#126. O2 is an oxygenated recovery drink for athletes. We talk with founder and CEO Dave Colina about being the first to scale and commercialize an oxygenated recovery drink. The Loose Threads Podcast features in-depth discussions with leaders across the rapidly changing consumer economy.

Check out the full transcript below. 

 

Dave: [00:00:01] The initial premise behind the product was detox, hydration and energy. We’ve evolved as the product has evolved, and the market has evolved to really just this notion of recovery. Getting you back to your best self faster.

Richie: [00:00:18] That’s Dave Colina, co-founder and CEO of O2, an oxygenated recovery drink for people living active lives. Dave founded the company with his business partner Dan after seeking to replace the high-sugar energy drinks they were turning to after workouts. The quest led them to oxygenation, a process that pumps extra oxygen into liquid and can help your body process toxins faster. This speeds up recovery after a hard workout—it was just the differentiator they were looking for.

Richie: [00:00:44] I’m Richie Siegel, the founder of Loose Threads, which analyzes and advises next-generation consumer companies, and FaceLift by Loose Threads, a retail incubator and accelerator for leading brands and retailers. For our latest analysis and insights, check out our free weekly newsletter at LooseThreads.com. We also announced Loose Threads Live, our invite-only, entirely off-the-record gathering for founders, executives and investors on October 3rd in New York City. Learn more at LooseThreads.com/Life.

Richie: [00:01:14] I started the Loose Threads Podcast to spark engaging discussions with leaders across the consumer economy. That’s why I was excited to talk with Dave about how he relied on CrossFit gyms to grow the brand’s audience and how it’s using that foundation to expand into the national grocery arena. Here’s how it all began.

Dave: [00:01:32] I found myself in this position where I was drinking a lot of Red Bull and a lot of Gatorade, and I started to look for healthier alternatives. I wasn’t doing CrossFit yet which has become a big part of our business, but I was doing my own high intensity interval training. And so I starting to take fitness pretty seriously, nutrition very seriously, and I couldn’t find anything that worked as well for me as the traditional sports and energy drinks, and I couldn’t find anything that had a better nutritional profile at the same time. So there is stuff out there that, you know, is better for you. I’ve always wanted to like coconut water, for example, I just could never really get past that taste. And so I approached a friend of mine who at the time was finishing his medical residency at Ohio State’s hospital to see what he did instead. He had a very similar lifestyle to me. He was also working all the time, he was pretty fit, had an active social life. After I asked this question—you know, “I’m drinking all this Red Bull and Gatorade, I know it’s not good for me but I can’t for anything else better, what do you do?” He sort of shamefully looked at me, was like, “I drink the same shit and just feel bad about it.”

Richie: [00:02:38] Talk briefly about why there was such mass adoption of what is not the greatest thing for you, in those environments.

Dave: [00:02:46] I think, historically, there just hasn’t been a range of options. Gatorade’s story dates all the way back to the 1950s, I think, is when the University of Florida started to experiment with it for their football team. And, up until recently, it was Gatorade and Red Bull. And so, if you go to a grocery store or a convenience store, you know, still most of the facings are probably dominated by the Gatorades, Powerades in the sports section, and the Red Bulls and Monsters in the energy section. But you’re starting to see more and more cleaner options available.

Dave: [00:03:21] And so I think that with the rise of a more transparent environment in the late 2000s around what people were putting into their body, I think that’s also kind of given rise to other brands that provide cleaner healthier alternatives like O2.

Richie: [00:03:37] Those brands—the Gatorades the Powerades, the Red Bulls, the Monsters—I mean, they were also incredible marketing machines.

Dave: [00:03:42] Oh yeah.

Richie: [00:03:44] Right? Would you attribute that to their entire success, effectively?

Dave: [00:03:46] 100%. And what Gatorade and Red Bull have both done really, really well is to lock in certain retailers. So, an example: Dan and I both went to Ohio State. And so, as the company founders, we’ve got pretty deep roots in Ohio State. The company is based in Columbus. And we had been approached by somebody from Ohio State wanting to carry our product, and it got all the way up to the key decision makers when the decision was squashed, because Ohio State has a contract with Coca-Cola which owns Powerade, and Powerade sees us as a direct competitor. And so, I think that many of the sort of legacy brands have done a really good job of locking in contracts like that. But at the same time, more and more options are prolific, especially direct-to-consumer. And so I think that’s kind of loosened that grip on the consumers by those companies.

Richie: [00:04:44] Yup. So, if we go back to the beginning again…I forgot where I cut you off.

Dave: [00:04:47] So I think we were right at the need that both you and I had for a product like this. So, the two of us were, at the time—I think we were, you know, in our mid-to-late 20s, had very few obligations outside of our careers and could effectively conquer anything if we put our minds to it, right? So we kind of looked at each other like, “Alright, well, you have this problem and I have this problem. Chances are other people like us do too. We should just make our own drink. How hard can that be?” Famous last words. Turns out it’s pretty tough.

