The Next Brand, Episode #9
Leaning into a local food system and how to build wealth at a young age
|Justin Mares||Aug 1, 2020||7|
Hi there, and welcome the 200+ new subscribers to The Next Brand - my take on health, wellness and brand building.
In the last 4 years I’ve founded 2 health brands (Kettle & Fire and Perfect Keto), which did nearly $100mm in revenue in 2019. I’ve raised ~$20mm to build Kettle & Fire, gotten into 10k+ retail stores, bootstrapped Perfect Keto, launched 80+ SKUs… and have a small portfolio of Shopify apps I run on the side. Previously, I worked in tech and had no experience in CPG, DTC or any other 3-letter industries.
🆕 What’s new
A lot going on in the world, but nothing I want to cover here. Instead, let’s talk about something fun - like geographic distribution of economic opportunity!
For the first time in a while, I wrote a blog post for an idea I had for a way to decrease geographic inequality. I’m trying to get better at putting my ideas to paper, and this was a fun one to write up.
If economic mobility is something you’re interested in, check out the post: I’ll keep this section snappy. This is a long newsletter and I spend most of it digging into how messed up our food system is (surprise), and how our over-regulated system makes a chicken at Wal-Mart cheaper than a chicken raised next door.
Otherwise, for more current takes I’ll occasionally post to Twitter - please say hi!
💪 Health stuff
The issues with the American food system are so broad (and so numerous) that lots of people have thoughts of how to change it. Including yours truly 🙋♂️.
Regenerative farmer Joel Salatin argues for a parallel food system, akin to homeschooling. Don’t like the system? Just opt out, and skip the supermarket for the farmer’s market. Instead of fighting Big Food directly, let farmers and entrepreneurs compete fairly. You might think this is how the system currently works, but it’s not. At all.
Due to regulation built for the big guys rather than smaller food producers, it’s nearly impossible for anyone to compete without duffle bags full of cash.
For example, Salatin’s friend (a dairy farmer) wanted to start making cheese. But in order to meet US regulations, it would have cost $100,000 to make one pound of it.
Salatin doesn’t break down the $100,000, but a quick scan of Virginia’s guidelines for small cheesemakers gives us a taste. Want to sell a pound of cheese? It appears that you need to build an entire, separate, facility … and pass inspection for a certification. The certification is free, but the facility sure isn’t. You’ll need:
A milking barn/parlor (must have concrete or otherwise impervious floors)
Milk house/room (impervious floors + smooth ceiling)
Cheese processing room (must be separate)
Vat/batch pasteurization machine (quick Google search suggests $12k+)
Raw milk cheese can be made in some instances, but require detailed aging and antibiotic records
Storage vats (meeting 3-A sanitary standards, like all equipment)
Proper food labeling (just like in a supermarket)
This Virginia Law site mentions even more requirements, and it’s a massive headache trying to figure all this out. How is a farmer even supposed to know what to do? Why should one need dozens of hours of research and tens of thousands of dollars to make a test batch of cheese?
An Oregon State University study estimated startup costs for an artisanal cheese company. In order to produce 7,500 lbs of cheese per year, it would cost $267,248. They also mentioned that “initially building too small a processing facility is a common mistake exhibited by artisan cheese makers.” Basically, they said starting small is a recipe for disaster — but trying to be bigger is (obviously) very expensive.
Salatin’s friend could theoretically raise the money, but “how do I know if I have a cheese that people will want unless I can experiment with a few pounds and try to sell some to folks?” The current climate makes it far too risky for farmers and entrepreneurs to experiment, and most can’t afford to even try.
Just imagine if you had to spend $250k and get “certified” to launch a podcast, publish a website or write a blog. This barrier alone would have meant no rise of independent podcasters, no Facebook, almost none of the internet. This sort of expensive, up-front “permissioned” innovation is the exact opposite of the permissionless innovation that’s launched America’s most innovative, successful tech companies.
Salatin again - “For the small producer and processor, the non-scalable regulations create a discriminatory cost structure on the price of the product or service. When the small outfit enters the marketplace, its product or service is at a competitive disadvantage. People are always asking us why local meat and poultry is more expensive than what’s at Wal-Mart that came from 1,000 miles away. It seems like it should be cheaper if it’s sold across the fence to the neighbor and doesn’t have all that transportation behind it. The high cost of local food has nothing to do with actual costs. These costs almost always are a result of inappropriate regulations that preclude efficiencies. Like requiring a bathroom in the smokehouse.”
