Startup To Scale

91. How Modest Coffee Ended up $200k in Debt From a Failed Distribution Deal

February 06, 2023 Foodbevy Season 1 Episode 91
Startup To Scale
91. How Modest Coffee Ended up $200k in Debt From a Failed Distribution Deal
Show Notes Transcript

Marcus and Jenni are the co-founders of Modest Coffee and recently experienced the worst of what could happen when a distributor partnership goes bad. What started as a huge win for with a Walmart launch, ended with KeHE returning $250,000 worth of product and the company $200,000 in debt. Listen to learn what happened, their top lessons learned, and how the internet saved their business.

Link to full story from Modest Coffee:

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Modest Coffee

[00:00:00] Hey everyone, Jordan here, and I've been excited for this episode for a really long time to talk about some of the issues and watchouts growing with national distributors as a small emerging brand. And for this conversation, I have invited on Marcus and Jenni, who are the co-founders of Modest Coffee, and they went through a very chaotic period over the last few months dealing with large distributor.

So I have invited them on to share their story, lessons learned to help you, our listeners, avoid the same mistakes and to know the right questions to ask as you are navigating along your journey. So Marcus Jenni, welcome. Hi, how are you? Hello. Thank you. Hello. Thanks for having us on. So, I know you are coming off this very rollercoaster period of a time.

I'm going to link to your blog post in the show notes for anyone who wants to read the full story, because I think you summed it up very eloquently and talked about all the, the things that happened on your [00:01:00] journey. But we'll love for you just to give a quick 10 seconds on modest coffee in general and then we'll jump into a little bit of your story.

Cool. Yeah. Thank you. So modest coffee. We are a high end single origin specialty coffee roaster. And we focus on bringing to market five different coffees and at a time. and it's always one farm or one region at a time. And it's always seasonal. It's always fresh. And we kind of have everything from a light, super light, super premium coffee to dark roast, to a decaf Swiss water decaf.

But we really focus on like farmers quality and sustainability in, production and then also in, both at the farm and at our own warehouse. So we're really big on kind of treating people the way we want to be treated. Yeah, I love that. Yeah. And our idea with modest coffee is to just simplify specialty coffee buying.

So, like Marcus said, we've got five coffees, five tiers. We do the curating within those [00:02:00] tiers to help our consumers understand and just find something that they're going to like, they can trust us to make a decision for them. Yeah, I think my biggest thing is I like to delight people and give them coffee that they've never had before.

So it's always, fun to, to see the joy when people try something that's just like, wow, I didn't know coffee could taste like that. Yeah. So, yeah, that's us modest coffee. I love that. And then how long have you been in business now? This is our 10th year. Yeah. We're like nine and a half years in.

So, yeah, it's been a while. Yeah, it's been fun. It was quite the journey. I know most most companies don't make it past three, let alone five. So 10 years I think is great. So I'm very stubborn. . I will not give up . So I know both of you went through a very trying experience working with a national distributor a couple of months ago.

Can you give maybe the top line version of what happened with that? Sure. So we decided a couple years ago that we wanted to grow our [00:03:00] business. You know, we've been doing, you know, local deliveries and we wanted to go nationwide. So we decided to work with a nationwide grocery distributor, KeHE.

And so we hired a food broker to help us navigate that. And then KeHE approached us about Walmart wanting to do a specialty coffee and tea program. And we said, sure, let's go ahead with that. That was April of 2022. And so KeHE ordered. A ton of coffee from us, like 34,000 bags of coffee, which to us is like a year and a half's worth of coffee.

And then because we were a new vendor, they wouldn't pay us for the coffee. We were on this new vendor payment hold. And then Walmart dropped the deal with KeHE, and so then we were left. You know, fighting with KeHE about payments and this product. And eventually we, you know, got a lawyer involved and KeHE agreed to send us back our coffee, but not until after the lawyer got involved.

