We are just on the cusp of one of history's biggest value-creating, most disruptive transformations driven by autonomous intelligence. Because that hasn't happened yet, The Intelligence Tsunami (https://www.amazon.com/dp/B0CXH5DDRP) highlights stories of how others have ridden previous transformational waves. My biggest success was investing in an organic grocery store chain, which we grew to $100 million in revenue. Nothing is more thrilling and lucrative than finally getting this right. If I can do this, you can do this too.
One day in 1996, an associate with my angel investment firm called me to come to Asheville, North Carolina, to visit Earth Fare, an organic grocery store he wanted us to invest in. I told him he was nuts. There was no way we would invest in a grocery store. He bugged me so much that to shut him up I agreed to go see the place. My uninformed intuition could not have been more wrong.
Roger had run a small organic grocery store in Asheville called Dinner for the Earth for about fifteen years. About eighteen months before I met him, he had opened a new store about four times the size called Earth Fare. Roger gave me a tour of his new store. I noticed a special on soy milk, which was stacked almost to the ceiling at the front of the store. He explained that Earth Fare sold more soy milk than any store in North Carolina, so they bought it in bulk and sold it at a discount.
“Hmmm…,” I thought, “this is just a grocery store focused on a distinctive customer.”
When we got to the produce section, I picked up a tomato. “Gosh, Roger, this is expensive. How do you get this price for a tomato?”
“Well, you have to understand, John, that half of our customers have a vegetarian in the family,” he said. “If you are a vegetarian, produce is what you eat, so you are willing to pay for a high-quality tomato. Plus, they don’t buy meat, so their total cart price is probably less than yours.”
“Hmmm… that was a clear, easy-to-understand problem,” I pondered.
At the time, conventional grocery stores in the Southeast carried few, if any, organic products that many vegetarians wanted to buy.
Ryan’s Family Steak Houses had been a Peat Marwick client of mine a decade earlier. They had a demographically driven store location model. Their headquarters had earlier been a large two-story house. They converted the top floor into their “war room” covered in maps on which they methodically analyzed the communities where the next Ryan’s might be located. They’d drive around a community and pick out intersections that felt right. Back in the war room, they’d put a pin on the map at these intersections and order the demographics around them. They’d locate stores where the art of their intuition matched the science of the demographics.
Through opening around 200 stores, they had never had a failure. As a result, Ryan’s was one of the best-performing stocks on the NASDAQ during much of the 1980s.
On the Earth Fare tour, I asked Roger, “Half your customers are vegetarians? Is that right?” My mind whisked back to Ryan's war room. Now, my informed intuition kicked in. This was a different demographic, but I could see rolling out a chain of organic grocery stores based on a store location model similar to Ryan’s.
Greenville was about an hour and a half drive from Asheville. During due diligence, I spoke with the vegetarian wife of a Greenville physician who was an investor partner of mine. I invited her to join me on an upcoming trip to visit a cool organic grocery store I had found.
“Oh, I shop at Earth Fare all the time,” she said, to which I replied, “You drive an hour and a half to go grocery shopping?” I imagined the number of conventional grocery stores this Greenville resident must pass to shop an hour and a half away in Asheville. “Why?” I asked. She answered, “Because no grocery store close has anywhere near the selection of natural and organic products I prefer.” “Wow!” I thought.
Remember, this is the mid-1990s in the Southeastern US. Asheville was different. It was the Boulder, Colorado, of the Southeast. Our biggest question at the time we invested was whether there were enough vegetarians anywhere else in the Southeast to support an organic grocery store.
The insights from these customer discovery conversations validated a customer’s need not well served by traditional grocery stores and led to our investment in Earth Fare. The key was developing a data-driven process for finding markets with enough vegetarians. I engaged the former head of real estate at Ryan’s, now a consultant, to help us create a store location model for Earth Fare that was very similar to Ryan’s model with the demographics changed.
Several of our investors, who were senior leaders in the food industry, felt Roger had done an excellent job creating the prototype of Earth Fare’s store concept. At their urging, my angel group invested about $3 million in Earth Fare in three investment rounds.
