Case- Educating Octavia

EDUCATING OCTAVIA - By: Edward O. Welles

Octavia Randolph's business began as many do: with an idea unsupported
by experience. She fell in love with a product she didn't know how to
make, package, or sell. So she began at ground zero and spent two years
on self-education. Now, her Caribbean-inspired snacks are ready.

A man and a woman lie on a Caribbean beach under a penetrating sun. They
are on seasonal parole from icy Boston to the island of Nevis, where the
light and colors are as fresh as the fruits and vegetables the land
offers. The woman is an architectural preservationist -- with a career
in need of some serious restorative work. Her job has become too many
drawings, too much consulting, and too few real buildings. She wants to
make something she can touch, feel, and hold. Here, on her first trip to
the Caribbean, she feels alive, her senses quickened by the colors and
the dreamscape of the beach. She remarks on this to her husband -- and
by the way, she adds, slicing another mango, somebody should start a
business packaging all this beautiful produce and importing it to the
United States.

Cut to New England, two years later, the winter of 1989.

Octavia Porter Randolph is sitting in her shoebox of an office in a
Waltham, Mass., high rise, a full-length parka flung on a nearby chair.
A February wind whistles outside, across a landscape of oyster grays and
pewter blues. Behind Randolph hangs a wall-sized map, resplendent as a
tapestry, of the island of Dominica, where pepper sauce is about to come
out of a processing plant and into colorful bottles marked with the name
Oualie, which translates, roughly, as beautiful waters -- and someday
soon, Randolph hopes, as flowing cash.

At the core of Oualie (pronounced oo-walley) Ltd.'s metamorphosis from
beachbound vision to up-and-running business lies a story whose title
could be "Educating Octavia." Here is a woman for whom the past two
years have amounted to a crash course in the art of starting up. In that
time, she has made hundreds of cold calls, hung out in grocery stores to
watch how merchandise moves, and tapped the talents of people who know
more about the food business than she does. She has studied everything
from the economy of the Caribbean Basin to the placement of bar codes on
soft-drink labels. It is the sum of this effort that has brought Octavia
Randolph this far, allowed her to move at least from a sunstruck
epiphany on the beach to a cramped office overlooking a snow-swept
parking lot.

Oualie has created an initial line of six Caribbean-inspired specialty
and snack items, some of which will hit retailers' shelves this
September. Each is packaged in vivid, attractive colors. The line
includes: a low-sugar carbonated juice made from papaya and passion
fruit; two conserves, one made with mango and lime, the other with
passion fruit and papaya; chips, cut extra thick, made from fried
bananas, not potatoes; a salsa based on fruit, not tomatoes; and a
pepper sauce made from Scotch Bonnet peppers, which are native to the
Caribbean Basin.

Randolph's intent is to make high-quality snack items and everyday
prepared foods. She is not selling another can of chili powder that sits
in your kitchen cabinet for as long as you own your house. She claims
she is making foods that add accent to daily life, round the clock,
through the seasons. You can drink Oualie sparkling fruit juice at
breakfast, lunch, or dinner. The chips you can eat anytime, anywhere.
They go well, by design, with Oualie salsa. "This is food you rip open
the bag and eat," Randolph says. "Retailers love that kind of product."

The U.S. market for gourmet and specialty foods reached $10 billion in
1986 and is expected to grow to $14 billion by 1990. The natural-soda
market currently exceeds $100 million and is growing at 4% a year. But
Octavia Randolph knew little of this in January 1987 when she returned
from Nevis, determined to start a company and change her life.

Her first day of work Randolph called on the Boston chapter of SCORE
(Service Corps of Retired Executives), the FDA, USDA, and U.S. Customs.
She began studying the Caribbean Basin Initiative, a government program
that encouraged U.S. investment in the islands. She subscribed to trade
journals to learn how specialty foods were bought, sold, packaged, and
processed. She knew where she wanted her line to end up: in high-end
specialty food stores in the Boston area. She would start local and
build a following, "customer by customer." Randolph made the rounds,
noting what was on the shelf and how it looked. She asked a lot of
questions and got some free advice. "People in the food business like to
talk about food" -- a good thing, since Randolph had budgeted zero for
market research.