So then to sell that coffee, we decided to fire sale it online for half [00:04:00] price and then went viral. So it was a very, very crazy. So you went from an extremely high high of launching in KeHE and Walmart, Uhhuh, to the low of knowing that all this product that you already produced would not be sold. Mm-hmm.

and you didn't have it. And they would maybe get sent back, maybe disappear somewhere. Well, they wanted us to pay them $40,000 almost to take the coffee back because of their fees that they charge. So, yeah. Which is so yeah, we didn't know what would happen cuz we weren't going to pay that fees, those fees..

Which is something , that all national distributors is in the food space they require. But you never expect this to happen at the full volume. Right. You'll mm-hmm. look, oh, maybe a couple cases here and there. It can happen, but not everything that you sell them. Right, right, exactly. Especially when we didn't even want to send them all this coffee.

They asked us for it. So yeah. But yeah, and then that was the low low. And then, yeah, we went back to this high, high of this virality where we sold. Like [00:05:00] 30,000 bags of coffee in 15 hours almost. And so I think it's important to remember as well, right, you sold most of those , at a discount. Yeah.

Cause you're trying to move the product out. So it's not like you made the full retail, you know, the full selling price on those, but you gain a ton of really great. Customers and followers who really relate it to your story and wanted to support you through that journey. Is that right? Yeah, definitely that love so many.

We got like 4,000 new customers and I'm like, between me and Jen, I'm like, if even like a small percentage of them loves our coffee and wants to buy again our online business, I'll double. And if it's like E, even like slightly bigger, small percentage, it'll triple. It's like crazy, like . We're really excited actually about these new customers and exposure.

It's been kind of good in a way. Plus, I think it really just helped us understand like, who is important to us? Like, , and who are we important to you? So, you know, six months of dealing with KeHE and then like Walmart by extension you [00:06:00] know, they don't care about you at all. And it's like every single time everything was a fight.

It was very, it was very depressing. And then to have this viral moment where, So much love and support from people we don't even know from individuals. That was, I think the most powerful thing about it is that we sold all of this coffee, like most of it was one case at a time. And so like the situation that we had been fighting these behemoths over was like repaired for us and our lives were given back to us.

Because a bunch of singular people, you know, our story resonated with them. So it just kind of, it shows how important like individuals are and how like people, a community, yeah. It's how important that is, especially as a small business. So different communities I think rallied around us too is like the bike community in Aurora where we live and like, you know, and like the coffee community and then online, you know, which spread it, you know, kind of [00:07:00] globally.

It's just like all of these different little communities. We saw them kind of responding all, you know, in their own time. But you know, over time it was pretty wild. If you did not have the virtuality and kind of had the online sales after and you had to take all this product back, what would've happened to you and your business?

So my goal was to start, you know, I wasn't gonna Tommy boy, it, you know, I was gonna put it in a van and just like hit the road and see if I could sell it , you know, that was one idea. But the biggest idea we had was that Marcus was actually just going to go back to work. He was gonna try selling it, but he was actually at a point where he was like, I'm really at this coffee.

If we don't sell all of this coffee to somebody, I'm done. And so he actually had a job interview that next week where like the final interview at a job and he was like, you know, I'm just checking out a modest coffee forever. He's like, I don't wanna keep doing this. I don't wanna keep fighting this.

I work so hard and you know, this is where it's gotten me. So that's kind of, that's kind of, we had kind of [00:08:00] ended up at a point where it's this worth it anymore. But we did have a plan though. It was like first try to sell it. Then, then be out, you know, then, right. Then just pay the debt back over time and shut the business down.

Yeah. Yeah. Well, you know, it's interesting because I always tell other founders that, you know, starting a business is supposed to be hard. There's challenges, but it doesn't have to be this damn hard. Right? Like, why are there, so it seems like you're constantly pushing a boulder up a mountain sometimes.

Mm-hmm. , because a lot of the odds are stacked against you, especially in the food and beverage industry where. For some reason it's landed on the brand owners and like the product makers to take all the risk. Mm-hmm. , because in working with these large distributors, the distributor buying the product, they're actually not buying it completely.

I'm doing air quotes because they can return it to you if the product doesn't sell at no cost or even charging for it. Mm-hmm. and then even after they sell it to the retailer. [00:09:00] That in retailer doesn't sell the product or all of it, they can then return it to the distributor who can return it back to you as the brand owner and it stops there.

