#1272 Dan Reese On Building A Million Dollar Milkshake Brand

Dan Reese is the President of Milkshake Factory. In this conversation, we talk about his time working at Heinz & Kraft, his interactions with 3G Capital and their ruthless prioritization of cost cutting, scaling of Milkshake Factory, economics of the business, and why they may become one of the next great premium brands in food & beverage. ======================= Auradine, a leader in web infrastructure solutions including blockchain, AI, and privacy, has unveiled the world's first 4nm Bitcoin mining systems, featuring breakthrough EnergyTune™ technology, setting new standards in performance and energy efficiency. The Teraflux™ product line from Auradine offers best-in-class performance, efficiency, and total cost of ownership (TCO), positioning it as the optimal choice for Bitcoin mining needs. With EnergyTune™, a patent-pending technology, Auradine's Teraflux™ systems enable rapid demand response and optimal energy usage, fostering a symbiotic relationship with electrical grids, and contributing to sustainable energy practices. Designed and manufactured in the US, Auradine's Teraflux™ product line not only ensures cutting-edge technology but also mitigates supply chain risks and provides increased supply chain resiliency. Visit ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠www.auradine.com⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ for more information the Teraflux bitcoin mining systems. ======================= Cal.com is leading the charge of scheduling platforms in the open-source sphere, offering you the chance to harness the efficiency previously reserved for elite corporations and tech gurus. That's right, Cal.com is transforming sophisticated calendar management into an accessible tool for all via a user-friendly interface. Discover how countless users are optimizing their time in unprecedented ways. Use code “POMP” for $500 off when you set your team up with Cal.com. ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Dan Reese is the president of Milkshake Factory. In this conversation, we talk about his time working at Heinz and Kraft, his interactions with 3G Capital, and their ruthless prioritization of cost cutting. Then we talk about why he went and joined a small chocolate family

• 0:46Anthony Pompliano?

  to go and scale Milkshake Factory. They have 10 stores today, but now they're franchising across the country. And we get into the dirty details of all the finances, the economics of the business, and why exactly they may become one of the next great premium brands in food and beverage. I really enjoyed talking to Dan, and I learned a ton in this conversation. If you love business, if you love entrepreneurship, then you're going to love Dan Reese. Here is my conversation with the president of Milkshake Factory.

• 1:14Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:38Anthony Pompliano?

  This episode is brought to you by Cal.com. What do I have in common with Chad Hurley from YouTube, Toby from Shopify, and Alexis from 776 and the co-founder of Reddit? We all use Cal.com instead of Calendly, and we are all early investors as well. Cal.com is leading the charge of scheduling platforms in the open source sphere, offering you the chance to harness the efficiency previously reserved for elite corporations and tech gurus. If you like to have your calendar organized and be able to have an efficient exchange when scheduling. But you love all of the benefits of open source technology, then Cal.com is for you. They are transforming sophisticated calendar management into an accessible tool for all via a user-friendly

• 2:21Anthony Pompliano?

  interface. You can customize it and you can make your calendar work for you. Use code POMP for $500 off when you set up your team with Cal.com today. Again, go to Cal.com, C-A-L dot com, and use code POMP to get $500 off when you sign up. Cal.com, an open source tool that allows you to take back control of your calendar, be efficient when scheduling, and make sure that no one can steal your time.

• 2:49Anthony Pompliano?

  This episode is brought to you by Auradine. They are a brand new startup led by a number of Silicon Valley legends who just raised $81 million to build the future of internet infrastructure. You're probably wondering what that means. Let me explain. There are numerous new disruptive technologies that are being adopted simultaneously, from blockchain to artificial intelligence to zero knowledge technologies. In order to ensure that these technologies thrive in this new world, we need new infrastructure, and that is where Auradine comes in. They just launched their first product line called Terraflux, which is a Bitcoin miner powered by the world's first 4-nanometer silicon chip technology. These air-cooled, single-phase and dual-phase immersion cooling miners have unrivaled speed and efficiency.

• 3:32Anthony Pompliano?

  They have superior uptime, and they leverage a brand-new innovation called Energy Tune that allows miners to dynamically adjust the energy consumption and Bitcoin hash rate based on demand response needs of the electrical grids. Auradine is an ambitious company working on hard problems. I'm really impressed with them, and if you want to check out more, you can go to Auradine.com. That's A-U-R-A-D-I-N-E dot com. Go check them out at Auradine.com today.

• 4:01Anthony Pompliano?

  All right, guys. Bang, bang. I've got Dan here. Dan, you are one of the very special people who has worked with 3G, Kraft Heinz, and really seen some of the biggest deals in the history of business, or at least in our lifetime. Talk a little bit about your experience and kind of the acquisition, and then obviously, the integration and the scaling of that business as it's gone over the last couple of years.

• 4:21Speaker 02

  Yeah, so I can have a traditional business background, you know, consulting, private equity portfolio company, got my MBA from Duke, and then went to go work for at the time Heinz North America in their brand management group. That was where the brand managers, you know, they had full P non-responsibility, and, you know, there was marketing component too, but that's where I really wanted to learn how to run a business. So I was there for a year or two, and that's when 3G Capital came in in 2013 or 20, yeah, I think it was 2013. And, you know, for those that are aware of the 3G model, it's pretty disruptive, to put it politely. So I, you know, a lot of people jump ship, but I kept my head down and ended up working my way up to that organization pretty quickly. And, you know, learned a lot

• 5:04Speaker 02

  through the 3G model. I didn't see eye to eye with all of it, but they were right about a lot of things, in my opinion. So, you know, we did that whole integration for a couple of years. I led the whole condiments portfolio, did Super Bowl commercials, all of that. And then, the next big move was the integration, quote unquote, with Kraft in 2015. So I was part of the team that did that, boots on the ground, integrating Kraft and Heinz. And Kraft was a lot bigger than Heinz at the time, so it was pretty ambitious, to use a word. And just to give people a sense of what that looked like, you know, my job there was leading the $2 billion, then Kraft Heinz condiments portfolio. I mean, we owned probably half

• 5:47Speaker 02

  the condiments aisle, all the salad dressings, all the, you know, mustard, ketchup, barbecue sauce, the whole deal. And there was a team, I think of 75, and then they gave that portfolio to me and said, here's a team of seven. Good luck. So, really, really disruptive change. You know, I didn't really, at the time, believe it was going to work. It was too much Too soon. Sadly, I ended up being right about that. Now, obviously, this is a decade ago. So this is a no way commentary on Kraft Heinz's current situation. But that's kind of when it was a lot of short term incentives, pandering to Wall Street, proving to them the 3G model would work. So, long story short, I kind of wasn't having a whole lot of fun anymore.

