#96. Dirty Lemon quenches thirst with direct-to-consumer beverages. We talk with co-founder Zak Normandin about how the company uprooted the antiquated beverage industry to rapidly develop products and communicate with customers via text message. The Loose Threads Podcast features in-depth discussions with leaders across the rapidly changing consumer economy.

Check out the full transcript below.

Richie: [00:00:00] Welcome to the 96th episode of the Loose Threads Podcast, a show about the rapidly changing consumer economy. This episode is brought to you by Loose Threads Membership, which gives you actionable analysis, insights and events that drive growth, and Loose Threads Espresso, your energizing and high-pressure filter for consumer news—in context. We also have a newsletter that features the latest analysis of the consumer economy. Check it all out at LooseThreads.com.

Richie: [00:00:34] Joining me today is Zak Normandin, co-founder of Dirty Lemon, a direct-to-consumer beverage company focused on drinks and distribution for modern consumers. Zak started the company after a decade working in the food and beverage space where he realized the antiquated methods of grocery store distribution and product development.

Zak: [00:00:50] In 2015, really the only case study was Soylent but we really used that as a framework. I was like, if they’ve been able to be this successful selling to basically Silicon Valley, we can build something that’s more relevant for the modern consumer.

Richie: [00:01:05] Instead, he wanted to build a company that could develop products at a rapid clip and communicate directly with customers via text message. Here’s my talk with Zak Normandin.

Richie: [00:01:18] Why don’t we start. Just talk a bit about your background and then we can work our way up to Dirty Lemon existing.

Zak: [00:01:23] I’m from Massachusetts. I grew up in a very blue-collar town. My dad was a pharmacist. My mom was a stay-at-home mom. I thought as a child, I always wanted to be an architect. I loved drawing. I loved coming up with ideas. I didn’t know what I wanted to do after high school and knew a guy that was a couple years ahead of me in high school [who] ended up going into the Coast Guard. I saw that experience and it sounded cool. He was jumping out of helicopters and saving people in Alaska. I was like, “Oh, that’s awesome. Is that something I can do right out of high school? I’ll do it.” I ended up doing that. I went to boot camp right out of high school and spent a year in Newport, Rhode Island and then I spent three years in Mississippi and I was on a ship down there. We were basically chasing drug runners in Central and South America which was really exciting and very surreal at times. Having not really traveled much before I got out of high school and then really being in international waters chasing someone who’s trying to run cocaine to the U.S., it was very interesting.

Zak: [00:02:25] So I did that for four years total. While I was in the Coast Guard, I got an engineering degree and then I got out and I worked as an industrial designer. So I was designing test equipment for airplanes—which I really wasn’t qualified to be doing—but ended up finding a job with a company that was manufacturing test equipment and basically went from that to really just looking for jobs in the side. I got bored with that work and was looking to keep myself busy at night or on the weekends. So I ended up joining the local Chamber of Commerce in my town and they have breakfasts every week where—

Richie: [00:03:03] Like a Rotary Club.

Zak: [00:03:03] Yeah, exactly. Right. And then a woman there had a cookie company that was in Whole Foods nationally and I randomly met her one morning and she asked me to redesign the package that she had to basically allow for more cookies inside of the box. And I was doing these really big industrial assemblies, designing stuff with steel and aluminum. I was like, “Yeah, cardboard is super easy. Send me the dieline and I’ll just increase it by a couple inches and I’ll make it in 3D for you and I can show you the whole thing.” And I ended up doing that project and really was excited by just the process of going from a product on paper to something that was actually—we weren’t just making one of them. It was really going to be made millions of times, the exact same thing. And I think that really opened my eyes to a world that I hadn’t really known about before which was industrial design in the consumer products world.

Zak: [00:03:56] And then, going back to my childhood, I remember that my grandfather was an architect and I always remembered seeing him draw and, at the time, the reason why I wanted to be an architect was because that was the only career path I knew where you could draw something and then actually make it into a real thing, which is actually something that I think schools should be teaching, that there’s this world of creativity that exists beyond traditional career paths that you would associate with design or engineering or whatever.

Zak: [00:04:23] So ended up creating that product for her and then, as a young dad, I was shopping in the grocery store. It was just a really boring selection of products. It was Gerber and Earth’s Best which was an old brand that Hain Celestial bought and wasn’t really excited by any of the brands and I was looking for products that spoke to me as a young dad. Having had the experience of creating the product with that woman before I was like, “Well, I could do this. I could create a product of my own.” So I ended up making an organic version of a product that was already on the market, but there was no organic version of it and this was at a time when organic was just starting to really gain popularity. It was a freeze-dried fruit snack. So I went through the whole design process, basically learned how to set diet lines for packaging on flexible packaging and went to a couple of trade shows and got some contacts.