That figure matched her first-year outlay for advertising; packaging,
not promo spots, would be crucial. "The food business is a marketing
business," she says. "The packaging is so emotional. It's the only
statement a little company like Oualie can make to the potential
purchaser." In April 1987, after interviewing four design firms,
Randolph chose Clifford Selbert Design Inc., in Cambridge, Mass.

"We hit it off," recalls Clifford Selbert. "She was willing to give us a
lot of freedom as well as some clear direction. That's rare in a
client."

Randolph found the first design too understated. It looked like a wine
label -- too much white space. Selbert rejoined that the colors she
wanted were too dark, too brooding. You didn't want people picking up
jars of jam and thinking of voodoo. They agreed to punch up the colors,
make them hotter. Several months later they had a bright, eye-catching
label -- something a curious customer would at least pick up.

Although Randolph felt confident about her design sense, she was egoless
enough to know that she needed a lot of help when it came to running a
business. In May 1987 she recruited Oualie's only other full-time
employee, Deborah Pepin, 31, through a referral resulting from a cold
call. Pepin, Oualie's vice-president of sales and distribution, came
from the largest specialty-food importer in the United States, where she
had been a sales representative. She brought with her contacts from the
more than 200 accounts she serviced and knowledge gained from a decade
in the industry.

Pepin advised Randolph to trim Oualie's beverage offerings from two to
one -- much easier to interest the trade in a single drink. When
Randolph said she wanted to market a mustard, Pepin told her to forget
it; there are already too many out there. Pepin also suggested they put
their conserves in 9-ounce jars as opposed to the standard 15-ounce jars
the European competition used. Europeans eat more jam than Americans.
The price per ounce would be the same, but Oualie's jar would cost less.

Meanwhile, Randolph enrolled in an entrepreneurship course at Boston
University in the spring of 1987. She then angled for acceptance at a
business incubator in Waltham, Mass., and in September got in. She knew
the center, with eight nascent businesses under one roof, would be a
fount of business knowledge. She also counted on getting a lot of free
advice from its 10-member advisory board of accountants, lawyers,
consultants, and other professionals. One of those people, a business
strategist, now sits on Oualie's board.

In August, Randolph approached Odette Bery, the chef and owner of a
well-known Boston restaurant. Bery had written a cookbook in 1986 that
had caught Randolph's attention. Randolph also knew that Bery,
one-quarter Indian, had lived and cooked in Africa and the Caribbean.
She also was classically trained, having attended both the Cordon Bleu
cooking school in London and Maxim's Academy in Paris before she turned
20. Randolph wanted Bery to help formulate Oualie's recipes.

Randolph went to the restaurant and for 20 minutes laid out the Oualie
spiel, during which Bery -- impassive as a statue -- listened in total
silence. As Randolph finished she thought to herself, "All is lost."

Bery leaned forward, finally speaking. "I think what you're doing is
terribly exciting, and I'd like to be involved."

Bery, working as a paid consultant, has since formulated four of
Oualie's first six recipes, at a total cost to the company of less than
$3,000. She shares Randolph's conviction that Caribbean cuisine is on
the cusp of acceptance. Randolph's knowledge of and feeling for food
impresses her as well. "Octavia looks for what I call clean flavor. In
her conserves the sugar is down to a minimum, and they have an exquisite
flavor. She's not looking for quick shelf items. She's looking for
quality shelf items."

Getting help in kind was easier than getting it in cash. Randolph
figured she'd need somewhere between $300,000 and $500,000 to start the
business and get the first six products out the door. She was looking
for no more than 10 knowledgeable private investors. "Good investors
bring more than money," she says, "they bring wisdom." She was also
determined to pay her consultants in dollars, not stock. "You don't want
to end up with a million shareholders each owning a fraction of the
company. That's a rotten way to create a company. Those people can give
you a lot of grief down the road."

Randolph could afford -- barely -- to keep things so closely held. She
had $75,000 of her own money. "I knew with that I could at least get
going, write a business plan, produce samples, and say to people, 'Here,
open your mouth and taste this.' " People then would open their wallets.

Not exactly.