• 6:29Speaker 02

  And I was the first first person to ever kind of walk from that partnership group of Kraft Heinz. And then that's why I wanted to take a very, very different path and do something more entrepreneurial, which is why I left the Fortune 150 company.

• 6:41Anthony Pompliano?

  Now, when you think about 3G, most people maybe have heard of the organization, but they actually don't know what they're doing, how they do it. You you kind of went through this and, you know, got a front row seat. Describe a little bit about the 3G model and why you describe it as disruptive.

• 6:55Speaker 02

  Yeah, so it's it's aggressive cost cutting. I'm oversimplifying a bit, but they'll go after some, you know, historically, big CPG companies can be a little bloated. I think they are right about that from an objective business standpoint. So there's aggressive cost cutting, sometimes on the personnel side, very, very aggressive renegotiation of all vendor relationships, supplier relationships. You know, which can be tough if you have a trusted supplier of 30 years, they do not care. It's all about price, wipe this slate clean, and a lot of pretty aggressive tactics there.

• 7:34Speaker 02

  And, you know, they also have a pretty well-publicized zero-based budgeting policy, which basically means you don't budget off of last year, you budget off of zero. It's part of the planning process. And then every penny that you want to be part of your budget, you have to fight for. So it doesn't matter that you spent $10 million on TV supporting Heinz ketchup last year. Your number for next year is zero, and the same with everything in the business. So that's all the bigger stuff. And, you know, they set that culture through very lean travel, even executives are flying coach and, you know, renting crappy cars and that type of thing. So it's just very, very aggressive cost control.

• 8:15Speaker 02

  And, you know, they were able to drive massive movement in margin in a very short time. Period as a result, the, the problem was it's pretty disruptive culturally because a lot of people quit. Um, you know, they like to kind of bet on me at the time I was a lot younger where, you know, they could give me the big fancy job and pay me probably a fraction of what the old, the old person met made in that, in that role. Um, so that's why you see, I think the, the global CFO was 28 years old or something. So they'll do some pretty unprecedented things uh in their organization. So uh, but to their credit, they are willing to invest where it matters. I mean, we put a lot of quality back into products. I think uh, the, the current model of food and big food companies is a lot of short-term incentives.

• 8:57Speaker 02

  It becomes very easy to cost cut and take quality out. Um, and you don't really pay the price for that until the years in the out years. So I, I think they do some things right. It's, it's a little more aggressive than most. It's certainly not for everyone. Um, in, in what most people don't realize that the Heinz experiment with 3G was actually working. Um, it was private at the time and then once they, it was a little too much too soon with, with Kraft, in my opinion.

• 9:25Anthony Pompliano?

  When you talk about these cost cutting, you mentioned, uh, obviously there's personnel cuts, there's uh vendor renegotiations. Are there any other kind of extreme things that you saw just to give people a sense of like how aggressive this is?

• 9:37Speaker 02

  Yeah, I mean, basically you go anywhere on the P and L. Uh, there was a whole department called revenue management, which any of you consumer products people out there, you know, trade spend is promotional spend in the grocery store. And it's a huge line item in CPG P and L's where, you know, Walmart wants you to spend X amount in sales for Heinz ketchup for the big seasons, for instance. Um, and all the big grocery stores have it and it's, it's a little bit of relationship spend and they would come in and aggressively cut those because the ROI on those dollars wasn't always super high. And the spend got a little bit loaded, a little inefficient. You know, every year you add another sale and you look up after a decade and say, whoa, like this line in the P and L has gotten out of control. So to undo that, like to get off the drug or promotion can be difficult.

• 10:22Speaker 02

  Um, so you know, you're sitting at the table with a Walmart or a Kroger representing Heinz ketchup and it's a little, little bit of chicken, right? And you're you're making pretty aggressive, say, hey, Kroger, we're pulling a ton of money out of this. And they don't like it, but you know, as a brand like Heinz Ketchup, you can sometimes get away with it. So they weren't afraid of anybody or anything. And, you know, you have that mentality, kind of the bull in the china shop, and you can kind of get away with it sometimes. And you know that maybe you'll take some licks along the way, but they, that was kind of the strategy.

• 10:55Anthony Pompliano?

  Now, when you leave, you've got this great experience. You've obviously seen kind of inside the belly of the beast of a Fortune one hundred and fifty company. You could pretty much do almost anything you wanted to do in the business world, coming with the background that you had and the experience that you had. Why do you go to Milkshake Factory and what was so enticing about going and working on this?

• 11:13Speaker 02

  Yeah, I actually at the time was a small chocolate business called Edward Mark Brands. And I, what I know, I didn't want to do is, you know, I had peers that would jump ship and go work for P and G or General Mills. Again, great companies, it's not against them, but it's still kind of the same thing. Like, I knew I wanted to do something radically different. I always thought that entrepreneurship could be a decent fit because I didn't love the optics and the politics and the pandering to Wall Street and all that stuff. I just wanted to grow a business for the long term. So that's where I got a little bit, yeah, it's kind of again, stopped having fun. But that's when I met a family called the Edwards family, they're fourth generation chocolatiers. The fourth generation actually had very prominent careers in the White House in the George W. Bush administration.

