The Startup CPG Podcast

00:09
Jake Deleon
Most of our products are based in the US There are a few exceptions, like we're getting hit with materials from our packaging which comes from out of country. Also some of our core ingredients. And so, you know, it's definitely going to be tough, a challenging time because you know, in this kind of environment in our industry, like every bit of penny profit in your unit. Economics is really critical.

00:31
Matt Whiteside
We're not worried about weekly or quarterly earnings. We're focused on long term partnerships where we can be the permanent manufacturer for the people that we work with. So we really view tariffs as transitive. We're not looking to make a penny profit in the near term because of certain political environment, whether it's good, bad or the rest.

00:52
Daniel Scharff
Hello CPGers. Today we are talking about the tariffs. There's a lot going on and so many unknowns. But I wanted to bring you three different really important perspectives. One is from a brand that's badly affected and figuring out what it'll mean for her future. The second is a brand actually not so impacted, who may even stand a gain on lower quality products that are imported, who will face the tariffs. And then for a really important third perspective, I invited a friend of mine who's a US based co manufacturer. They work with a lot of emerging brands, even from our community.

01:23
Daniel Scharff
I wanted to hear what he thinks is going to happen in the short and long run, especially about prices for working with manufacturers like him because of all the demand that we expect is going to come onshore from brands here and from brands abroad looking to avoid the tariffs. I think you're going to learn a lot from this episode. I definitely did. All right, here we go. All right. Gia, thank you so much for joining us today. Do you mind first of all introducing yourself and telling everyone about your brand?

01:53
Jia Liao
Oh, okay, sure. Thank you for having me. My name is Jiya. I'm the founder of Hapa Queen. So Hapa Queen we are Sichuan food reimagined simple term. We use clean, high quality ingredients to recreate the boldest authentic flavor of Sichuan food. So pretty simple.

02:12
Daniel Scharff
And your product's awesome. We all love it. At startup cpg, where does your product come from? Where do all the ingredients come from?

02:18
Jia Liao
So they're all coming from my hometown, Chongqing, which is like in the Sichuan province area. And our factory is in the hometown of Sichuan Chile. So we are surrounded by chili farmers and that's where we source our ingredients. That's where we get our Sichuan peppercorn from nearby town and that's how we make it. So that our products are really authentic and flavorful and then we ship it to the United States.

02:42
Daniel Scharff
Awesome. I love Sichuan peppercorn, especially when it's used in food. I remember like Mission Chinese in San Francisco when I was there, would use it in some really interesting ways. You know, it has the kind of like numbing effect, but it also is really cool when it's interacting with spice.

02:58
Jia Liao
It's. It's a cool. That's a mala sensation. The spicy and numbing together. It's like a three dimensional of the spice experience.

03:07
Daniel Scharff
Yeah, yeah, that's exactly right. Yeah. The Szechuan peppercorn kind of like numbs your mouth and can make you like almost salivate a little bit.

03:15
Jia Liao
Salivate?

03:16
Daniel Scharff
Yeah. You've got the spice. It's super cool. Okay, so Gia, I know you're having a tough time already with the tariffs and so I wanted to invite you on here just to share a little bit about what's going on with you and where your head's at. Do you mind just, you know, tell us what's going on now?

03:32
Jia Liao
Yeah, I knew there's going to be tariff increase this year. I just don't know how much. I remember in January, one of my distributor called me and said, hey, Gia, are you going to increase the price? I was like, why? You know, the tariff is going to be anywhere from 10% to 100%. I'm like, oh my God, that's a huge range. I say, well, let me get back to you when we actually know what happens. Right. But I detail him. I say that if I could absorb it myself, I would because I really don't want it to increase the price. Just on the consumer end. Our product already considered a premium product. So it's already pretty high ticket price item. And I know that increase the price at the end is just going to hurt the brand.

04:14
Jia Liao
I mean, you lose demand, you know, in that case. And also the consumers, they're least willing to try for something new, you know, if it's expensive. So anyway, so the first 10% came out, I was like, okay, well that's not too bad. I think a 10%. I'll take a look. My balance sheet. I was like, I think we can absorb it. And then a couple weeks later also actually I was invited to talk about, I was invited to a panel called Global Flavor or Next generation of Global Flavor at the Expo west. And they asked me about the tariff. Well, they first asked me, I was like, oh yeah, I think I got the answer. I'm going to absorb it. You know, I can do this. And I think the week before I went on the panel, it increased another 10%.