As 1987 turned into 1988 -- the stock-market crash hardly a dimming
memory for would-be investors -- the company was stuck in neutral.
Randolph, as usual, was moving ahead in high gear. A spate of cold calls
led her to a state-of-the-art food processing lab at the University of
Massachusetts at Amherst, where she talked scientists into mixing up a
large test batch of mango-lime conserves, no charge. Oualie did sales
tests of the conserves with 15 retailers comprising its target market in
March 1988. "This," Randolph recalls, "was a sanity check, just to make
sure we weren't on Mars."

Thirteen of the 15 retailers signed purchase orders on the spot, based
on tasting just the one product. Some ordered the entire line. The 15th,
Bloomingdale's, was interested but prohibited by company policy from
writing a purchase order without finished product. Randolph figured
maybe she wasn't on Mars when, during one sales pitch, a buyer ate an
entire jar of jam.

Jack Kavanagh has spent the past 38 years in the food industry. He is
currently general manager of Roberts & Associates, which, with 261
employees, is New England's third largest food broker, handling such
hefty multinational clients as Motts, Guinness, and Quaker Oats. Roberts
is a full-service broker, dealing with both distributors and retailers.
When Octavia Randolph and Debra Pepin looked for someone with clout to
help them break into the right distribution channels, Kavanagh's name
came up.

Kavanagh sees people with new food ideas every week of the year, but
when he met Randolph and Pepin in May 1988 he sat up and took notice.
"The wheels started turning in my head."

What grabbed him was Oualie's drink, Caribe Crash. Beverages, he knew,
had more risk and more opportunity for the entrepreneur than foods. This
is because the market for them is so huge, yet so fragmented. A tiny
niche could turn into a large gold mine. In industry jargon, beverages
have more "velocity" than foods. The chips, the jams, the other fancy
foods were nice, but it was the drink that would drive this company out
of start-uphood.

The drink also stood alone. This was vital in the era of tight shelf
space. Bring a distributor a new line of drinks, and you'll be shown the
door. Conversely, one good drink can always be shoehorned into the
cooler. Caribe Crash reminded Kavanagh of one such success story:
Orangina, a stand-alone drink made by Pernod Ricard.

And Caribe Crash was well positioned. Orangina comes in an 8.45-ounce
size. Caribe Crash would be 10 ounces. It was targeted at women, but at
that size men would buy it, too. A 10-ounce serving would also leave
people thinking, as Randolph puts it, "Gee, if only there were just a
little bit more." It would bring people back for another bottle.

Moreover, Kavanagh saw the drink as more than just another upscale
gourmet drink. He knew he could sell it to a broader market:
convenience-store shoppers. "It used to be that women never went into
the c-stores," he says. "They were seen as dirty, high priced, and
crime-ridden. But that's changed. For women ages 18 to 35, c-stores have
become destinations, not emergency stops." Kavanagh labels this group
"cherry pickers." They shop selectively for a few items, including
high-quality beverages. Kavanagh also knows that "almost 75% of the
shelf space in convenience stores is taken up by groceries, but they
account for only 28% of profit and volume. The fastest-growing areas are
food service and beverages. The convenience stores could happily get rid
of grocery space tomorrow and fill it up with something else." What Jack
Kavanagh saw filling convenience stores that day when he met Octavia
Randolph and Deborah Pepin were bottles of Caribe Crash.

Kavanagh's advice may have been sound, but Oualie couldn't follow
through on it. Money was again the problem. By January 1989 Randolph
found the inflow of investment capital slowing. Having received
commitments for $200,000, she decided it was time to launch the company.

But with only $200,000, Randolph and Pepin had to make a hard choice.
They decided to produce the four products with the highest margins and
the greatest "synergy": the two jams, the chips, and the salsa. Sales
from these would hopefully break loose the additional $100,000 in
capital Oualie needs to produce the other two products: the pepper sauce
and Caribe Crash. The drink had a thinner margin, and Randolph and
Kavanagh further reasoned that it made sense to wait on it until the
business was better capitalized. It would have been fatal if they had
started producing Caribe Crash on a shoestring, run into huge demand,
and then not been able to meet it.