• 11:57Speaker 02

  So they were flying around Air Force One and all the big events of history, nine eleven, ground zero, Katrina. I mean, they have amazing stories. They gave that up to come back to the family chocolate business, which at the time, you know, this was not some big, you know, come back and and get on the family business gravy train. I mean, the business maybe had a couple hundred grand in sales, like I truly don't even know how they paid themselves. So they left the White House and Air Force One and came back to this tiny little chocolate factory in suburban Pittsburgh. You know, their, their conference room table was a moving box flipped upside down. So there's a real entrepreneurial grit story. And to their credit, they, they grew that business and they actually, they won the chocolate contract in the Pentagon. So they opened

• 12:40Speaker 02

  Chocolate shop inside the Pentagon. It was the world's most secure chocolate shop. And then that enabled them to get some volume and then they got some nice press in the Washington Post. That got the attention of the Costco buyer and then they got in front of Costco and co-created this item called Snappers. And, you know, we can talk about Costco. I think Costco is a brilliant business, is a wildly overlooked strategy in most of CPG because people don't understand it. But the beauty about being an entrepreneur in Costco is it's cash flow positive in day one. And can really, really give you a massive head start. So they got into Costco and, you know, they went from, you know, a bunch of little old ladies hand making chocolates on trays, selling cases here and there, to selling, you know, four tractor trailer loads to Costco. So again,

• 13:26Speaker 02

  awesome entrepreneurial grit story of hand welding chocolate lines and production and all of that to make it happen. And they got into Northeast, the product sold and then there's eight regions of Costco and then it started kind of spreading like wildfire. So they were on kind of the early stages of this tidal wave of growth and that's when I met them. And we got to talking and I was like, huh, this is a really good product, you know, fun brand, like let's, let's give it a go. And then I was fortunate that I could bring, you know, probably I think I brought eight people with me from Kraft Heinz of the best of the best. So we had, in my opinion, kind of a world-class CPG team on this tiny little chocolate brand.

• 14:05Speaker 02

  But once I got into it, like I had no appreciation for just how much was figured out at a big business. So like I come into this entrepreneurial world as Mr. Fortune 500, I'm, I'm thinking about, you know, packaging and consumer research and I come to find out like they don't have a price list and I'm like, oh, okay. And I started to have those realizations of, oh, like we have payroll next Thursday and we have to meet that. So the numbers were a lot smaller, but it was, the stakes felt a lot higher if that makes sense. So we ended up doing a whole bunch of work there. We grew that business from essentially nothing to about 50 million in revenue over, over the course of about six years. You know, we're in the Inc. 5000 fastest growing companies.

• 14:50Speaker 02

  America for six straight years. So most of that was in the back of Costco through diversification via brands and products. We did some other stuff in retail as well. And then Milkshake Factory was actually a bit of an afterthought, which we can get into next. But the chocolate business is actually how I made my leap from Kraft Heinz into this kind of crazy entrepreneurial world.

• 15:11Anthony Pompliano?

  Talk about the transition from what I'll call literally small business and you know, kind of little old ladies making chocolate on trays as you described it to kind of, hey, we should probably have some sort of production line and we should actually have a price list and we should kind of professionalize the business. It sounds like you all were pretty, you know, integral as you brought this team to come and do that. Is it something where you guys showed up and you were like, hey, here's all the things we got to do? Or did they actually understand, hey, we gotta make a lot of changes here, but we don't necessarily have the time or the expertise to go do it. So let's go find people who can come and do these things.

• 15:41Speaker 02

  Yeah, I think they were smart enough to know what they didn't know. Now, again, they're chocolatiers. They can do everything about the product and whatever else. But you know, they're in a Costco meeting and saying like, you know, they're Googling what's a case, what's a pallet, like what's packaging? They didn't know anything. So that's when, when they met me, you know, I'm kind of the, I call it the CPG fundamentals guy. So anyone in CPG, there's a very structured playbook you have to have in terms of, of pricing and promotion and strategy and margin and distribution. And you know, right on and on and on it goes, right? And like, if you don't execute that well, you are gonna really struggle. Like, that's just the reality. Now, doing that stuff doesn't guarantee your success. So, you know, I came in and the first, I think, 20 days,

• 16:24Speaker 02

  we changed the packaging because we knew the functional communication wasn't there, right? Because and then we, you know, with the, the product quality, the shelf life wasn't there because they were hot depositing caramel on pretzels. There's a whole, I'll bore you with all the chemistry, but if you hot deposit caramel on pretzels, the, the moist caramel wants to find equilibrium with the dry pretzel, you end up with hard caramel and a soggy pretzel. And when the bag sits on the shelf of Target for potentially eight months, you end up with a really bad product. So, you know, we reformulated the product, I think it was 27 times, but just basic stuff around CPG fundamentals. Product shelf life, margin, etc. And that's when, you know, I and others came in. Um, the Edwards family said, yeah, that's why we brought you on.

• 17:09Speaker 02

  Like, tell us, tell us what we need to do. And then, uh, Chris, the oldest brother, uh, he's a brilliant, uh, relationship builder. So he's very, very successful in that Costco room where he can walk into a room with Costco and co-create and, and sell a whole bunch of volume. Um, I always joke that at Kraft Heinz, I usually get my face kicked in by Costco and I could never sell anything and they were super tough. And then I walk into my first Costco meeting with Chris and he gets a hug from the buyer. And I'm like, a hug? Like, what is this? So, um, it goes to show, you know, you kind of, there's lots of different paths to, uh, to success.

• 17:43Anthony Pompliano?

  Now, what's interesting about that is Kraft Heinz is this massive company. You think you would show up, they'd roll out the red carpet, they'd beg you guys to put your product in the store. Uh, they'd be, you know, throwing money out the window as you leave. Like, it would just be this amazing relationship. The little chocolatier, though, you know, they're getting a hug. What is the difference between people and maybe the brands with somebody like a Costco?

• 18:03Speaker 02

  Yeah, well, Costco is all about the member and a little bit about the treasure hunt. And, and they don't really care about the brand. They care about the product because they know the member doesn't really care about brands. So, you know, the fact that, you know, I was representing, you know, the, the Heinz brands or whatever. They were like, okay, cool. How good's the, how good's the product? What's the price? Is this the best price? And then it's tough, right? Cause of Costco, I'm, I'm gonna, I know Heinz ketchup, for example. Costco wants some crazy price and then Walmart sees it, then they're mad at me. Now all of a sudden I've got a much bigger issue on my hands, right? Whereas the small chocolatier, you're not even Walmart. You're like, yeah, let's co-create. Oh, you want a little more chocolate, a little more caramel? Let's change the bag size, let's change the price, let's change the name of the product, let's change the picture on the bag.