04:52
Jia Liao
I was like, oh my God, I don't know. So at the panel, I remember I said that I don't know if I'm going to increase the price or not. I want to kind of wait and see. And I started kind of looking at the information, like, oh, well, I can hold on to it for a while because I just bought my inventory. So like I, you know, the current inventory is not the high tariff goods. So I can hold up for a few months, just see how it goes. And then the 34% came, like April 2nd. That was just a bad day for any CPG brands or any, I would say any company that's buying from overseas or have the ingredients or any parts from overseas. I mean, it is like everyone is affected. And I actually got my information wrong.

05:33
Jia Liao
I thought it was total of 34%. So I was like thinking it was like, okay, another 14% increase. I was like, look at my numbers. I was like freaking out. So, okay, well, this is tough. I don't think I can absorb 34%. So next day, a CPG friend of mine also sourcing from China, say, hey, Gia, what are you going to do with additional 34%? I'm like, wait, hold on. What do you mean by additional 30%? I said, I thought it was a total 34%. No, no, it's total 54%. Oh my God. At that moment, I just didn't know what to think. I was like, this is crazy. This is ridiculous. Like, how could people make money? And I knew that I had no choice but really to consider the price increase and like really think about a strategy.

06:15
Jia Liao
Like, how do I navigate this? Like, what do I do now? So I'm still trying to think in the reality and digest information. I've already started a conversation with my manufacturer, like I wanted to grow this market together, but if I'm forced to find a factory somewhere else or change my product line because the TEF is too high, then I can work with you. So then they are kind of actively trying to find a way so that they can lower little bit cost on their end and I will absorb on my end majority of the cost and I'll pass them a little bit to the consumer or to my distributor, then to the consumer.

06:50
Daniel Scharff
So your product, which is manufactured in your hometown in China, are you're buying from the manufacturer, the product, are they sourcing the ingredients and paying for them? And you just Buy finished product or do you?

07:02
Jia Liao
Yeah, so I give them the recipe, the formulation. I work with a che to kind of came up with a recipe and then we have exclusive deals or non disclosure and they will create the recipe and then they will. I will send them the. Actually I even buy the packaging separately because I don't think this source really good packaging. So I'll buy a package function gen so where they manufacture more of a higher quality packaging products and do my expert. So I will send it to them. So I'll send all the parts, you know like the outer package is a glass jar and then they will just create the content inside and assemble everything together.

07:39
Daniel Scharff
Okay. So then basically just the price for you of the finished product now would theoretically go up 54. But it sounds like you're going to talk to them. You're hoping that if this is where it actually settles, you know, I mean who really knows.

07:53
Jia Liao
Yeah, I feel things might change again in my lower end and increase it more. I don't even know.

07:58
Daniel Scharff
I mean it feels like it started out with like well here's 10 like okay, oh, you're fine with that? Well then here's another 10 like oh, you like that? All right, here's a bunch like well are we done man? Yeah, just let me know.

08:11
Jia Liao
Yeah, well I think in a fair play you will be like I will pass one third to my manufacturer. I observe one third and the 1/3 price increase. But in reality it doesn't really happen that way because the manufacturer I don't want them to lower the quality of products. Like where do they lower their cost? Right. So more likely they will probably lower like 10, 15%. That's already pushing it. And I already told my distributors that I'm going to increase the price, the wholesale price 6 to 8% so I cannot increase too much, maybe about 50 cents when you arrive to the consumer end and I have to absorb majority of the cost and that is just kind of the way it is. But I think I always see a silver lining in all of this.

08:58
Jia Liao
It's like at least I feel as a small business I have a very little fixed cost. So everything's kind of variable or most things. So when those situation happens able to absorb more like off the cost aversively. If I'm a big company, I have tons of people I'm hiring that are huge overhead costs. There's no option but to put a lot more burden on the consumer end by increase however much price that increase. So I think in this way I think I'M able to absorb a bit more. I just have to cut down my spending on marketing and treatment which is loose lose for everyone. Right. The factory lose more profit. I obviously, you know, lose more profit for the retailer.