Right? Like, you can't go to your coffee bean supplier and say, oh, the product that we made didn't sell. We're gonna need to you buy all this coffee beans back from us, that's expired. . Right. Exactly. That's true. I mean, , that's, you know, that's definitely something that's like, That we've experienced like firsthand at, just how, how much the risk is on the producer like us, the manufacturer.

It's 100% our risk for sure. Yeah, and I think that's like a big lesson learned here too, is that like the distributor. We started working with them and our thought was like, oh, the distributor's gonna help us get to the next level, right? We're gonna have this broker and like this distributor and, and they're gonna help us.

And it's like, I've learned coming out of this that it's like the distributor does one thing they distribute. [00:10:00] And it's like, the biggest lesson is like, I never, like, I don't look at them as like a vehicle for growth any longer. It's like, When they came to us and said, this isn't gonna sell through Walmart, you should try and find another home for it.

I, you know, I started pounding the phones and trying to find another home for it, and I actually got us into like 30 new accounts. But I know all of those buyers and all of those stores now, and they're still buying coffee from us and so, I like That to me was a big eye-opener of like, it's all about relationship.

It's all about building those and it's like nobody's gonna build your business , like you, like you have to own building your own business and like a partner or a broker, like they don't give a sh they don't care. Like that's not their job. Their job is to move it. I think that's like important to kind of view the distributor as more of a somebody who will, is like your delivery person.

Almost not, I say they're like a warehouse and trucks . Right? That's exactly. And you know, we [00:11:00] thought like, you know, our food worker was like, oh yeah, KeHE, they have account managers and they'll go into stores and sell your product and help you get placement. And like everything that we thought we were going to get was.

N just so far off, there's hundreds of thousands of products. There's no way that they could do that if they, you know, it's like just, it's not what they're built for. Well, I think that's one of the challenges though, because as a emerging brand kind of getting into those channels for the first time, they kind of can sell you on the dream, right?

Mm-hmm. and saying like, Hey, these are all the things that we can do, but the likelihood of that happening is, well, right? Like they can sell a new product in to retailers, but it's usually. The products that the retailers have that have name recognition and the retailers want anyway because they've heard about it before.

Because , they're popular, but for new pro, newer products to them that they just haven't heard of yet they're not gonna be asking for them. And those account reps will just move on quickly. Right. If, if it's not something that they know that's going to mm-hmm. The one thing that I wanna touch on as well are [00:12:00] really the emotional, mental, and the physical.

Ramifications , of running a business. And if, for those watching the video, Marcus, you have had a, an injury from the business and I'd love for you to share just your experience on of that blood, sweat, and tears. Yeah. You know, I yeah. So for you guys watching the video, right? I did after this kind of virality and we were like maybe two thirds of the way done shipping 'em all out.

I had been repairing a vintage coffee roaster from 1970s, but it was an old Italian coffee roaster. And. In a freak accident, I had like the first test roast done and maybe like trigger warning. But like, yeah, I had a freak accident and I, and there was an exposed gear and I was looking for , a draft in the duct work and I didn't know that gear was there.

You couldn't even see it. You opened the door. Yeah. Like you almost have to stick your head inside of. Area to see it. I stuck my hand in and, and immediately it grabbed my thumb and took it, and it didn't [00:13:00] give it back . So, so I, I like to joke that I, it's like a, the blood packed was sealed with my new coffee roaster.

It's working now. But it required a thumb to make it work. Well, I mean, cue this to both of you because this is like, I mean, it's. Literally losing a limb for the business. And you have such a positive mindset right now. I know that like I'm pure. It wasn't that at all times, but I really hear and recognize you and just like everything that you've put into this business and that you still want to find every way you can to make it succeed and grow..

Yeah. I think it is important though when you're thinking about like, you know, you're talking about trying to have a positive attitude in this, that and the other. I think it's just really important to be cognizant of like how much your strain of your body and your mentality and your emotional health.