I wasn’t the only one who initially had doubts about investing in a grocery store. I worked harder raising capital for Earth Fare than for any other investment we made. At one Earth Fare Board of Directors’ meeting after we invested, we needed to elect a Chairman. My investor partners on the Board pointed at me. None of them wanted the job. I had gotten them into this, so I had the privilege of being Earth Fare’s Chairman for five years.
Our first Earth Fare store prototype performed pretty well. With the money we invested, Earth Fare replicated its prototype by opening a second store in Charleston, SC. When the first store in Asheville opened, revenue grew fairly straight up and to the right from opening day. The new store in Charleston was roughly the same size as the first store. I projected that revenue in the Charleston store would open about like Asheville did and grow up and to the right in a similar way. Asheville was all the data I had.
An organic grocery store was innovative in Charleston in the mid-1990s. Sales on opening day were far above my projection. We were ecstatic. We were going to make a gazillion dollars.
My mother, who lived in Charleston, was a good cook and a conservative person. After shopping at Earth Fare, she called to say, “You’re going to lose your money. The prices are expensive. I didn’t find any of my regular brands. There’s nothing in Earth Fare that my friends and I want to buy.”
Ninety days after opening, revenue had crashed far below my projection. We were distraught. What had happened? We went from the thrill of victory to the agony of defeat in ninety days. Eventually, sales bottomed out and began to grow again, albeit from a lower point than I had projected.
There were also execution problems. Clearly, the leadership team didn’t have the skills to open and manage multiple stores. That’s not unusual. The intuitive, entrepreneurial skills necessary to define a problem and conceive of a novel solution are different from the operational skills required to grow a company once the solution is validated to solve the problem.
I drove to Asheville to have breakfast with Roger in the Blue Moon Bakery to discuss the need to recruit a CEO with experience growing a chain of stores. I asked, “Roger, do you want to run the company or build your net worth? Those might not be compatible.” Initially, Roger took that about as well as you might expect. Breakfast extended into lunch. To his credit, by the time I left, Roger was chairman of the search team for a new CEO.
One of my mentors and an Earth Fare board member was Jim, who had deep experience in the food industry, most recently as Chairman of the Sara Lee Food Services Division. Another was Marsh, who had been CEO of the 200 grocery store chain Bi-Lo. They knew that organic foods were the fastest-growing segment in the grocery industry at the time.
There were lots of small organic grocery stores across the country. Somewhere down the road, a consolidation of the industry would occur. Our strategy was to grow Earth Fare to be one of the country’s largest organic grocery store chains. The goal was for an institutional or private equity investor to pay us a premium price for the company so they could enter the organic grocery market.
Over several days, Jim and I discussed how to recruit a new CEO. We carefully considered everything that needed to be done to grow Earth Fare into a fifteen-store chain. We compiled a long list of the skills a new CEO would need. I looked at Jim, “That person doesn’t live on the planet.”
We sharpened our pencils and kept working. We decided which few items on our laundry list were the most essential skill sets needed. Earth Fare had deep organic food knowledge. We had a strong store concept we believed in. What the company most needed was operational skills, like distribution logistics and product merchandising.
A consultant working with the company organized a national search, from which we selected three candidates. Two were very impressive marketing types. The third, Mike, was an operator who lacked the personal pizazz of the marketing folks. Because we had created a very clear profile, the final selection was easy. We hired Mike.
Mike had previously been president of an eighteen-store, gourmet grocery store chain. His lack of natural and organic product knowledge wasn’t a problem. Earth Fare had that in spades. Operations was in Mike’s wheelhouse of deep knowledge and experience that he brought to the company.
After Charleston, we took a hard look at our store location model. What had we gotten right, and what could we improve? In the Southeast at the time, most vegetarians were affluent, college-educated individuals. That was the demographic we looked for in a community to identify vegetarians.
We opened a third store in Athens, GA. Sales opened high, crashed, bottomed out, and then grew consistently. We opened a fourth store in Columbia, SC. Sales opened high, crashed, bottomed out, and then grew consistently. Charleston, Athens, and Columbia grew so nicely that after being open for about eighteen months, they each again exceeded my revenue projections. It seemed that our new store model had become profitable and replicable.
