BEN RUDMAN - INVESTING IN CONSUMER BUSINESSES - EP. 28

Most of the investors I’ve had on the podcast aren’t interested in consumer businesses, which is precisely why I wanted to talk to a consumer focused investor. Enter Ben Rudman. Ben is the founder of Charis Consumer Partners, a consumer focused independent sponsor, and has a passion for consumer businesses that is hard to resist. In this conversation, we review:


- His time developing his expertise in consumer

- Why it’s such a challenging place for investors and where he looks to invest

- Some pitfalls and things to avoid in consumer

- What he’s learned being an operator

- Concluding our episode, Ben gives an amazing breakdown of Pepsi and why he thinks they are the best business he's ever seen

Whether you care about consumer or not, this episode is a must listen and filled with insights on investing and building companies. Ben is a wealth of knowledge and experience and I hope you find some great takeaways for yourself.

Listen weekly and subscribe on iTunes, Spotify, Google Podcasts, Stitcher, Breaker, and TuneIn.

https://www.alexbridgeman.com/podcast/ben-rudman-investing-in-consumer-businesses-ep-28


Full Transcript:


Thank you for sharing your time with us. I've been looking forward to this one for a while.

Thanks. I'm very flattered that you would want to spend an hour with me, let alone record it. I'll share a little bit of my background. I'm a non-target school average GPA kind of guy. I went to school in the rural Midwest, and came back to Denver where I'm from. When I was in college, I actually did an internship in marketing at a national restaurant chain called Famous Dave's. I loved it. I absolutely loved it. I was like, "I'm going to be a marketer, and it's going to be in consumer."

Frankly, growing up as a kid, I was always really interested in consumer, and specifically food. I'd say anything from CPG to restaurants, I was always thinking about it. When I'd go to somebody's house, I always know what cereal brands. Did they multi mill, or did they general mills? You open the fridge, and are they using some local dairy brand, or are they using private label? I just always mark those things. I wasn't making value judgments. I just love understanding what makes people purchase things, especially in our society where there's always the abundance of choice and all of those things.

Then I started to wonder how the product gets to the shelf, and why is it in this package? That's almost kind of random that cereal is in a box with a bag in it, but chips are in a flow wrapped bag. Then jerky is in this pouch. Why is it like that? I've always asked those questions. Same thing with restaurants, what form does the food come in? What are they actually cooking versus what's cooked in some plant somewhere else eight months ago? Always wondering how it all works and why.

When I came back, I was trying to work in marketing. It was[redacted]I just couldn't get a job in marketing anywhere. Nobody's trying to hire this aspirational kid with an average GPA asking a bunch of questions. I ended up getting this intern role at an investment bank only because they were in a pinch, and they needed somebody, and so they actually, as a case study, had me do a bunch of work, a ton of work. It was clearly like just they needed some leverage, and they're like, "Yeah, here, case study kid."

I was just like, "I'm really going to apply myself to this," so I worked really hard to do it. They were a really good group, and they poured a lot into me. They gave me an internship for two months. It went down to the wire. The last day, they finally offered me a full time analyst role, but it worked out. I was the fourth guy in this shop. It was a scrappy shop, and they had a guy who was focusing on all these pharmacy services deals. I got to learn that industry, and do the work you have to do to learn an industry.

Then they hired this MD, who she had been an operator in the pet care space, mostly pet food and treats and stuff like that. We got to do a lot of work rolling up pet supplies, businesses on behalf of a few private equity backed platforms, helping them find the deals and execute them. She had personal contacts with them and the expert in the space. I get to learn about what it is to develop that expertise and how to really learn a space and be a player in it.

Good bankers are really that. Good investment bankers are really in the mix, and people want them in the mix. Bad bankers are either really in the mix and nobody wants them in the mix, or they're not actually in the mix, and they're trying to give the impression that they are. She was really like that. The pharmacy services guy was definitely really like that. I just got to learn all those things. I stayed at that bank for eight years, a small just regional shop in Denver.

At the end of my eight-year run, I learned the dynamics of a professional services firm where it's like the young, up and comers, no matter how good they're getting, and how much business they're generating, it's not an easy business to transition. At the same time, I was realizing I didn't really want to be a banker as much as I loved the dynamics that I got to be a part of, and so I left, and I took a role with a PE fund in the consumer space where I'd spent most of my time as a banker, and specifically in food, which is where I'd been spending my time.

I developed this practice when I was a banker, where I would fill my revenue targets with one or two sell side deals a year. That generated most of the revenue, and it was maybe 20% of the work, and I hated it. Then there was this by side work that we would do, which was 80% of the work made very little money, but filled the coffers in between bigger deals. Then I developed this network of executives. I would go say like, "Okay, form a thesis, and then let's go chase it, and let's get this PE fund to give us a retainer."

Then we got a family office to say, "Hey, we'll co invest with you." I was getting it off the ground. Then there's all these dynamics with our firm. I just realized that maybe the best way to exercise this program would be with a fund or as an independent sponsor or something like that. I had a friend of mine who had just raised this fund, and he said, "Hey, why don't you come over to us, and maybe run your play a little bit, and I'll teach you a little bit about how private equity works on the business side of it."

They did that. They were extremely kind to me. I sourced their first deal and their fund, and helped them pull together some folks on the management team and came back to them and said, "Hey, I'd really like to do... I have some ideas about instead of centering our thesis on finding the next brand in this space, why don't we find the production technologies that are the most interesting, and figure out which businesses are best positioned from a go-to market perspective to leverage that manufacturing capability?"

Instead of picking brands, turn it inside out and find the best manufacturing footprint and supply chain, and execute against that. They were like, "Cool idea, not for us." It was definitely... They sent me off with a hug, and I put my knapsack over my shoulder. I went out and started this thing called Charis Consumer Partners, not knowing what it was going to be. It was either going to be a search fund or an independent sponsor. I knew I just had to go find a deal, and so found this business, looked at about 100 deals over the course of maybe four or five months, bankers, brokers, direct sourcing, and found myself talking to this business that made natural premium meat snacks.