Dave: [00:05:19] And so, we set out to, basically, build a better mousetrap around 2010. Dan’s a doctor, not a food scientist, right? I was in corporate strategy and marketing at an insurance company—certainly not a CPG. Neither of us had any inkling of what it was gonna take to take this product and make it into a real thing. So we kind of spun our wheels for about a year. Validated that, yeah, our friends would be interested in something like this. And then, in 2011, Dan came across a really compelling peer-reviewed medical study that showed the accelerating effects of ingested oxygen on the liver’s metabolism of toxins. And so he shared this with me, and immediately I thought, huh, that’s kind of interesting. The strategist in me was already looking for something to make different and make unique about…

Richie: [00:06:10] The hook.

Dave: [00:06:10] Yeah. What’s the hook? Like, it’s okay to be a better version of Gatorade and Red Bull, people get that, but is that enough? And so, immediately I thought, that’s our hook. The oxygen the thing, that’s it. Dan felt the same way. It’s like, this is a really underutilized ingredient, so to speak. And in the medical community it’s pretty well known the benefits of ingesting oxygen, but nobody, you know, outside of medicine really knows that, right?

Richie: [00:06:34] Why do you think that was?

Dave: [00:06:36] It just hasn’t been commercialized before. And I can tell you why, now. It’s really challenging to make an oxygenated drink! But again, our naivete played to our benefit, for sure there. So we started to network our way into the beverage industry, and little did we know that there are key players that you kind of have to line up to get something made and produced, one of which is a flavor house. Another is a co-packer—you can certainly try and make something yourself. That comes with its own challenges—but we started to reach out to these folks and, in every conversation, as soon as we got to the oxygen piece, we got laughed out of the room.

Richie: [00:07:13] Had they even heard of it, or they were just like, “No?”.

Dave: [00:07:15] Well, so, in the beverage industry you’re taught to keep oxygen out of products, much less put it in.

Richie: [00:07:22] Because?

Dave: [00:07:22] So, oxygen is corrosive. You know, it doesn’t play well with other ingredients. It’s one of those things where there is a certain threshold of, let’s call it two parts per million. If you’re over that threshold in most beverages you’re not in a good place. And so, we had begun to have these conversations, and we quickly realized there’s a lot to this that we just don’t know. One thing being this whole notion of adding oxygen to a drink. So, not only do you not want to keep it out, we want to add it in.

Dave: [00:07:49] And so, we found that nobody in the industry was really willing to talk to us. And after about another year of spinning our wheels, we thought, you know what? Let’s just try and make this [ourselves]. Let’s take it into our own hands and see if we can make this drink ourselves, since nobody else would do it for us.

Dave: [00:08:08] And so, there was a small restaurant in a part of downtown that was kind of up and coming in Columbus called The Short North, and it was Cajun restaurant. And Cajun food is all cooked in large batches. And so, we approached this restaurant about leveraging part of their kitchen that was under-utilized most of the week, because the batch cooking was done over the weekend and the kitchen wasn’t really being used on Monday/Tuesday. We approached the owner of this restaurant and he allowed us to pay, I don’t know, $50 bucks a month or $50 bucks a week? Whatever it was, in rent, so to speak. And we hired a food scientist from Ohio State to actually formulate this drink. So we gave him some parameters to work within and he did the formulation. We bought a bunch of ingredients off of Amazon and at our local homebrew store in Columbus. And we procured an old restaurant bar gun from a restaurant supply store. So, the type that you would see at a bar that squirts out, you know, the Coke or the Pepsi or the soda water or whatever. And then we also procured—somewhat illegally, probably—a tank of medical oxygen. I’ll let you figure out how he did that.

Dave: [00:09:18] And so, we had all the components in order to make this drink [ourselves].. So, the food scientists gave us some guidance on the recipe for this beverage, and we were making it in this kitchen in small little batches, the same way that Coke or Sprite will come out of a bar gun, it’s a syrup and a water mixture. So we would make the syrup and then we would oxygenate the water, and it all came combined through this bar gun. And so, we started to bottle the product in small-case batches. And, universally, all of our friends that we tested this with was like, “This is just a terrible tasting drink.” Like, “This is awful, but it works like a charm.”

Richie: [00:09:57] What does “work” mean in that—or, at that time, what did “work” mean?

Dave: [00:10:00] So, originally, the idea was, alright, we want to get folks back to normal faster. So after grueling physical or mental activity we want to bring people back to their best selves. And often that would include after a long night out for our cohort of friends in their mid 20s, too. And so, folks began to play around with this drink in different scenarios, and it was universally regarded as a very, very functional beverage. Like, this drink just works. It, I mean, it hydrates me really quickly, I feel better after I work out, it cures my hangover, etc., etc., etc.

Dave: [00:10:37] We knew that we were onto something once we got that feedback, and then we went into, let’s say, ten to 15 stores in Columbus selling this drink that was in this silly glass packaging and tasted terrible. We were selling it for five bucks, but the proof of concept is what we were looking for there. And we got strangers to buy it, and then rebuy it, and rebuy it. And we really knew we were on to something once we heard that the Ohio State basketball team was buying it by the case and using it before and after games.

Richie: [00:11:08] Hmm. But it still tasted bad.