• 18:46Speaker 02

  And if you do it right, you, you know, we were very successful in almost co-creating with these buyers. So many people go into Costco and they try to like, hey, here's my product, like you gotta buy it. And for us, it was like, hey, here's some ideas we have and we have a whole table full of samples. And we just co-create real time in the meeting. If you can do that right, then the buyer is emotionally invested in that product because they created it with you. And that's a big deal if you actually understand how Costco works in terms of some of the politics in the buying network. So it was, it's not, you know, we could go in with that strategy with Walmart. Hey, we're the little chocolatier and they would say, we don't care. You're not Hershey, you're Mars. And, you know, we actually had that experience where they put us in the bottom corner of the shelf. You know, we didn't perform because

• 19:30Speaker 02

  we never really had a chance. So that's why for a lot of younger entrepreneurial brands in CPG, and I see him and I, you know, I love all these founders that come up with these amazing brands, but when they go after small fragmented regional grocery distribution or even a little bit of Whole Foods, like it's a really tough way to scale because the economics just aren't there. Like you can't, I can almost promise you, you're not making any money because the volume isn't there. And then they hammer you on price and promotion. Whereas Costco, we built the entire company, a cash flow positive from day one because Costco pays in 10 days. And our co-man, he would pay in 30. It's a brilliant thing, right? And you're guarantee, you're shipping tractor trailer loads of volume

• 20:13Speaker 02

  all over the country. So again, Costco's, I could talk all day about Costco. I'm a Costco loyalist till I die. I think their, their business model is, is just brilliant. And I think they execute it better than anybody, in my opinion.

• 20:28Anthony Pompliano?

  So we have the Edwards family. They've got the chocolate business. They're in the Pentagon. They're in Costco. Everything's going amazing. You've got $50 million in revenue. And my understanding is, is that Milkshake Factory basically was created as a solution to try to entice people to come in during the summer because I'm assuming that chocolate and heat don't do so well together. Explain a little bit the story of the Milkshake Factory. It almost seems like it was like a sub-brand that now is scaling nationally as well.

• 20:54Speaker 02

  Yeah. So it was funny that, you know, I don't want to say it was an afterthought at the time, but as you can imagine during that zero to 50 million growth in the chocolate company, we were, we were pretty busy and pretty focused. And the Edwards family's mom, also, you know, third generation, she had a little chocolate shop on one of the streets in Pittsburgh. You know, every little town has one. It's, it's, you know, there's a million little SKUs of tiny little chocolates. And if it's not Valentine's Day, Easter or holidays, it's kind of a tough business. Business to be in, right? It's it's just it's a hard way to make a living. So Dana, the founder of the Milkshake Factory, one of her college projects was like, man, we don't sell anything in the summer. I mean, no one's going in to buy salted caramels in July. So she's like, why don't we start scooping milkshakes? And you know, they're fourth generation chocolatiers.

• 21:38Speaker 02

  So of course, the recipe and the shakes are unreal, right? Their standard of quality just is impossibly high. So they just started scooping shakes out of mom's chocolate shop. And then, of course, people loved them because they were awesome. And then they realized, wait a minute, this shake business is actually way better than the chocolate business. So um, you know, the business used to be called Chocolate Celebrations, and then they rebranded it to Milkshake Factory. Um, but still, the heart of the Milkshake Factory is still chocolate. So, um, you know, it used to be all chocolate and no shakes. Now it's about eighty percent shakes, twenty percent chocolate. Um, but it's still, it was just one little retail shop and it was the Milkshake Factory and it was fine. Um, but it was it was just kind of off to the side. We didn't like pay much attention to it. But the big inflection point for Milkshake Factory was in twenty sixteen.

• 22:23Speaker 02

  Uh, PNC Bank was building their global headquarters in downtown Pittsburgh. You know, gorgeous new building, you know, LEED certified, greenest building in the world, whatever, whatever. Uh, and they just didn't want another Starbucks in their lobby. So they came to us and said, hey, will you put a Milkshake Factory down here? And we were like, you know, this is right in the thick of our chocolate stuff. We're like, yeah, we we'd love to, but we we just can't. We just can't. We can't. And we said, no, I don't know, probably ten times. Eventually, they came with an offer we couldn't refuse. So we kind of reluctantly put a Milkshake Factory in there. And then we decided, hey, when we're doing it, we might as well do it right. So we rebranded, um, anyone on video, the zoom background behind me is that store with all all new architecture and much more thoughtful branding and design. Spent way too much money building it out, to be clear.

• 23:05Speaker 02

  Um, but once we opened those doors, it was a huge success. I mean, just runaway success. And that's when we realized, huh, like, maybe we're on to something with this Milkshake Factory. And that's when we opened six more stores over the next eighteen months around Pittsburgh, urban, suburban, college, um, etc. And that's when, you know, I've done a lot with different brands in my career, and there's something about the Milkshake Factory. That I can't quite articulate, but people love it. They just love talking about it. They love coming to it. It's a little bit of nostalgia. You know, no one's really planted their flags as doing really high quality milkshakes, which we can get into. Then we got hit with COVID, got through that. That was tough, obviously, but it made us better.

• 23:49Speaker 02

  Have since opened a couple more stores. So we have 10 stores around Pittsburgh to really validate the model. And then, you know, within the last years, when you've kind of got into franchising, which, which we can get into. So Milkshake Factory really started as this kind of afterthought, and then it kind of turned into this side project. And then it wasn't until a couple of years after that when you realized, hey, wait a minute, we, we might be on to something. And then once we exited the chocolate business, for, for us and me personally, we wanted, we've always really believed in the brands. We wanted to see, you know, see what we could do with it. And that's kind of what we're doing right now.

• 24:22Anthony Pompliano?

  So I want to just do rapid fire, a bunch of questions about the actual business today before we get into the franchise opportunities that, that you guys are doing. So first, you said 10 stores all within the Pittsburgh area. What is the distance between maybe the two farthest from each other? Like, how many can you pack in from a density standpoint to a city?

