest only, I believe, and then it’s principal and interest after that.

Let’s talk a bit about the history of the business, you started in 2015, is that right?

2015, doing the subscription economy and started it out as a pure play, just a direct to consumer subscription model.

Yeah, selling subscriptions to candy, how did that work then?

There were things that went very well that, from a business standpoint, allowed us to build a supply chain. We grew to, at a peak, 38 or 40 thousand subscribers. We acquired a lot of customers and we could do it very cost effectively. What most subscription businesses find is that the business’s success or failure will turn on how long they can keep customers and we were really a middling company, we were right in the middle in terms of how long we were keeping customers, so I would qualify it as a good business, but not a great business in terms of being able to continue to scale that on a standalone basis. But what it did allow is for us to develop, like I said, a supply chain, a very loyal following, got over a million Facebook followers, about 150,000 Instagram followers and it’s what led us to the business that’s succeeding today which is our wholesale business.

I’m just interested in how you set the business up to begin with, where did you get the candy made and what did you charge, give us a bit of detail of that?

Sure. If you really want to know where I started, I started out of my garage under the way I test these businesses because I’ve built and created a couple of pretty scalable businesses and had some good exits. When I did this one, I didn’t want to bring in DCs, so I literally tested the Candy Club concept, which we bought the URL for $26,000 dollars. When I tested it, I started out with a URL called My Candy Express which I paid $7 dollars for. I would go to a retailer, basically wholesalers and buy the product almost at retail. I was buying the key words myself and my daughters and I were assembling the boxes when the orders came in, so it truly was a garage based start-up. I funded it myself and once I realised that there were metrics there that showed that this could be a scalable business, that’s when I turned it into a real company.

So you were buying candy wholesale, going out in the car and buying it and bringing it back and packaging it?

Literally, we were doing that. I was sourcing the packaging locally and buying the key words myself and my daughters and I were doing all the pack out. We went from no orders to about 300 subscriptions a month and each one had six different candies in there, it was a couple thousand different containers to pack out a month and we all had other stuff we were doing, this was just kind of a little side idea I had. We decided that there was a there-there, but I needed to turn it into a real business.

What were people paying for the subscription?

When I started testing it, we were charging $19.99 a month, plus shipping and handling. Today, we have improved the product experience and the quality of the candies and the places that we source from, today our average AOV is closer to $40 dollars.

I notice your subscription revenue fell in the latest quarter, is that side of your business dying now?

In the latest quarter, we put out the quarterly yesterday so you may have seen old information, but our direct to consumer business was actually up 49 per cent quarter over quarter…

Okay, I missed that.

But you’re 100 per cent right, we had been falling and what we had decided to do when we were having success in the wholesale market in our wholesale business, we decided to pull the investment dollars away from acquiring more customers and investing that into the wholesale business. That was really running that for us as efficiently as we possibly could. Now, we’ve really optimised that business and so now both businesses are growing nicely.

A couple of years ago, four or so years into the business, you thought that it’d be a good idea to sell candy near the checkouts of clothing stores, is that right? Tell us about how that came about.

Yeah, no, it was much closer, really, 2019, so it’s only been about a year and a half. Mid-2019, we got the idea and the way we came up with that, or I came up with that, was that we have customers who are paying us almost $50 dollars a month for candy and while there’s candy in mass market retailers all over the world and especially at the checkout, high-end retailers where our customers who are spending $50 dollars a month, that’s a high-end customer, the retailers that she shops in – most of our customers are mums – had no confectionary offering.

I didn’t see this really as much about confectionary as I saw it as a real estate play where we could take all of these high-end specialty retailers like Bloomingdales, Macy’s, Saks Fifth Avenue, Nordstrom Rack, all of those are current customers right now, and we could take this unused real estate that they had and give them an opportunity to ring up incremental sales when customers are checking out.

What are we talking about, ‘unused real estate’, you mean near the checkout?