Zak: [00:05:15] My packaging supplier for that company was in China. I found them on Alibaba. I don’t get checks like this anymore but I remember credit card companies used to send checks with your credit card so if you wanted to write someone a check and just have it go onto your bill, you could do that. I remember writing myself a check for $20,000. I maxed out a credit card so that I could deposit the money into my account and so I could wire the money to China just so that I could start this first round of packaging. I remember sitting in my basement and going through this whole process and having a Skype call with the person in China and I’ve been doing that for the last ten years. That was 2008 and I’ve been taking similar risks like that with more money and more at stake.

Zak: [00:06:00] And then ended up getting into Whole Foods really quickly. I met a guy who owned a grocery store and he said, “Hey, you should meet my friend Ben. He could maybe help you get into Whole Foods.” And he was like, “Yeah, I could do that. I know the buyer really well.” I was like, “Great. How can we make it happen?” And he’s like, “Let me just show it to her next time. If she likes it then you could just give me $500 or something like that.” I was like, “Yeah, of course.” It was just such a different time for food, there are so many food startups now. It’s insane. But then there [weren’t] many products out there. In 2008, I’ve realized now, it was a terrible time to be starting a business. Bad economy, we had just gone through this terrible time financially and so, naturally, there’s wasn’t a lot of capital for people to start things.

Zak: [00:06:46] And so I ended up getting into Whole Foods and then Target and we were selling everywhere when I sold the company. And then I started an agency where we were making food products for much larger companies. So after I sold that, there [were] a lot of people [who] reached out and said, “Hey, we would love for you to do some consulting work for us.” And then I quickly turned that into agency and realized I hated selling ideas to other people. It just was not my—I hated giving the idea away and then being like, “Wait, but what are you guys going to do with this? Is it ever going to come to life?”

Richie: [00:07:14] Probably nothing.

Zak: [00:07:16] Yeah, exactly.

Richie: [00:07:16] Yeah.

Zak: [00:07:17] Well that’s what ended up happening. We made 30 consumer products over two and half years. I think maybe one or two of them are on the market right now and they were really cool concepts. So I did that. And then I had built this really amazing network of manufacturers and co-packers and ingredient suppliers and really just started playing around with new concepts. The original Dirty Lemon beverage was activated charcoal, dandelion root, lemon juice, mineral sea salt. I was interested in this idea of activated charcoal because all the juice shops were using it, but no one had really built a national offering for it. So we basically formulated around activated charcoal for the first beverage. But in a much broader sense, what I was most interested in, in starting something else, was removing the layer of, basically, distribution and brick-and-mortar retail from the equation so that we could have a more direct connection with customers. I really wanted to build a direct-to-consumer beverage brand and we started. In 2015, really the only case study for that was Soylent and those guys did a really, really amazing job building something that was so non-traditional for the beverage space. Now they’re going into traditional accounts, but we really used that as a framework. I was like, if they’ve been able to be this successful selling to, basically, Silicon Valley, we can build something that’s more relevant for the modern consumer.

Richie: [00:08:37] What were the pieces that came together? Did you have the drink first? Did you say you wanted to do direct-to-consumer first? Did it all happen at once? What’s the original inkling or incarnation in 2015?

Zak: [00:08:45] We started playing around with beverages at a facility in New Jersey. There’s a process called HPP, which is a pressure pasteurization process so, instead of applying heat, you apply pressure. It basically extends the shelf life of the product without having to add preservatives or anything else. Because you’re putting 80,000 pounds of pressure on the bottle and you’re basically compressing everything inside, I had this idea that if you put fresh ingredients inside of a bottle and then put it into the HPP machine, it would essentially extract all of the flavor from those ingredients. So I use the analogy of tea. It would be like taking a tea bag and then having it instantly—

Richie: [00:09:22] Like instant steeping.

Zak: [00:09:24] Exactly, yeah. So we started playing around with that. In order to do that, the bottle shape that I really loved was this Boston round shape which was actually a shampoo bottle when we first started. We’ve since created basically a custom bottle that only we use. I loved the shape of this Boston round bottle and every time we were running a product for one of our clients, we would go in with a bunch of, basically, our own products and just throw them in the machine and just see what happened. So, in a lot of ways, it was definitely the product that came first and then the technology was something that—I knew we built to sell one-off cases but I wanted a really easy way for customers to be able to come back and reorder the product. So the vision was: I want people to be able to, when they’re on their last bottle of Dirty Lemon, just send us a text message and say, “Hey, I need another case of Dirty Lemon,” and then it would come right away. That was really the thesis for the framework of the platform and what we built.