09:39
Jia Liao
They don't get as much of marketing spend on buying end caps and you know, ads and for consumer, they have to pay more. So everyone lose.

09:48
Daniel Scharff
So speaking of everyone, what do you think your competitors are going to end up doing? So you know, people who produce other products like yours or that could fulfill similar occasions, do you think that they're going to be doing the same thing you're doing? What do you expect?

10:01
Jia Liao
I think it really depends on if they have manufactured in the US or not. And I can definitely see that some are not as affected. I already talked to a couple of, I guess friends. I'll see them more allies. So we're kind of in the same space. But then I don't consider them as a competitor but really we're friends sharing information and then they say that oh, we manufacture in the US and we kind of bought our ingredients ahead of time. Last year I was like geez, you're smart. And I think for brands like that are super prepared and had that foreseen vision, they are unaffected. I don't think they'll increase the price.

10:36
Jia Liao
But for the other ones who also manufacture from overseas, especially the country that with the highest tariff like Vietnam, China, now Taiwan, maybe in South Korea and I mean it depends on how big they are. I feel like the bigger you are, the thinner your margins are because you have to keep growing by spending more, you know, like doesn't matter ads or marketing and you're getting investment dollars so you have to get into more stores and more store equals more freefill, more ads. So and I feel that the price definitely going to increase next three to six months. It could even be good thing for smaller guys like us. So I don't know. I will try to increase as little as possible, but obviously I cannot absorb 54% on my own.

11:24
Daniel Scharff
Yeah, I'm sorry that makes sense. Okay, so let's play out a hypothetical. Let's say it's six months or a year from now and you have passed along a price increase of you know, let's say 2/3 of it or something like that which has increased your shelf price and maybe your competitors, some of them have not because they're producing in the U.S. Are you going to be looking to try to get more competitive on price? Are you going to look to try to produce more in The US Is that even possible for you? How would you think about that?

11:53
Jia Liao
I thought about the option and I think it's very difficult because the ingredients that's key for our product just doesn't grow here. Right. And then also, if I were to find a manufacturer here, they have to source all the ingredients. The doubajiang, the fermented black beans, like the Sichuan peppercorn, Sichuan variety of chilies, all from China. So which is still 54% of the tariff. And not to speak, the labor cost is 10 times more than in China. So I end up probably paying even more than the 54% tariff. So that's kind of like I play that scenario. And also, you know what? It just takes so much work to transfer factory. Like, they might not get a formulation right in terms of like, flavor. It might change a lot. So you don't really want to change something that's already working. That's my fear.

12:40
Jia Liao
So what will happen, that's what I'm already doing is I'm looking for different categories with already lower tariff to kind of begin with. Because what happens is all the product from China depending on category, it has already a set cost. I don't know if you call tariff or duty, but there's like a bunch of fees. For example, my sauce has much lower than my noodles. On top of that, there's 54%. So if I were to look for category that already naturally have a lower base and I'm able to kind of lower the overall price, you know, so that's another thing I'm already looking at. And if all things fail, you know, I could get into a different category of products that has lower fees overall.

13:23
Daniel Scharff
Okay, thank you for sharing that. So just last question as we wrap up here, which is how do you look at these tariffs? Just kind of as a person who is from China, but you know, you live here and do they just feel like crazy and unfair to you? Do you understand the intent with some of them? How do you interpret them? How do you come to terms with them?

13:44
Jia Liao
Okay, I guess as a. Just as a person, not as a business owner, I understand why the tariffs happen. You know, the way it happens is instead of, I feel like putting a tax on income is putting a tax on consumption, which is like, easier to control. Everyone spends money, but not everyone will report the right amount of income. You know, it's easier to collect. You know what I mean? And that will really help with US deficit. So I, I see this, I see why it will happen. But in the process, like so many people get hurt. Like, especially the small guys, right? Get really hurt. Yeah. It is kind of crazy. I feel that it's understandable that these things happen. I just hoping it's more of, like, something more gradual.