Even within that, there was a niche where in meat snacking, there's jerky, and then there's other stuff like sticks and bars and that kind of stuff. These guys didn't make jerky. They're the only game in town though in sticks and bars and stuff like that, and in the natural segment, which was the highest growth, tons of category tailwinds and all this tacit knowledge, a little bit of a capitalism advantage type business to where it's like, "If you're making jerky, it's completely different equipment to make this stuff, which is why it's so bifurcated."

I was like, "Perfect." I just hung around the hoop with them. They came to me and said, "Hey, Sam, the founder, is getting up there and wants to go watch Cardinals spring training games down in Jupiter, Florida. Why don't you buy him out?" His son Kevin was 50, and has been just working like a dog for 20 years and said, "I'm ready to maybe cash in too," but they both said, "I want to keep some chips on the table. Why don't we put something together?" We did, and the rest is history. I ran it like a search fund.

I stepped into CEO, and I've been running the business. We've owned it for about two years. We've been fortunate that we've been fairly successful benefiting from the category tailwinds and doing a bunch of heavy operational stuff. I've got really good mentors too, just from my background. Some of them are on the board and stuff, so we've got kind of an all star team that we were able to bring to this business, and we've grown it pretty significantly.

We've almost tripled it in terms of poundages in the last two years. I've got a business partner who just joined who's got a similar background to me, operator and finance guy and CPG. He just joined, and he's looking for our second platform now. We started as a search fund, and moving to an independent sponsor model, and hopefully going to get our second platform here soon. That's the background. That was probably a little long, I apologize.

You mentioned a few tailwinds in the business you acquired. Can you go in more depth on what those are?

There's a few. If I were to simplify it, there's primarily I will say there are three tail insights. I'd say number one, a consumer trend toward eating more protein is friendly for us, consumer trend towards snacking, and then a consumer trend toward clean healthy ingredient decks. People eat more protein. They want to eat more protein now. It's part of eating a healthier diet. Snacking is huge, so you may or may not be surprised to know that about five out of six consumers in the U.S. eat at least one snack every day, one packaged snack that is.

Then one out of six consumers in the U.S. eat five snacks every day. You talk about a very committed consumer base, and it's a big one. That snacking is all sorts of things. It could be chips. It could be pretzels. It could be popcorn. It could be jerky. It could be yogurt. It could be all sorts of things. As larger consumer bases, it's also very competitive and broad in terms of what the landscape can look like.

Then there's this trend toward cleaner ingredient decks, so people want to eat food with fewer ingredients on the label and maybe less sugar and that kind of stuff. We can deliver against a lot of those. One of our advantages as well is we make most of our stuff with grass-fed beef and ABF, Turkey and chicken and that kind of stuff. We even make some plant-based products, so it's hitting on a lot of those trends as well.

It sounds like you've been into consumer products and food pretty much your whole life. Is there something that really ignited that interest for you when you were a kid?

Absolutely. I was one of those kids that I paid attention to everything. I liked going to the grocery store with my mom, and she would have to pull me along, because I would stop and look at stuff. I'd be really amazed by... You walk into the grocery store. I grew up in Denver, and I'm sure they do this in every city. There's the Pepsi cans, the things that are in the shape of a Denver Broncos logo. Who made that and how did that end up that way?

Was that a corporate mandate from Kroger corporate back in Cincinnati telling that, "Hey, this is your new planogram. Go do it," or did Pepsi come in and do that? How did Pepsi get the people to go do that in every grocery store in the United States? How many grocery stores are there in the United States, and what does it cost to build that team? I've always loved that kind of stuff. Trading lunches at school was really interesting. I'd be interested in what the brands were.

Even in college, we'd go grocery shopping, and all the... We had no money, and I would come back and I try to figure out who made the stuff on the all the label and figure out, "Is this a big CPG that's making this, or how is Aldi getting this made?" I know Aldi doesn't have a factory for all of these things, and just trying to understand how all that works. I've always been a nerd about this stuff.

That's awesome. That's awesome. I've interviewed primarily search funds and small company investors on the podcast. I haven't actually talked with a lot of consumer-focused investors because most of these investors shy away from consumer. They want business services or home services. What do you see as challenging about consumer, and then where do you see the opportunity in consumer that you get really excited about?

I feel like consumer is one of the hardest industries. It's one of the easiest industries to learn and one of the hardest industries to invest in. Everybody to some degree knows consumer because you are one. It's not the same as healthcare, because you could argue, "Well, I'm a health care patient so I could get healthier." It's not the same. The way the healthcare business model works is so intricate, so you're not just going to learn that from getting your appendix out.

But I'd say in consumer, there's all these factors. The funny thing about consumers is it's so fun. You go to trade shows in consumer, and you go to a happy hour event for investors or something. You're going to meet lots and lots of people who have no consumer background at all who want to put capital to work or investing in emerging brands. They'll say, "Hey, what do you think about this deal? I'm looking at this deal." You'll think like, "Oh no, runaway," like, "Do not look at this deal."

It's one of those industries that there's those traps everywhere. I feel like it probably happens in tech too, where it's like you should probably ask yourself why you are seeing the deal. Why would it even fall to you if there's all these people who have so much cachet, and brand and all this advanced sourcing capability? Consumer is very similar in that way. I'd also say it's right for all sorts of bias. I've always tried never to invest on the basis of my own personal consumer preferences.

The reason is, I hate to say it this way, but I'm a one percenter in a trendy area, in a city. There's not that many of me. The fact that I don't go into 7/11 in St. Louis and eat the hotdogs off the little rolly bar works against me in that way. There's a large base of consumers that I don't understand. There's purchase decisions for in-home cleaning products that maybe female consumer makes that I just have no empathy toward, and so to assume that I know the... Just because I'm a consumer, and I like the logo or the brand or the website or the Instagram account, to assume I understand what they're doing and how they're doing it is very naïve that bias exists.