Then, we bought a gourmet grocery store in a highly educated and affluent neighborhood in Greenville, SC. We converted it into an organic Earth Fare store. It didn’t fail, but it never performed well. Just when it seemed we had new store openings figured out, we hit a glitch.
That sent us into a deep dive, analyzing the data we used to locate new stores. Asheville hadn’t opened high, crashed, and then grown. What was different about Asheville? Each new store was in a highly educated and affluent community. What was different about Greenville?
After deep thought and discussion, we realized Roger had run a small organic store in Asheville for many years. When he closed his small store and opened his first Earth Fare, his customers moved to the new store. We didn’t have an established customer base in any new market we entered.
We also realized that Charleston, Athens, and Columbia were all college towns. Greenville wasn’t. The first three had politically liberal college faculty, many of whom were vegetarians. Greenville’s affluent residents were mostly conservative meat eaters.
We evolved our store location model to better identify vegetarians, adding and testing new data sources. For example, we looked for progressive social groups like environmental organizations as a sign that the city had politically liberal residents. Each store had a community room where these groups could hold meetings for free. They’d promote to their members that they were meeting at Earth Fare on a certain date, which was free advertising for us. That worked well, so we added identifying progressive social groups to our store location model.
As we began to understand our customers better, we saw that our best customers were hard-core organic food buyers. Whole Foods attracted foodies who liked gourmet food with complex flavors and new textures. Earth Fare’s hard-core organic customers were “crunchy” people who were politically liberal, environmentally aware, and embraced a natural lifestyle.
When we opened a new store, many conventional shoppers like my mother gave it a try, were disappointed, and never returned. This is why sales crashed initially. Unlike my mother, the crunchy people would have been turned off by seeing a brand they could have bought in a conventional grocery store. Sales would bottom out when we got down to the crunchy people left. They loved Earth Fare a lot and told all their crunchy friends, which is why revenue would grow nicely after the conventional shoppers were gone.
Roger opened the first Earth Fare store based on his informed intuition from operating Dinner for the Earth for a decade and a half. We tried to capture his intuition about this initial prototype in our first data-driven model used to open the Charleston store.
Each time we opened a new store, the pattern of sales opening high, crashing, bottoming out, and then growing consistently became reasonably predictable. We fine-tuned our model over time through what the AI world calls reinforcement learning. We’d run the model and compare it against the expected result, the revenue projection. We’d fine-tune the model and run it again when we opened the next store, getting closer each time to the expected result. Do this enough times, and the model gets to be pretty good at predicting what the revenue of a new store will be.
At the time, we used the organic neural networks in our brains to do this. Today, we could use deep neural networks to do this which might identify connections in our data that lead to better results that we never imagined to consider.
We had evolved from Roger’s informed intuition to a data-driven, operationally excellent process. That’s always the goal in transitioning from a startup to a highly profitable, fast-growing company.
By the twelfth store or so, we could enter a community we’d never been in before and accurately forecast revenue in the first couple of years. When we sold Earth Fare, our pitch to potential buyers was “Just add cash.”
From one grocery store with $7 million in revenue, we grew Earth Fare to a chain of fourteen stores with $100 million in revenue before selling it to a private equity firm. A series of private equity firms grew Earth Fare to about fifty stores in the subsequent years based on our validated store location model.
Earth Fare was by far my angel group’s most profitable investment. The irony is that had I told my investor partners at the beginning that our best investment would be a grocery store chain, my investment group likely would have never gotten off the ground. Had I known our most profitable investment would be a grocery store chain, I might not have started the firm.
When all systems are firing on all cylinders, the company has become a high-growth platform. If you do this right, you may reach a point where your flywheel is spinning so fast that your ability to continue growing rapidly exceeds your resources. That’s the time to pitch “Just add cash” to an investor or an acquirer who wants to ride the tsunami to incredible success. You should be rewarded handsomely.
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John Warner
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