Yeah, near the checkout. Near the checkout, there’s nothing really on those cash registers, they tend to be very clean and there’s nothing on there. Whereas, at the checkout of mass merchants, mass market retailers, there’s confectionary in almost every retailer you can think of. I saw this as an opportunity to let them take this basically unused space, which is the most valuable real estate that customers are standing there with their wallets in their hand and take an impulse category, which confectionary is, and put it in these retailers. The reason why these specialty premium retailers currently weren’t doing anything in confectionary at checkout was that there’s no good product market fit. Essentially, what you’d be asking a Nordstrom Rack to be doing is taking a bag of M&Ms and sticking it on the checkout, and these are high-end retailers who aren’t going to do that. But one of the things that grew out of our subscription business was a high-end premium, well-packaged, giftable supply chain in our finished goods and our products. And so, it was a really good fit to go into these specialty market retailers.

Really, what I did was I called up a few of these specialty market retailers and the President of one, Peter Nordstrom of Nordstrom, called up, went up and visited and pitched him on the thesis. We have secured, since then, 20 well-known national accounts, prominent retail accounts in the specialty market and we’re adding more every quarter. By the way, most of this has been done during COVID.

But nobody’s been going into the stores, the stores have been closed.

Traffic’s been down, so where they might have been ordering for full traffic in the past – the stores were closed for about three months, but most of the stores are open again. Traffic’s way down and so they’re ordering less but they’re still selling through at every retailer and as we’ve disclosed, every retailer who we’ve gone into has expanded the relationship, has continued to reorder. We’ve got a winning proposition here and we fully expect that in the third and fourth quarter, when brick and mortar comes back in the US, when everybody’s been vaccinated and we get this herd immunity, that we’re really going to win our fair share of business.

Tell us how it works exactly, do you sell the candy to the store? It’s not there on consignment, is it, or is it? Are you selling directly to the store and just getting cash upfront or what?

It’s a one-way sale, there’s no consignment, we sell it to the retailers and they take full position and ownership. I’ve been in various CPG businesses over the last 30-odd years of my career and this is the first business that I know of – we haven’t been asked for a dollar of markdown money. It’s hard to ask for markdown money when you’re reordering product. The product is going into these retailers and it’s selling out well. We had a 90-per-cent-plus reorder rate from our top 25 customers in each of the last six quarters. We’re getting the sales, customers are buying the product, retailers are reordering and they’re expanding the relationship.

And there’s no sale and return going on?

No sale and return, we haven’t given any markdown money, never taken any product back since inception, full stop, and that’s an absolute.

What sort of margin are you doing?

We’ve got, right now, a 42 per cent margin for our products and that’s up from about 38 per cent last year and 29 per cent the year before. We’re still subscale, relatively speaking. We believe and we have basically a hitlist of actionable items that we are targeting to get us to 48 to 50 per cent over the next 12 to 24 months. One of the reasons that retailers love our products is that they can sell the product at a 50 to 65 per cent margin. It’s not a fashion related product like most of their other businesses that are selling clothing, so they don’t have the hit the fashions right. Nobody’s ever marked down the product that I’m aware of or had to close it out, it’s got a very long shelf life, so it really is a good bargain for everybody.

We’ve got a great product line, our retail customers make a lot of money on it from a margin standpoint, it’s high turn, we don’t have to worry about any markdown money or close-outs. Consumers in the US, the candy category has a 98 per cent household penetration and the average consumer purchases 33 times a year, so consumers love it and there was really just this void that I saw in the specialty market and this opportunity to take a good product market fit in a big category that’s wide open and start selling our products into this market.

It’s not exactly health food, is it? I mean, the whole trend in food retail seems to be towards organic and healthy foods and so on. You’re a bit of a hold-out there.

Yeah, I get that question a lot and it’s a very fair question, but what’s really true, especially here, is that there’s a fight to quality and artisanal in every category. I would say that in certain categories that is a migration to more healthy foods, but even in the snacking area, whether it’s cupcakes or other baked goods or ice creams there are other examples of basically the same thing that’s happening with what we’ve done in confectionary in their categories, where it’s not that people aren’t doing it, what they’re doing is they want better quality, better ingredients.

They might eat less of it, but they’re enjoying it more. We charge a premium, so they’re spending the same or more as they were on the mass market execution of it and it’s really everything in moderation. We’re certainly not telling anybody to forego the four main food groups for our product, but everybody snacks and this is where, done in moderation, it can be quite enjoyable. You should try it!

Well, you’ve got to start selling them in Australia before I can.