Dave: [00:11:10] It still tasted terrible. Yeah. So this was still a part-time endeavor for both me and Dan. But once we had the product to that proof-of-concept stage is when I became personally ready to take the dive. So we did about…it was either six to nine months of this pilot. And then I decided to leave my day job, and I knew that we had something functionally, we just had to make it taste right. Right? And so, I felt like you could probably hire that out. You could probably outsource that to a flavor house. And we did.

Dave: [00:11:43] And so, we found a flavor house that would work with us and partnered with us in a way that really nobody had, up to that point, because now we had a track record. We had proof of concept. Whereas before it was just a pipe dream by a couple of guys who didn’t know what they were doing. And after about a, let’s call it nine-month formulation process, we had the components of this beverage bottle that actually tasted good, and a recipe that was all natural and delivered on those functional benefits that we knew were important, and we were ready to put it into production.

Richie: [00:12:18] What did you go for with the taste?

Dave: [00:12:19] So, with the taste we were looking for something that was kind of light, crisp, refreshing. Not overly-sweet. Something that I would describe as “chuggable” after a workout. And I think that’s where we arrived at. And it’s hard to make something taste really, really good when it’s functionally equivalent to two-and-a-half times the electrolytes of, say, a Gatorade, and has as much caffeine as a cup and a half of coffee, and only 20 calories and two grams of sugar. And it has to be all-natural. So that’s a pretty tall order. And that wasn’t something that I was really willing to compromise on, either, especially after I’d invested the rest of my life savings into getting this right. We were gonna get it right.

Dave: [00:12:57] So, we still work with the same flavor house today, and I joke with them that, you know, we’re probably the largest pain-in-the-ass client that they’ve ever had, because we certainly won that value equation. Like, the most of their engagements don’t last nine months in formulation. We played it out until the recipe was actually perfect, or as close to perfect as we could possibly get it. And only then were we going to put it into production.

Richie: [00:13:23] You had kind of the blueprint now of what could be produced. Where to after that?

Dave: [00:13:28] Once we had the formulation prepared, I had pulled together a small group of about five people who had served as various mentors to me at different points in my career to effectively build out an advisory board. And from that advisory board we did a very small fund-raise that would allow us to do a large-scale production run. And we found a producer that happened to be already bottling an oxygenated water in a can out in California. I mean, so many stars had to align for this to come to fruition. In retrospect, it’s still kind of crazy. Like the fact that they were producing an oxygenated water in a can, in a cold-fill capacity, and doing so in a way that was all-natural—so it didn’t have any preservatives, so there was an all-natural kill step in there—and packaging it in twelve-pack cases. Those are a lot of the things that had to intersect there. But we found it, and we were able to convince this guy to give us a shot and he did.

Dave: [00:14:30] And so, we did our first production run in February of 2014. And I was still the only full-time employee—full-time or part-time or otherwise employee. Dan the doctor never left his day job, he’s still a doctor. And we had—I don’t know how many pallets. Maybe 60 to 80 pallets of this product come in.

Richie: [00:14:53] That’s a lot.

Dave: [00:14:53] I mean, which was a lot for us at the time. And I was solely responsible for selling it. So it was pretty overwhelming once the product actually hit the market.

Richie: [00:15:01] So, in terms of the sales, you know, you’d come from the marketing side before. What was the plan or the strategy of how you would get rid of 60 to 80 pallets?

Dave: [00:15:09] Yeah. I came across that plan not too long ago and laughed, because it doesn’t look anything close to like—

Richie: [00:15:15] Oh, like the actual document, huh?

Dave: [00:15:16] Yeah the actual document.

Richie: [00:15:17] What was on there?

Dave: [00:15:17] So, it was a business plan that I wrote as part of our first round of family and friends fundraising that was modeled largely off of Honest Tea’s business plan. Honest Tea made their business plan public and, basically, I just took that template and then reworked it to be fitting to O2. It was based around introducing the product to convenience stores and to independent retailers. And I can’t remember what we projected in terms of sales or volume or, whatever, geography, but it had nothing to do with direct-to-consumer, and it didn’t have anything to do with selling to various CrossFit gyms or yoga studios. And, now, those two parts of our business are certainly two of our largest. So the business plan as it was written then was just a more traditional route-to-market type of business plan for a drink.

Dave: [00:16:11] What actually happened was much, much different. What actually happened was, once we had two semi-trucks full of this product that nobody had ever tried before roll into town, I had to figure out how to sell it. And I basically sold it out of the back of my car to anyone who would buy it. And for the first three or four months of the business that allowed me to get a really, really good feel for what types of retailers are gonna perform the best with this drink and what types aren’t. And so, I quickly realized that it would take me just as much time to drive to our warehouse and pick up two cases of O2 and drop it off at a convenience store as it would [to] drive to our warehouse and pick up 10 cases of O2 and drop it off at CrossFit Hilliard. And both of those retailers would sell through that same order in about two or three weeks.

Dave: [00:17:03] So the ROI on my time—which was, like everybody, is super-limited, like I can only make so many deliveries in a certain day—was all with the CrossFit gyms. And it just so happened, based on my own background as a trainer, that I had a bunch of buddies who had CrossFit gyms in the area, and were initially willing to do me a favor and put it on sale at their gym, and it turns out it did really, really well. That captive audience is so ripe for our product. I mean, they read labels, which is good for us, and they get it. And our product is also non-carbonated and every other drink out there in the space is carbonated. And so it’s very, very distinct in taste alone, and it’s got a very clean nutrition facts panel which is important.

