Abstract

Lamar Letts, an undergraduate student at Northeastern University in Boston, had developed a vitamin water drink in response to his needs as a high school student athlete in Brooklyn, NY. Due to heart disease, Lamar could not use the vitamin waters that were on the market. On his own, he developed a better tasting, lower calorie alternative. In trying to sell this product commercially, Lamar faced the challenge of how to distribute the product. One of the toughest challenges for an entrepreneur with a new product is trying to reserve retail shelf space. Although Lamar had been successful in placing his product on the shelf in several retail outlets that he could service directly himself, he was having difficulty finding wholesalers to expand his distribution. He was in a catch-22: Retailers were not interested until he had wholesalers to partner with, while wholesalers were uninterested until he had retail traction. In 2017, Lamar finally found a midlevel wholesaler who was interested in carrying his product. Lamar realized that if he signed with the wholesaler he would need to scale up his company quickly, which most likely would require raising money. Lamar must decide whether he is ready to change his organization to take advantage of his multiyear effort to find wholesalers.

Introduction

I think I can finally break through the catch-22 of getting a larger distributor. The distributor, Atlas, and I seemed to hit it off because he asked where I'll take the brand and do I have the drive, being so young. Normally I'm asked if I have investors and if I am certified to be carried in chain stores. But the chain stores ask if I have distributors, and investors want to see that I have distributors and retailers. I've spent three years trying to break in, and I may finally be at the door. But if I go through the door, my business is going to change completely.

Lamar Letts, the founder of a sports drink company Hylux, was working on the financial numbers he was going to present to the potential distributor of his product in Central Massachusetts. Lamar was a senior at Northeastern University in Boston, where he was majoring in finance and marketing. He had been working to develop his company since his freshman year, when his thinking at the time had been, "It'll take 4 months to launch the company." But it actually took two years to develop the product that he introduced in 2014, and in 2017 he was still trying to develop his means of distribution.

Lamar was born in Brooklyn, NY, where his parents owned two Jamaican restaurants, and grew up on Long Island. He had run track and played football in high school. As a consequence of dealing with myocarditis, which is an inflammation of the heart muscle, during his senior year of high school, Lamar began to question the current selection of functional beverages on the market. Functional beverages contain ingredients with health benefits, such as vitamins, herbs, or fruits. Lamar's dissatisfaction with available sports drinks motivated him to create the perfect health beverage for himself and others. Immediately after his recovery from myocarditis, Lamar either had to dilute commercially available sports drinks, because he was not exercising at his previous level of intensity and could not afford to consume the extra calories and sugar, or create his own homemade sports drinks. He had known that there was a lack of hydration alternatives for health-conscious individuals; however, it was at this time that he realized the extent of the problem. "I always figured that someone would do it," he said, referencing creation of an alternative sports drink. But when he realized that no one had, he set out to develop a much improved sports drinkone that would combine the lightness of water with the benefits of a sports drink.

Because Lamar's parents owned restaurants, he had contacts in the food industry. He employed a food scientist, who developed a recipe for a light sports drink that had a nice taste. The cost to Lamar was USD 1,000 per flavor. Lamar decided to produce three flavors, using USD 3,000 he had saved for college. His first attempt at packaging used a standard bottle, which was very inexpensive. He was able to find a small co-packer in Brooklyn, NY who agreed to the small production runs. He raised money from friends and family to fund the first production run. Now that he had product, Lamar needed a plan to sell his merchandise.

Lamar decided to sell online. To save money, Lamar produced videos and created the website on his own. For the videos, he wrote the scripts, cast the actors, and shot and edited the videos.

At first, few noticed the website. Recalling the online launch, Lamar said, "I launched and no one cared. I guess that is the rite of passage for entrepreneurs. I realized I had to do the leg work and make them care." Despite the inauspicious start, Lamar did sell product online, although he could not sell out his first batch. The website is https://drinkhylux.com/.

