Every Food Brand Does This, Hampton Creek Just Got Caught
New allegations about corruption at Hampton Creek, the parent company of the popular eggless Just Mayo product, reveal that the brand’s popularity may in fact have been bought and paid for by the company itself. A comprehensive Bloomberg investigation suggests Josh Tetrick, founder and CEO of Hampton Creek, was behind an internal operation to inflate its own sales by buying the company’s products from supermarkets, “according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails.”
The employees not only bought the company’s mayo from numerous stores, but also called stores pretending to be customers wanting to know if they stocked Hampton Creek’s Just Mayo.
“We need you in Safeway buying Just Mayo and our new flavored mayos,” Caroline Love, Hampton Creek’s then director of corporate partnership, wrote in an April 2014 e-mail to contract workers later obtained by Bloomberg. “And we’re going to pay you for this exciting new project! Below is the list of stores that have been assigned to you.” The email identified Hellmann’s, the best-selling brand of mayonnaise, as Hampton Creek’s clear target. “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”
Tetrick explained the point of the buyback plan was not solely an effort to boost sales, but to test product quality, something that had been an issue according to another scandal that rocked the company last year when former employees alleged numerous quality control problems had plagued the startup.
Back before writing about food on the Internet, I worked as a sales and marketing manager for a brokerage firm in the natural food industry, and later directly for several leading natural industry brands. One of the more common practices as a broker or company sales rep? Buying clients’ products off the shelf. On several occasions, at the instruction of my supervisors, I called stores pretending to be a customer looking for items. More than once, I bought product and shipped it back to the company’s headquarters. While I’m not sure what happened to the product after it left my charge, it is entirely possible it was sold back to other stores.
Clandestinely buying a brand’s product off the shelf was especially common for new items, or for brands or products not seeing the initial growth the company had anticipated. But it was most common when natural brands made the leap from Whole Foods and other natural-focused markets, to the major supermarket chains: Safeway, Kroger, Target, Publix, etc–similar to Love’s direction to Hampton Creek employees.
I worked as a broker between 1999 and 2003 when the grocery industry was just beginning to recognize the potential in placing these items in their stores. It was a big risk— both for the conventional supermarkets who were giving up valuable shelf space, and for the nascent natural food brands paying for placement (called slotting fees), a controversial practice many insist is Big Food corruption at its most blatant. For lesser-known brands, like Hampton Creek, the risk of being too unknown or unusual to perform in conventional supermarkets means the target audience is a customer who needs convincing–someone most likely unfamiliar with the product(s) that are often more expensive than the conventional offerings. Early success—even if it’s somewhat disingenuous—is critical in convincing the stores to keep your brand on for at least a little while longer.
For about a year, I worked with a perishable beverage company that had just been placed in a very mainstream supermarket in New York City and the surrounding areas, and it wasn’t selling well. But the company founders were desperate to keep the product in there, not just because it was a huge account. Other supermarkets look at how products perform in similar markets before committing to bring the product into their stores as well. So being kicked off the shelf is never a desirable situation if you want to secure more supermarket placement. In this case, I was routinely fed a supply of free product coupons, which I took to the store to “buy” the about-to-expire products off the shelf. I used those products for events and demos or pitched them. It was an annoying part of the job, but one by that point that I came to recognize as just part of the deal for virtually every startup food company at some point or another.
I love drinking wine (I have a toddler), but I really don’t know much about buying it. I kind of know which grapes I like, but there are a million brands out there and hardly ever the same ones appear at every store I shop at. So my number one buying tool is digging into the deep pits on the store shelves; I’m assuming the holes are there on those SKUs because consumers must love that product and are buying it up, even if it’s just one committed customer buying numerous bottles at a time. I may be totally wrong—a child (definitely someone else’s) may have knocked those bottles to the ground mere moments before I arrived. The store could be phasing out the brand because it’s the most terrible wine ever (as if there is such a thing). But regardless, it’s the tactic brands hope work when they send employees into stores to purchase their products off the shelf. Consumers see those first few bottles, jars, or boxes pulled off the shelf, and they inquisitively dig their hands in as well. “That must be delicious,” they think. And a lot of the time, they’re right.
It’s akin to the line out the door at a hot restaurant or bar; the queue for a new movie or club. No one likes to be the first person on the dance floor, and that rule applies to many other ways we participate in our community. Which is more appealing: The stall at the farmers market with no customers picking through its offerings, or the one where a crowd of people is laughing, sampling, and filling up their bags? Which one are you more likely to want to check out?