The other one is the way that capital flows in consumer is not as direct in other businesses, so like the search fund friendly businesses, like your classic Royce Yudkoff, endearingly profitable. Go find a business that's doing roust about services on some mission critical public service or something that's never going to go away, and they're just going to collect recurring revenue, and EBITDA turns into cash and stuff like that. Those are straightforward businesses that some days, you catch me on the right day.

I'm like, "I'm in the wrong business," but other days, if you can understand and learn how to navigate what we call in consumer price pack architecture, which is basically the questions I was asking earlier like, you go to Costco. Just notice next time the size of the packages that you're looking at, and the trays that they're sitting in and how that pallet is constructed, versus then go to... What do they have up in Portland? It's not Ralph's.

What do you guys have up there?

Fred Meyer.

Yeah, you have a Fred Meyer up there. Go into a Fred Meyer, and you'll see obviously something completely different, and you'll see maybe some things are sitting in retail-ready cases. How many patches are in those cases and why? Somebody has to construct those. Sometimes it's a machine. Sometimes it's a human being. I like to call it the hidden factory. There's a hidden factory behind everything, and everything is very intentional and thoughtful.

If it's not, it will cost you. There's very little margin for error, but very high reward for proper execution. That's why I love it. There's these pitfalls and traps for knowing how to navigate it.

Yes, so that guy who presented you the deal, or maybe that was just a anecdote, what sorts of things within a consumer deal would make you scared and run away?

Right off the bat, I'd say gross margins. That's a heuristic, but I'd say right out of the gate, though, I'd go there. The second one would be competitive dynamics. You really want to understand the category and what the alternatives are, and what you're up against execution wise. Right out of the gate, I'm going to ask like, "Why does this brand or business exist? Should it even exist? Do they have enough value to add incrementally to this category? Will they bring extra consumers in? Will they create a new category? Will they change the way we think about X, Y or Z?"

Even if you can answer those questions, then the next question is, "Who are they facing?" Like Kevin O'Leary says on Shark Tank, such and such is going to come in and squash you like the little bug you are. That's not really true in a lot of cases for challenger brands, but what is true is, "Are they choosing a path that is going to mean they're going to have to execute just like Pepsi in order to make it happen?" Then I want to know why would I bet on them instead of just go buy some Pepsi stock, and just understanding those pieces.

It's basically the unit economics, the competitive landscape and the unique value proposition to put it into three neat little buckets. But if somebody is naively approaching each of those three buckets, then I'm pretty scared pretty fast, and I think I can swipe left, if that makes sense.

What business models do you find really, really interesting in consumer that you focus on?

I'm sort of the inside-out consumer guy, so I'm not going to answer it the way a lot of people I really admire would. There's some incredible people on Twitter to go follow like Webb Smith and Chris Cantino and Jamie Schmidt and those people who talk about consumer all the time. I save their tweets all the time and go back and read them, but I'd say from my perspective, I think just where things are going... From 2006 to 2018, we'll say, I'll focus more on food and CPG, but there was a sort of era where brands were the large strategics in the space knew that consumer preferences were changing faster than they could innovate.

There's a lot out there about R&D spend in tech versus R&D spend in consumer, and people will say, "Oh, the strategics just aren't investing enough in R&D," but as someone who knows how r&d and food works, you can't just pour capital in. It's not going to just make stuff come out the other side that people want to eat. I do think M&A is a valid strategy, but there was a lot of overpayment. I think you could go back, and I could find you some slides that just show, "Here's a row of deals that traded for three to five times revenue multiples." That were just complete disasters for strategics.

The assumption was like, "Okay, brand, you've reached anywhere from call it 20 to $50 million. That was the pattern of annual sales. Yes, you're cash flow negative, but you're really just reinvesting through sales and marketing. We can probably toggle that sales and marketing lever later, so we'll move that aside. Your gross margins are strong enough, so I think this brand can fit on our platform, and we have access to way more distribution than you do, so we're just going to blow it out, and we'll be successful."

What they found was a lot of these brands existed were growing rapidly as they filled their niche. It's like the crossing the chasm bell curve. They cross the chasm into that early adopter, and then maybe into the first half, but there is no second half of the bell curve for those brands. There's the natural channel so there's maybe 4000 doors of Whole Foods sprouts, NGVC. Stop me if I'm using too many acronyms, but there's these natural grocery stores. Then there's maybe another 5000 doors of really nice Kroger's and stuff like that.

Maybe you can throw Wegmans into that, and maybe you can throw... Depending on where you are in the U.S., or you can throw Publix even or HGB or something like that, but there's not that many of those either. If you fill up that distribution, and then by the time a strategic buys you, they can't force you through the keyhole at the high V in Council Bluffs, Iowa. What happened is all these brands hit their heads really hard their velocities when they tried to go out and all this distribution just crashed, and these acquisitions just plummeted, or at least they didn't work out.

You have this landscape now, fast forward to today, where everybody's looking at it and they're saying, "Well, I can't build a brand that is burning cash to get to that exit." That's not reliable anymore, because strategics are now saying, "Wait a second, we want you to be 100 million in revenue and really validate this. And we want you to prove that you can do it profitably on your own P&L, because we don't even trust that we can bring you on to our platform and make it work. So why don't you get to 100,000,010 of EBITDA, and then we'll give you that multiple?"

By the way, that multiple is still probably going to be more like two to 3X. Now all of a sudden, margins really matter when they mattered less than growth before and retail proof points. It's about unit economics. It's about margin, which all of a sudden, everybody's looking internally and saying, "Wait a second, outsourcing the co-packers and building this virtual brand, maybe either doesn't work or we need to be more thoughtful about how we're doing it."