Richie: [00:10:18] When did that piece hit in 2015?

Zak: [00:10:20] It was very early. I had some friends—I didn’t really know anyone in technology. We’ve built a good network now. I had some friends [whom] I had met a long time ago. I was like, “Hey, this is my idea. I’m starting a new beverage company. Do you think that you could build this for us?” And he did. He built the original iteration of the platform. So that was probably end of 2015.

Richie: [00:10:42] What were your expectations going into the launch and then how did it actually go?

Zak: [00:10:46] Oh, we thought we were going to make so much money right away.

Richie: [00:10:48] It’s the worst. It’s the worst when you feel that.

Zak: [00:10:50] Yeah. I was like—

Richie: [00:10:51] Do you know what your number was?

Zak: [00:10:53] We made a couple hundred thousand dollars in two months which was—

Richie: [00:10:56] What did you want? What was the number you wanted?

Zak: [00:10:57] Oh, I could pull up the model. I don’t remember. I mean it was something crazy. Some friends of mine in Australia started a skincare line and they were doing close to $20 million dollars in revenue their second year, which was really impressive to me. I was like, if they can do it, then we can definitely do it. This was an Australian company. They had a good presence in the U.S., but they were mostly selling internationally. Yeah, I mean they hit something at a time that was so different on Instagram. They were this viral sensation of a product. But, yeah, my expectation was, if we only sell a thousand cases or whatever, we’re going to make X amount money. I mean we’ve since gone on to sell millions and millions of bottles.

Zak: [00:11:40] But, yeah, it’s very challenging. It’s a very challenging market. Starting a new—a new brand, especially right now, is really hard because you have to cut through so much noise. The expectation was very, very high and then the reality of it was, for us, it’s not as great as we thought, but it was enough to be like, “There’s something here.” Because the first iteration of the tech platform, we couldn’t even read the text messages that customers were sending us. So it was just a keyword-based bot to process orders for one single product. And I remember changing the system over to allow for two products, which is a really big deal.

Richie: [00:12:12] Did you at all think, at that point, that the direct-to-consumer, doing it over text message, as you said, was meant to solve really the retention, recurring, reordering process, but didn’t actually help with the acquisition side?

Zak: [00:12:23] There was definitely a friction point there on the acquisition side. I had one VC just walk out of a room and he was like, “You’re never going to hit any scale with this. It’s just completely stupid. Why would you try to sell products over text message at scale?” It was a new behavior at the time. I think we just hit it at the perfect time because now this is becoming so commonplace. We have companies hit us up every single day asking, “Hey, are you thinking about licensing the tech out?” Obviously, we’ve validated it, but also I do think that text message marketing, in general—there’s a lot more conversation around SMS marketing, conversational commerce. What we’re building is what I think will be a very big part of the future of ecommerce, which is this conversational model where when you want something, you just say what you want and then you get it. We’re always texting all the time. My kids don’t even pick up the phone when I call them because they’re just like, “Dad, text me.”

Richie: [00:13:14] “Don’t you dare leave a voicemail.”

Zak: [00:13:18] The behavior is changing so dramatically. Buying something over text message, to your question, was challenging. I think that there was a friction point there. What we realized was that, originally, we built this beautiful, slick web interface where it was like, “We process orders over text message.” We were really overt about it. “We process orders over text message and it’s easy.” We tried to sell it to consumers.

Richie: [00:13:40] “Secure!”

Zak: [00:13:42] Yeah, and people were like, “Nah, I’m not buying this at all.” But now what we do is we bring you all the way to the end of the conversion funnel and then we say, “Check your phone. You’re going to get a message to confirm your order.” And it’s just really subtle and then, once that first order happens, people are like, “Wow, that was really easy.” You have to convince consumers that it’s something that they want to be doing rather than try to oversell them on new innovation. That’s a big lesson I’ve learned over the last ten years, is I always want to shoot for the moon and try to—

Richie: [00:14:13] There’s just—a lot of baby steps get you there.

Zak: [00:14:15] Exactly, yeah. Especially when you’re trying to roll something out to a large audience.

Richie: [00:14:18] Right. And somewhat change behavior that’s entrenched.

Zak: [00:14:20] Yeah.

Richie: [00:14:21] Did you raise money before you launched this?

Zak: [00:14:23] Bootstrapped really early on and then I went back to my some of my original investors and we raised a couple hundred thousand dollars in 2015.

Richie: [00:14:31] Got it.

