Food Startup Ran Undercover Project to Buy Up Its Own Products

August 5, 2016 09:45 AM

In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90 million into his vegan food startup Hampton Creek Inc. Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless Just Mayo product into Walmart, Kroger, Safeway, and other top U.S. supermarkets within about three years of starting his company.

What Tetrick and his team neglected to mention is that the startup undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was. At least eight months before the funding round closed, Hampton Creek executives quietly launched a campaign to purchase mass quantities of Just Mayo from stores, according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails reviewed by Bloomberg. In addition to buying up hundreds of jars of the product across the U.S., contractors were told to call store managers pretending they were customers and ask about Just Mayo. Strong demand for a product typically prompts retailers to order more and stock it in additional stores.

Expense reports reviewed by Bloomberg show contractors bought back jars of Just Mayo from Safeway stores. Former workers say Hampton Creek also purchased its own products at Kroger, Costco, Walmart, Target, and Whole Foods locations across the country. While a November 2014 e-mail from the corporate partnerships team said the company would stop store buyouts, three former contractors who worked for the company in 2015 say the practice continued, and directions were given verbally.

“We need you in Safeway buying Just Mayo and our new flavored mayos,” Caroline Love, Hampton Creek’s then director of corporate partnership, wrote in an April 2014 e-mail to contract workers known as Creekers. “And we’re going to pay you for this exciting new project! Below is the list of stores that have been assigned to you.” Love’s memo also referenced a key competitor: “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”

Tetrick, Hampton Creek’s chief executive officer, says the primary purpose of the purchases was to check the quality of the mayonnaise. “Because of this, we now understand the impact of trucking and shipping our product and enabled the system we have today that mitigates the risk of extreme temperatures,” Tetrick wrote in an e-mail. “Assessing the product from the customer perspective, more than anything, gets us out of the bubble of typical manufacturing. This was and always will be the primary purpose of it, which is why we’ll continue doing it.” Melanie Myers, an executive who worked in the company’s corporate partnerships team, says in a statement that the program was primarily for quality-control purposes but “we also thought it might give us a little momentum out of the gate.”

Tetrick says the program has cost about $77,000, representing less than 0.12 percent of the company’s sales. Tetrick provided Bloomberg with 15 e-mails to contractors referencing quality-control assignments. He also presented a database showing surveys Creekers were asked to fill out after going to stores, checking jars for misaligned labels, breakage, or issues involving ingredient separation, which he says occurred when early versions of the jars were exposed to extreme temperatures in transit. The workers were sometimes instructed to purchase substandard merchandise and send it to headquarters, he says.

However, the survey database—containing almost 3,900 entries in 15 states from March 2014 to January 2015—didn’t account for hundreds of Just Mayo purchases by Creekers during that period, according to e-mails, receipts and expense report records seen by Bloomberg. Five former Hampton Creek contractors and two ex-senior staff members say the buyback assignments were separate from quality checks at stores. The ex-contractors say in most cases they were told to simply buy up jars at nearby stores and were free to consume or discard them—not look for quality issues, as the company says.

“It is highly questionable for a company to purchase its own goods,” says David Larcker, a professor of accounting at Stanford Graduate School of Business. “Revenue is an important number for evaluating growing companies, but the companies need to be transparent about the source of that revenue. They also need to be transparent about their growth. If the sales are not generated from legitimate customers, that needs to be disclosed and is important information for investors to evaluate.”

Hampton Creek’s approach to quality control is also unusual. Companies typically ensure the quality of products before they leave the factory, says Kurt Jetta, who runs a retail and consumer data company called Tabs Analytics. If they do find issues in stores, food makers usually don’t buy the products. Instead, they give the retailer a credit. “There’s no legitimate explanation for a manufacturer buying significant quantities of their own product from the shelf,” Jetta says.

Founded in 2011, Hampton Creek marketed itself as a food technology company that ferrets out new plant proteins and uses them to reformulate everyday grocery items like mayonnaise and cookie dough. Tetrick, now 36, went around Silicon Valley vowing to disrupt the food industry and won over such leading VC firms as Founders Fund and Khosla Ventures. Today Hampton Creek says its backers include several billionaires, such as Hong Kong’s Li Ka-shing and Yahoo!’s Jerry Yang. Despite criticism from other investors who say the company is less an innovator than a deftly run marketing machine, Hampton Creek has raised $120 million and turned Just Mayo into a cherished brand among sustainably minded consumers.

Thousands of new packaged food items are introduced each year in the U.S., and a majority of them fail. For a young company, it’s critical to perform in a test market, with those results used by retailers to justify increasing distribution, says Jim Hertel, a grocery industry analyst at Inmar’s Willard Bishop. Sales from a major retailer can also be used as part of the pitch to investors. “If you’re an early-stage company, there’s a lot of pressure to demonstrate results,” Hertel said.