I think to answer your question, this is a very long way to answer it. I felt like I had to give you the background. I think the most interesting businesses are the ones who are enabling the capital efficient ways of capturing consumers at shelf or online. I think that those businesses are either brands, whether they're virtual or not, who can develop products that enabled strong, strong unit economics. Their co-packers and private label manufacturers are vertically integrated brands that can execute that in a manufacturing plant environment, subscale and at scale.

Finding that tacit knowledge, it's tough to write down, but it's something that happens in a plant environment every day that can grow, is the most interesting thing.

How do companies get shelf space today?

Companies get shelf space today all kinds of ways. It's by hook and by crook. I mean, you can build it... There's a couple of strategies that have been played out over the last 20 years. I'd say those two strategies are... I'd say one is channel specific, so it used to be that you could go to Whole Foods, and build your brand locally at Whole Foods, and build it and then try to get Whole Foods National get to 10 million. Once you've raised capital around that, get to 10 million, raise a private equity round, then go try to jump over to the conventional channel, and blow it out and then get acquired.

That was that old playbook of your craves and bark thins and whatever. Then there was, "Let's build a capital efficient landscape locally," so like, "Let me build my brand in LA, and I'm going to go across multiple channels in LA." Maybe I'm a beverage brand, so I'm going to go in some key convenience stores. I'm going to do some corporate mini marts at a Google office or something. Then I'm going to go do some Ralph's and Fred Meyers and Bristol farms and whatever.

I'm just going to play this ground game here in LA. I'm going to promote, promote, promote, but I'm going to do it in a capital efficient way, because I'm not trying to do it everywhere. I'm just doing it here. The downside of that is like, "Great, you proved it, but do you have a brand if you go to what happens in Arizona, or Nevada or Bay Area, or Seattle or Portland or Denver, whatever, where the consumer is not trained to go look for you anymore?" It's not hard to get on shelf, frankly.

That's the other scary part. The other thing that I run from is you see brands that are just like, "Hey, we want an investment from you, and we've got all this distribution. Isn't that awesome?" You're like... You look in their data, and you see the velocities aren't that strong, and you're like, "Oh my gosh, you have so much distribution that you're about to lose," and it's really capital inefficient to make consumers aware of you in LA and Fayetteville, North Carolina.

It's way too much capital that's going to go toward driving those velocities and those turns and that awareness, so getting on shelf is not the hard part. It's like in private equity how getting the capital isn't the hard part. It's getting a good deal. Same thing.

With Coronavirus making e-commerce much more important and a bigger part of just general commerce, do you still think that there's a ton of value in going after local shelf space versus trying to build a brand purely online, or is that changed from Coronavirus, or has it stayed mostly the same?

I'll say yes with a little asterisk, so the asterisk is that it depends on what you're trying to build. Before, I'd say personally, I felt like ecommerce was coming in food and beverage, but it was going to take a while because, first of all, anybody who's bought produce on Instacart knows how hard that is. That sucks, so you want to go to the grocery store. You want to see touch and feel. I'd say Coronavirus has changed a few things like the shopping pattern for consumers in the premium end of things was, "I'm going to go to Fred Meyer, and I'm going to fill up my center store pantry stock basket."

"I'm going to buy flour there. I'm going to buy eggs there. I'm going to buy milk there. I'm going to buy vegetables there. I'm going to buy meat there, and then I'm going to go to Whole Foods, and I'm going to walk the perimeter. I'm going to buy some specialty items, because they have some cool, unique stuff. And then I might go to Trader Joe's, and pick up my Speculoos cookie butter or whatever. Then by the way, I'm going to swing by Natural Grocers, and pick up a couple of supplements, and oh yeah, they have that kombucha that I really like."

That was like people were piecing together their pantry that way and their fridge. I'd say that Coronavirus has completely disrupted that. It really negatively, it adversely impacted Whole Foods specifically very much. It adversely impacted Trader Joe's, although part of that was related to some of their own internal social distancing policies. What really happened was people were like, "Well, I'll see what I can get on Instacart, and see what they got. Then I might go shopping online for the rest, and see what brands exist."

"I'm going to Google it. I'm going to go on Instagram, I'm going to whatever." At scale, it just shifted the hell out of that behavior. Some categories were really adversely impacted by ours included in meat snacking for a little while, but it's like anything that's impulse buy, that got wiped off the table, because I'm not impulse buying through Instacart ever. But if there's an online presence with some existing household penetration, some brand awareness, et cetera, that benefited.

I think that back to your point, that changes selling stuff online. The package that you receive things online is completely different than the grocery store. When you buy beverages online, that's the best example. You might spend $50 on a 12-pack of cans for your favorite functional beverage, whereas at a grocery store, you might buy six of this brand and six of that one and whatever. It's a completely different animal.

I think some of that consumption is here to stay. I think some of it's going to shift back to a little bit of the recent past, but I think there's some permanence to that change for sure.

With your current meat business, I'm assuming that those snacks aren't perishable. They don't need to be refrigerated during shipping.

Correct.

Then do you see a greater focus just in your own personal investing as a result of all this? Do you think you'll focus more on companies and brands that sell non-perishable products that can be shipped more easily?

I'd say that's an overall consideration with unit economics, but I'd also say there's a couple considerations. I don't think people are done eating prepared food in home. I don't think all of those dollars are shifting to DoorDash. I'd say I think it's increasingly difficult for... Meal kit brands and stuff like that did okay during some surging and stuff, but I'd say that direct landscape remains very competitive. However, there's other ways to get that stuff to market.

Maybe you're selling frozen vegetables that are portioned, and that's your manufacturing business. Maybe you buy raw vegetables. You cook them. You freeze them, let's say. Then it becomes a question of what is your capability in terms of portioning them? Can you make small retail packs? Can you make food service packs? What is your value proposition? Can you go to a food service and say, "Hey, food service, I'm going to remove labor."