14:28
Jia Liao
You know, you add like, 1 or 10 or 15 or even 20%, I think. Understandable. But if you start with, like, 54%, like, think about it. How do people even react to that? Like, you know, it's like, what kind of choices do people have? They have to increase the price. And overall, I mean, everything is already so expensive in the United States in the past five years. Like, you go to restaurant, everything's so expensive already. So everybody's gonna feel that tension, feel that, you know, they have less spending power. So I don't want to give you politics, but, you know, to me, I just think that the decision is quite rushed and quite sudden. It just really hit people unexpectedly. Didn't really give enough time for the small guys or people to even react.

15:12
Jia Liao
Now I feel really sorry for the people who last year, when he spent all the time, move their factory to Vietnam, which I know a lot of people did, because they're like, oh, yeah, you know, it's cheap labor, but they're not getting sanctioned by the China. And now guess what happens, right? And, you know, those people are the one left with the bag, so.

15:28
Daniel Scharff
And for now, who knows? It could change again.

15:30
Jia Liao
Who knows? Yeah, things might change again. I just feel now we are in such a volatile economy and environment, it's already difficult to be in cpg, and now we have to deal with this bigger environment and deal with radical policies. It's, like, difficult landscape. But, you know, we all will prevail. You know, the ones that are most resilient will come on top. The one that couldn't take the storm will sink. And that's just the way that, you know, the world works. And I hope we're the one that raised up to the top.

16:02
Daniel Scharff
I know you will be. Go hot pot queen. All right, Gia, thank you so much for sharing all of these insights. We really support you and wish you the best of luck, and we'll look forward to following along the journey. What's the best way for people to support you now and follow along with you?

16:17
Jia Liao
Go to our website, hotbahqueen.com. We're trying to scale our D2C business. We have really delicious. You can go find us on Instagram @QueenOfHapa.

16:28
Daniel Scharff
All right, thank you so much.

16:30
Jia Liao
Thank you, Daniel. Have a wonderful weekend.

16:33
Daniel Scharff
All right, now, let's hear from another brand. Jake, thank you so much for coming back on the podcast. Did you mind, first of all, just letting everybody know who you are and what you do.

16:42
Jake Deleon
Good to see you again, Daniel. Thanks for having me back on. My name is Jake Deleon. I'm the founder of Fila Manila and we make Filipino inspired pantry staples.

16:50
Daniel Scharff
All right. And so I was chatting with you a little bit about the tariffs. Super interested in your perspective. Do you mind just telling me a little bit about how you see things right now and how it could potentially affect you?

17:00
Jake Deleon
Yeah, I think it's like both myself and a lot of founders I talk to and I'm sure from your side as well, I think everyone is trying to wrap their head around what is going on. There's a lot of documentation out there's a lot of news, trying to figure out what's exempt, what's included, what the exact tariff is, how the suppliers are reacting, who's going to absorb it. But I could tell you from our side, you know, I did some background checks earlier what's going on, but thankfully most of our products are based in the US There are a few exceptions, like we're getting hit with tariffs from our packaging, which comes from out of country. Also, some of our core ingredients, for example, banana puree for banana ketchup, comes from outside of the US as well.

17:36
Jake Deleon
And so, you know, it's definitely going to be tough, challenging time because you know, in this kind of environment in our industry, every bit of penny profit in your Yoon economics is really critical. But daddy, I was telling you, I mean, that said, I can see some glimpses of positivity coming from this news, at least for companies like ours. Right. Because at Filip Vanilla, you know, we have a pretty unique product specifically positioned for Filipino flavors and cuisine. Turns out most of our competition are the brands that are imported from the Philippines. So think about your legacy brands that have been around for hundreds of years, right. From big multinational corporations based in the Philippines. And since the blanket tariffs, I think it's 17% or something in the Philippines or so. Yep, yep.