• 24:39Speaker 02

  Yeah, it really depends. And Pittsburgh is a weird market where people don't go across bridges and there's tunnels and little pockets of neighborhoods. So, you know, it's about a store per 75 to 100,000 of population, you know, give or take. It's not quite that simple. We have some stores that are actually less than a mile apart, but they're through a tunnel and over a river. So, you know, it kind of doesn't really count. But if you go all the way to the northernmost store, to the southernmost, they're probably 25 miles apart, give or take. So, you know, Pittsburgh's, I think, the, you know, the 40th biggest metro in the country or something like that. So I think 10 stores, we could probably opportunistically maybe put one or two more in, but that's about the ceiling for Milkshake Factory. And if you think about bigger metros like, you know,

• 25:22Speaker 02

  Dallas, Fort Worth, or Atlanta, obviously the potential is a lot more than, than 10 or 12.

• 25:27Anthony Pompliano?

  Yeah, that makes sense. What is the average revenue on a per store basis? And then what does profit on an annual basis look like?

• 25:32Speaker 02

  Yeah, so average revenue is between eight and 850. We've got a couple of stores that'll do, that'll do seven figures. But yeah, on average, it'll be between 800 and 850. And then, you know, average profit, and this is speaking from the franchise side, we're at kind of baking a royalty rate. You know, we like to see around 20%. You know, we've got some corporate stores that'll do in, in the high 20s, pushing 30.

• 25:56Anthony Pompliano?

  Got it. When you think about the actual products themselves, is this a type of store where like one milkshake vanilla or chocolate or you know, one thing is 70, 80% of all milkshake shales? Or is there a pretty distributed, um, you know, kind of sales, um, uh, kind of interest, if you will?

• 26:12Speaker 02

  Yeah, it's very distributed and we've been super intentional. Like way back at Mom's Chocolate Shop, it was 55 shakes line priced at $4.50. So we've done a lot of work. I'm a firm believer in a premium brand. So we've done a lot of work, uh, to premiumize the brand. Uh, and we kind of have a good, better, best menu strategy. We have about 20 shakes. Uh, we've got some, you know, so the good model would be the standard chocolate vanilla strawberry. That's about 13% of revenue. Then we have a kind of a standard bucket of shakes. It's, you know, it's peanut butter brownie. It's mint cookies and cream, stuff like that. And then we have a, we just introduced kind of a more premium tier of shakes, um, for the less price conscious consumer. Then we also have sundaes and we also have a dairy free menu. And then we also have the chocolate. So the, the highest shake on our, uh, menu will do

• 26:56Speaker 02

  between seven and eight percent of total revenue. So it's, it's pretty well, it's, it's, we call it the illusion of complexity. It's this big, beautiful menu, but operationally it's actually super simple to execute. But if you come in, uh, usually it's, it's a little bit of a paradox of choice situation where consumers have a hard time picking what they want. And then that usually keeps them coming back.

• 27:15Anthony Pompliano?

  The brand that you were mentioning it earlier, like Milkshake Factory, for some reason that name just sounds awesome. It has this like brand promise of like, I'm going to the, the pros, right? Um, the stores, obviously, when you walk in, uh, I recently interviewed, uh, Ron Shake, who's founder of Panera, has been the chairman of Kava, and he talks a lot about the experience. Like not only does the brand have to kind of resonate, but also when you walk in, it's got to feel like you're getting that brand promise before you ever even taste the product. How much does it cost to build out one of these stores?

• 27:40Speaker 02

  Yeah. So, uh, in our, uh, franchise disclosure document, the range is about $4.90, uh, up to about, uh, you know, six, six 50ish. So split the difference, call it 550 ish. That's with a franchise fee. So, you know, it depends a lot on area and square footage and, um, build out and what you negotiate with your lease, et cetera, et cetera. But ballpark, um, just a right round number, call it, you know, five, five 50s.

• 28:03Anthony Pompliano?

  And then what about, uh, people who come get a milkshake, eat in the actual location versus they're taking it to go? Like, how do you think about that stuff? And then also is there a delivery component to this where you start to try to figure out, okay, how do we actually bring the milkshakes to people where they are versus have them come to the store?

• 28:17Speaker 02

  Yeah, so we offer some seating. Most of our stores will have anywhere from kind of eight to 20 seats. So there's some seats, but you know, we're not a coffee shop. You're not bringing your laptop and hanging out all day and doing work. And then basically we've realized that some of our small, the store we just opened is only 1300 square feet. And you see a lot of this in QSR and retail where they realize you actually can drive pretty comparable revenues off of a more efficient layouts. And more efficient layouts mean, you know, cheaper to get open and cheaper rent because rent is based on dollars per square foot. Where, you know, our first store is over 2000 square feet and we have this really nice little dining area. But you're looking, you know, like, man, that's an extra 500 square feet that we probably don't really need. Like, I personally would bet we could drive 90% of revenue without that.

• 28:59Speaker 02

  Because milkshakes are a very portable format. It's not an ice cream cone. People are willing to take, you know, the kid can carry the shakes out. So we try to offer some seating for people that want to hang out for maybe 10, 15 minutes as a group or as the Lily baseball team or whatever. But it's not a linger and sit down type of model. And, you know, we do well when there's places to go outside of the store. Because then it's a win for the consumer. They can go sit on the bench or the whatever or the table and then we don't have to pay for it. So that's kind of how we think about the store. But definitely airing on the smaller side really drives capital efficiency, which is a, which is a huge deal. And then, uh, sorry, go ahead.

• 29:42Anthony Pompliano?

  I was gonna say, let's talk about the unit economics of a single milkshake itself. Um, you know, you pick one, but what does it look like if you're selling it for, you know, X dollars? What does the cost look like? And kind of if you could break down some of that cost, how much of it is like the actual chocolate, you know, ice cream or any other ingredients are going into it?

• 29:58Speaker 02

  Yeah, so it really varies, but I mean, on average, you know, we like the shakes to be in the kind of like the 75 ish margin range. Now, the big component that we make all of our ice cream in stores. So the ice cream and the subsequent dairy that goes into that ice cream that we make in stores is the biggest cost component. Uh, and then, you know, we make all of our own proprietary syrups with real vanilla bean. So, you know, we're not skimping on costs for our inclusion. It's all, you know, it's real strawberry purees. I mean, you can look at our vanilla syrup that we use. And it's jet black because there's vanilla bean in it. You know, you can go to Starbucks and look at their vanilla syrup and it's clear, right? So like those little things, uh, and, and again, our founders as fourth generation chocolatiers, they say like, I don't care how big we get and it's always tempting, right? Just to cut a couple of corners here and there.