Maybe that positions you really, really well to sell into the ghost kitchen channel. Then maybe I can do small retail packs. Well, maybe that positions me really well to sell the meal kits into that channel, or maybe I can do a finished product and freeze it and then sell to a grocery store in a package that feels safe for consumers to pick up and doesn't feel like you're going to get Coronavirus from taking in-store sushi or something.

I'd say it changes what capabilities we focus on, but I don't think it eliminates the cold chain, for example, from being interesting.

Another part of your investment thesis is focusing on brands with roughly one to 10 million in earnings. Is that a result of your perhaps limited capacity early on with your firm, or is there something about the small end of consumer that you find particularly interesting and you want to continue focusing on even as your strategy scales a little bit?

Consumer private equity is brutal and very competitive, and the best assets go for premiums. That's just the way it is. Consumer private equity has really experienced... It's been a ride for the last while. I don't think there's an analog in tech or anywhere. If you think about the industries that have private equity activity in growth equity, mostly that's healthcare and tech, where you're doing minority deals and EBITDA positive businesses, and then you have venture.

There's a really clear, bright line. That bright line doesn't exist in consumer, so you have a lot of funds, who wanted to get in... Back when strategics were dipping down and buying smaller businesses, the big buyout funds were like, "Oh no, we can't buy stuff anymore, so we need to make growth investments," and so we raised these growth funds. But then they found themselves doing all these basically venture deals. They took a lot of zeros. A lot of the big name funds took a lot of zeros in the last funds.

If you had a fund six that was based on that, you might not have a fun seven. I'm not going to rattle off names, but there's a lot of names that aren't coming back for another fun. I'm not rejoicing in that, but they ended up having to take venture risks and not really realizing it because they thought there was a M&A pot of gold at the end of all these rainbows, and there wasn't.

You can't just by getting those businesses even positive justify the 3x revenue entry point that you took on your minority investment, even if you use structure, and so it created some tough dynamics for a lot of funds, which also meant if there is an asset, that's five to 10 million of EBITDA that's maybe a co-packer and a category you want to be in, those got really expensive too, because those were the best alternative. It's not uncommon to see a five to 15 or $20 million EBITDA business, which is in food.

The world needs another private equity investor to focus on five to 20 of EBITDA and food. It needs a hole in the head, so there's really no need for that. Those are going to trade for a lot of times nine, 10, 11, 12, 13, 14x EBITDA, whereas one to five might have some tougher questions to answer in terms of like, "How do we bring this thing to scale?" I've chosen to focus there, just for sheer sanity's sake more than anything, but valuations are a big part of it.

You've mentioned your time as an operator of your business. What do you feel like you've pulled from that experience towards the investing side of your business?

A lot. I'd say I'm going to be a lot more empathetic the next time I'm a board member, for sure. It's tough, man. I think being an operator is tough in every industry. In mine as a co-packer, nobody ever says, "Hey, Ben, thanks, that was fast enough, good enough and cheap enough." Your life is constant assault from all angles. Your suppliers are constantly trying to raise prices. Try selling manufacturing services to scrappy upstart brands and private label retailers, and then buying your raw materials from Tyson.

From the get go, you're going to get your butt kicked from all angles. I'd say understanding it... I'd also say really developing and understanding... As a board member, you are getting information. That is I don't care who you are. As a board member, I don't care who you think you are, what your background is. You're getting pre-digested information. The management team has to reach into this dark hole inside their business that is pure chaos, and turn it into something that makes sense.

The level of comfort you think you have with ambiguity, if you've never been an operator, is nothing until you come get really close to that dark hole and jump in. I'd say that that's the biggest learning is understanding just how ambiguous and complex a business can really be from the inside, at least in my business. Maybe that says something about me as an operator. Maybe I'm dumber than some others.

I doubt that. I'd love to hear more about those dynamics, if you're willing to dive a little deeper.

Without getting too much into specifics, I'd say you're constantly making trade-offs. I'd say the trade-offs are between information and efficiency. You just constantly have to walk a line, because there's all this stuff in business school and everything about... I didn't go to business school, so I shouldn't speak about business school. There's all this stuff everywhere about what gets measured gets done and everything like that.

I don't think measuring stuff is the challenge. I think it's finding what to measure and then making the trade-offs as to how deep you need to go, because it's collecting information and reporting it is always someone's burden. At the same time, you need it, and you need real information. You need to develop a culture of commitment to the truth, rather than what we call... I don't know if you love swearing on your podcast, but at westerns, we call it the fuck-you answer or the real answer.

The fuck-you answer is you ask a question, and somebody says, "Oh, it's probably this," and you have to stand and be like, "Is that the fuck-you answer, or is that the real one?" They'll say, "Okay, I didn't..." We say, "Did you ask why five times?" I was like, "All these tropes, the five why's, all that stuff. How do you know that what you just said is true?" Most of the time, it's not a simple observance.

You have to all agree upon what is statistical significance, and how do we get to the least amount of statistical significance and organizational burden as we possibly can to believe that what we're measuring here is actually true for whatever the application is? That's the big challenge. Whereas when I was a board member, I always thought, "Okay, send me your management scorecards and KPIs and stuff, and I'll scrutinize them." It's not that simple.

Do you have an example within your business or another you've been a part of, where you had to go through those tropes to figure out what's the truth in what's going on?

Lots of them. I mean, at westerns, I can give you an example. I told you early on that things have gone really well for us, and we've tripled in terms of volume. Well, to do that, you have to hire. We took an organization that had slowly and steadily grown, and we started growing it really, really fast. You go from an employee base that largely has been there for a long time, is used to some change, but slow, and now you're adding fast change. Then you're adding a bunch of people they don't know.

The bunch of people they don't know are all new, and they don't know anything. This job, it's pretty nuanced. There's all kinds of really specific things you do to make meat sticks that you don't do in everyday life, so you have a training and a learning curve. Then we just introduced churn because there are a lot of people who get in there like, "Really, I have to do this all day? This sucks, bye." You just are going to have that, and so we had a lot of challenges with...