Oualie has established relationships with four co-packers who will
produce its products under contract agreement. Two co-packers are in New
England, two in the Caribbean (Jamaica and Dominica). Of its first four
products, three will come from one co-packer in New Hampshire, which
will ship directly to retailers during the company's first year of
operation, with Oualie picking up the UPS bill. The fourth product, the
chips, will be handled through Roberts & Associates, the food broker.

In Oualie's first month of distribution, September 1989, its first four
products will go to approximately 70 outlets in the Boston area --
high-end specialty grocery stores. By the end of Oualie's first year,
Randolph foresees servicing 250 retail accounts with an average monthly
order of 25 cases per store. She expects sales for the year to reach
nearly $800,000, with a net profit of $45,000.

By the second year, Randolph sees Oualie going through standard
distribution channels with Jack Kavanagh's help. Sales, she projects,
will climb to about $3.2 million, net earnings to $1 million.

Randolph believes that by starting local and overseeing distribution in
the first year, she will establish better rapport with retailers. Oualie
will do a lot of in-store demonstrations and tasting of the line, as
well as stocking of the shelves, hiring trained professionals on a
part-time basis to do much of the work. Specialty retailers welcome this
kind of active involvement by manufacturers. It means free promotion,
free labor. Going the specialty-store route accomplishes two other aims.
First, it allows Oualie to sidestep the slotting fees that food
companies pay supermarkets just to put their products on the shelf.
Second, selling through the specialty trade gives Oualie more control
over quality of presentation, something Randolph is obsessive about.

By limiting availability, Randolph can worry less about the capital
needs and quality-control problems she would likely face if demand were
to soar. By starting small and staying select, Randolph believes she can
build a local and loyal following among Oualie's target audience:
educated and working women, ages 25 to 44, with family incomes of
$30,000 and up.

But if Randolph is cautious, she is also ambitious. She foresees a
tripling of sales from year one to year two -- with her juice product
still not yet in distribution. She sees Oualie as a national brand,
which means getting her products into supermarkets. That's a long shot,
considering that each year 8,000 new food items are introduced in the
United States, and the average supermarket stocks only 10,000. Is
Randolph intimidated by the odds?

"No, not at all," she says. "Our aim is to produce sales figures in the
specialty stores that we can then confidently take to the distributors,
persuading them to carry the product." The distributors then will
approach the supermarkets with the Oualie line, which Randolph asserts
will be wanted. Why? "Supermarkets these days are looking even more for
products that provide the long dollar." Grocers want higher-margin
products like Oualie's.

Jack Kavanagh has an expression to describe many of the hopefuls who
want to break into the food business: "Everybody wants to get to heaven,
but most people aren't prepared to die to get there." He explains: "An
awful lot of people who come in here have wonderful ideas, but I'm also
looking for enthusiasm and commitment. That's very, very important.
Octavia has shown me a lot."

In May 1988 Randolph heard that the CEO of Ocean Spray Cranberries Inc.,
Jack Llewellyn, would be speaking at a seminar in Boston. She called his
office, saying she would be there and wanted to know if Llewellyn might
have a few minutes to speak with her. No, said his secretary, his
schedule that day is tight. Thanks very much for your interest.
Good-bye.

Randolph attends the lunch. Afterward, as Llewellyn is being whisked out
the door to his next appointment, she buttonholes him: "I'm the lady who
called your office." Llewellyn replies, "Give me a call." Randolph does
-- later that same day -- and is promised a 15-minute appointment. The
meeting extends to 45 minutes, ending with Llewellyn asking, "How can we
help you?"

In short order she has an appointment to meet with Ocean Spray's
director of purchasing and marketing and a senior purchasing agent.
(Ocean Spray buys fruit from 52 countries.) In the midst of that meeting
Randolph allows that, gee, she sure wishes she had a way to test-market
her fruit drink. Brief, awkward silence. "Well, uh, perhaps we could
bring you into an Ocean Spray focus group."

Randolph returns some weeks later with bottles of Caribe Crash. Nineteen
women, ages 35 to 54, taste the drink; 17 say they would definitely buy
it.

Randolph has no formal relationship with Ocean Spray, yet clearly she
has its CEO's ear. Llewellyn has offered to have the company's senior
purchasing agent come to Randolph's office one day in the future to help
her smooth out any wrinkles relating to her purchasing arrangements.
That kind of validation offers hope as Oualie's moment of truth nears.
"Keeping up my momentum is going to be a challenge," admits Randolph. "I
know there's going to be a wonderful reception for these products.
People will taste them and say they're great. But then what?"

