POTENTIAL FOR GROWTH IN APPLES
Dragons’ Den is back and so are we. Each week, Financial Post contributor Mary Teresa Bitti revisits CBC’s previous week’s episode. We capture what the cameras didn’t and in the process provide a case study for readers, zeroing in on what pitchers and dragons were thinking and what the challenges for the deal are going forward.
The pitch Toronto-based entrepreneur Michael Petcherski entered the den prepared and ready to sell. He even had a snappy jingle for his signature brand, ThreeWorks Apple chips. In 2012, he launched ThreeWorks Snacks & chips, after building a 12-year career with some of the largest packaged goods companies going: Heinz, Unilever, cadbury, danone.
“Moving from company to company, I realized I was never going to be a great fit for corporate positions because I’m outspoken and I have my own ideas.”
About six years ago, he set up shop as a broker/third-party sales agency representing other brands, handling their sales and marketing efforts and negotiating listings with major retailers in canada. In 2012, he changed his focus. “I realized I was still basically an employee and what I really wanted was to build long-term equity by launching my own brand and also partnering with key brands to build a snack-food company,” Mr. Petcherski says.
The timing could not have been better. “The whole food industry is going through a revolution as consumers are adopting healthier eating habits. At the same time, everyone is always on the go and in a rush,” he said, pointing to the growth in the industry, which is worth $2-billion in canada and $92-billion globally.
“Just look at all the other packaged goods companies trying to launch snack foods. I saw that opportunity and decided to create a healthy snack food. Our original product has just one ingredient, Fuji apples. Our other chips are still Fuji apples but they have a natural flavour added. They are sugar-free, fatfree and gluten free.”
Soon after launching, the company landed shelf space at grocery chain Safeway, which was also involved with the initial development of the product. ThreeWorks is also available Shoppers drug Mart, IdA, Guardian and rexall as well as in independent grocery stores in the Greater Toronto Area, such as Pusateri’s, IGA, Michael-Angelos and select Loblaw stores, among other retailers.
In addition, Three Works represents Frésh Mints from Germany and Sugarpova, tennis star Maria Sharapova’s candy company, in canada. “I knew I wanted the brands we partnered with to be fun, innovative and colourful,” he says.
The deal When Mr. Petcherski
Companies that have potential and are growing get bought out
entered the den, Three Works’ flagship apple chips were already being sold in 450 stores across canada at $3.99 a can. Sales were at $850,000 for all three brands, with the apple chips accounting for $460,000 in revenue. And he had achieved a gross profit margin of 65%. Mr. Petcherski asked for $300,000 in exchange for a 20% equity stake. The investment was to help him break into the U.S. market with part of the funds going toward a social media campaign and the rest to build up cash flow.
Jim Treliving offered $300,000 in exchange for a 50% equity stake and Mr. Petcherski accepted. The deal is still in due diligence but both sides appear eager to come to terms. “Jim is a great strategic fit. He’s made a lot of deals on the food side and he has a passion to help this business grow.”
Three Works has been doing just that since the episode was filmed last spring. It has had its four strongest months since it launched, turnover and sales per store have increased and new flavours are in development. A dragon’s point of view “Michael is one of the best pitchers we’ve seen on the den. He knew his numbers, he is a grocery industry veteran and he’s realistic, particularly when it comes to an exit strategy,” Mr. Treliving says. “The fact is that companies that have potential and are growing get bought out. Look at Vitamin Water. He is realistic and open to that. We are excited about this deal and are working to make it happen. We’re trying to determine the real cost of going to the U.S.” An expert’s opinion John cho, partner with KPMG enterprise, is impressed. “The entrepreneur has a distribution side for third-party products as well as his own brand of dehydrated apple chips. His customers are retailers. He has multiple flavours, unique container packaging for this space, which helps set it apart, and a 65% gross margin.
“He’s clearly getting the attention of the buyers and has a nice mix of products. As he gets larger, the trick will be inventory management. There will be challenges with the increased n u mbe r of SKUs [stock keep ing units]. Having the right systems in place to determine which flavours are selling and using that information to guide purchasing decisions will be critical.”
As for selling into the United States, Mr. cho notes that the market is much more competitive and the product will need to have a clear differentiation. “He may want to focus more on building up a canadian presence and working capital first. Selling into the U.S. may be premature, particularly since he’s only been in business for such a short time.”