Dave: [00:17:45] So, looking back, it made perfect sense that this audience was gonna be so quick to adopt our product. But I remember very early on, at one of our advisory board meetings prior to the business actually getting off the ground, somebody asked me if I thought we should sell it at the CrossFit gym that I coached at, and I thought, “That’s a stupid idea.” You know, “I bring my protein shake that I make at home into the gym…”

Richie: [00:18:08] Right. You have to display something.

Dave: [00:18:09] Yeah, right? Who’s gonna buy a product at a gym? That’s silly. Well, little did I know, a lot of people are gonna buy products at gyms. And so it was one of those things where we just had to see it in the native environment in order to fully understand the potential.

Richie: [00:18:22] In terms of, I guess, the efficacy. At that point, what was your level of comfort and/or ambition of what you were gonna claim it does? ‘Cause the efficacy is a huge part of it—

Dave: [00:18:33] Oh, it’s a huge part.

Richie: [00:18:34] But you also can go really overboard on that and piss people off, and so forth.

Dave: [00:18:36] 100%. Totally. And what’s really interesting is that since we launched O2—we launched back in 2014. And so the initial premise behind the product was detox, hydration and energy. We’ve evolved, as the product has evolved and the market has evolved, to really just this notion of recovery. Getting you back to your best self faster. What’s also interesting is that we’ve been fortunate enough to have done this over the course of the last few years, when some really compelling peer-reviewed medical studies have come out on the efficacy of ingested oxygen clearing lactic acid faster from the body. That’s not something that we planned for. That’s kind of a happy accident. These studies hadn’t been done by the time we launched O2, but we started to hear from our own customer base very, very early on that, gosh, when I drink O2 I just feel less sore the next day. And Dan I both didn’t really have anything to back that up. We didn’t know why that would be.

Dave: [00:19:39] You know, I guess it kind of made sense, anatomically, but there was no science that supported that until, I want to say 2015/2016 is when the first one of these studies came out that indicated that, actually, oxygenated water will help the body clear lactate faster. And there was another one done in 2017. And so, the body of evidence isn’t quite as robust as the premise of detox, but it’s very much growing, and it’s very interesting to us, because it lines up directly with what we hear over and over and over again from our customers around, “If I drink an O2 after I work out, I’m just less sore the next day. It helps me feel better faster in a way that I quite can’t put my finger on, in a way that’s different from a cup of coffee or just rehydrating.”

Richie: [00:20:24] So, you’re starting to kind of scale in CrossFit gyms now at this point. Where do you start to spend your time? And so, we’re in 2014, 2015?

Dave: [00:20:33] Yup. 2014. Still just me selling O2 out of the back of my Prius. And I started to spend my time with the CrossFit gyms and another blossoming market for us was with Whole Foods, and retailers like Whole Foods. So, I knew with O2 that I always wanted to get it into Whole Foods. It’s where I shopped, and the values aligned with what I believe in around food and quality, but I also knew that I didn’t want to blow it with Whole Foods right out of the gate. And so, one thing that I did early, which I think helped, was to test the waters a little bit with mom-and-pop grocery stores in the local market, so that kind of refined the pitch and refined my position, and learned about what it would take to be successful in that environment. And so, for the month of March of 2014, I was basically camped out at a local grocery store every weekend sampling O2, and it did really, really well there.

Dave: [00:21:30] And so, in April I approached a larger but still kind of regional grocer called Lucky’s Market to carry O2, and I did the same thing at that store. And then once it was successful there is when I approach my local Whole Foods store, and it’s [the] same story; we killed it there. And it was just by nature of sampling the product, giving folks a taste, doing a little bit of education. But once I had the data from the Whole Foods store on Lane Avenue in Columbus on how well sales were going there, I could approach the Whole Foods store in Dublin. And once I did the same thing, rinse and repeat for success at that store, I could do the same thing with the Cincinnati stores and I could do the same thing with the Cleveland stores. So the business really became rooted in CrossFit gyms and Whole Foods stores in 2014, and that was largely our strategy for 2015/2016, because there is also a nice amount of overlap there, too. CrossFitters shop at Whole Foods stores, people who do yoga shop in Whole Foods stores. There’s a beneficial overlap between the two that actually helps both types of retailers.

Richie: [00:22:34] Are you selling online at this point? Or not yet?

Dave: [00:22:37] We were selling a little bit online. It wasn’t a focus. Because, unfortunately, we sell a product that’s really heavy to ship, right? And high shipping costs were extremely prohibitive at the outset. Now, we did debut our product online in 2014, and we made it available for our friends and family to purchase online, which is basically the only people buying it online at the time. But it was costing us an arm and a leg, and so we didn’t emphasize it. But we started to emphasize online sales a little late. We didn’t quite get to take advantage of the super-cheap paid social boom, but it was closer to end of 2016, early 2017, is when we started to focus online, because we found that, just like we could grow the brand with hyper-targeted focused marketing and CrossFit gyms—so, for example, if you show me a CrossFit gym with 100 members, I’ll show you 80 people who are gonna be receptive to our product.

