Virtuous Networks: How Social Ventures Scale Up Supply and Distribution
Today, we complete this trifecta with a focus on supply and distribution chains. At issue here is how to build and improve supplier relationships, manufacturing processes, and sales strategies.
It’s important to remember that none of the critical factors – funding, media, supply chains and distribution – operates in isolation. Each element reinforces the others in a virtuous cycle, and the successful ventures we studied advanced on all three fronts simultaneously.
A company’s venture capital investors, for example, can provide introductions and credibility to a major distributor. But a distribution partner can open other doors to suppliers and additional distributors, as well as suggest product enhancements and introduce new investors.
Consider Whole Foods, the giant supermarket chain, which was a pivotal partner and advisor to several companies in our study – Revolution Foods, Back to the Roots, and World of Good. Whole Foods also became an important partner to Fair Trade USA in its later years.
Walter Robb, the co-CEO of Whole Foods, told a recent forum at IBSI that his firm’s efforts in developing suppliers are central to its “stakeholder” approach and partnership strategy. “Business should strive to be a cathedral for the human spirit,” Robb remarked.
Revolution Foods gained entrée to Whole Foods through an introduction from an early investor: Jerry Gallagher, a partner at Oak Investment Partners. Whole Foods then connected Revolution Foods to Stonyfield Farm, a major produce supplier, which offered the same wholesale pricing on dairy goods that it gave to Whole Foods. That was a huge help in lowering Revolution Foods’ costs and allowing it to conserve cash. Revolution Foods was then able to build a competitive and profitable business before it had achieved traditional economies of scale.
At World of Good (WOG), Whole Foods became the company’s first important customer as well as a mentor in helping the start-up expand its sourcing of craft goods.
A key observation in our research was the self-referencing nature of different distribution partners within the same market verticals. Once Whole Foods agreed to buy products from Back to the Roots, for example, other major supermarkets such as Costco and Safeway signed on because they felt “safety in numbers.”
Fair Trade USA had already become well-established by the time it partnered with Whole Foods, but that partnership nonetheless spurred major expansion and product diversification.
“Right now, they are driving a lot of our growth and innovation,’’ Paul Rice, the founder and CEO of Fair Trade USA, told us. “We launched 20 new products with Whole Foods in the last two years that no one else is doing — stuff like coconut water and peaches and watermelons and asparagus.”
Manufacturing partners can also be central to a social startup’s success. D.light, another company in our study, chose to manufacture in China in order to drive down the cost of their solar lights. “The reality, especially at that time, is that southern China was the place to make consumer electronics products at really affordable prices, with high quality,” says d.light’s co-founder, Ned Tozun.
But basing production in China created ripple effects. Two of d.light’s co-founders had to move to China to directly supervise manufacturing. Similarly, they had to have “feet on the ground” in both Africa and India to ensure that their sales channel worked. Having a distributor in each region was not enough. As a new company, the founders realized, d.light had to work with the local distributors to train their sales people and to further refine the product’s value in the marketplace.
Embrace, which produces low-cost, electricity-free warmers for premature infants, began its manufacturing in China as well. But its founders quickly realized that their product demanded exacting and high-quality production, which made it necessary to move their manufacturing closer to India, Embrace’s customer base.
Embrace also learned a hard lesson about the unexpected pitfalls in a seemingly ideal distribution partnership. General Electric became an early Embrace distributor and an important strategic partner. But GE’s sales team had little incentive to sell Embrace’s warmer, because the warmer sold for only $200 – one percent of the price for a traditional GE incubator. Even though Embrace’s warmer offered major advantages for impoverished communities with unreliable power, GE’s sales team had neither the product knowledge nor lucrative commissions to motivate them.
Embrace’s founders also had to re-think their original idea of selling their products through government hospitals. To the founders’ surprise, local governments paid little attention to their innovative product. It was far more effective, they found to build support through local champions outside of government. “Government is a good long-term strategy, but not a good immediate commercialization strategy,’’ recounts Jane Chen, co-founder of Embrace.
Sanergy, which developed low-cost toilets as part of an integrated waste treatment and recycling chain, had a similar revelation in Kenya. Sanergy’s founders had initially targeted local governments in rural areas, but its products and services attracted little interest. The company then pivoted to more densely populated cities, where their local sales teams could replicate sales among common types of customers.
In closing, what have we learned about the role of supply chains and distribution channels in the early success of social venture start-ups?
The first take-away is that a social enterprise’s initial manufacturers and distributors may not be the permanent solution. As the social start-up gains traction in the marketplace, it will likely transition its suppliers and manufacturers to partners that can scale. Second, having a local presence is essential for successful sales and manufacturing; if you produce or sell abroad,someone on the team needs to be prepared to move there.
Perhaps most important, some business partners can be mentors as well. Whole Foods actively mentored several smaller and growing social enterprises. This works best when the larger company believes that the start-up is strategically aligned with the larger firm’s goals. Having said this, pairing with a large firm doesn’t guarantee increased revenue; larger partners actually require more management, to ensure that newer products are effectively sold within their channel and that the end customers are ultimately satisfied, resulting in product re-orders and a deeper partnership over time.