Zak: [00:14:31] So really, really super small checks. And that got us pretty far. We’ve been very scrappy and we really haven’t raised that much money to date. We’re at a place now where the only way for us to continue to grow is to actually raise some growth capital, which is fine. I’m very proud of what we’ve accomplished with the money that we’ve raised and we just have to keep going.

Richie: [00:14:50] Okay, so you launch end of 2015 into 2016. What are you focused on? What are some of the priorities now that it’s out of the gate?

Zak: [00:14:58] We wanted to offer the same level of service as Amazon Prime. The majority of the work that’s gone into the business has been in setting up operational infrastructure that can scale and, for a long time, we subsidized the price of shipping just to get customers the product in two days. Because I didn’t want people to be like, “I’m waiting a week for a beverage?”

Richie: [00:15:18] It’s expensive because you’re shipping water.

Zak: [00:15:20] Exactly, yeah. We were paying almost $40 a case when we first started.

Richie: [00:15:24] That’s crazy.

Zak: [00:15:24] On a $65 product. This was before we had VIP, which is our subscription. But, yeah, $40 on a $65 dollar product. We were underwater on every purchase, which was fine because we wanted to build the customer base. So the focus in the beginning was really just on putting out fires related to shipping errors, re-shipping products. It was just a lot of hand-holding and management. And also I think what we’ve done is really incredible, but it is sheer luck that we’ve been able to keep the company going this long and I mean that in all honesty. There [are] so many factors that at any point in time could sink you. Navigating that fire does not take skill. It’s just complete luck.

Richie: [00:16:04] Was there one that you thought almost would knock it out?

Zak: [00:16:07] We had—this isn’t an issue anymore, we have much better facilities now—but we used to use co-packers [who] would put the wrong ingredients in bottles. They would put the ginseng blend inside of the collagen bottle. And now we have checks and balances in place, but just things like that. And then, also, we would have a full truck that needed to go to customers and UPS never picked it up. I guess it was nothing that could ever completely sink the company, but there’s just always fires to be put out.

Richie: [00:16:33] Accumulating, yeah.

Zak: [00:16:35] Like our ops team is in Los Angeles—and they start their day at five in the morning. Intentionally they’re in Los Angeles because their day ends up ending around mid-afternoon and then they can do actual work. But, up until then—

Richie: [00:16:47] They’re firefighting.

Zak: [00:16:48] Yeah, they’re picking up the phone and they’re just making sure that the trains are running on time.

Richie: [00:16:52] You said there are nine beverages today. How many were there at launch and how many developed over 2016 also?

Zak: [00:16:58] Just one on launch: the Charcoal. And then we launched Collagen and Sleep as well, in 2016. And then in 2017, we launched Ginseng and then in 2018, we launched Rose Matcha. We’ve had a lot this year. Rose Matcha, CBD, the Vogue beverage. Yeah. And then we have Turmeric that we just released as well. So that’s the last one and we’ll do one more this year in December.

Richie: [00:17:21] What was it like going from one to three that second year?

Zak: [00:17:24] Consumers wanted more from us. We thought Charcoal had way more legs than it did.

Richie: [00:17:31] Why?

Zak: [00:17:32] A little bit was just me being naive to how transient consumers are in what they want to buy. I just think the modern consumer is looking for fast access to new products all the time and I don’t think that they’re happy with just the same thing over and over again. I think in some categories that makes a lot of sense. Nike can make the Air Force 1 forever because it’s classic. There’s some legacy there. But consumable products, specifically‚—and this goes for restaurants and food and beverage companies and whatever‚—I think they just need to constantly be evolving and changing. That was driving that for us. At some point, it wasn’t about the beverages. It was more about really challenging the distribution system that Coke and Pepsi have been using for the last 100 years. And I knew to do that we would need to evolve beyond being just a charcoal beverage.

Zak: [00:18:19] Maybe that was it. Charcoal is limiting—or having a single product. And also a lot of people associated us with a cleanse. It was like a detox and they always called us a detox brand, which I hated because that was never the intention. It was just that we were taking advantage of that ingredient, the fact that there was popularity around that ingredient. So we wanted to shift that perception and what’s interesting is that, when our collagen beverage came out, people were like, “I’ll have the collagen detox.” So they were still associating the product with detox even though it had nothing to do with detox at all. Collagen was for your skin and your hair. But that was the biggest driver. And now, for 2019, we’re committing to one beverage every month.

Richie: [00:18:56] Wow.

Zak: [00:18:56] So we’re just going to keep driving innovation.

Richie: [00:18:58] In the first year or so, was there any point where you almost gave up on the text message-based system? Or you were just like, “This is the only way we’re going to do this?”