She answers her own question by further admitting that good-tasting food
and zippy labels won't carry the day. Running the business day to day
could get thorny. "Managing the co-packer relationships will be hard.
I'm cognizant of how many little ways we could be tripped up." She hopes
by year's end to have enough money to hire a full-time operations
person.

While Randolph knows there is no turning back, she wouldn't have it any
other way. "One of the most remarkable things about these past two years
is that I've learned so much about something I didn't know anything
about before: business. What continues to astonish me is how helpful
people are if you have a vision and you communicate it to them. They are
eager to assist you. That's a tremendous and continuing revelation to
me, and I hope someday I'll have the chance to give some of that back;
to teach someone else some of what I've learned."

Research assistance was provided by Leslie Brokaw.

* * *

EXECUTIVE SUMMARY

THE COMPANY

Oualie Ltd., Waltham, Mass.

Concept: Make and market a six-product line of Caribbean-inspired snack
and specialty foods, first to regional specialty stores, later to
national supermarkets

Projections: Sales of $800,000 with $45,000 profits in year one; $3.3
million in sales, $1 million in profits in year two

Hurdles: Overcoming a capitalization shortfall; getting shelf space in
the crowded specialty/snack food category; getting consumer acceptance
for a cuisine -- Caribbean -- that hasn't yet achieved widespread
popularity

THE FOUNDER

Octavia Porter Randolph, 36

Given the origins of her company, it's hard to argue with Octavia
Randolph's self-characterization: "There's an element of recklessness or
courage -- or both -- in me." It's an element that's been there a while.

Here's an abridged bio: Randolph dropped out of an all-girl prep school
at 17 and headed West in 1969 to breathe the liberating air of San
Francisco. From there she stayed on the road less traveled, which led to
Mexico where, as she puts it, "I hung out." A year later, resettled in
Los Angeles, Randolph landed an office job in an architectural business
by day and took drafting courses at night. That paid off with a job in a
structural engineering firm. Randolph's interest came to focus on
architectural history and preservation, a field in which she worked as a
consultant for the next 12 years. Randolph believes it is this
experience that those who would doubt her management skills shouldn't
overlook. "I've always been very self-directed," she says. "That's why I
can do something crazy like turn my back on 12 years of work and start a
food company."

FINANCIALS

Oualie Ltd. Projected Operating Statement

Year one Year two

SALES

Salsa $311,825 $1,269,468

Banana chips 311,825 1,259,802

Jams 173,666 737,614

TOTAL SALES 797,316 3,266,844

COST OF SALES

Salsa 204,142 767,031

Banana chips 183,145 681,892

Jams 117,800 442,618

TOTAL COST OF SALES 505,087 1,891,541

GROSS PROFIT 292,229 1,375,343

% gross profit 37% 42%

Year one Year two

EXPENSES

Payroll 173,223 276,308

Professional services 20,000 18,250

Advertising 20,400 24,000

Travel and entertainment 12,000 20,200

Miscellaneous (rent, office services, 36,579 64,719

insurance, etc.)

Interest (14,744) (32,939)

TOTAL EXPENSES 247,458 370,628

PRETAX INCOME 44,771 1,004,715

% NET PROFIT 5.6% 30.8%

WHAT THE EXPERTS SAY

COMPETITOR

BOB KEIM

Co-owner, Vine Inc., a small Martha's Vineyard, Mass., manufacturer of
grape-flavored sparkling water

Oualie is very, very similar to our company. We didn't have any
experience in this, and we decided we wanted to do it. I took a year for
planning and research, and Randolph has done the same kind of thing.

My problem with her plan -- and this doesn't mean that she can't pull it
off -- is that I had a lot of difficulty just learning the beverage
business, and she's trying a number of products. That's very ambitious.
I think Jack Kavanagh was right to tell her, "Limit your selection."
Even though it's all fancy foods, every product is different. The
government regulations on food are different from those on beverages.
The production and manufacture of these things are completely different.