[Laughs] I’ll send you samples.

Yeah, but somebody spending $50 bucks a month on candy from you is getting fat, I would have thought?

The people that are doing that are buying our absolute largest configuration and so for a family of – if someone’s got four kids, a family of six, the subscription lasts a month, it really isn’t nearly as much product as it would sound like. It’s a couple of candies – you guys say lollies – but a couple of candies a day. Our wholesale product, the product that we’re selling into retail, really averages $5.99 to $7.99 on the counter there. It’s not a single assortment by any stretch, it ends up being anywhere from four to eight servings and it’s comparable to any other kind of snack from a caloric standpoint. But the quality is just – you can’t even compare it to the mass market product.

At least you don’t spell it with a K like Krispy Kreme doughnuts.

We don’t spell it with a K, we make it easy for everybody to enjoy it without having to get tricky with the spelling. We don’t sell it in Australia, but one of the things about our product line is we are sort of a subset of the entire confectionary business. We have chocolates, we have enrobed chocolates, we have chocolates with nuts in it and all kinds of different configurations, sours, gummies, apples. One of the things that the specialty retailers like about us, is we’re really a one-stop shop for them. This isn’t core to their business, so they don’t want to have to go out and manage 20 different vendors to the extent that they like what they’re doing, they’re happy because we can deliver them basically a candy store experience with them having to just work with one vendor and that’s really the key selling point for us.

One of the more interesting things about your company is that it’s listed on the ASX and prior to listing on the ASX, you picked up Australian investors including James Baillieu, can you tell us how that came about?

Yes. I was the primary investor in the business early on. Some businesses are good for venture backing and some aren’t. I’ve had a venture-backed business before and I just had a feeling that this particular business was going to need some nurturing and most VC businesses are scale or go, basically. I didn’t think that this was going to setup well there. So, rather than traditional VC route, I went the family office route. Early on, I got in the Coors Family, the alcohol Coors Family, and some other sort of high profile family offices. Then, somebody introduced me to some of the family offices over in Australia. We got a few very prominent investors while we were still private, as you pointed out, James Baillieu being one of them.

Before we were public, he was a small not actively involved investor with a relatively small investment, relative for him. Then over time, we got to know each other a little bit better, he really liked the pivot we were making from the subscription business to focusing on the wholesale business. He’s got some good deep experience in fast moving CPG businesses and so, he thought it was a good fit for him to get more personally involved, partner with me on the board and work on strategy and become a much larger shareholder.

That then led to the IPO on the ASX, is that right?

No, actually, sorry, that was right after the IPO. We were publicly listed in early ’19, about February, and then James came…

Why did you list on the ASX?

ASX, as you well know, is a robust base for investment capital in small market cap businesses. We had probably 70 per cent of our investor base was in Australia already at the time based on family offices that had invested in the company. They introduced me to the process and it just seemed like a really good fit for what we were looking to do. I think that ASX companies can be fairly valued if we can create a really scalable business, which I believe we can and our board believes we can, and so since we already had such strong ties to Australia it just really seemed like a natural fit.

Tell us about your strategy from here, how many stores are you in and what do you think the upside potential is?

We are in 17,000 stores right now as of our latest 4C quarterly and that makes up about 11,000 customers within that. Those are brick and mortar customers as well as wholesale e-commerce customers. Our research shows that there are over three million doors/locations in our addressable market in the US. I can tell you that in the mass market there is confectionary carried at 99 per cent, if not higher, of those stores no matter what their job is and we believe that we can grow dramatically from here and still not scratch the surface. There would be no reason why we couldn’t, over time, acquire hundreds of thousands of retail locations, be in hundreds of thousands of doors and we still wouldn’t have really any market share. It is a massive addressable market and without talking in hyperbole, the sky really is the limit in terms of our ability to acquire customers if you just look at the parallels in the mass market area.

Just let me sort of be clear about what you’re saying, are you saying that there’s three million stores that are in your addressable market which are kind of non-food stores, I guess, or non-supermarkets, that 99 per cent of them have candy already or don’t?