Zak: [00:19:07] I just didn’t want it to be like everything else. We had conversations about it but, in my mind, I knew that that was the biggest value add. What’s funny is that, even as developed as we are now, it’s still a really complicated thing for investors, specifically, to understand because it’s just so new. I think we—and this isn’t to pat ourselves on the back—but we really are three or four years ahead of the curve with this type of transaction behavior. I think, until it’s validated in a really big way, people are going to be cautious of it. But I know that if we are able to execute on the vision for the company, I want to have millions of customers purchasing beverage products from us with many different brands.

Zak: [00:19:51] I want, basically, consumers to look to us for beverage innovation but also, when they want to buy water or they want to buy sparkling water or juice or whatever, I want to be the go-to for that stuff. And if we’re able to realize that, it’s going to have a significant impact on the way that Coke and Pepsi do business because we’re collecting so much data on consumption behavior that they’ve never had before. So we can see personal preference, basically ordering cycles, when they’re purchasing a product, when they’re not purchasing it. I mean there’s just so much rich data there that we can use to more efficiently run the business.

Richie: [00:20:22] It’s interesting because I guess you’re almost—obviously, there’s tons of talk about direct-to-consumer, but when you’re working through Instagram or Facebook on the acquisition side, when you’re working through email or whatever on the retention side, there are all these different filters that actually disintermediate the direct-to-consumer nature of that. But, generally, there’s no filter on text message. It’s just like you’re straight in there.

Zak: [00:20:43] Yeah, exactly, and the great thing about it is the dialogue that we end up having with customers that we can go back and look at. So we can see, in 2016, some ordered for the first time and they were asking us about pregnancy, for example. Like, “Can I drink this while I’m pregnant?” And then we have an in-house naturopath on staff so we can start to build profiles around our customers that allow us to actually better serve them. We’re very committed to protection of data. Data has been misused in the past, but there is a way to use data to actually provide consumers with a far better experience than what they would be normally receiving through other traditional brick-and-mortar or other means of interacting with a brand. And that’s what we want to do. Be able to connect with consumers and provide them an elevated experience and that falls directly in line with what consumers are looking for.

Richie: [00:21:32] And so when it launched, it was just a bot, you said. At what point did it become more conversational and like you actually were having conversations?

Zak: [00:21:39] Our first update was probably the spring of 2016 and we could finally see what people were saying, which was fascinating because it was a lot of endless loop-type situations where people were cursing at us and stuff like that.

Richie: [00:21:51] Right.

Zak: [00:21:51] And also people trying to mess with the system. You could see what the triggers were. I always know when someone’s trying to just figure it out because they’ll be like, “Help,” or, “Can I talk to someone in customer service?” And now it happens within five minutes. You’ll have someone come back and be like, “Hey, what’s up? How can I help you?” And everyone thinks it’s a robot. We do have a bot on the front end, but the great thing about it is that the way that we’ve built the system is, if you ask it any questions that’s outside of the logic that the bot created, it just gets pushed to live customer service. So there’s really no hang up at all. But, yeah, we updated the system in probably the spring of 2016 to allow us to be able to see customer conversations.

Zak: [00:22:27] And then, beyond that, we’ve just made a lot of updates. We bought a company earlier this year, Poncho. So we’re utilizing a lot of the infrastructure that they’ve built their system with to be able to just make our communication with customers more effective. They were managing millions of customer interactions. It was really impressive to see the scale.

Richie: [00:22:46] It was text message-based weather, right?

Zak: [00:22:47] Yeah. It was basically your weatherman, essentially, but he was a cat. A fictional cat that lived in Brooklyn.

Richie: [00:22:54] From Betaworks?

Zak: [00:22:54] From Betaworks, yeah.

Richie: [00:22:55] So into 2017: You have three beverages out now. It sounds like there’s some stability and I assume product-market fit has happened-ish?

Zak: [00:23:04] Yeah, of course. I mean we knew, once we had 10,000 customers or whatever, we were like, “Okay, there’s something here. We just need to amplify it.” I mean the challenge, to be honest, has always been, how do we reach a large number of people? And that, historically, has been through Facebook and Instagram, but now, as we shift our strategy to retail, I do think that we have the opportunity to actually acquire customers profitably and generate natural or viral buzz without having to pay for it. Because the marketplace is just very cluttered, digitally, right now. Facebook and Instagram; there’s a lot more advertisers now than there were in 2016 and that’s why we’re shifting all of our spend away from Facebook and Instagram.

Richie: [00:23:42] So I’m curious just to talk a bit about just what you were seeing leading up to this point. Because you said, in that Times article, that you shifted like 90% of a $4 million dollar ad budget to offline.

