When Kari Warberg Block, founder of all-natural pest-repellent firm EarthKind, talks about preparing for negotiations with big chain stores, it comes across a little like Moneyball for small-business owners who want to punch above their weight with retail giants.
There is a sliding price of what the female farmer turned entrepreneur is willing to sell her product for — a 5 percent window from her starting price down to her rock-bottom discounted price, the walk-away number that is the same for every retailer in the world. Block has also figured out the value of everything that a retailer could offer that might factor into a discount: prominent product placement on the shelf or near a store’s entrance, free catalog advertising, longer deal terms, special in-store or online promotions.
“I always use margin requirements, but we’ll take less margin for a strategic win that helps us meet a new goal or gain efficiencies in some other way, like less marketing costs,” said Block. Her products, known as Fresh Cab (commercial) and Stay Away (her mass brand), offer a safer, more sustainable and more humane way to rid farms, homes and businesses of mice and bugs. “It’s always an open discussion — creativity grows when you have restraint.”
Honed over the 15 years since founding her company, Block’s negotiation techniques have helped win business with national stores like Lowe’s, Ace Hardware and Target (online). She’s grown EarthKind into a profitable $8.5 million, 30-employee entity since the discovery at her kitchen table in New Town, North Dakota, that balsam fir essential oil and ground-up corn cob repel mice effectively.
But there’s one Holy Grail of a customer that, despite saying it wants to sell EarthKind products, refuses to take part in Block’s negotiations: Wal-Mart Stores.
In 2013 Block flew to Bentonville, Arkansas, home of the retail giant, for an initial meeting with a Wal-Mart buyer (Block had hired a consultant to coach her on Wal-Mart’s average price points and profit margins). Shortly after, the retailer emailed her a purchase order, but with a catch. Block said the price at which Wal-Mart wanted to buy EarthKind was 12 percent to 15 percent less than what they had discussed in person. (That’s 12 percent to 15 percent less than Block’s lowest price for any retailer.) Then Block couldn’t get the buyer on the phone.
“I received an email,” she recalled. “‘That’s not in our policy to negotiate on price,’ [the buyer] said. It was disappointing.” A second email, saying the same thing, followed another unreturned phone call from Block.
Wal-Mart did not respond to repeated requests for comment.
Block decided on her bottom-line message to Wal-Mart: She wouldn’t work with the company, “not until you let me make money.”
“I would really like to do business globally with Wal-Mart … but if they’re going to reduce the price on the shelf and use it as a loss leader, that’s bad for my brand,” the EarthKind founder said.
Walking away from Wal-Mart and its hundreds of millions of weekly customers would dumbfound many small-business suppliers, but it turned out to be one of the best things Block, at the time, could have done for EarthKind.
The Wal-Mart squeeze
Stories of Wal-Mart squeezing suppliers are not new — it has, after all, built itself into the world’s largest retailer mainly by offering rock-bottom prices to lure customers, an approach that became even more important when earnings sagged in recent years. The pain that comes from working with it includes difficulty scaling and maintaining business at the level that Wal-Mart demands.
Even though Wal-Mart’s leverage in deals is no secret, saying no to Wal-Mart’s business isn’t something most small firms want to do. Landing the behemoth as a buyer of their goods is a dream for many suppliers, as it can swiftly lead to rocketing sales and market share. Wal-Mart’s CEO, Doug McDillon, boasts on the company’s web site, “For our suppliers, working with Wal-Mart means access to the 260 million customers who shop our stores around the world each week.”
Reaching even a small percentage of Wal-Mart shoppers would have been a good step in growth for EarthKind, which has just only started to break into mainstream, big-box retail. Its first customers, whom Block persuaded to try free samples of the solution she came up with by trial and error, were farmers and equipment dealers near her family’s farm in New Town, North Dakota. “Farmers hate getting ripped off. They’re cheap in that respect,” Block said.
The idea for the product came to Block during the early 2000s, at a time when she was looking to subsidize her family’s $30,000-a-year farm income. One day while driving her truck, a mouse ran up her leg. After warding it off with perfume, she did some research. She found that 98 percent of the then-$100 million mice-control market was made up of poison-based products. By calling around to farm-supply stories, she also estimated that U.S. farmers lose roughly $8 million a year in farm equipment damage caused by pests.
“Saying no to Wal-Mart allowed us to make sure we have good execution with our other customers. And it doesn’t break their hearts when you say no to their competitors.”
Block handed out the initial samples in the fall of 2002.
“I was also looking at human behavior. [Farmers] aren’t going to take the time to hang something up or do anything extra; they were tossing in a bag of poison, so they might as well try this pouch,” Block said.
By February of the next year, most of the trial clients were happy. “They didn’t have to clean up dead bodies; they didn’t have to worry about poisoning their dogs,” Block said.
Selling the farm to grow the business
Sales grew incrementally as EarthKind picked up more equipment dealers including her local John Deere, but then Block hit a roadblock. Her brand had just received some local press, and an Environmental Protection Agency representative sought her out at a tradeshow to tell her that any product being sold to control pests needs a license, a process that could cost up to $2 million.
“[The rep] recommended that I not go through with it, but I made up my mind — my product had to come out because we just keep killing things, it goes against nature.” Block said. “If I grew to have 2 percent of the market, that’s a good little business.”