Something always goes wrong, and if something goes wrong with more than
one product, I don't know how she could handle it.

FINANCIER

SKIP CUMMINS

General partner, The Vista Group, New Canaan, Conn., a $335-million
venture capital firm with positions in two food companies.

I think she's working, but she's not working smart. Randolph's plan is
inconsistent with the available financing. She has to come up with
reasonable milestones given the money she's got. The question "What can
I sell?" is a lot different from "What can I successfully market given
our cash resources?"

I'm concerned she really has no focus. I think she ought to work on at
most two products. With one product she ought to go into the
distribution outlets she's talking about -- specialty shops. I think
that's a good strategy. She can do that with a manageable amount of
capital, and she can control the amount of time required to support the
outlets by controlling the number of shops she's supplying. By doing
that she will prove that the dog will eat the dog food. And for the
other product, she should do some sort of deal with a corporate partner
who can somehow take the time and money to support the soda.

By setting two goals -- getting a good deal on the soda for distribution
efforts, and proving that she can get distribution with one product in a
test market of Boston-area specialty shops -- she's now set two
reasonable milestones.

I wish she'd worked her buddy network better. Where are the advisers who
have a track record of successful performance? Consider the design firm:
she didn't choose it because it had successfully designed the package
for the Dove Bar or Soho soda. She went by personal chemistry and low
rates. And Jack Kavanagh could have been tapped for help with creative
financing. Randolph could have said, "Jack, I don't have the money to do
soda, but you're interested in it, what companies do you know of that
would work as good partners?" He said the soda's the hot product, and
she seemed to let it drop.

Also, I think she's making a serious mistake not compensating
consultants with stock; it can provide a lot of leverage in a start-up.
If I were Randolph I would set up a pool of stock for five key
consultants -- in marketing, for instance, and maybe for her chef and
Kavanagh -- preserving her most precious asset, which is cash. It's hard
to say exactly how much of the company she'd have to give away, but a
pool of 10% would seem reasonable.

Because I think she will have a very difficult time building a major
company in the market that she's chosen, a large venture capital firm
like ours would not be interested in investing. However, that doesn't
mean that she can't still build a $3-million to $5-million, profitable
specialty-food company. I think she should measure success by her
ability to get to that point.

OBSERVER

SUSAN FRIEDMAN

Executive editor, The Gourmet Retailer Magazine, North Miami, Fla.

Randolph's entering the market at a fine time. At the most recent
international fancy-foods show, the Jamaican representation was larger
than it's ever been, with 10 manufacturers. There are two Caribbean
cookbooks recently published. I think Caribbean cooking is beginning to
be well received.

But there's a contradiction that concerns me. She's looking for quality
shelf items, but she's also working with an individual with an interest
in going broader in the market -- like putting the soda into convenience
stores.

She has to make up her mind where she wants placement. If she wants to
go specialty right now, I think she should avoid discussing the mass
aspect, because that could be a real turnoff for the specialty
independents. They're competing with the supermarkets, and they want to
be able to offer unique product.

I think she has something special. But she has to determine if she wants
to go specialty or mass market.

WHOLESALE CUSTOMER

ARI WEINZWEIG

Co-owner, Zingerman's Delicatessen, Ann Arbor, Mich.

She deserves a lot of credit -- she's done her homework, she accepted
that she didn't know everything, and she got help. Randolph was smart
not to go with the soft drink first, yet I question whether the product
line is focused enough to the outsider. What do two jams, banana chips,
and soda have in common? They might not even end up in the same area in
a store. I don't come away with the feeling that Oualie has a cohesive
line of products.

The question I always ask myself when we sell something is, "Why would
anyone want to buy it?" Right now there are way too many jams on the
market. The chips seem more unique; they'd give her a better chance to
get attention. I'd consider starting with just the chips.

It seems to me that she also has two different long-term strategies for
distributing her line. It's common that producers want to sell to both
supermarkets and specialty stores, but they aren't at all related. If I
know that in two or three years she wants all these products in
supermarkets then I might sell them, but I'm not going to put a lot of
energy into it. It's just not worth it for me. She should think more
about this. It's very common from the producer's point of view to see
the supermarket as a panacea. It isn't. I'm not sure what her priorities
are.