11 Aug 16 Hampton Creek exposed in undercover project to buy up its own vegan mayo
An investigation by Bloomberg has uncovered some uncomfortable truths about what was really behind the fast-track success of much publicised US vegan food maker, Hampton Creek.
In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90-million into his vegan food startup Hampton Creek.
Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless product, Just Mayo, into Walmart, Kroger, Safeway, and other top US 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 US, 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.
Tetrick, Hampton Creek’s CEO, 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.”
“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.
It’s unclear at this point how investors will respond to the allegations of artificial sales inflation, notes a report in FoodDive.com.
It’s even less clear how consumers will react toward a company that represented a movement for transparency in the food industry while possibly participating in secretive business tactics.
The report has a bigger direct impact on investors, but the scandal could impact consumers’ perception of the company and whether any food business — major or startup — can be completely transparent.