Salatin dedicates an entire chapter to explain why he can’t sell bacon - even though he’s allowed to sell sausage, ground pork and pork chops - bacon is technically “processed” meat, and processing meat without a license is illegal.
He compares it to getting a driver's license in some bizarro world where you could only get a license if you owned a garage, and a seven-seater car with 500 horsepower. It isn’t about competency or cleanliness, it’s about infrastructure.
Regulations require bacon is slaughtered at an external slaughterhouse and packaged at the processing site. Here’s the cost breakdown:
“When we sell a pound of bacon, we have more than $1 in butchering the animal—that goes to the slaughterhouse. Then we have $2 to the curing facility for curing and packaging. That’s $3 a pound right off the top. When we sell bacon for $6 a pound, we have only $3 left to pay for the pig, the feed, the labor, and the marketing. And that ain’t much. The problem with all these infrastructure and paperwork requirements is that they are non scalable. They discriminate against the small operator because the big outfits have enough volume to spread the high cost over additional product.”
Again, this is just one frustrating instance. For pretty much anything farmers want to sell — it comes with mountains of equipment, certifications and paperwork. Big Food can spread that cost throughout their corporate offices and many millions of dollars in profits, while farmers have to do it all themselves.
Another of Salatin’s friends makes pickles. She cooks in 5-gallon pots, while large companies cook in 1,000 gallon pots. But according to the regulations, a pot is a pot. So, both outfits need to fill out the same amount of paperwork. Which, according to the book, is pretty much a full-time job. The big companies hire an office worker, but the small pickle-maker can’t afford that and does it herself.
Another friend runs a small slaughterhouse. By law, he has to probe the meat hourly to document its temperature. One day, an employee forgot one check. An inspector saw one blank square on the sheet, and made them throw away $40,000 of beef due to “noncompliance.” A big company can eat $40,000. A small company can’t.
This extra cost in labor and risk gets passed on to the consumer, and taken out of farmer’s profits. So not only is everything that farmers want to do illegal and financially risky, but their frustration comes out of your wallet.
The natural question is: If farmers can’t fix agriculture on their own, how can we help? What’s the actual fix?
Unfortunately, there’s not a great one. The best I’ve found after extensive research is to keep voting with your dollars and support local farmers as much as possible. Sacred Cow (great book btw) has a helpful list of resources to shop local, and you can check out directories like Eat Wild and Local Harvest.
And, of course, you can vote with your actual vote. An Eater’s Guide To Congress has been analyzing congressional votes related to food issues for over 6years. It’s a great way to see which politicians actually care about your health, and which ones have accepted donations from Big Food.
I’ll share more ideas for how we can fix this in future issues, but for now, we need to show farmers that this isn’t a COVID blip — that increased demand for local, regenerative food is real and here to stay. Let’s all do our part to improve our food system.
🤑 Biz stuff
This episode, I want to talk about building wealth at a young age.
There’s an idea floating around on Twitter that the best way to build wealth is to buy a small business. This approach advocates using an SBA loan + small investment to own ~85% of a business that you then run for 10 years and build wealth.
If you can do this, more power to you. However, I think this tweet misses something really important: to paraphrase Brent Beshore, most small businesses don’t stay small on purpose. If you have the ability to acquire a business for $7mm, it’s worth $7mm (or less) for a reason. Presumably, the business had difficulty growing. In order to change that, you have to bring something unique to the table: either skills, capital, relationships or something else that will make the company grow in value.
This is why I struggle with this advice. Unless you’re bringing unique skills or ability to the table, it’s unlikely you’ll automatically be able to make the small business you’re acquiring scale any better than current management can. It’s not like current ownership wants to stay small: they just can’t figure out how to grow it. If you can grow a business, you should apply your skills and abilities in a way that maximizes leverage for you: in many (most?) cases, this probably does not include spending a decade doubling a small 3-chain barber shop.
This advice also carries a lot of risk. If you’re paying 5x earnings, you’re effectively paying today for the cashflow the business will generate over the next 5 years. 5 years from now, if you were right, you’ve broken even (cash-wise). If it grows, even better - you’re building net worth!
Now, what if the business doesn’t perform at current levels. What if it dips slightly, or you bought in winter 2019 and are now faced with the prospect of operating a barber shop during a pandemic?