“Strong demand for a product typically prompts retailers to order more and stock it in additional stores,” reports Bloomberg.
The problem here for Hampton Creek is that the buyback operation occurred about eight months before the company secured $90 million worth of funding in 2014. The buyback amounted to at least $77,000, which Tetrick explained to Bloomberg gave the company the “customer perspective” in going to the store to purchase the products.
“However, the survey database—containing almost 3,900 entries in 15 states from March 2014 to January 2015—didn’t account for hundreds of Just Mayo purchases by [Hampton Creek employees] during that period,” Bloomberg said of emails, receipts, and expense reports it analyzed. “Five former Hampton Creek contractors and two ex-senior staff members say the buyback assignments were separate from quality checks at stores. The ex-contractors say in most cases they were told to simply buy up jars at nearby stores and were free to consume or discard them—not look for quality issues, as the company says.”
Regardless of why Hampton Creek did it, it’s a practice that’s been done probably since the first supermarket opened its doors and brands were desperate to stay on the shelves.
“It is highly questionable for a company to purchase its own goods,” David Larcker, a professor of accounting at Stanford Graduate School of Business told Bloomberg. “Revenue is an important number for evaluating growing companies, but the companies need to be transparent about the source of that revenue. They also need to be transparent about their growth. If the sales are not generated from legitimate customers, that needs to be disclosed and is important information for investors to evaluate.”
Larcker has clearly never been trying to keep a food company afloat in a cutthroat market.
The reason organic and natural food brands are still only a drop in the supermarket aisle bucket isn’t because consumers aren’t eager or interested in trying these items—there are enough data that say otherwise. It’s because Big Food has a stranglehold on our food supply and doesn’t like letting it go. This is perhaps no more evident than the case that put Hampton Creek on the map in 2014 when main rival Unilever (Hellmann’s) filed a lawsuit against Hampton Creek alleging that the company was misusing the word “mayo” because its product is egg-free (the FDA definition of mayo included eggs). While Unilever eventually dropped the case, it spurred the FDA to make similar allegations against the company, only to also change its position after Hampton Creek contested the charges. The now-former president of the American Egg Board resigned when emails were leaked showing that the organization was specifically “going after” Just Mayo out of fears that the company could take serious market share away from category leader Hellmann’s and thus the eggs it purchases to make the product.
Just last week we covered the news that bottled water is about to outsell soda for the first time ever in U.S. history. Good news for your health, of course, but it’s even better news for Big Soda brands. Why? Because they own nearly all of the bottled water brands. Trying to eke out shelf space in a cooler dominated by Coca-Cola and Pepsi is a bit like trying to convince those same companies their sodas are to blame for our obesity and diabetes crises.
It’s no surprise that natural and organic food companies continue to be bought up by major food brands: Justin’s Nut Butters was purchased earlier this year by pork producer Hormel, best known for SPAM—the anti-health food if there ever was one. General Mill’s bought Annie’s Homegrown a few years back. Danone, which bought Stonyfield Yogurt in 2004, just acquired WhiteWave foods for $12.5 billion. Coca-Cola owns Honest Tea. Clorox owns Burt’s Bees. There are countless others.
Oftentimes, this is the goal for natural food brands—build it up and sell it to the companies running the supermarket show. Let them do all the dirty work of managing a multi-million (or billion) dollar brand, because, make no mistake, it ain’t easy. After all, supermarket aisle space isn’t curated based solely on the store buyer’s preferences. That rarely has anything to do with it. It’s bought and sold just like the products you pile into your cart. Big Food brands buy their way onto the shelves, end caps, and coolers. And if a smaller brand expects to take some of that expensive real estate for itself, it better earn its keep. Supermarkets don’t necessarily want to favor the biggest spender, but it’s how they make their money, especially in competitive markets where the groceries themselves are priced just a few cents over cost.
Maybe Tetrick and Hampton Creek did play with the numbers to secure more funding. Having spent so much time behind-the-scenes of the industry, I can assure you, it’s not uncommon. It’s an act of desperation. But is it corruption? I suppose that all depends on how you define the “rules” of our food system. When millions of dollars are spent by brands each year just to get supermarkets to give them the premier placement, smaller brand buying their products off the shelf to stimulate the market doesn’t seem much different, let alone any more corrupt.
“Thousands of new packaged food items are introduced each year in the U.S.,” reports Bloomberg, “and a majority of them fail.” But not Hampton Creek. At least, not yet.
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Photo via Hampton Creek