It took Block about four years of back-and-forth with the EPA and about $200,000 — much of which came from grants, the selling of her beloved pack horse and camper, and income selling produce — to finally get her license. She officially launched EarthKind in 2007, and on the backs of John Deere (her first national account) and a small army of farmers, she was able to work her way into RV and marine dealers. It took three years to get a callback from Menards, the Eau Claire, Wisconsin-based home improvement chain with about 300 stores in the Midwest. Dealing with Menards foreshadowed the experience she’d go through with bigger chains. It wanted a lower price, and it wanted her to change her brown-box packaging to a plastic clamshell.
“They said, ‘If you manufacture it in China, you’ll get the price down to where you’re going to sell it,'” Block recalled. “That defeats the whole purpose of growing a business using U.S. agricultural products that are environmentally-friendly, too.”
Block eventually hooked Menards on another idea, a store locator service technology on EarthKind.com that lets customers see which stores are selling non-poison pest control.
“I went back into their office and showed that we’ve got 30,000 customers in their area who would buy our product in your store if you had it,” she said. Menards was impressed, and after a heated price negotiation — Block left the room when the buyer wanted a price lower than her walk-away limit — the retailer bit. Today, the retailer is one of EarthKind’s most consistent buyers.
The allure of all-natural
IRI, a Chicago-based market research firm, estimates that year-over-year retail sales for the overall pest-control market — which includes chemical products and devices intended to kill insects and rodents — was almost $800 million as of late December 2016, up 5.5 percent from the previous year.
Unlike most of the poison-based products, 90 percent of this sector, EarthKind’s are safe to use around food, children and pets. Driven by consumer demand in other industries as well, the all-natural category is growing. Sixty-one percent of pest-control users polled prefer to use natural, non-chemical alternatives, according to a recent Mintel Group research report.
This is what eventually led Lowe’s, the world’s second-largest home improvement chain, to strike up a deal with EarthKind two years ago, after meeting Block at a woman business owner-focused tradeshow. Lowe’s had conducted some surveys and found that customers were asking for all-natural options for things like herbicides and pesticides. Lowes was impressed with EarthKind’s history selling to the agricultural industry, and after some trial and error on new packaging and price negotiations, Lowe’s placed EarthKind’s Stay Away in a prime spot in 350 of its stores.
“Her products do really well,” said Jason Miller, Lowe’s merchandising director for lawn and garden. “We were happy with the accretive sales it has produced; it didn’t steal from the category.” In December, Lowe’s extended its deal with EarthKind to place its products in 1,700 of its stores, a program that will extend into April.
The Lowe’s business is indicative of how EarthKind has grown over the past year. Sales to hardware stores and farm/home stores grew 51.5 percent and 44 percent respectively, while new sales to grocery stores and lawn and garden stores grew 695 percent.
Lowe’s also illustrates the type of partnership that Block says is integral to growing her firm the way she wants. The back and forth she carries out with such retailers — price negotiations almost always follow each big new order — is typical of what analysts call a good relationship between vendor and buyer. “Key vendor relationships with retailers are very collaborative and not adversarial,” said Charlie O’Shea, a senior analyst at Moody’s who covers large retail. “It may get down to the nitty-gritty on price every so often, but it’s hard for a large retailer to flip a switch and replace a key vendor.”
While accepting the deal (sans negotiation) with Wal-Mart would have definitely boosted EarthKind’s revenue, it would have strained the firm on a few different levels. “We didn’t have the infrastructure to support the customer — I didn’t want my people focusing on one customer solely. … Such a big [account] ends up risking the report cards with others,” Block said, who decided early on that no single retailer would make up more than 15 percent of EarthKind’s business. (Lowe’s made up 15 percent of the firm’s sales last year.)
Settling on a lower price with Wal-Mart could have also impacted deal-making with everyone else. “All of a sudden my negotiation in that room [with another retailer] becomes much more difficult if they throw the Walmart [price] up,” she said.
There was also the fear that Wal-Mart’s lower price may have eroded EarthKind’s profit margins and hindered Block’s growth plan. That plan includes sourcing American-grown raw materials from family farms, manufacturing stateside, keeping a low carbon footprint, and investing in a workforce of which 20 percent is made up of developmentally-disadvantaged workers, who help with packaging. She also provides 100 percent paid health care, vacation packages and bonuses for all employees based on company growth and profitability.
While a deal with Wal-Mart won’t happen until Block can facilitate a more involved price debate, she’s slowly ramping up operations so EarthKind can handle other big retail brands — maybe Target and Costco — in the next year or so. In 2015, she moved manufacturing from North Dakota to North Carolina so she could ship product quickly and more cost-effectively to retailers. Last year, she added robotics to the plant floor. She has also hired three executives to fill out her leadership team.
One indirect way to finding more big customers — and another possible way into Wal-Mart and Target — is via Burt’s Bees, the all-natural skincare line owned by The Clorox Company that Wal-Mart already sells. EarthKind is an inaugural member of Burt’s Bees Launchpad, an annual grant program that helps start-ups operating in the all-natural health and well-being market. Through the contacts she’s made in the program, Block recently toured the Burt’s Bees factory, where she picked up ideas on how to reward and motivate employees.
Block is also mentoring a Burt’s Bees sales planner, who previously ran the firm’s business with Target. “We’ve not been able to get into Target stores — they own the moms and millennials market,” Block said.
Meanwhile, Block has no regrets about playing hard-Moneyball with the world’s biggest retailer: “Saying no to Wal-Mart allowed us to make sure we have good execution with our other customers,” she said. “And it doesn’t break their hearts when you say no to their competitors.”
— Maggie Overfelt, special to CNBC.com