Dave: [00:23:35] We could also hyper-target people online, and so that’s what we did. And we found the same level of upside there as it just started to work really, really well, because it resonated with that same type of person, and it became very complementary to our grocery business, too. Because if we’re in a market where we have built a pretty solid direct consumer following and/or a pretty solid gym following, then as soon as we open up traditional retail in that market it’s gonna do pretty well because we’ve got people pulling it off the shelf from day one.

Richie: [00:24:08] In 2015/2016, what are you spending time on that needs improvement, isn’t working as well, etc.?

Dave: [00:24:15] 2014 is when we really suffered our first crisis as a company. And, in retrospect, it wasn’t much of a crisis, but it really felt like one at the time. That was very, very early on into the first year of the business. I distinctly remember where I was and sort of how this unfolded, kind of like it was yesterday. There was a Facebook message that came through to our Facebook page from somebody who had just tried O2, and he was like, “Hey, this is great. I really love what you guys are doing here. The flavor is awesome, but the nutrition facts, I don’t think it could be possible that they’re right. Because it says that you guys have 360 grams of sodium in your product and 370 grams of potassium. Can that be right?”.

Dave: [00:25:05] And so, I look at my phone and I immediately think okay, this guy’s got a nutrition-related question, I’m gonna kick that over to Dan the doctor. So I sent Dan a text, was like, “Hey man. Can you check Facebook? Somebody has a question about our nutrition facts panel.” So I go back to what I was doing, I think I was packing boxes for shipment, Dan calls me about 10 minutes later. And that was my first sign that something was off, was a phone call in the middle of the day versus a text message or an email. So I pick up the phone. He’s like, “Hey man. Are you sitting down?” I’m like, “No, I’m not. What’s up?” And so he said, “Well, we’ve got a problem. You know that guy who just asked if there were 360 grams of sodium and 370 grams of potassium in O2?” I was like, “Yeah.” He was like, “Well, if that were true, we would have over a pound of salt, per can, in our product.”

Dave: [00:25:53] We made a typo on the label. I’m like, “Oh my god, you’ve got to be kidding me.” And so, completely irrationally, I rush out to our warehouse and I start pulling product off of pallets, looking at the back of every can and, sure enough, we made a giant typo on the nutrition facts panel, which said that we had grams instead of milligrams. So I didn’t know that this is actually fairly common occurrence in food and beverage, shockingly enough, and there are many ways to sort of right that wrong. But I had no idea at the time and I was two weeks into this. And so I remember thinking, well, we had a good run at it. You know we’ve got a product that people seem to really like off the ground. And, sure I’ve disappointed basically everybody who I’ve ever cared about who’s helped me in one way or another with this business getting it to this point, but at least it’ll be a good story in the future.

Dave: [00:26:40] As soon as I picked myself off the floor, basically I called a really prominent beverage attorney and talked through the issue with him, thinking he was going to tell me that, well, it’s over.

Richie: [00:26:51] Shut it down, yeah.

Dave: [00:26:52] Shut it down. And he was like, actually this is pretty common, and you can either hope nobody sees it and sweep it under the rug, which wasn’t really our style. Or you can try to cover up, with a sticker, the nutrition facts panel, and technically it’ll read accurately but it will look kind of silly. You just hope nobody really notices. Also not our style. Or you can put like, an announcement on the website and say, “Hey, you know we screwed up. This should be milligrams versus grams. Sorry.” And so I thought, you know, none of those options really sound great, right? But what we ended up doing I think was the first time where our values sort of came into fruition and materialized. What we ended up doing was we took the sticker idea and we took the announcement idea and we combined them into one and we got about one hundred and fifty thousand stickers that read, “Oops ,our bad. This should be in milligrams versus grams.” Something like that. And we spent every weekend hand-stickering every single can that we had in our warehouse.

Dave: [00:27:56] We would take a case off a pallet, unpack it, put a sticker on the can, put it back into the case and put it back on a pallet. We hand-labeled about 150,000 cans over the course of those first six months. And so, that was a moment, sure, of crisis management for us, but it was also a moment of a values-based business kind of living up to those values. That’s when—you know, we have three values at O2, we take them really seriously, honesty, humility and hustle. That’s when we really figured out how we want to roll as a company. And so, over the course of the rest of that year when we weren’t stickering cans we were trying to figure out the best model to effectively build and scale the business that doesn’t involve just me driving around in my Prius everywhere in Ohio. And that was another challenge in and of itself.

Richie: [00:28:47] How did that start to come together? ‘Cause, as you were describing it, there’s definitely like, the unscalability of you’re in the aisle all day.

Dave: [00:28:54] Yup. So we ended year one at about 50 to 100 CrossFit gyms and all the Whole Foods stores in Ohio, which were all the accounts that I could personally service myself out of the back of my car. And so, we then had to solve for the same strategy just on a larger scale. And shipping costs was still pretty prohibitive, but what we were able to do is we found a type of shipper called a small parcel delivery company that would warehouse a couple pallets of our product, and they would pick pack and deliver it anywhere in Ohio or Pennsylvania—so, our surrounding tri-state area—for four bucks a case today, which is insanely cheap. And so we started to assemble a network of these small parcel delivery companies across the United States who would do effectively the same thing. And then we would just focus on getting products sold into CrossFit gyms and getting products sold into Whole Foods stores. And we had a route to market that didn’t involve the margin sacrifices of, say, a distributor, or the pains of Dave delivering it himself out of the back of his car, but was close to scalable.