We went from just being an absolutely amazing low turnover for a meat plant especially. We had a turnover rate of like 10%, which is unheard of. Meat plant turnover is 80%, not 10. We've patted ourselves on the back. Then when we started hiring like crazy, boy, that thing spike, and we had 80% in that second group that started to join. We had to really figure out why. There's a lot of stories you just want to tell yourself versus what's real. We had to face the music on what we were doing to people, just throwing them in the water and saying, "You know how to swim, right?"

Then before they could answer, we're out the door on to the next thing, because we're so busy. We weren't getting the efficiency, and we weren't getting the poundages. We weren't meeting our deadlines. We weren't doing all these things. Even though we were growing and putting good numbers on paper financially, we had to sit down and really ask what's working. We had to ask every employee one on one looking them in their eyes, making them feel safe, making them not feel like they're meeting with the Bobs from Office Space, what's working?

What's not working? What do you need from leadership? What ideas do you have, and showing them that there was a safe environment to just tell us the pure truth, and then also tell them what they needed from me and just have pure accountability. All of our OKRs and all that stuff, we held true to them. But at the same time, you're just not thinking about those OKRs until the OKR meeting, and you're finally checking the scoreboard again to see if what you're doing is working.

We had to hold each other really accountable to say like, "Are we telling the truth here, or did I get to an internal fuck-you answer to myself? Am I just relaying that to the group, because I'm tired of asking?"

That's a perfect Office Space reference, by the way. How have you structured your hiring process going through all of that today? What's it look like today, and how do you build a team and a culture?

It's not perfect. I mean, we've installed a lot of things. We've become very... We've adopted a few philosophies. I don't want to make it sound like it was bad before, or the prior owners were bad or anything, because they weren't. They did a great job building a really loyal employee base. We just really formalized a process. We just applied a process that just was really rigid. We added system rigidity that couldn't be broken, and then we identified people internally.

I think this is the key. You have to learn. You have to find people to bet on to solve problems, I think, especially in a big complex manufacturing environment. I can't speak to a lot of other environments. It's not just finding the right answer. You have to find the person to bet on, and so we had to find people who were passionate about developing their peers. We found one woman who's just incredible. She has a PhD in audiology, and she's our head of safety, which is crazy.

She's the smartest person in the room. She's just really passionate about safety and developing. We said, "Hey, we have a lot of people who know safety now, because you've done such a good job developing people. How would you like to run training, because who better to run training than the person who keeps everyone safe?" That person cares about everyone too, so you're going to feel cared about. She's also tough. We have built the moneyball environment, if you will, where everything is measured, and we're constantly trying to understand what are the drivers of success down to the pretty micro level.

There's whiteboards everywhere in our plant that are constantly tracking things. Those whiteboards are turning into spreadsheets and everything. We can give her like, "Hey, so and so is here, and I need to be here. Why don't you come alongside and put your arm around them, take them to lunch, sit them down and say, "What do you need from this job? What do you want?" Let's find a way to give that to them and get them to come back and say, "I really want to be here."

Then by the way, tell them, "You're here. I need you here. Let's develop a path together to get there," and installing that culture has worked really well, in some cases. In other cases, I don't mean this in a way that could be interpreted as politically incorrect, but it's going to come out that way. There are just some people who don't aspire for anything, and they're going to come into your plant, and they're going to take your money for a few months until they get some vacation time. They're going to take a vacation, and they're not going to come back.

When you're trying to hire a lot of people, you're increasing your exposure to hiring, versus if you're interviewing 20 people for 10 jobs, you're going to get five of those people at least. Whereas if you're interviewing 20 people for one job, you're not going to get that person if you do it well enough. I think lowering our expectations in some regard, and developing a path to identify, got it out, and then reward the people who are like, "No, no, I want to be here, and I want to grow, or I want to do well, or I just want to stay in this role. Leave me alone, but I'm going to be good at it."

Those people are fine too. Just try to develop a place for everyone to thrive in that organization. I won't say everyone, but people to thrive in a way that aligns with where you're trying to save the company. The other piece with respect to that, that was a tactic, but philosophically, it's also about providing two things organizational clarity, so where are we going? Making sure everyone knows that like, "What are you a part of, and what are we trying to do collectively, because that might provide some context to why I'm like, "Hey, we got to make these pounds today."

Then also, make sure that people have the organizational clarity on where they're going, and they have clarity on what their role is, I'd say in that. Those are the two things, so tactically and strategically, the philosophies we adopted.

Is there a company or founder that you try to model your business off of, or you've taken a lot of lessons from over the years?

Lots of mentors. I always envied the guys who really, really like reading Charlie Munger stuff and get a lot out of it. I like it, too. I think a lot of his stuff is very helpful, but I don't have anything that I feel like I can personally apply all the time, but I wish I did. At the same time, there's just a lot of people out there who've been kind enough to just take me under their wing, and give me advice when I call. I've stolen a lot from them. I don't have an operator that I really, really look up to.

I bet you if you took all of my internal PowerPoint slides and you projected them on the sky, there'd be a lot of people out there who said, "That guy stole that from me." There's a lot of that.

That's awesome. What class would you teach in college if you can teach about anything you wanted?

I'll give you two answers. I don't know which one it would be. One, I'll call it gospel theology, so anyone who follows me on Twitter, which is actually not that big... I make that sound like it's a bigger following than it is. Anyone who does follow me on Twitter knows that I'm not out there with my Christian beliefs. They're actual beliefs, and so like any good belief, I feel like they should actually be applied without you even having to think about applying them. I think if it's a sincere belief, yes, I actually do believe that stuff.

I think it's actually quite a reasonable belief system. I would like to teach that. I'd actually like to teach it in a non-theology environment, like the people who aren't trying to study theology, but maybe like philosophy or something. I feel like, especially today in the U.S., Christians have mischaracterized ourselves. We found ourselves as this political group. I cringe every time I hear the phrase evangelicals. I will never check that box on any census or survey. I think we're not a political subpopulation.