• 30:42Speaker 02

  Um, you know, we just simply refuse to do it because if we're the milkshake factory and you don't have the best shake you ever had, you know, what, what are we really doing? Right? That's the, that's the flag that we have planted. So, you know, we try to drive pretty good margin through the business. Um, you know, we're tweaking the business a little bit. We're making a lot of chocolate in store, uh, which basically means you're using free labor. It's labor that's already on the clock that you're paying for during downtimes. You know, it's Tuesday at 2 P M. You know, we're not that busy and you're paying a couple of people to be there. They can make some chocolate. If someone walks through the door, of course, you know, make them a shake. Um, so little changes like that. It's really about optimizing a hyper efficient labor model is just critical in this business. And that's when COVID really revolutionized that for us in terms of running, you know, how lean we can be.

• 31:27Speaker 02

  And our, and our cost base is actually, uh, pretty, pretty fixed. So when you drive the seven figures of revenue, um, obviously there's a lot of profitability there.

• 31:35Anthony Pompliano?

  Now, what's interesting to me is, uh, let's take just the market of Pittsburgh, right? You guys have 10 stores, uh, within called 25 mile radius, you know, give or take, with many of them even closer than that. Um, it's very different than if you had 10 stores across the country, right? And so, uh, we have seen some stores, um, is specifically in CPG. So you know what we're going to do is actually, we're going to have one central location where in your guys' case, you're going to make the ice cream, the chocolate, whatever. Uh, we're going to go and we're going to warehouse all of the, um, you know, various, uh, containers and things that we need, whatever. And then we're just going to use it almost as like a distribution point to these 10 stores. How much of that in kind of logistics efficiency on a, you know, local scale are you guys really pursuing versus no? We need to have this model be able to be standalone and, and each store needs to be able to do every single one of these things as we scale it across the country.

• 32:19Speaker 02

  Yeah, so we have not done kind of the hub and spoke from a distribution model. You know, when I say we make our ice cream in the stores, meaning the individual stores, we're not making it at an offsite location and shipping it to the stores. And we're trying to set up, obviously, now as we're going towards franchising, it's a very different animal when you think about national supply chain, especially, you know, we're not growing regionally, you know, where we're selling units in Utah, in Texas, in Florida, in North Carolina, in Connecticut, et cetera. So that presents some challenges. So it's really all about finding that right distribution network. And there's a whole network of distributors out there for both dairy and all of the other goods that we have. So that's kind of the, that was been the challenge of the last six months, is taking our supply chain from regional. You know, we've got kind of nine little, you know, mom and pop-ish type,

• 33:05Speaker 02

  you know, vendors in network where, you know, that's not scalable nationally. So there is a bit of a weird chicken and egg where, you know, you're kind of, you need the volume to work with the big guys, but sometimes it's hard to get the volume unless you're with the big guys. So there's a bit of a chicken and egg there. So we're working through that in terms of what that national supply chain looks like. But you think, you see food and beverage brands all the time. You know, it's a challenge getting product where it needs to be reliably and at the right price. So we're spending a ton of time on that right now.

• 33:36Anthony Pompliano?

  Let's talk about franchise. So obviously, you've got 10 corporate stores. You're doing pretty well, right? Business is growing. At some point, you guys decided, let's go do the franchise model. What are the pros and cons of the decision? And what pushed you guys ultimately to decide to do it versus refraining?

• 33:52Speaker 02

  Yeah, so, you know, coming out of COVID, we opened two more stores. We were sitting at 10 stores in Pittsburgh. So really, the decision was threefold. You know, choice A is run a 10-store business in Pittsburgh. And there's nothing wrong with that. That's a perfectly nice business to run. Option B would be expand via corporate development model. And then option C would be franchise. And, you know, we all kind of sat around the table and said like, man, we really, really believe in this brand. I think Pittsburgh is kind of a C-minus milkshake market. We talked about why, but the fact that we're as successful as we are in Pittsburgh, I think has a, it shows that there's a lot of potential for this brand, in my opinion. And so they said, all right, well, we're not standing Pat is not an option. So how do we grow? Right? What's the strategy look like?

• 34:33Speaker 02

  And if you actually get into the economics of a corporate development model, you know, if you want to do it, or you know, look at what Culvers has done over the course of many decades, kind of methodical systematic growth. And again, hats off to them. They've done it brilliantly. Um, but you know, they've done it over the course of a generation and and kind of slow until you build that up. Uh, and then, and then they obviously picked it up. But in terms, in terms of just either raising money or spending our own money, it is very, very capital intensive to grow a QSR brand on your own to meaningful scale. You know, we could go open up another 10 stores, but let's say we wanted to open up, you know, 40 more stores, you know, rough math, you need at least $20 million, likely more. And you're like, oof, like, like that's in from a valuation standpoint, 10 stores in Pittsburgh.

• 35:18Speaker 02

  I mean, the whole company's not even worth that. You know what I mean? It just doesn't work. Right? So that's kind of when we realized, you know, we didn't set out to franchise at all. And I, I honestly was a little dismissive of franchising and embarrassed to admit. Um, but then once we started learning about it, we realized we had the perfect brand for it in terms of super simple operations, super scalable. Uh, you know, no one's doing what we're doing, a proven concept with 10 stores, you know, check, check, check. So we're kind of the F and B solution for people that don't want to do F and B. Um, and then we, we were smart enough to know, you know, we're business people, but we're not franchise people. So I spent most of last year talking to every franchise development company in the country. Right?

• 35:57Speaker 02

  There's kind of these, um, these houses that will help you franchise your business because there's a lot of, I equate it to walking through a field of landmines. Uh, it's really easy to step on one. And if you step on one, it can be game over. So we wanted help kind of walking through that field. And, uh, long story short, ended up partnering with a, a company called Franworth. And, you know, in my opinion, they're, they're the best of the best. They get 400 deals across their desk every year. Um, they'll do one or two. And then our big moment of validation, and these guys all are big time, you know, ex franchise CEOs. Um, they've scaled big franchise brands from nothing to 500, um, et cetera. You know, Drew Brees, the Hall of Fame quarterback, uh, is part of that group. So it was when they all came to Pittsburgh and said,

• 36:39Speaker 02

  Wow, like this operation is incredible and this product is incredible. That was our moment of validation because we had our 10 little stores and I don't know, like we like it. Does anybody else? And then when the Franworth folks came and were really blown away, that's when it was like, okay. I think, you know, we're going to give this a go and then we formed our franchising entity at the beginning of this calendar year.