The Early Days

Lamar talked about his next steps. "I did not know how to make money in this business. I thought I would have to go out and sell every single storeI would have to negotiate with every store manager. I eventually learned about distributors." Lamar began by visiting grocery stores and trying to convince the managers to stock his product. The small independently owned stores would buy Hylux, but the large stores would not. "I did not know about 'buyers' in the chain stores. The managers would smile and say let us think about it, but you would never hear from them again," he recalled. Lamar then decided that he would instead approach gyms and fitness centers as his targets to avoid the "shelf" competition that already existed in grocery stores. While still in school he would drive to 10 gyms per day in Boston. The reactions to his pitch provided market validation. Although he began to secure accounts, he discovered that servicing the accounts was a challenge. He could not conduct product tasting events and deliver product in a timely fashion. He began to lose some of his early accounts.

Lamar searched online for distributors but found none existed for fitness centers. The available distribution channels were, in effect, requiring him to rethink his retail outlets. "My first distributors were small independent distributors in NY. They saw my product in some bodegas and in my parents' restaurants and became interested." Lamar found that his market became regionally differentiated: in New York City he had two small independent distributors and his outlets were small independent stores. In Boston, he could not find small distributors, so his Boston market remained gyms that he serviced himself.

Because of the resistance he was facing from larger distributors, Lamar decided he had to make some changes to improve his chances of success. He spoke about the differences among the distributors he encountered:

Small distributors did not need to know the numbers because they knew you did not have any. They were betting on you having an interesting product that they could get in on early. The bigger distributors, however, were asking how big was your production, how much money did you have invested, what were your sales projections. They wanted to know that you were legitimate and that you were in it to win it, because they did not want to waste their time on you. Big companies can pour all sorts of money into an unproven product and get distribution. But the little guy cannot.

Lamar decided that one thing he could do to appear more legitimate was to create a custom package that would allow higher quality branding. Using a Kickstarter campaign, Lamar raised USD 14,000, which enabled him to hire a graphic designer who designed professional packaging.

The money also allowed him to create another batch. He then started rethinking his target geographically:

I wanted to be in gyms in NY, Chicago, and Los Angeles. But now I am finding that I have to go with small distributors in smaller markets to prove myself. I did not plan on Central Massachusetts but I have the opportunity there. I may have to think about smaller towns in the Midwest too. If I can get some smaller chains in the Midwest, then I can get some distributors. So it is opposite from what I thoughtI need to get the retailers to get the distributors.

Industry

The functional beverage industry in the United States is divided into four main parts: (1) hydration; (2) energy and rejuvenation; (3) health and wellness; and (4) weight management. The total U.S. non-alcohol beverage market was valued at over USD 160 billion in 2016, and the functional beverage industry was approaching USD 20 billion of that total. (All data taken from Hylux business plan). The functional beverage market had been showing steady growth during the last decade; however, in the last few years a sharp increase in sales was observed.

Consumers were navigating through food and beverage varieties with a greater breadth and depth of knowledge, as there appeared to be a cultural shift away from "health" and toward "quality of life," where consumers focused on positive and vital experiences, emotional wellness, new exercise techniques, complementary medicine, and what they viewed as "clean, real foods" (The Hartman Group, n.d.).

Competition in the functional beverage industry came from sports drinks such as Gatorade and Powerade, flavored waters such as VitaminWater and SoBe Lifewater, and enhanced waters such as Essentia and Smartwater. These products compete with Hylux across the board, as they are beverages that are fortified and provide some sort of functional benefit to the consumer. Important indirect competitors in the area of fruit-flavored beverages are brands such as Tropicana and Odwalla.

Lamar's idea was to differentiate Hylux through the combination of its unique tasting blend, low calorie count, low sugar count, and the functional benefits of the formula, which are delivered by the vitamins and electrolytes that it provides. Hylux offers consistent vitamin and mineral content in each flavor, similarly to sports drinks such as Gatorade; however, it also gives the light flavoring and health benefits that enhanced water provides. This positioned Hylux to be a healthful combination of a sports drink and enhanced water. It had less sugar, fewer calories, and more vitamins and nutrients. The most important factors of the drink formulation were natural ingredients, color, taste, and functionality.

Hylux offered functional benefits similar to those of its direct competitors but with fewer calories and sugar while also containing more vitamins and electrolytes compared to major competitors. This was important because it spoke directly to the core health-conscious consumer that Hylux targeted. Hylux and Hylux Water (an unflavored version) competed with each competitor in their own unique way.