I think we're a group that should have clarity on what the Bible says about who God is and who we are, and if you develop clarity on these two points, it really actually helps make this world intelligible. I say this as somebody who was an agnostic for most of my life until I changed my perspective when I was 25. I would teach that. Then the other one is funny enough. I would teach valuation, and specifically centered on maybe it's valuing private companies. I think there's a lot of really incredible tools out there, and I wouldn't try to touch those.

But I think valuation is too tools oriented. I think there should be a holistic view that's more based on learning how to do the first principles of identifying risk and then properly pricing it. I think, taking an inside-out angle rather than like, "Here's how you do a DCF. Here's how you search for comps. Here's how you take the mean and median. Here's how you do a football field chart." I think that would be pretty fun and interesting.

I guess we never talked about Twitter or your Idea Gallery writing.

I mean, Idea Gallery, the purpose of that is, I think, I have a lot to say on a lot of things. I think what I have to say sometimes doesn't come out right, unless the right context is set or in the right scenario. I really love writing for that reason, I think, because you have total control over... You can build the canvas and the backdrop, and then paint the actual content. The other piece is I was constantly ranting my views at my wife, and she was like, "You got to start just writing, and do a blog or something. I don't want to talk about this anymore."

That's how idea gallery came about. I used to teach these home Bible studies. I just felt like... I have a lot of friends who we have these incredible conversations. I feel like I would just like to share it a little bit more broadly, and it sparks really interesting conversations with other people in my network and friends. That was really the purpose of the idea gallery. Candidly, in the last eight months, I haven't been very good at sticking with writing just because I've been so swamped, but there's a long pipeline of things that I'd like to write about.

Then what about Twitter?

Twitter is interesting. I think it's certainly a great alternative to Facebook, where everybody on my feed in Facebook is somehow a political extremist one way or the other, and just boring. Twitter, I think, is what you would hope for in a social network to the extent that you're looking for interesting ideas. I think Twitter during this time has become a little unhealthy, at least for me. I have to be very careful that I don't think our brains were designed to carry the cognitive load that is inherent with all of this stuff, especially like...

It's hard enough to run a business through COVID like March and April. Those were hard, hard months as an operator. Then I was getting on Twitter all the time, and reading more about it. How much more miserable can I make myself at the end of the day? I do think On the flip side, it's like this is an incredible treasure trove. I've made some, hopefully, lifelong friends and amazing connections with like-minded folks and not so like-minded folks.

I know I've offended people, which means you're probably doing something right or wrong, but you're at least alive, I guess. It's a nice tool for interacting with the world in a way that you probably wouldn't.

Have you gotten a lot of value out of this small business investing group on Twitter too?

Definitely. It's hard to pinpoint exactly what specific things I've taken away. I did a Twitter thread around December. At the end of the year last year, I had the top 100 tweets of the year. I meticulously bookmarked really interesting things. I'm probably going to do it again at the end of this year, time and weather permitting. But I think just going back and reviewing just some amazing insights and nuggets of wisdom that people have are huge. I'd say just the frameworks that people use to think about things, threads about logistics and threads about some industrials business or some commercial real estate deal or whatever has been crazy.

That stuff's just available just sitting there. It's awesome.

Yeah, it's a great way to get a small peek into a bunch of other different industries and how people in those industries think and view investing. It's been fascinating for that. I totally agree. What's a belief used to hold fairly strongly that you've changed your mind on?

I think we hold some of our deepest convictions subconsciously, and we don't become aware that they exist until we change them, or go through something revelatory or an epiphany or something. I'll keep this one businessy because I think it matters. I think a lot of us say we don't believe in credentials. A lot of people are like, "I'm not a credentialist," like as a requisite to establish credibility or social capital. If that's true, though, what's the purpose of LinkedIn and resumes and bios, and... What we say is introductions on podcasts like this or conference calls.

I think we're always trying to build our own resumes. Then we say, "It doesn't matter," and we're trying to be accepting and stuff, but I'd say we actually do believe it. Looking back as a non-target school, average Joe guy who got into this really competitive, crazy industry, I'd overcome hurdles to be a professional that I always somehow knew I'd overcome. I don't think I believed in credentialism for myself, but I think I believed in it for other people, which is horribly hypocritical.

I'm not trying to imply that I overcame a bunch, because I know I'm a middle class white guy who's had all the mentors and everything that one could possibly want. I've been the beneficiary of all kinds of unmerited favor, but I think that my beliefs did apply to others. It wasn't like in a harsh way, but it would always be if somebody who's working for me is asking for a promotion, I'm slower to give it or whatever. I think I've learned it in a couple ways, so the people who I'm trying to rope in that I want to work with, you see this in private equity all the time actually, like operating partners, and there's a bunch of faces on their website.

It's like, "He's the CEO of whatever, Kellogg's or something," and what a feather in the cap of that private equity fund that they have this guy as an operating partner, but he actually doesn't do anything. I found actually that those guys who are really just selling their knowledge and experience are worthless. They're literally worthless. I've run into this... It's been my biggest gripe in my career trying to build everything that I've built. I've been naive enough to work with those people.

When I say I didn't believe in credentialism for myself, but I did for them, I was like investing in them based on that, and they always under delivered. Whereas, we say this at westerns that when it comes to breakfast, the chicken is involved, but the pig is committed. I like to partner with pigs. Even though I secretly believed inadvertently that credentials really mattered, I need to find the people with the best credentials and partner with them. It really is, I think, you need to find the pigs. You need to find the people who are committed.

They're not just involved. They're not just trying to lay an egg. They're going to jump on that skillet and be bacon. I think about my team at westerns. We didn't go out and hire all these credentialed people. We have a bunch of under credentialed underdogs, but we are absolute savages, just absolute. We own our shit. We take responsibility. We dig deep and establish the truth and insight. We serve each other. I'll take us over a sexy startup started in some dorm room at Brown, nothing against Ivy League schools, and a group of Fortune 500 gray hairs, nothing against gray hairs.