18:18
Jake Deleon
They're going to get slammed with those tariffs on top of a lot of the FDA scrutiny that they've been having with a lot of the imported quality ingredients coming from the Philippines as well. So it's almost like a double whammy for a lot of those big brands. And though not going to be the same price as Philip Manila, if you kind of compare even with the tariffs and all that stuff, what happens for us is that the Benefit is that the gap in the pricing behind these cheaply made imported products and our products were made in the US Obviously clean label is shrinking. And since that gap is shrinking, it's. We're getting a lot of interest from retailers, specifically Asian channel retailers. Right, Your Asian stores that are more open and more excited and more interested in kind of considering our products.

18:57
Daniel Scharff
Yeah, that's a big amount. I mean, a 17% increase that they're probably gonna have to pass along is gonna make a big difference. Just out of curiosity, how do you feel about it? Because you have, you know, an awesome product which represents Filipino culture. And so I hear you saying, like, look, those are cheaply made, lower quality stuff. So you probably feel, I'm guessing you feel good about that part of like, you know, this can help make accessible higher quality, better made products. So Jake, that's a massive impact for them. Right? They're really going to be struggling with whether to absorb that or pass it along. Right. To those retailers and those retailers to those consumers.

19:36
Daniel Scharff
So you know, one question that I have for you, I guess it's kind of philosophical one or a reflective one, like how do you actually feel about these tariffs for you as a business owner? Because you know, you have this amazing product representing Filipino culture and cuisine and you know, they do too. But I hear you saying, I actually like this, pushing consumers toward a better made, higher quality product, making that more accessible to them versus stuff that's cheaper and imported. Like, is that kind of a good way to sum up how you feel about it or do you have different feelings about it?

20:06
Jake Deleon
I think the overall kind of statement is that it's very mixed feelings.

20:10
Daniel Scharff
Right.

20:10
Jake Deleon
So obviously as a founder, someone who manages the PNL from my side and also thinking about my friends and our network who are also in the industry, it is going to be tough. It's going to be a painful period because usually when these things happen, we know the larger companies can absorb it, but it's usually us emerging brands that feel the brunt because even every a hundred dollar one thousand, ten thousand dollars increase ingredients is a big hit financially for us. But that said, you know, if we look at the. Perhaps one of the intentions of the tariff is to drive US manufacturing and US based companies in that lens. It's maybe straight. Tell me. Oh, but I mean, we're seeing some good effects on our business specifically. Maybe not for every business out there, but for Filibanilla.

20:49
Jake Deleon
You know, since our competition are most of the imports, our products, since they're domestically made. We're benefiting from that just because, like I said, the gap in pricing between our products made in the US and the imported products are now closing.

21:01
Daniel Scharff
Yeah. It's interesting, like the different perspectives that there are out there. There is Jake, this CPG entrepreneur who wants to have the impact on this ecosystem here. There's also, you know, one of like the economists and people who are just kind of like Jake the American or Jake the Filipino American or, you know, however people look at themselves, they probably have like different perspectives that they probably try to reconcile. Right. With like how they actually feel about this. For me, as an entrepreneur, it'd be hard for me not to mainly feel about it the way that was most self serving to me. Like, well, actually this makes it easier for me. Okay. Like, I feel good about it, but it's not so simple as that.

21:35
Daniel Scharff
I think especially because like our community of entrepreneurs, CPG entrepreneurs, is such a conscious one that believes in positive change in the world and helping all kinds of people for many different reasons. Right. It's like so hard to draw a line on something like this. What do you think?

21:51
Jia Liao
Agree.

21:51
Jake Deleon
And I gotta add to that, Daniel, I mean, like these things, we have no control over it. The best we could do is react to it. And the way that react is pretty critical to how our business will survive in the long term.

22:02
Daniel Scharff
Right.

22:03
Jake Deleon
So I mean, maybe the benefit is that it could force brands like ours and other brands to relook at their product portfolio. There are certain products that are really impacted. And are there certain things you could do to pivot? Maybe even to work for the tariffs to work for you? Right. Or maybe less of an impact? I mean, the same thing with COVID Right. Covid was terrible. We had no control over Covid. And look, a lot of the pivots that happened during that period and I'd say with this, since it's kind of disrupting everything, this could be another opportunity for companies to pivot in direction they never thought they would, but they would have to in order to survive and thrive.