• 37:00Anthony Pompliano?

  What's up with Drew Brees and franchises? I think he's also involved in Ever Bowl, which is like another franchise concept.

• 37:06Speaker 02

  He's involved in a lot, sliders, walk-ons, bistro, Ever Bowl. And, um, you know, he's such a great guy. I spent a little time with him and he's so humble where you meet him. And, and, and he's like, hey, I'm Drew. I'm like, I know. Um, so he's just like, he's just like, you're just so humble. Uh, and just so, he's so meticulous and thoughtful. You can kind of see why he was so successful on the, on, on the field. And you'd think that, you know, you're running into athletes all the time of varying levels of sophistication. I think there's a lot happening in that space, which I love. Um, but Drew was just so plugged in, asking great questions about the business and talking about his businesses. So, you know, he's not some sports figurehead who's just cutting checks. I mean, he is in it and I give him a lot of credit. He is, he is a really, really sharp guy.

• 37:51Speaker 02

  But he's also like one of the nicest guys you'd ever meet. So, um, yeah, it's cool just to kind of have access to him. And yeah, he actually even yesterday was, you know, I think he tweeted about us of, oh, I'm so excited about Milkshake Factory. And he wants to open one in San Diego or whatever. So, um, so yeah, it's kind of fun just to, you know, have, have him on the team.

• 38:07Anthony Pompliano?

  That's awesome. Um, let's talk about the franchisees. How do you evaluate who the right franchisee is? Uh, obviously they're going to operate your business. They're going to be their local representative. They're going to ensure, you know, kind of brand and like all these components are really important. But also they're going to be part of generating revenue for you. And so they've got to have the business sense as well. But like, how do you go through that evaluation process and ultimately decide on people?

• 38:28Speaker 02

  Yeah, huge deal. It's a huge deal because you're, you're effectively getting married to these people, right? Where like they're, you're going to be business partners for a decade or two. And if they fail, especially the early ones, um, you know, we're, we're kind of sunk. The model has to validate and by validate, I mean, franchisees have to get open and they have to say nice things about us. And then then we go award more units and that's how the snowball grows. So if our first franchise- Franchisees aren't successful. Um, you know, our growth trajectory looks very, very different. So that is why this conversation is so important. So we have a whole franchise sales organization that goes through, I think it's a 10 step process, highly vetted, you know, walking through all of the, the different components of the business. So they need to deeply understand the business. They obviously need to be vetted financially to make sure they have capital.

• 39:14Speaker 02

  Cause as, as everyone knows, if you're out of capital, that's a, that's a, that's a problem. So they go through that very rigorous process. And then our final step is what we call discovery day, where all people who make it through that whole process will come to Pittsburgh for a 24 hour period, meet the team, spend time in stores, very immersive. It's a half day of presentations. The goal is that they would leave that with all of their questions answered. And, you know, they're vetting us of course, but we're also vetting them. So that's kind of our two way kind of matchmaking thing. And, you know, we've said, you know, we'll, we'll probably end this year with around 50 to 60 units awarded. And if we said yes to everybody that, you know, was financially qualified and wanted to invest, that number would have been about two X higher, right?

• 39:56Speaker 02

  And those are tough conversations to have because people want to buy in, they're ready. And they say, yes, I want to do X amount of units in X market. And we have to say, you know, I'm sorry, I don't think you're a great fit. A big thing we look for is this is a people business, right? And if you can't build culture and lead a team and hire a good team and be out in your community, this is not the business for you, right? So I think some people fall into the trap of thinking, oh, I'm going to start a business and it's going to be mailbox money. So I try to sniff that out and I try to be very transparent upfront. Like if you think this is mailbox money, I'll look you right in the eyes and say it's not, and it's not anything close. And if a brand does tell you that, I would be very, very leery because usually that doesn't exist.

• 40:36Anthony Pompliano?

  How many of these people have previous franchisee experience? They've been doing, whether it's Wendy's, Chick-fil-A, you know, or maybe even non, you know, food and beverage type concepts versus those that this is the first franchisee that, uh, situation they're going to enter into?

• 40:48Speaker 02

  I would say about half. So you meet people with, you know, all varying levels. You know, I've talked to people that, oh, I have forty Pizza Huts and, you know, big, big scale, right? All the way to, you know, we just approved a group in their twenties that is just hungry and they're fed up with their corporate gig and they're ready to run through a wall to make this happen. I love people like that. I'll bet on those guys any day. They're gonna open one unit. So it's kind of a whole spectrum. Um, but you see people that have been in the franchising game a while. You know, it's, it's, it's not rocket science. You, you, you pick the right brand. You get open and it doesn't have to be food and home services, um, beauty, fitness, whatever, and then roll profits into growth and do that for a decade or two and that's how you look up and you have forty Pizza Huts. So there's people that are looking to, you know, diversify their franchise portfolio.

• 41:33Speaker 02

  Um, and, and there's some pretty heavy hitters that'll have kind of centralized resources that'll manage a franchise portfolio across maybe four or five brands. And they say, oh, you know, Meal Street Factory is kind of cool. We, we'd love to do it and we can kind of plug it into our infrastructure. Uh, and it can be pretty profitable. So it's a wide range. Um, but yeah, I'd say about half.

• 41:53Anthony Pompliano?

  Those big players, what, what are they doing in the centralized services? Is it just like management centralization, P and L centralization or, or something else?