Customers

Lamar discussed his target market as follows: "Our customers are men and women between 21 and 35 who are health oriented and conscious of their nutrition." From surveys he found that these people have an education level greater than a high school education and may not pay the most attention to the fitness of their lifestyle. However, they are conscious of small decisions that can have an impact on their health. Even though they do not always do healthy things like drink water or eat healthily, they know the benefits of it and make it a point to act on these healthy habits in some way, shape or form. Lamar added, "Our product is also catering to the needs of athletes who partake in any activity at any level of fitness. We see that individuals who are generally aware of the health benefits of proper hydration are attracted to the product."

The current customers were gym patrons in the Boston area as well as regular gym goers and athletes at Northeastern University, and fitness-oriented consumers in New York who shopped in delis and convenience stores. What these groups had in common was that they acknowledged the need for daily intake of vitamins and electrolytes and felt that Hylux's offerings were sufficient. Gym patrons were generally more interested in the exact benefits of the vitamins in Hylux and wanted to know what each one did to benefit them after a workout. Athletes and gym goers at Northeastern University were interested in the all-natural/no-additive offerings as well as the light calorie load and vitamin and electrolyte offerings. Fitness-oriented consumers in New York were interested in the fact that Hylux had a great taste and had fewer calories and less sugar than Gatorade, Vitaminwater, and other leading health drinks.

The primary target retailers were mainly specialty health and fitness stores such as gyms, bike shops, and health clubs. These stores were deemed good places to sell due to the specialization of their staff and their "opinion-setting" ability in the health world. Many of these gyms did not buy Gatorade and other sugar-filled drinks because they recognized that they were not the healthiest options. These locations included Women's Fitness of Boston, Fisique Fitness, Rock'N Fitness, and Zone5 Fitness. By starting at local gyms, Lamar felt that Hylux could get proper exposure to its target market and eventually gain enough popularity to expand into larger regional franchises and gain space on the shelves of national health-related franchises such as GNC and Equinox.

Convenience stores and delis in New York City and Boston were Hylux's secondary target retailers. Two local distributors in New York City had allowed Lamar to reach out to health-conscious consumers who watched their weight and calorie intake. Hylux resonated with these consumers because it had less sugar, fewer calories, and more vitamins than most competing fitness drinks. In Boston, small retailers such as Symphony Market and Wollaston's allowed Lamar to reach the health-oriented consumers at Northeastern University. These students were on sports teams and/or were regular gym goers. The convenience stores carried many different and competing products. Lamar, however, felt, "Our superior health-based offerings and promotions directed to fitness-oriented students and consumers allow us to project our message and attract our target customers."

Products and Services

Hylux came in two forms: unflavored and flavored. Being able to offer both allowed Lamar to be flexible in how he appealed to consumers, whether it was with a zero-calorie enhanced water or with a low-calorie flavored water. Hylux was sold in 500 ml (16.9 oz) bottles. Each bottle contained a series of vitamins, minerals, and electrolytes that provided functional benefits to the consumer. The unflavored version was called Hylux Water, and the flavored was called Hylux Sport. The flavored form had three fruit blends, which were kiwi-strawberry, lemon-lime, and berry mix. The drinks were naturally flavored and naturally colored and were made in strict accordance to the guidelines set by the Food and Drug Administration in naming something as natural. Hylux was hot filled, which meant that it was heated to temperatures between 185 and 194F before it was put into a bottle. This extended its shelf life to around one year and ensured its freshness. The packaging displayed images of the fruits that flavored the drink. The color and texture of the drink were visible through the bottle.

Lamar had found that in a gym setting individuals were more interested in Hylux Water. The bottle, therefore, was designed to make it easier to grip by being slightly taller but noticeably skinnier. In the convenience store setting, consumers responded better to the flavored version. There was some overlap though, as people in gyms did opt for the flavored drink and consumers in convenience stores did purchase the enhanced water. Lamar thought, "People who live an active lifestyle appreciate this choice because different workouts and activities call for different types of supplementation."