But any day, on the basis of those factors alone, I'm sure there are some scrappy people who are like, "Yeah, well, I went to an Ivy League school and I'll kill you," then that's probably true. But the fancy NASCAR slide on pitch deck slides don't mean what I always thought they meant. That's a long answer, but I'd say I've come around over a long period of time to really learn to find the pigs find the ones who are going to jump on to the skillet, and burn a little bit with you in the hard stuff.

When people are making introductions to you or presenting themselves for the first time, and they have a space and an email, like a cold email to give a bio of themselves, what strikes you as more interesting today versus credentials?

I don't want to give the impression that I'm like... If somebody does, I do it too. I throw my credentials out there too. We all do it. There's nothing wrong with it. I don't want to get the impression that I'm against it. I'm not anti credential. I think it's great that somebody achieved a lot, and they're proud of it, and they should share it. What else would they tell me? I'm a really hard worker, believe me. I think though I'm going to partner with you. I'm going to trust you out of the gate. That's been one of my calling cards is I will believe in a person if I'm going to partner with them.

If somebody sends me a cold email, and they want to work with me, first of all, I'm flattered that they sent me a cold email. Second of all, I'm glad they shared their background. Third of all, it's going to take a while to get to know me. That's generally true. I'm not going to play hard to get or anything, but I do want to make sure I know I understand the person. I want to get a feel for, "Is this a pig or a chicken?"

What's the best business you've come across?

What do you mean by best? What is best? Is it best at delivering shareholder value?

Whatever measure you think is best for you.

I think the best businesses... I don't think I have an answer for the one, but I want to say that the best businesses are not just the ones that create shareholder value. They're the ones that are meaningful to society, but I think they also have to create shareholder value. I don't think a VC subsidized business that provides a really good service that we all value that may not actually work in the long run is the best business. At the same time, there are probably some profitable businesses that create shareholder value that still make trade offs to the benefits of their customers, employees and community, and vendors that are really valuable.

I can't think of what those are. Maybe it's like Patagonia or something, I don't know, but I'd say I'm a sucker for strategy and execution, which I think is so core to CPG. I bet the search fund people you talk to have way cooler businesses that are super niche, that are like, "Man, I never would have thought of that." I'll already kneel on the ground and lay it down at their feet, but I'd say this is going to be like the most roll your eyes answer. I think Pepsi might be the best business out there from a strategy and execution perspective, from my little tunnel of vision vantage point.

What about them do you like in particular?

They're the epitome of what vertical integration is. If you think of vertical integration as not necessarily owning all of the value chain but owning all of the value chain that you should own and that you can add value to under your ownership versus somebody else owning it, they extract value and create value. They create value and extract it at every point that they own. It's strategic, and it's economic, and it's powerful. What I mean is if you look at them, they own everything from in-store execution all the way back to manufacturing, and in some cases, logistics.

They create these massive barriers to competition that are just hyper structural. In the beverage space, unless you get on Pepsi or coke trucks, you're at an economic disadvantage period. By the way, those trucks ain't got a lot of room for a lot of brands, so not everybody's getting on. The beverage space in general has a competitive choke point that's just hardcore and real. The other piece is they're in snacking heavily through Frito-Lay. They've got this manufacturing network that is incredible, so they have something like 50 something chip plants. I'm sure somebody from Pepsi would slap me.

I think it's something in the 50s where they're all self manufacturer. By the way, they also dominate categories that you don't even think of. They dominate hummus with sabra. You don't even think about... In all these other categories where challenger brands have taken share, taken share, taken share from big brands, the categories Pepsi is in, that's not the case. It's salty snacks. Nope. It's a hummus. Nope. Beverage, carbonated soft drinks. Nope. I'm not really pro sugary soft drink and MSG flavored Doritos, even though I'm a sucker for them.

I think that over time, their product portfolio is going to have to evolve, but they're so entrenched. They own these plants. They make the network work together. Most businesses have a hard enough time just owning these plants and keeping them running, let alone figuring out how to load up a truck that weighs out with Pepsi drinks. Then they put Funyuns on the top to cube it out the rest of the way, and those Funyuns are riding free all around the country. That's a huge advantage. Then on top of that, they manufacture them at scale on these really efficient lines.

Then on top of that, not only do they have enough logistical advantage to get them to stores, they can deliver direct to store. Then they go to retailers and say, "Hey, you don't even have to keep our stuff in your distribution center. You may have to for these challenger brands over here, but not us." Then the retailer is always going to say, "Well, my carrying cost of that inventory is a lot lower, so yeah, let me fill up with some Pepsi stuff." They are. They're always going to. Then on top of that, inside the store... Do yourself a favor the next time you go to a Walmart.

Walk in and go to the chip aisle. First of all, you will walk by five Pepsi displays on your way to the chip aisle, but when you get to the chip aisle, look at how the Pepsi stuff is merchandised, the Frito-Lay stuff is merchandised, and everybody else. This isn't me thumbing my nose at everybody else because I know how gosh darn hard it is to manage brokers and field sales people and stuff. But Pepsi has this field sales network that is so outrageously strong, everything will be pristine. If you've ever been to Walmart, you go into other aisles, and it's like, "Why are the plastic forks on the floor?"

Notice Pepsi and Walmart, but Pepsi is everything is fully filled and totally symmetrical and perfect. They're just a machine. They're going to out execute you at every step of the way, so you got to find a way to not play on that paradigm against them. It applies to the big companies and the small companies in that space. That's why I think they're the best.

That's amazing. Thank you for sharing. I love having you on the show here. Your energy for consumer is contagious. I'll never go into grocery stores the same way again, so thank you very much for sharing your time. This is fantastic.

Thank you. I appreciate the opportunity to talk about it, and it's good meeting you.



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