Richie: [00:30:07] Alright. So it sounds like the direct business is kind of starting to grow a little bit in terms of inflection points or where you’re spending your time, two or three years in now.

Dave: [00:30:16] Yeah. Two to three years in I still had my hands in most things. I had [an] employee in year two, and then I think we had another two join in 2016. So still [a] very, very small team, and most of my time was spent on sales, sales and marketing. I hesitate to even call it marketing, because what we were doing was really just feet-on-the-street type sales, knocking on doors and closing new accounts. The business started to get to a point where we could actually entertain kind of a more advanced sales model. I would say around 2016 when we basically knew how much upside was in CrossFit for us and how to unlock that upside. And so, we got very, very formulaic about not only closing new accounts but also how to make sure that those accounts were successful with our product.

Dave: [00:31:15] And so we went through an exercise in 2016 where we mapped out the entire—from prospecting to onboarding to retention—account process for CrossFit gyms, and we found some pretty big holes in there that we were able to fill in a way that other companies just weren’t doing. And so, there weren’t any companies that were really focused on maximizing retail for gym owners. Every company was trying to sell a gym owner something, no company was really teaching a gym owner how to sell something. And so I kind of had to learn, and learn fast, the keys to retail, and do so in a way that would allow me to train folks who had no retail background on how to set up a retail operation. And how to, you know, instead of making it a time suck, an actual revenue-generating activity for your business.

Dave: [00:32:05] And so I spent the better part of our early days really perfecting that process. And we got it to a point where we could get most gyms selling our product really, really well and doing so without a lot of work from them, by educating them not necessarily on our product, but also instead on retail in general and how to set up an effective retail operation. And, you know, it’s not rocket science, but it does take a few things in particular that you’ve gotta do well, such as merchandising and point of sale. Basic stuff, but nobody ever teaches that in high school or college, and you don’t get a packet on how to retail stuff when you open up a gym.

Dave: [00:32:47] And so we got really, really good at filling this void in the market for helping gym owners sell stuff. And, in return it certainly helped gym owners sell a lot more of our stuff as well.

Richie: [00:32:59] In terms of the product, I’m curious to talk a bit about, I guess, just assortment and price point.

Dave: [00:33:03] Yeah.

Richie: [00:33:04] Is there one SKU? Were there multiple SKUs?

Dave: [00:33:07] So, if you’re gonna print an aluminum can—which, from the outset, we were limited, because we make an oxygenated drink. Oxygen’s a very small molecule, so it actually seeps out of plastic. So it’s either aluminum or glass for O2, and glass is out, because glass is bulky, it’s expensive, and it breaks. So it was like, alright, we’re just gonna do aluminum, that’s our packaging. To print on an aluminum can, you have to order 155,000 cans per SKU. So that’s a really high amount of cans if this is your first production run, right? But we’re like alright, we’re gonna do it, we’re gonna do it right.

Dave: [00:33:40] So we wanted to have more than one SKU, ’cause we felt we could get lost if we didn’t have more than one SKU, but we also couldn’t really afford to have more than two SKUs. So, in the development process we developed, I want to say, somewhere between four and six really, really solid flavors of O2, and we chose two for those same reasons, and the ones that we chose were also kind of formulaic about the taste profiles, too. We wanted to have a flavor that was super-approachable and we wanted to have a flavor that was kind of unique and interesting. So we debuted an orange mango as the super-approachable flavor, most people have had orange mango something. And then we also debuted a grapefruit ginger flavor, which is our super unique and interesting flavor.

Dave: [00:34:25] We found that people kind of enter the brand through the orange mango flavor, and then, they’re like, “Ah, this is actually really, really good. Lemme try this other grapefruit ginger flavor. I’m not crazy about grapefruit or ginger but I’ll give it a shot.” And people love it. And even the people who, as I mentioned earlier, just are kind of grapefruit or ginger skeptics, absolutely love that flavor. So it gave us enough to be dangerous on the shelf with two facings, but it also wasn’t so much that we had two years worth of inventory in our first production run. And so, over time, as we’ve kind of gotten those two flavors more and more in the market, for the first three and a half years, those two flavors were the only option. And then we got to a point where we can entertain new flavors financially. And we did so, but it also wasn’t much of a stretch, because we had a type of taste profile, a base to work off of. We had a formulation that was not too sweet, very crisp, refreshing, nothing artificial, low sugar, no aftertaste. And so making other flavors off that base formulation wasn’t too much of a challenge.