In-store marketing is a crucial way for a young company to build a brand and boost sales. Hampton Creek held Just Mayo tastings and other demonstrations in supermarkets around the U.S. Wearing the required uniform of a black hat and t-shirt with the startup’s three-leaf logo, the Creekers were supposed to persuade shoppers to try the product and then hopefully buy a jar.

In 2014, the job changed, according to five former Creekers who asked not to be identified for fear of reprisal. Now they were being asked not simply to promote Just Mayo but to start buying it as well—an initiative the company dubbed “Special Project” or “Buyouts,” they say. Love, who has since been promoted to Hampton Creek’s vice president of mission, suggested how Creekers could do this most effectively in an April 2014 e-mail to a contractor. “I might go through the self-checkout lanes, or make several transactions going to different cashiers each time to avoid questions like, ‘Why are you buying so much mayo?!’” Love wrote. “Make sure you are not wearing your HC gear when you go into Safeway. This is an undercover project.”

In interviews this week at Hampton Creek’s San Francisco headquarters, executives emphasized that quality control was the main goal of the buyback program. “These folks did an awesome job for us, primarily in helping us improve our quality,” Love says in a statement provided by Hampton Creek. “They were our eyes and ears on the ground. I’m proud of what we did and how we continue to do it.”

One former contractor assigned to buy Hampton Creek products provided receipts showing purchases of more than 140 jars of Just Mayo in a day. Another contractor described buying at least 20 jars per store and says Hampton Creek gave workers directions to visit over a dozen stores in less than a week. Ex-Creekers say they were told to do whatever they wanted with the product after finishing the job. Some donated the supply to food shelters or handed them out to friends and family, but most say they threw it in the trash. E-mails from Love show the buybacks took place in the Mid-Atlantic, Southwest and Pacific regions. The five former Creekers say they happened all over the country.

Hampton Creek also paid contractors to pretend they were customers and call store managers of Whole Foods, Safeway, and Kroger locations to stoke demand, according to e-mails reviewed by Bloomberg. “You will be calling Whole Foods Market locations as a customer to create buzz and increase demand for Just Mayo flavors and Just Cookie Dough in these stores, putting pressure on the Regional Buyer,” says a March 2015 correspondence signed by Melanie Myers of Hampton Creek’s corporate partnerships team. E-mails from Myers list some 100 store locations for each contractor to call in places such as Arkansas, Louisiana, Massachusetts, New Jersey, Oklahoma, and Texas.

The e-mails also directed contractors to conceal their identities and fib if questioned on the calls. “Remember, you are calling as a customer,” says an e-mail addressed to a contractor and signed by Myers, whose title now is Ingredient Sourcer. “The conversation should go something like this: Hi, I’m doing some catering and I’m looking to pick up this new mayonnaise. I think it’s called Just Mayo ...” In another script, contractors were told to say, "Hi! I’m hoping you can help me out. I’m planning a Back to School event and I’m looking to pick up this new mayonnaise. I think it’s called Just Mayo ...”

Two ex-contractors for Hampton Creek, who sued their former employer in February 2016 seeking unpaid wages, reference an assignment to “buy out shelves” of the company’s products in a lawsuit filed in a federal district court in New York. The suit also says Hampton Creek failed to provide them with detailed documentation of their compensation and work-related expenses for tax-reporting purposes as required by state law. In an e-mail, Tetrick says that team of contractors helped improve quality control and “gave us a push when we landed in our first conventional account, which is why all of us will always be proud of their work. A handful of folks don’t represent the views of everyone.”

In at least some cases, Hampton Creek lumped in expenses related to buying its own products with wages paid to contractors, according to five former workers. All five said money they were given to buy jars of Just Mayo were treated as taxable income, making them liable for a higher tax bill than their actual earnings would require. One former contractor provided H&R Block tax records showing this to be the case. Another Creeker asked the company in an e-mail to separate the expenses from taxable income. But the request was ignored, the contractor said. Hampton creek declined to comment about the alleged practice.

“Treating reimbursement of business expenses creates a compliance burden to the contracted employee,” says Joseph Carcello, a University of Tennessee professor who sits on the Securities and Exchange Commission’s investor advisory committee. “There’s no way this reimbursement approach is in the best interest of the contractor, and there are limitations to what the contractor can deduct.”

Two former senior staff who worked closely with Tetrick in 2014 and 2015 say the Hampton Creek CEO initiated the buyouts partly to make sales look better to potential investors. One says Tetrick didn’t disclose the practice to would-be backers during fundraising pitches in 2014. Fundraising pitch decks reviewed by Bloomberg do not reference the buyouts. “We always comply with our disclosure obligations to prospective investors,” Tetrick says in an e-mail.

Earlier this year, Hampton Creek was looking to raise additional funds to help pay for an ambitious vision that imagined as many as 560 new plant-based products, which could include vegan “oysters,” “blue cheese” and an egg-substitute product it calls “Just Patty,” according to an investor presentation reviewed by Bloomberg. The company is still trying to close the round and is seeking investors in Asia, according to two people familiar with the matter.

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