The ingredients for the beverages were sourced in Amsterdam, NY, the labels were sourced in Chicago, and the bottles were sourced in Pennsylvania. Everything was sent to the co-packer, located in Brooklyn, NY. The product components were sourced from these firms in these locations based on their geographic proximity to Brooklyn and on their rates.

Production took one week. When the ingredients arrived at the co-packer, they were mixed together in commercial kettles and then filled into bottles, which came down an automated filling line. After they were filled, groups of 12 were packaged together with shrink wrap and stacked on a pallet. The co-packer did all of this and charged Lamar for use of its equipment. Lamar did not need to be present during production; however, he came in to watch production and to sample, to ensure quality.

Lamar commented on outsourcing production:

Since production is outsourced to the co-packer, we do not need to invest in equipment, and only need to focus on storage, logistics, marketing, and sales. After production we receive 6-foot-high pallets from the co-packer that we must truck to Boston or a different location in New York for eventual sale. The supply chain works because it is efficient and each member provides us with a quality product. With the way it is set up now, we can easily order the flavored water or the unflavored water and expect the same consistent quality and one-week lead time. We have established positive relationships with our supply chain members and we have been given outlines of volume-based discounts that we can get as we increase our order sizes. We feel that being horizontally integrated is the best option for both price and quality at this moment.

The advantage Lamar had in using the small co-packer was that he was able to get small production runs. One large barrier that many smaller beverage companies faced was the high minimum production requirements of co-packers. The disadvantage of using the small co-packer, however, was the inability to quickly ramp up production if a big order came in.

In gyms Hylux retails at a premium of USD 1.99-2.49. Convenience stores sell the beverage at USD 1.49 and USD 1.99. Lamar commented:

Customers have responded well to the prices in gyms, because they fall in line with the prices that they are used to seeing inside the gym. We have learned that these prices are stable in the gym environment, and product demos that push the benefits of the product further help keep the perceived values high. We have seen that the pricing in convenience stores aligns with competing products and has been working well for us. Most of our volume has been at the higher price point, so we take this as an indicator that the perceived value of the beverage matches the pricing. In the future when our production costs get lower, we will assess whether we should decrease prices or keep them the same. If customers still feel our product is worth the value and if competitors are still in that range, we will most likely keep prices the same.

The main form of customer acquisition was through product demonstrations, which Lamar did by himself. Lamar thought this worked well, but he was capacity constrainedhe could not handle any more accounts. The demonstrations allowed Lamar to educate gym goers about the product and to build a community around Hylux in the gyms. Gym managers and owners seemed to like this because it added a unique gym experience for their members by giving them something new to partake in while also driving sales of the beverage.

Lamar estimated that he had spent about USD 5,000 on web-based advertising through videos and his website. However, he thought that his efforts on video were not the most relevant to immediate sales. He commented, "The learning that we have had on the effectiveness of ads lets us know that there is room for more efficiency in marketing spending."

Decision

As of April 2017, Lamar had sold more than 12,000 bottles of Hylux. He had also reached his capacity to personally handle business with retailers. Except for the two small wholesalers in New York City, Lamar was the distribution system. But now Atlas distributors was willing to take a chance on him. Although excited by the opportunity, Lamar realized that servicing a mid-sized wholesaler would be difficult to manage. The wholesaler would want to be assured that Lamar could deliver enough product so that the wholesaler could service its accounts. It did not want to experience running out of inventory and other issues with its retailers because Lamar could not service the wholesaler. Lamar's current production and supply chain would have to be changed because his small batch mixer did not have the capacity to handle larger orders. He would also have to raise money to be able to order the larger production runs, and he could no longer rely on his current friends and family to provide him enough money. This meant that Lamar would have to find investors and turn his company into a full-time business for himself. This is what he had wanted, but now he understood that he had to be sure he had a competitive product. He knew it worked in gyms, but would it sell in retail outlets where it was competing against large, established brands?

Transcript from Interview with Lamar

00:07

Hi, my name is Rebecca Frankel, and I am here today with John Friar, executive professor of entrepreneurship at Northeastern University. Thank you so much for joining us here today, John. Thank you for inviting me. Pleasure to talk about entrepreneurship anytime. I'd also like to discuss your case, "Hylux Vitamin Enhanced Water, Finding a Distribution System." What inspired this case? Well, that was one of my students. So this is a company that was created by an undergrad student.