Dave: [00:35:31] And we also knew that a lot of people who were existing fans of O2 wanted something caffeine-free because, either they work out at night or they want to give it to their kids instead of Gatorade. And so our second set of SKUs that we came out with was almost a replication of that same formula of the first set, the formula being an approachable flavor and a unique and interesting flavor. Modeled off of that base formulation we debuted a caffeine-free lemon lime and a caffeine free blackberry currant. The lemon lime was kind of the more approachable flavor and the blackberry currant was the unique and interesting one. And it was very, very easy to do that, because we had three and a half years of customer feedback and customer demand, and it was really only one degree of separation from what we were already doing, one degree of innovation.

Richie: [00:36:21] And then in terms of price point?

Dave: [00:36:22] So, O2 is a fairly expensive product, relative to other sports or energy drinks. It’s $3.49 per can. And we priced it at a premium on purpose. One, it’s kind of get what you pay for, so it’s expensive to make a high quality product. But, two, I knew that price was, and I’m sure still is, the number one indicator of quality to somebody who’s never heard of the brand or the product. And so, by pricing it at a slight premium to Red Bull or Hiball or FitAid or a Kill Cliff or—

Richie: [00:36:58] Which are like, two-bucks-ish.

Dave: [00:36:59] Yeah. High twos.

Richie: [00:37:01] Yeah.

Dave: [00:37:01] We would be conveying that, hey this is a better product. And so that’s what we did. And we’ve been able to generate as much, if not more, volume at those prices, which is great for the retailers, too. Our margins are in line with the margins on other beverages, but for every product that’s purchased they’re making a lot more per unit than they would be a lower-price product. So when the retailer gets behind it like that, they’ll merchandise the hell out of it. They’ll build displays because they know it’s gonna help them hit their profit goals.

Richie: [00:37:31] Bring us up to the present, in terms of where your priorities were, kind of inflection points. And, I guess, how you’re managing kind of all three parts of the business now.

Dave: [00:37:40] The biggest inflection point for us in the last few years has been when we got to a point where we could raise a significant amount of capital, and start to do some of the things that I’d known that we needed to do with the business, we just didn’t have any money for it. So we did a pretty comprehensive label redesign in 2017, a rebranding exercise. And that was something that was well-needed and cost a good amount of money to do and to do it right. But we had made the original O2 label ourselves, me and Dan the doctor, and another designer that we found, basically on a PowerPoint. And that can got us so far, but it was time to kind of revamp the can and revamp the brand.

Dave: [00:38:25] And so, we did so in 2017. And in conjunction with that exercise, we also started to retail at Kroger, which was a company that’s super-super large, and is also a local company to us—they’re in Cincinnati, we were in Columbus—and Kroger had kind of been chasing us for the past few years to offer O2 available for sale in Kroger, but we just didn’t have the capacity to support it. So once we got to a point where we had the capacity to support Kroger we entered that retail environment, and that was certainly an inflection point, in that it showed us that O2 could be successful outside of the gym, and also outside of the natural grocery environment, which is just a different crowd of people.

Dave: [00:39:07] Everyday people don’t really shop at Whole Foods or go to CrossFit, right? Everyday people definitely go to Kroger, and we’re very, very successful there. And so, if there was an inflection point, I would say it was around 2017 when we started to really get a better understanding of the brand that we wanted to build, have that reflected in the packaging, and start to work with mainstream retailers like Kroger and get a better understanding of what it took to be successful there.

Richie: [00:39:34] Did the move into Kroger and, call it to the broader market, change how you marketed the product? Or was it never actually marketed as a CrossFit thing in the first place?

Dave: [00:39:42] I would say that it’s evolved, certainly, kind of how we show up, for sure. We try to. And we’re still wrestling with this, is how do we maintain our identity as a high-end fitness brand in a way that’s not super-alienating to people, either? So it’s changed a bit, but I wouldn’t say it’s changed too much because, at the end of the day, O2 is certainly for people who are exercising at a high intensity and who care about what they put in their body and don’t have, you know, all day to lay around after a high intensity interval training workout or a high intensity workout. If anything, it’s changed how we approach the business in terms of different retailers. So our go to market with Whole Foods looks a lot different than our go to market with Kroger, because they’re just gonna sell different volumes of our product. And so applying the Whole Foods playbook to Kroger wouldn’t make sense and applying the Kroger playbook to Whole Foods wouldn’t make much sense either.

Richie: [00:40:41] In terms of scale, how do you think about what is possible? And then also, what is realistic through the lens of not ruining what you’ve created, in terms of going too fast or too big or so forth?

Dave: [00:40:54] Yeah. We’ve been pretty careful about avoiding going too fast and too soon. You know, going into this, I didn’t come from a CPG background, I didn’t know what I was doing, but I tried to study what led to failure in other companies, and it would often be companies trying to bite off more than they can chew too early on. So we’ve been real meticulous about our growth from the outset, with the intention of having a line of sight to success at every single retailer. So we’ve never wanted to get a bunch of placements on O2 and have the product just sit on the shelf. Getting on the shelf’s the easy part, it’s getting off the shelf that’s the hard part. But nobody tells you that when you start this.

Dave: [00:41:33] I look at what we can actually support, and it becomes much more of a factor of what’s realistic versus what we want, right? I’ve got a team now of 13 people and they’re all incredible. And as much as I would love to tell you that we could support 20,000 retailers, we just couldn’t support 20,000 retailers yet. But we can certainly support a thousand, and we can probably support 10,000. And so as we go from guaranteed success or close to it at those thousand retailers, and that becomes 5,000, that becomes 10,000, we start to learn our way into what it takes to be successful at 20,000. And that’s been the idea, is to grow in an incremental fashion where you can make sure that your existing retailers are successful, and so, that any new retailers are probably going to be successful too.