Zak: [00:23:50] Right.

Richie: [00:23:51] What was leading up to that? What gave you the confidence to say, “We have to just get out of what we were doing and then go into this whole new thing?”

Zak: [00:23:58] Have you ever ran ads before on Facebook?

Richie: [00:24:00] Yeah.

Zak: [00:24:01] So there’s really no rhyme or reason to why one ad gets picked up and gets traction and one doesn’t. You can have the best performance marketers in the world running this and they’re just like, “We can’t tell you.”

Richie: [00:24:14] There was another article in the Times, six or eight months ago, about the guys at Hubble. Basically, they just talked about how their entire ad team just literally sits there reloading the page all day long and they were going insane because they just didn’t know why anything was working and all they could do was just keep reloading in the dashboard.

Zak: [00:24:29] Really?

Richie: [00:24:30] Yeah. But to the point of no one knew why [and] they were just spending [more] money.

Zak: [00:24:34] Listen, when it works, it’s great. We would spend $20, $30,000 a day. We would spend as much money as we could because we were acquiring customers profitably. So as much money as we could feasibly spend in a day, we were spending because we were making that.

Richie: [00:24:47] Right.

Zak: [00:24:48] We were seeing the ROI immediately on it.

Richie: [00:24:50] When did it break timewise?

Zak: [00:24:52] Early 2017. When the algorithm changed. Yeah. CAC has just been going up. We’re like four or five times CAC right now and our ads have only gotten better. The ads are getting better, our landing pages are better. It’s a better strategy.

Richie: [00:25:06] Right. Worse results.

Zak: [00:25:07] Yeah. The unfortunate part is that the venture community just continues to dump money, stupid money into Facebook and Instagram. I don’t know if you saw the earnings report for Facebook, but the ad revenue is bigger than ever on digital and it just doesn’t—

Richie: [00:25:22] Yeah, we’ve been tracking since 2011. The average Facebook ad is up 17 times.

Zak: [00:25:26] Yeah.

Richie: [00:25:26] That’s just the average ad.

Zak: [00:25:27] Right, right. So obviously like our 4X is weighted in our favor because the ad quality has gotten better. But, yeah, that’s unsustainable. We can’t continue to be putting effort and money into creating content and everything else. I mean we’re still going to create content, but we’re just going to appropriate it to different things. I think, for us, it started when, at least for me, I started seeing much larger brands advertising on Facebook. When you look at it, in a really simple sense, a car company wants to attract a millennial [and] a company that is selling a $20 product is trying to attract that same millennial. But they’re both in the same advertising—

Richie: [00:26:02] Right, because it’s a marketplace.

Zak: [00:26:03] Bidding process, yeah.

Richie: [00:26:03] They’re just gonna outbid you.

Zak: [00:26:05] Exactly, right. That’s what’s driving the prices up, is established companies that, historically, have had a commanding presence in traditional retail, they’re saying like, “Oh, maybe we’re leaving money on the table so we’re gonna start shifting it to digital.” But the irony of that is that, as that pendulum swings, we’re going right in retail.

Richie: [00:26:22] Right.

Zak: [00:26:22] Because that’s where we think the most value is. Because they have been ineffective at retail, which is the reason why they’re having to shift their marketing spend. It’s not that retail is a bad place to be playing. It’s actually probably the best place to be playing right now because consumers want experiences. They want direct interaction with brands. They want to touch and feel things and they want to take pictures and all that can’t happen when you’re looking at just Instagram. It has to happen in a real place. If I was Audi or one of these car companies, I would open a racetrack and then charge people to come and test drive any car. Something like that. There’s so much cool experience that you could do.

Richie: [00:26:57] And plenty of space.

Zak: [00:26:58] Right, and no one’s doing anything. Their answer is just to shift dollars online which, ultimately, isn’t going to do anything.

Richie: [00:27:04] I remember reading one of the earnings reports from Facebook. It was probably two years ago. I think Sheryl Sandberg was starting to talk about how they were building these amazing direct response products for the Cokes and Pepsis of the world and that was the moment where they would just start outbidding everyone because they have millions and millions of dollars.

Zak: [00:27:19] Yeah, of course. Right.

Richie: [00:27:20] And that was at the end of the small business being able to share a viable channel.

Zak: [00:27:24] And a lot of them, they don’t even really know what their CTA is. They don’t really know—

Richie: [00:27:28] Why.

Zak: [00:27:29] Yeah, why are you spending the money there? Because Facebook and Instagram advertising is built on this idea that it’s going to be an impulse purchase. That you’re going to see something and be like, “Okay, cool. I’m gonna buy it.” Because the attribution window is so short for those ads.

