@ Cinnaholic: The Sharks just Changed your Business Model
Florian and Shannon Radke are the owners of Cinnaholic, a cinnamon bun company that offers a unique boutique retail experience featuring delicious cinnamon buns (judging by the reactions of the Sharks) with over 30 frosting and 30 topping choices for customers to customize their cinnamon buns. Their buns are safe for people with food allergies; they contain no dairy or egg products and are cholesterol free. This makes their product safe for the over 50 million Americans with an intolerance for dairy, and 5 million people with severe food allergies. Cinnaholic’s buns are also 100% vegan, which is a popular buzzword in food today and a consistently growing market. The have one retail location and did $260,000 in sales last year, and were asking $200,000 for 20% of the company to open up another retail location. They have a minor online sales presence but seemed to have their hearts set on expanding through more physical locations, and not cyberspace.
Cinnaholic's product is built around the store experience, but Kevin O'Leary estimated that it would cost at least $250,000 to make and market another brick and mortar location. Barbara went out, but not before shamelessly plugging her successful food experience with Cousin’s Maine Lobster (just one of many plugs from the Sharks this week), and Daymond dropped out also. Kevin argued that they should sell online while doing his own plug for his successful backing of Wicked Good Cupcakes which he turned from a moderately successful retail product into a very lucrative online selling food item. Robert was concerned that the second store will be an expensive risk and didn't like their valuation. He then offered $200,000 for 40% of the company contingent on them not opening another store and focusing on selling online. Kevin offered $200,000 for no equity, but $1.20 on each bun sold until he recoups his initial investment, and then 60 cents on every bun in perpetuity. If you are shocked that Kevin offered a royalty deal that is heavily slanted in his favor, then you are clearly not an avid Shark Tank fan!
The Radke’s left the room to talk about business model, and after conferring, they came back and turned down Kevin's offer. They then countered Robert’s offer with one of $200,000 for 35%, but he stood firm at 40%. It almost seemed like the couple was going to appeal to Mark Cuban who was silent, possibly risking the offer that Robert has on the table. But Mark never committed to anything, and the Radke’s agreed to Robert’s offer of $200,000 for 40% equity.
The couple is undoubtedly happy to have Robert as a partner, but their negotiations leave room for a couple of different discussions. First off, you have to wonder how leaving behind the unique retail experience they are offering and moving to mostly online sales will effect their brand. They claim that their products ship well in their limited experience in selling that way, but really having a food product fresh and being able to make choices about what to put on it (including fresh fruit and other things that can’t be shipped) is a totally different business and customer experience. In their retail store they sell their buns for almost $6 a piece. Obviously that price will go way down if they are mass producing and shipping them as you can buy pre-packaged buns at stores or even fresh ones in a lot of bakeries for way less than that. While it’s true that their product will appeal to more health conscious or diet restricted customers, it is questionable that that will ever translate to mass sales. The average consumer will opt for better value or the lesser priced items, and while even though they are producing more, Cinnaholic will probably still remain one of the higher priced items in that category.
Secondly, the Radke's made a few mistakes that might have cost them some extra money. They left the room to discuss their options (always a mistake because the dynamic of the negotiations can change while leave the Sharks unattended), and then risked blowing their deal with Robert by trolling for an offer from Mark. The Radke’s biggest mistake though was that they weren't prepared for the likelihood that the Sharks would balk at investing in a company that depended on retail locations. Anyone who watches the show regularly knows that food items are a hard sell to the Sharks. By now they have all probably lost money on food deals at one point or another. For every Wicked Good Cupcakes or Cousin’s Lobsters success story there are a ton of food items and companies that failed to become a successful bigger business and cost some Shark somewhere his/her investment. The Sharks are extremely reluctant to buy into any business that involves setting up stores, as there are just too many variables (and the Sharks give up too much control) in these situations.
Furthermore, storefront businesses are subject to a lot of different factors that can make or break them including proper staffing, location, rent, competition, etc. The Radke’s admitted that they already had a mail order business in place for their product, yet they pitched their business as more of a franchise when they had to know that it would be almost impossible to secure an investment from the Sharks that would involve opening more stores. Planning ahead and tailoring their pitch to what the Sharks would be more likely to invest in would have enabled them to negotiate from a position of strength, rather than what happened, which was them changing their plan on the fly after Sharks had already dropped out. They lost most of the Sharks' interest and left themselves with basically only one option and no leverage, which is never a good strategy when conducting business.
Authored By: Pete Troshak | Twitter: @Shak74