• 42:00Speaker 02

  Basically, uh, the big thing would be, think of all the back, back office stuff. So usually there's some like IT slash infrastructure system stuff. A big thing is hiring, right? If you can imagine for a business like ours, just, you know, there's a lot of churn and it's summer workers and management turnover and it's kind of the game that you're in. So having a, a, a scalable and efficient hiring operation is huge. And then if you think about centralized book, bookkeeping and accounting, um, in, in HR, which obviously is related to hiring. So, so kind of that type of stuff where if you're just a, a random franchisee with a store or two, you're probably just doing it all yourself. Um, but if you have a network of fifty or a hundred locations,

• 42:38Speaker 02

  obviously you can afford to, uh, professionalize your operation a little bit. And, and some of the, the, the, the numbers that those, those folks do are, are pretty impressive.

• 42:47Anthony Pompliano?

  I've had the great fortune of interviewing a ton of people who have started some of these franchisees businesses. Everyone from Dunkin' Donuts all the way on down. And one of the things that always fascinates me is there's almost two different ways to kind of have oversight. There's like the qualitative and the quantitative. Obviously quantitative, like you're getting the P and L. You know, are they getting foot traffic? Are they not? Are they getting profit? Are they not? But in terms of the qualitative, how do you? Do you guys just show up in the store and like, is it clean? You know, are the people nice? Like, like, how do you kind of quality check, if you will?

• 43:19Speaker 02

  Yeah, I mean, honestly, like, it all starts with the numbers, right? That's the source of truth. And usually, if you're driving good numbers, then something's working. But I think there's a couple of sources of truth where for us, it's about, again, we tell people all the time. We'll teach you how to make shakes. We'll teach you how to open your store. You need to run a good culture and that means that translates into friendly customer service and keep your store clean. Like, our store has no commercial, you know, kitchen equipment. There's no fryers. There's no grease traps. There's no gross kitchens. Like, our store is spotless and, you know, the bathroom is spotless, right? So literally, good customer service in a clean store. I know it sounds so simple, but that'll get you pretty far in this business. So I think a lot of that will manifest itself into reviews.

• 43:59Speaker 02

  So reviews, especially when the sample size gets a little larger, even across our 10 stores, like, without looking, I haven't looked at the reviews in probably a couple of months. I could probably rank our stores by reviews in order and I'd probably get it right, right? Because, you know, you always have someone that'll, you know, someone will hammer you for a one star review because of whatever. And that's inevitable. But if you can get the sample size of hundreds or even better, thousands of reviews, that means you're doing something right. So some of our stores will have, you know, 2,000 4.8 star reviews. And you're like, okay, that, that's a big deal. Now, again, sadly, there's some games you can play in the review world with bots and stuff. So we don't, we don't do that stuff. So that playing field is a little bit tainted.

• 44:40Speaker 02

  But I do think if you look at reviews, you can kind of see, okay, why is this store 4.3 instead of 4.8? And why are people complaining about, you know, service or cleanliness or whatever? And then if you kind of have that's the more qualitative side. And then if you layer on the quantitative side, obviously, there's a, there's usually a story to be told there as well.

• 45:00Anthony Pompliano?

  That makes sense. Um, my last two questions for you around economics of this kind of franchise model. How much does it cost in terms of the franchisee putting in to get started? And then what does it look like if, let's say, the store does a million dollars in revenue? You have cost, you have kind of the franchise fee of all this stuff. Like, what does that look like for the franchisee as well?

• 45:18Speaker 02

  Yeah, so the number I mentioned earlier, that 550 number, that includes our $60,000 franchise fee. Now, again, that $60,000 is for one store. If you go all the way up to 10, you get the volume discounted and it works out to 35K. So think about a sliding scale from 60 to 35K per store, depending on how many you buy. So that's upfront, kind of do it closing. Um, and then, you know, that's kind of, I view it as one bucket of pre-opening costs. So that 550 number I mentioned, that counts that franchise fee of, that's how much it costs to sign your FA to getting open. On average, of course, it's decent variables on either side. Um, and then ideally, you know, I love for cash on cash return to be around three years is a decent benchmark for this industry.

• 45:59Speaker 02

  Um, now, obviously, if you can use leverage and things like that, you can juice your own returns quite a bit better than that. Um, but, you know, I think if you're doing a million dollar store, you know, your profitability should be in the, you know, ideally, you know, 20 to 25 or even higher range, and that includes a 6% royalty and 2% brand fund. But again, that's just our experience with the corporate stores. I have to be careful not to project what the franchisee can make, because that's an earnings claim. So I try to be super transparent in our FDD, um, our item 19, which is where we disclose all of our data. We all store P and Ls, everything, so you can kind of see, see what we're doing in there and get a pretty good sense for the, the business and the P and L.

• 46:37Anthony Pompliano?

  Yeah, that makes a ton of sense. Dan, this is fascinating to me, and I appreciate you kind of explaining it so well to, to folks. Um, I'm left, I guess, with just with actually one last question, which is just like, you worked at the big company, now you worked at the small company, it's quickly becoming a big company. Which one's more fun?

• 46:54Speaker 02

  I think we all know the answer to that. It's the small company. Come on. Uh, yeah, I'll, I'll again, all love to the big company folks. I've got a lot of friends at big companies. If I have it my way, I will never go back to a big company. I, you know, I, I read about quarterly earnings and I'm like, what are we doing? Like I, I just am out on the whole thing. I, I love just getting a small group together within line incentives. I'm such a big believer in people, right? So I spend almost all my time just trying to get the right people to the table. That's our team. That's our partners. It's Franworth. Um, it's our agency partners and obviously it's our franchisees. And, you know, I, I'm really proud of what we've done this year. It was such a great group of people that I like. I just genuinely like and genuinely want to hang out with and, uh, you know, we don't have to talk about Q1 earnings, um, which is, which is pretty awesome.

• 47:37Anthony Pompliano?

  I love it. Where, where can we send people to find you on the internet or find out more about Milkshake Factory?

• 47:41Speaker 02

  Yeah. So I'm trying to be a little more active on Twitter. Uh, I've been enjoying that. So I'm at Dan Reese, R E S E 21. Uh, so trying to engage with folks there. Been having fun with that. And then, uh, we're at MilkshakeFactory.com and we have a whole franchise page. So yeah, anyone interested in, in Milkshake Factory or even not just franchising in general, please reach out to me on Twitter, um, via DM. Uh, happy to chat.

• 48:02Anthony Pompliano?

  Awesome, Dan. Thanks so much for definitely doing it again in the future.

• 48:04Speaker 02

  All right. I appreciate it.