00:40

He's actually from Bronx, New York. He was running track, had heart disease as a high school kid, and when he was trying to recover, he was trying to look for athletic drinks that he could use. Because he was trying to work back but he had to go towards low sugar. He had to go with really a different formulation than what was commercially out there.

01:10

So he had found a market gap through his own experience, which again, is a way lots of entrepreneurs come up with product ideas. His parents owned a couple of Jamaican restaurants in New York. So he was already kind of hooked in to kind of food services, food sciences. And he took his tuition money and spent it getting a formulation for a new sports drink that was higher vitamins, lower sugar.

01:50

How pleased were his parents with that decision? Well, I think they kind of took it in stride, said hey, you know, he's going to figure it out. And they were entrepreneurs themselves with the restaurant. So they kind of understood that. So he made that up, and then he started to find distribution. So originally he started selling online, which is what a lot of entrepreneurs will try to do. And the trouble is if you don't have a marketing budget, it's very hard for people to find you.

02:24

Because there's so much going on. And then with shipping and everything else, he wasn't making any money. So he realized he had to go after retailers. And in New York, he started placing the bottles in his parents' restaurants. And a one-person wholesaler happened to be in the restaurant, and said, oh, so a tiny, tiny wholesaler picked it up and was able to get him in bodegas around New York City.

02:56

But that really wasn't the target market. It was an athletic drink. And up in Boston while he was going to school, he started to go to gyms and workout facilities. And they wanted the product. The challenge there, there's no established distribution into gyms. There's wholesalers into retail outlets, but not into gyms. So he had the conflict of do I go after my customers where there's established distribution, and try to break into the wholesaler network and get into stores around campus, or stores around town, or stores around anyplace?

03:45

Or do I have to create my own distribution to go after gyms where people are working out? And gyms would work better for him for a couple of reasons. One is there isn't all this competition from the big brands who are advertising like crazy. And two, is there's really no price competition. Because they can sell the stuff in the gym for a little bit more. Because that's all there is going to be in a gym or workout facility.

04:19

Again, there's this ongoing issue of I have this product that seems to have a place in the market. Everybody who's tried it loves it. He's getting good feedback. People want it. But how does he get it into some place to actually sell it? And he was going through the challenge of well, how do I find wholesalers? Or do I have to create a whole new distribution system to go after a retail point that isn't currently being served?

04:52

So which path did he end up choosing? Well, he was kind of doing all of them, which again, is typical. He was stocking the retail outlets and the gyms himself. And then that started causing problems because people like me demanded he show up to class. And so then if a store had a stock out and he didn't get to them, he would lose that account. Because the retailers do not want to work with somebody who's going to let stock run out.

05:32

So this is a case where it really can get into a discussion of all the issues. What are the tasks that wholesalers take on? What is it that retailers are looking for from wholesalers? And how does an entrepreneur break into this? And so at the end of the case, he's starting-- again, it's been about four years. He finally found a midsize wholesaler in central Massachusetts, a place he wasn't even thinking about selling product.

06:08

But this wholesaler had a history of taking on new product. I believe it was Sam Adams. He may have been the first wholesaler to take on Sam Adams beer. So he found a wholesaler who was sort of a risk taker and said, OK, I will do this. But now you have to give me a amount of volume if I'm going to distribute this.

06:39

Well, what Lamar had been doing was he would take, like, his $3,000 that he had for tuition and do a batch run, and then sell the batch. And then make that money, and then take that money, put it back in for another batch. But now all of a sudden, he's at a situation where he has to, if he goes with this wholesaler, probably go out and raise a lot of money because he has to make a big batch run. And it'll also going to require him to find a new manufacturer, because the small manufacturer will do small runs, isn't capable of doing the big runs.

07:19

So the case goes through all these issues of how do you find distribution, and then ends with well, he's again at the verge of success. But this is going to put a lot of pressure on his business. Because if he wants to make this step, he's going to have to go raise money, he's going to be building an organization, kind of change everything that's going on and really transform his business.

07:50

And so he's deciding which way he's going to go in that.

Questions

1. Analyze Lamar's development of Hylux from the idea stage to product prototype.