No, no, what I’m saying is, in the mass market, whether or not it’s Walmart or a Target, a grocery store, a convenience store, a gas station, if you looked at all of what we would consider the mass market, virtually all of those have confectionary at checkout. We’re looking at the specialty market and that specialty market is really sort of anything that isn’t mass market we’re calling a specialty retailer. There, there’s virtually no confectionary and so we believe that there’s no reason that the good product market fit, our thesis is, is that a large number of those retailers would want to put a great product on their checkout based on how well this whole category does in the mass market, if there was the right product market fit, and so that’s our thesis. But if you look at who we sell to, we are selling to large national department stores, we’re selling to national chains that are specialty clothing. We’re in casinos, we’re in hotels, we’re in nail salons – at the opposite end of the spectrum.

On a daily basis, I’m seeing nail salons and independent toy stores, ice cream shops, baked shops, we even had an order last week from a dentist and I can’t tell you why but I saw the dentistry in our sales order flow. The addressable universe, the parallels here are – everybody wants incremental revenue, confectionary works in the mass market, if you’re a retailer and you have a cash register and you’d like to try something there, there isn’t a better category to put there from a reach and a frequency purchase standpoint and that’s the massive market we’re going after.

The dentist was obviously trying to drum up business.

Maybe, maybe this was lead generation for him.

Yeah, absolutely. [Laughs] What’s the plan then, are you going to keep running just under cash breakeven to keep the marketing going, is that the plan?

Yeah, the plan is, is that we’re going to really invest in the business now that we’ve got the working capital and we’ve got a series of initiatives including product development to go into some new distribution channels, we are going to continue to invest in salespeople and our lead generation campaigns that we do digitally, we’re investing in technology to create our own wholesale portal… We’ve got a series of initiatives where we’re investing in the business. We’re certainly not doing it with reckless abandon, we’re doing it with an eye toward getting the maximum ROI at the same time, scaling the business as quickly as we can and we’re really a growth business now and we’ll sort of stay right here where we can continue to – if we were to continue to scale the business, we’re going to just continue to reinvest where we think smartly…

We’re certainly not going to do it irresponsibly and if we think we should be profitable we’ll go in that direction. But for right now, we think there’s enough investment opportunities in front of us where it will serve all stakeholders in the business to keep reinvesting in the business for scale. Because to a certain extent, this is a land grab and the more doors we can get sooner, the more locations that we can get carrying our products based on how often they reorder, the bigger business we’re going to get over time. It’s an incredibly sticky product from a retailer reorder standpoint. This is about acquiring as many retailers and locations as we can as quickly as we can.

Are you starting to come up against anyone who’s noticed the opportunity and is competing with you?

We really haven’t. I have some theses for that. One of them is, the category, as you said, is a little contra, people aren’t necessarily investing in non-healthy related food businesses, sugar businesses aren’t on a shortlist for VCs to invest in. This is a small business when you start it, the big strategics really don’t start small businesses, they tend to acquire them, so we don’t have a lot of natural competitors out there. Not that somebody can’t come, they certainly could and I’m not sure that I wouldn’t welcome a little bit of competition out there to get more people doing the same thing because it’s such a big addressable market and if you had two people doing this in a big way it might get more retailer attention even faster. But I’m also happy that we’re really the only ones out there doing this that I’m aware of. We certainly aren’t bumping into anybody out there.

Do you think it’ll ever be worthwhile building your own factory and making it yourself?

Right now, we use third party logistics companies to do all of our wholesale pick and pack and assembly work. At some point, we’ll bring that inhouse. But the manufacture of candy is probably not and the reason is that if we do that we’re going to be beholden to our own specialty, and there’s only so many SKUs we’re going to be able to develop that are unique. What’s interesting about our model is that we go out and we source from all over the world, primarily in Europe and the US, unique places that the product’s not available widely, certainly I know we’re really hardly anywhere in the US.

And we are able to pick the best of the best as it goes to be beholden to what we can come up with in manufacturing. By picking the best of the best, we are always offering our retail customers literally the best product that’s available and that’s a pretty unique opportunity versus most manufacturers who are only marketing their own products. We can market anything and that’s one of our unique selling points.

It’s a very interesting business, Keith, thanks very much for talking to us.

Hey, I appreciate your time, thank you so much.

That was Keith Cohn, the CEO and Founder of the ASX-listed Candy Club.