And your mental health. I know especially through this whole, you know, debacle with the distributor, it was [00:14:00] like You know, it caused it like like a sense of depression. I was having a hard time just kind of functioning in the world. So I was like, I had to kind of identify that. And so what I decided to do was go get a seasonal job one day a week so I could just get out of my life entirely.

So I think just Making sure and lush cos I don't know if we're allowed to say a cosmetic store. It was fun, like tie in. It was really fun. Right. And it was genuinely smelled like a bubble bath coming home. It was great. Oh that's great. Everybody I worked with, it was like nobody was associated with coffee.

No pressure at all. It was, I just showed up. I had like a 20 year old manager tell me what to do. It was fantastic. . And so I think. I think it's important to kind of go to whatever lengths are necessary. Yeah. To protect your mental health, to protect your physical health, making sure that you're sleeping enough, eating well.

All of that is so important. And so I think like even when like a tragedy like this happens, it's like, okay, well we still have to make sure we're focused on like, Like taking care of ourselves and Marcus getting better and [00:15:00] Marcus making sure he takes the time he needs right now. Like we're founders, right?

Like I feel like you can't be a, a business founder without being optimistic. Right? That's, and I think that's true, like, , you know, like for, for me and Jenni, were like, we're painfully optimistic I think. And generally our optimism is painful. . Well, and I think, you know, Marcus, as you were telling me before as well, that if you were roasting coffee yourself until you're 70, you would be happy with that.

Right. And like, really just being so it took me that this happening though, to get there like I was. Down and depressed. Like I was ready to just like shut it down and never, you know, like, think about coffee again. But now, like, you know, I lost my thumb. I haven't been able to do anything for two weeks, and I'm like selling out.

It is like, you know, and then do what? Be bored. Like, it's horrible. Like, no, it's like I love roasting coffee. I love, like, like I said, like bringing people joy and it. It's like, I could, I for [00:16:00] sure. No, it's like my whole, like, if this is my lifestyle brand, nice. Just roast coffee forever. Like, totally good with that now.

It's, my whole perspective has changed. And I think part of that though too is, being resilient, right? It's , like, you know,, it's i's, I don't wanna say it's just a thumb, it's, I stack ranked them and it's literally my second favorite appendage. And. But I have another thumb, right? And there's gonna be a prosthetic and stuff like, you know, it's sad, but.

You gotta go on. It's not gonna stop me. You know? You gotta keep moving forward. And it's like you can't, think like after all of this time you lose a thumb and that's what throws you in. throws away like nine years or whatever. Right. So you definitely have been through so much and, and then one thing that's important for you is to share any lessons learned to other founders.

And so maybe in terms of like a click lightning round, what are some of the other things that you've learned from this experience? That you want other [00:17:00] founders to know so that they won't have to go through the same thing you. I would definitely say first things first is don't let anybody push you into something that you're not comfortable with.

If this, if you're finding yourself in a situation where you're questioning or you're wondering, or you're like, this doesn't feel right, like, go with that. Definitely trust your instincts. There was times when these orders were coming in from the distributor where I was like, this is not right. There's no way that they're gonna be able to sell all of this coffee as a new product launch.

And I wish I would've pushed back like I wish I would've. I know my business better. than KeHE or Walmart does. And I understand like our product, our customer base, our price point and I shouldn't just trust them because they're these big corporations and like, you know, somehow that means I should blindly trust them.

Definitely wish I would've trusted in myself more. And then also I wish I would've had more , like fortitude to go up against these behemoths myself because I finally did in the end and I was. Well screw you. [00:18:00] Talk to my lawyer. You know what I mean? And I was like, got to a point where I was like, these people have screwed us over so much.

Like I don't care about our relationship with them anymore. I'm gonna do what's right for us and I'm just gonna dig my heels in no matter what. And finally we got somewhere after that's what we started doing. And then I think also May, Marcus will probably talk more about it, but yeah, like Marcus was saying, owning the relationships.

We didn't have a contact at Walmart. Had we had a contact at Walmart, maybe we could have reached out to them and tried to figure out what was going on, but we didn't. I, and I, yeah, so I mean, that's definitely like a key thing is like owning the relationship, knowing who the buyer is, like being able to call that person and say, Hey, what's going on?