Richie: [00:27:43] Yeah. It’s also interesting from the retention perspective too though, because I think you see a lot of these companies that just plow the money into Facebook. They optimize for transactions, but they’re all these one-time purchases. But it seems that you also, because you had the whole back-end piece that was really built on the repetition and the loyalty or whatever, you were in a better place to keep those customers than other companies that would just churn through them.

Zak: [00:28:04] Yeah. I think also the product is just higher velocity. People like drinking beverages.

Richie: [00:28:09] And then it’s gone.

Zak: [00:28:09] Yeah, and once it’s gone, then you need to either replenish it or you don’t get that product anymore. I think, in the case of beverages, it’s just a higher velocity, high-consumption rate type product, which is really the opportunity that we’re going after. The beverage industry is a trillion-dollar global industry—just non-alcoholic beverages—and it’s largely held by Coke and Pepsi. We think that there’s a lot of whitespace that’s going to be opened up in market share that we can obtain from people who are just like, “No, I don’t want to drink soda anymore. I’m looking for a more relevant offering that’s suited to me.”

Richie: [00:28:42] Retail also solves your shipping problem.

Zak: [00:28:44] Oh, yeah. Absolutely. The great thing about retail for us [is that] everything that we’re doing is vertically integrated. We own the retail channel which is essentially the distribution point and then we also own all of the products that are being sold in it and they’re all reinforcing the brand message that we’re looking to communicate.

Richie: [00:28:58] And you own the marketing channel, effectively.

Zak: [00:29:01] Yeah, absolutely.

Richie: [00:29:02] Yeah. So Rent the Runway announced something this week where—so they have five stores. They just announced this partnership with WeWork where they’ll put return boxes in 15 WeWork locations basically so people can drop their stuff off on the way to work. They’re pursuing this hybrid strategy between their own stores where you can get the full experience and these quicker interactions that are still really important. As you build more of these, do you see opportunities to literally just put vending machines in places or do you feel that you have to have the full thing everywhere you go?

Zak: [00:29:29] I think vending machines are really interesting. We’re unsure of how it’s going to work at scale. Right now we have a really great case study in a moderately busy street in TriBeCa. But we’re not in Times Square and we’re not in Union Square. This is a small street in TriBeCa. So I’m unsure of if the current concept would work at scale in many other locations. It would be a really interesting test. I think what we’re focused on in the near term is actually incorporating more tech into that space. It’s 100 square feet. It’s so small and it truly is like a walking vending machine. You walk in, there’s an iPad, a big touchscreen in the space. You have music. You have a mirror for selfies or whatever and basically a thousand bottles of Dirty Lemon in front of you. It’s really straightforward. We could layer in other tech that actually makes that a smarter experience on the back end. So we’re gonna be incorporating RFID tags on all the bottles that we can see actual movement of bottles in and out of this space.

Zak: [00:30:27] We thought this retail project in TriBeCa was going to be done months ago and it hasn’t been because it’s challenging. This is a reason why people aren’t jumping into retail as fast as they jumped into, “Hey I’m gonna make a granola or a website.” It’s expensive. It’s costly. There [are] a lot of variables, a lot of people to manage. I think that has been a very expensive lesson for us this year is just, before going into a retail project, understanding better what the implications of that are.

Richie: [00:30:57] So in early 2017, you realize there is a better way to do this. The Drug Store, which was the first one here, opened recently, right? So it took a year or so of planning to get there.

Zak: [00:31:08] We did a three month pop in Nolita and that was the first Drug Store. We had bartenders making homemade versions of all the Dirty Lemon drinks. We saw through that, when you’re around friends and you’re listening to good music and the atmosphere is good and all of this stuff, it didn’t really matter. We weren’t serving alcohol at the time, but people loved just drinking our drinks in more of a social setting [where] you’d expect to have alcohol. So that was really the first point where we were like, “Wow. We have something here.” We did a bunch of parties at the space. It was a very fun summer.

Zak: [00:31:39] Then, [in] 2018, we wanted to do it again and we started looking at spaces and we found this amazing space in TriBeCa. The setup is very different than the Nolita location. So the front part of the space is what we dub “a walk-in vending machine.” You walk in, you grab a bottle of Dirty Lemon and then you just text us and tell us what you took and it’s all honor-system based. We’re utilizing the technology that we developed for the direct-to-consumer business. A lot of customers will come in, grab a bottle and we see the latency between when they take the product and when they actually text us and a lot of times it’s like once they’re sitting at their desk, when they get to the office. It’s not always immediate. [But] they’re not waiting, and that’s great. I think that establishing that trust with it, with our customers, and allowing them to be able to grab a product anytime. Also cashierless retail is the thing. Now the cool part about that front section is we hit the timing just perfectly and now we’re getting included with Amazon with all of their cashierless stores that are opening. We’re in these retail disruptors articles and stuff which is in line with the cycle of innovation that we want to have.