Dave: [00:42:22] I think that the size of the market is huge. We play in a very big attractive growing market. And, at this point, we know how to attack it. So the size of the market has never been the question, it’s whether or not we can actually do it justice and we can ensure that each retailer selling our product is successful, and we can ensure that any direct-to-consumer campaigns that we’re running aren’t just a giant waste of money. So it’s not so much a question of market size as it is a question of sales and marketing for us at this point.

Richie: [00:42:52] What’s been the cheapest and most expensive lesson you’ve learned, building the business?

Dave: [00:42:55] The cheapest lesson was probably the story I mentioned earlier, around hand-stickering 150,000 cans, ’cause that was a great lesson in humility and hustle and honesty. And you make a typo on a package once, you don’t make that again. That took up a lot of time and energy. By no means did it take up a ton of cost to do that, and it also gave us a foundation for a values-driven business that we treat very, very seriously today.

Dave: [00:43:24] The most expensive lesson that I’ve learned has probably been that there’s a lot of noise out there with respect to paid social, and not a lot of outside expertise that can deliver on that. I think it became very, very easy in 2014, 2015, ’16, ’17 maybe, to build and scale a brand on cheap Facebook ads. That’s not the case so much anymore. And so, there are a lot of companies, a lot of ad agencies, a lot of marketing agencies that tout themselves as experts in that field, and I was in a tough position last year where I hired a group that I thought was gonna be best-in-class, and spent a ton of money with them, and our results just went from good to bad really quick. We’ve since taken that in-house, and I think that’s been a beneficial lesson, but it’s also been a pretty pricey one, for me.

Richie: [00:44:13] In terms of what’s on the horizon, what are you most excited about in the next six to 12 months?

Dave: [00:44:18] So we’ve already validated the market over the past few years, and we’ve validated our ability to attack it, and our ability to get a product that people really, really like in their hands and we’ve seen them repeat purchase over and over and over again. What I’m most focused on now and most excited about is actually growing a team to do this. So we went from four people on the team at the end of last year to 13 now, and we did most of the hiring of those 13 in the past four months. And so a lot of my time now is focused on optimizing the team structure and the roles and getting everybody firing on all cylinders and rowing in the same direction. And that’s really, really exciting to see what can happen, when you put a group of people in the same room and give them the same kind of high-level goals and let them attack it. As long as they’re the right people operating under the right set of values there’s a lot of magic that can happen.

Richie: [00:45:13] How many do you drink a day, and what flavor?

Dave: [00:45:16] I’ll usually have two O2s a day. When people ask me what the favorite flavor is it’s always kind of like picking a kid. You know, you’re not really supposed to have a favorite. But if I do have a favorite it’s the grapefruit ginger, which is the caffeinated flavor, and then I’ll have a caffeine-free flavor after my evening workouts. I go between lemon lime and blackberry currant pretty regularly.

Richie: [00:45:34] Would you guys ever open up your own retail store?

Dave: [00:45:36] I don’t think we’d ever open up our own retail store. I think there’s a lot of interesting things happening in the retail environment around this concept of kind of temporary retail, whether it’s a pop-up or mobile pop-up retail environment. I think there’s some cool stuff happening there that we might look at for 2020 but, frankly, we haven’t had the ability to even entertain doing our own retail setup when we’ve been focused on Whole Foods and Kroger and making sure that those guys are successful. But I see a lot of upside in retail as sort of a brand-building experience.

Richie: [00:46:08] Yeah. I guess that’s my other question. Given where we started talking about how the Red Bulls and the Gatorades of the world just spend hundreds of millions, if not probably billions, of dollars on marketing. Do you feel a pressure or inevitability that you’re gonna have to play that game that they’re playing, of sponsoring athletes and games and all those things? Or do you see a different path to get to where you want to go?

Dave: [00:46:34] Naively, I may see a different path. I don’t see us spending the amount of time or energy, much less resources, on mass marketing that the larger companies do. It’s just not in our game. I see a tremendous amount of upside in the types of marketing that they’re probably just not looking that closely at. You know, influencer or paid social still I think has a good amount of upside. Non-traditional retail like CrossFit, in many ways, is a marketing vehicle for us. Yoga for that matter. So I think that by continuing to spend our time with more untraditional approaches to building a brand, we’re only gonna benefit. And I don’t think that we could go head to head with those guys in that more traditional type of environment, even if we wanted to.

Dave: [00:47:23] So I don’t feel that pressure. And maybe we’ll get to a point someday where we have tapped out all the upside there is online, and we’ve tapped out all the upside there is on branded partnerships and influencer-type partnerships, and we go into mass advertising on TV maybe. But I don’t see that coming anytime soon.

Richie: [00:47:43] Awesome. Thanks so much for talking.

Dave: [00:47:44] Thanks for having me.

Richie: [00:47:51] 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 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 and we hope you tune in next week.