Quite frankly, you’re screwed: you’ve made a hugely levered bet (with a personal guarantee) on a business that won’t be able to cover its debt service (or pay you anything resembling a salary). Your options pretty quickly narrow to: (1) declare bankruptcy or (2) pour your own cash into the business and try to turn things around.
And lastly, even if you buy a business and hold onto it for a decade… that’s a decade you’ve spent running a small business that (presumably) you’re not all that interested in. Yes it may pay well if everything works out, but is that a win?
If buying a business isn’t the right approach, what is? I think it’s focusing far less on the result of what you’re doing (ie buying a business) and more on investing in yourself. Rather than grow a portfolio of risky businesses, you should focus on growing a portfolio of valuable skills. Skills that you can leverage to get paid, whether by starting something, investing, or buying an asset. Only once you’ve built up a portfolio of valuable skills would I even consider going into debt to buy a small business.
How you build skills is a topic for another time, but at a high level:
Find people who’ve done the thing you want to do
Figure out how to work with them (I highly recommend the approach Charlie Hoehn outlines in Recession Proof Graduate)
Get your hands dirty doing the thing you want to get good at: marketing, painting, whatever.
In my case, at age 22 I went to work with a guy who - at age 36 - had something like 6 startup exits. I ran growth for 3 portfolio companies he bought, and got to work with him every day. I learned more in that 2 year period than in any other time during my career, and it gave me the confidence and skills to launch Kettle & Fire a few years later.
Finally, the best content I’ve ever seen on the topic comes from Naval:
😌 Dope stuff on the internet
Some of my favorite things since the last newsletter (note: I don’t get paid to recommend anything here):
📰 Article - Some of you may have seen the New York Times threatening to doxx Scott Alexander, the popular anonymous blogger behind (in my opinion) one of the best blogs on the internet. This caused a kerfuffle in the rationalist and tech communities, and the NYT has yet to change their stance on revealing Scott’s identity. Byrne Hobart, the author of one of my favorite newsletters, discusses some of the tradeoffs inherent in writing online. He also hits on something I think is critical: we need new social norms for social media. Balaji has discussed a no-cancellation clause, but boy do we need something. I just do not see a successful version of a future where social media continues to ruin lives, rage mobs gain steam and cancel anyone in sight. Social media is here to stay, and as a society we need to figure out how to evolve our social technology along with it.
Honorable mention for article of the month is Ben Thompson’s analysis of the TikTok war.
📚Book rec - For those of you who know who Wendell Berry is, you’ll understand what I mean when I say his book - The Unsettling of America - has made me question a lot about what makes for a good life. Wendell is an OG homesteader, and makes a strong argument for the value of building a life where consumption and production are not discrete activities: grow your own food, build your own community, make your own entertainment, etc. 5 year ago I would have laughed at his philosophy and mumbled something about Ricardian comparative advantage, but no longer. I’ve spent all summer in the countryside and am gradually coming around to the idea that there is a lot of meaning, value, and happiness to be gained from becoming more independent and invested in community, learning basic skills (hunting, gardening, etc) and becoming a more well-rounded person.
⌚Cool product - Honey Mama’s chocolates are just insane. My girlfriend and I have had to institute a rule that we can only buy them 1x/week, or else we end up eating them all in a honey-fueled haze of deliciousness. I’m not proud of it, but if you’re looking for a healthier treat, I cannot think of anything better than these little nuggets.
🎵Music - I had the opportunity to hear this killer mix live at a friend’s wedding (at a Brooklyn nightclub) last year and it’s been one of my favorites since. Happy 1 year(ish) Dylan + Aly!
🏀Random - As someone who spends a lot of my time each day on the computer, I’ve struggled off and on with some low-grade mid-back and neck pain. Likely a holdover from my terrible posture in my early 20s, and lots of computer work today.
In June, on the advice of a friend I decided to give Ido Portal’s hanging challenge a shot- a full month of hanging on a pullup bar at least 7 minutes a day. And wow, the results have been incredible: my shoulders feel better, my neck pain has basically gone away, and I feel much better in my shoulders and mid back. All in all I highly recommend you give the hanging challenge a go, and let me know in a month how you’re feeling!
The Next Brand subscribers are starting to pick up now, 9 months into this experiment - and I’d love it to continue. If you found something compelling, mind forwarding to a friend (or having them subscribe here)?
Otherwise, thanks for reading and feel free to reply and let me know what you’d like me to cover next!
Enjoy the month,