Richie: [00:32:41] So a lot of the things you’re talking about, whether it’s stores without cashiers, whether it’s direct-to-consumer on the texting side—these things have been talked about in a very nerdy way for years at this point. The solutions are often these very nerdy, technical, just uninteresting things.

Zak: [00:32:57] Right.

Richie: [00:32:58] It feels that you’ve found a way to just make them very consumer-friendly. You don’t really brag about the technical details. It just like, “Yeah, we do it this way and it kind of works.” How do you think you’ve gotten to a place where you’re not falling into the same traps that a lot of other companies do where they’re just yelling about the features and all these things that really no one cares about? And maybe it seems obvious to just focus on the experience, but it seems like that’s where everything else has kind of gone wrong.

Zak: [00:33:19] Everything that we do, even if it’s a new behavior like texting your order in, it needs to ultimately be something that is providing the customer some type of benefit. I know with The Drug Store, we’re moving a lot of product there every day and it truly is a value add to the customers living in that neighborhood [who] are already buying Dirty Lemon anyway. The fact that they can just walk by and grab product if they want and then take it with them, it’s a value add. Yeah, there is a lot of technical stuff that’s happening behind the scenes and the consumers don’t need to know about that.

Richie: [00:33:49] As long as it works.

Zak: [00:33:50] As long as it works. Yeah. As long as they’re getting their product. Our goal for 2019 is that, if you place an order, you should get it from us same day or, at the very latest [the] next day, in every U.S. market. Maybe there’ll be a scenario where it’s gonna be a two day situation, but we want to be packing and fulfilling orders as they come in. We want to have them shipping out and if they’re in regions where we have a warehouse, you should be getting it same day. If they’re regions where we don’t have a warehouse, you should be getting it next day. That should be the very latest that you would receive it and it just needs to work. I’m okay with there being a little bit of magic behind the scenes.

Zak: [00:34:24] We didn’t need to do two-day shipping. I’m sure that we could have gotten away with doing three- or four-day shipping and it would’ve been fine. But we want to continue to surprise and delight our customers. If you go out on a limb and you’re like, “Okay, I tried this beverage. Now I’m gonna order a case.” It’s $45 or $65 to purchase it. How much better would you feel about that whole process if you received the product a few hours after you ordered it? Or even the next morning. When you get something fast you’re like, “Whoa, how did that even happen? How did they get it to me that quickly?”

Richie: [00:34:53] And you’re setting the pace also.

Zak: [00:34:54] Yeah, exactly. I think this is what customers are going to want. It’s just the infrastructure that Amazon has in place prevents them from actually doing it at scale. But we’re at a scale right now where we actually can provide a far superior level of service to our customers.

Richie: [00:35:06] And then just looking at the future, you mentioned before a longer vision is to have multiple brands under this distribution mechanism. What is on the horizon there?

Zak: [00:35:15] In 2019, we’re shifting away from focus on a single brand and we’re going to be focused on multiple properties underneath one parent company and that company is Iris Nova, which means “new lens” in Latin. We’re looking at the beverage industry through a new lens. Iris Nova will house the operational infrastructure, the customer data and the technology and then we’ll have multiple brands underneath that. It’s Dirty Lemon, we have another brand that we’ll be launching later this year, The Drug Store, which is our retail component and then we’re looking at two other brand concepts in 2019. By the end of 2019, we should have four retail locations with The Drug Store, three brands underneath Iris Nova and probably significantly more advanced tech that’s driving the process between all of those companies.

Richie: [00:36:00] And so the idea was to brand The Drug Store as not specific to the brand entity so a lot could fit under it?

Zak: [00:36:05] Yeah. We want to use The Drug Store as a lab to test out new products and validate them before they get into a beverage format.

Richie: [00:36:11] Awesome, man. Thanks so much for talking.

Zak: [00:36:12] Of course.

Richie: [00:36:16] Thanks for listening to the Loose Threads Podcast. You can read full transcripts of the podcast and join the newsletter at LooseThreads.com. Feel free to leave a review on iTunes—we always appreciate it. And thanks to George Drake, Jr. for editing this episode. We have a great roster of upcoming guests including Chaitenya Razdan of Care + Wear and Billy Price of BILLY footwear. Thanks for listening and talk to you soon.