Like that is like, , that's, I will never take a blind deal ever again. Like that's something I've learned out of this. And then Just realized too while you were talking, is that you? You do have the ability to push back, right? Like I agree. Like you have, you have the ability.

If you don't have like a [00:19:00] way out like the hun, remember that for all of these distributors, 100% of the risk is on you. So if something goes south, you've made all this product, what's your contingency plan? How do you get rid? I mean, I, you know, I wouldn't take a deal like this again without having a way out, right?

Like without having a relationship with a, you know, a grocery buyer , or a grocery outlet or somebody, somebody to move that if that deal goes south. So I think, you know, just assume, right? Even if you know the buyer and they change their mind after they get the product, the risk is still on you. So, like, having a backup now is so crucially important, or a way to move whatever product it is if it goes south.

So it's still founders that. If a deal goes bad, we'll put you out of business then really think hard. I usually tell 'em, don't take the deal, but legally think hard about taking it. Right. Yeah. We just had too much trust in people. We had trust in our food broker. We had trust in KeHE. You know, we had trust in the fact that Walmart's a giant corporation and they wouldn't, it's Walmart.

They wouldn't say that they wanted, [00:20:00] they wouldn't do do this to anyone. Yeah, they're huge. They, and if anybody can sell that much coffee, it's Walmart. Right. So we for sure, we put a lot of like, this makes sense. That's like our optimism. That is painful though. But yeah, so that's, that's it too. , like, don't trust anyone.

That's like the hardest lesson always in business is like, that's where it, it seems like when you trust others more than you trust yourself. That's where it somehow, yeah. Don't put that wrong. The future of your business in somebody else's hands. Yeah, exactly. You have to own it. Mm-hmm. , I think as founders, we try to be trusting people.

Right. And especially in the food and beverage industry, it tends to me lean to like having nicer people in, this industry. But I always tell people, you know, like trust. That people will do the right thing. Well, I would actually say like trust that like something will go wrong. Yeah. And you have to be the one to save it, but you don't have to treat them poorly.

You treat them like, Hey, how can I make sure we're, we have the same expectations that we're communicating, that we can think about anything that that might happen and now you know, some of the questions that you ask next time [00:21:00] you see another deal or have a new relationship as well. Right? Yeah, exactly.

Yeah. Yeah. Learn the hard way that happens so often though. I think like small business and small business founders, everything has learned the hard way Almost so often. I'm excited that this has turned around into a positive situation for you and that has reunited you and the family with more energy because it, it could have very well went south in a very different direction.

And I really applaud you for your resilience in dealing with this and coming off the other side and ready to, to build the business on. and the way that you want to, right? So we were talking about instead of building for some end result of selling your company for millions of dollars, how do you build for the everyday journey, the every month journey, so that you are enjoying your experience of building it?

And I believe you'll be more prosperous by doing so as well. Mm-hmm. , I think it's great advice. I agree so whole wholeheartedly after this whole Experience [00:22:00] it's the, if you don't enjoy what you're doing, like, like that's, that's it. Like I, you know, I'm like, yeah, I think it's, that. Couldn't have been said better.

If you're making your product and you love it, and you love bringing people joy, just, you know, That's okay. That's enough. Well, and I think it's hard too because you get so many messages of like, build your business and then sell for a bunch of money and then like do something else. And you know, I think that kind of misses the Mark A.

Little bit of like, at least for myself of how do I actually wanna live my life? Like, I just tried that and that didn't work and I was miserable. So yeah, building a business that I enjoy every single day. And I enjoy going to. That's more important. Yeah. And we'll take that. I've, that's taken me outta commission for a couple weeks.

I can say do nothing for a couple weeks. Kind of sucks, . I know you're ready to jump back into things. Right. Well, Marcus and Jenni, thanks so much for, for vulnerably sharing your story with our, listeners and our founders. And you know, I know wishing you the best of luck and everything to come and looking forward to your journey.

[00:23:00] So thanks so much. Great. Thank you so much. Thanks for talking with us. It was great to meet you.