22:33
Daniel Scharff
Yeah. And I know you've talked about changes that you've made on your product portfolio side of the past, switching to more efficient packaging as well. Kind of those hard decisions that end up being a better move for you as a brand. Right. So yeah, I think you're right. It could end up forcing people to make some more strategic choices, which, I mean, strategic choices are good. Right. In this world of very finite funding and all that kind of stuff. I also wanted to come back to one comment. You made about the packaging. So you said that is one area where you would be impacted. Interestingly, I was just messaging with somebody today on Slack who they're saying, I use a US Cardboard box supplier.

23:08
Daniel Scharff
And they told me when I went to place an order this week that the prices are already up 10 to 15%. And she was like, yeah. I went and asked them why, and they're like, well, supply and demand. You know, people are already starting to come for our cardboard boxes and we don't have more, so we're going to charge more. So, you know, I feel like even people who feel like they're pretty safe on stuff like that, they're going to see it pretty soon. This is what I'm hearing from everybody. So, like, econ was my worst class in undergrad and also business school, so nobody, you know, call me out on this. But I feel like the tariffs intended to obviously try to even up trade imbalances between countries and create some revenue for the US Also give advantages to onshore manufacturers. Okay.

23:50
Daniel Scharff
But I mean, I think it's wild not to think that, like, there's going to be a lot of increased demand in the US and all the prices are just going to go up for everybody and we're all going to pass those prices along to retailers, thus to consumers, and thus everything is just going to go up, whether it's in three months or three years. We're just on that path now, which, as a citizen, I'm like, okay, this is going to be if it's better for you products and if consumer confidence goes down because the market is down, stuff like that will impact our industry for everybody, not just the importers, but also people like you.

24:25
Daniel Scharff
You know, like, there are products that they're like consumer pantry staples people can buy from Walmart that are cheaper options than your product or, you know, any of the amazing products coming from our community. Right. That are typically, you know, premium or better for you. So anyways, probably everyone just heard why I did not get an A Econ. But that's just what I'm thinking about.

24:44
Jake Deleon
Daniel, the way you're thinking about it is the way that I think most of Americans are thinking about it. I know there's a strategic intent behind it, but the reality is 99% of us, we don't think about, oh, okay, the strategic intent now makes sense. We think about, oh, my God, how much is this going to cost me tomorrow and how much savings do I have? And then will I make a profit or will I need to borrow money and that's what we think about, right? As business owners, as most consumers, as most Americans. So, I mean, the only thing I would kind of add is that, you know, it's still in the early days. We have to. Everyone has to wrap their head around it.

25:13
Jake Deleon
But at least, at the very least, I mean, like, of course, you have to work your mitigation plan to see how you can deal with the cost increases, but at the very least, try to see and try to identify is there some facet of this program that your business can kind of focus in and at least use as a benefit. Right. So in my case, in my example, I discuss kind of the impact that's having on a lot of our imported competition. It's not a direct competition, but it kind of affects what we do as kind of like in our category.

25:40
Daniel Scharff
Right.

25:40
Jake Deleon
And, you know, from that, you know, we see benefit. You could use that when you're selling into new channels, like Asian channels. You could use that when talking to investors. Right. Because now it increases the possibilities of distribution. So there's always at least maybe one facet. Even though it's terrible news, there should be one facet. I think that every brand can look at this and see how this can.

25:58
Daniel Scharff
Work in their favor. I think that's a really important point and I don't want it to be lost on anyone just because we're towards the end of this segment now, I don't have tuned out during that part. I think that's super interesting what Jake just said. Wow. Yeah. Like, if you are actually on the benefit side of this, where, you know, you're mainly onshore sourcing and production, this is a big advantage for you that you can be communicating to your audiences, retailers, and to investors right now that probably give you a leg up. So, Jake, thank you for all of these insights. It's really helpful to talk to you know, now kind of in the moment as all of this is happening and hear how you're thinking about it. And then you just have all the awesome insights as usual. Do you mind?

26:36
Daniel Scharff
Just as we wrap up here, just remind everybody how they can support you, Jake and Philomenilla.

26:41
Jake Deleon
Yeah, of course. You can check us out online@philomenilla.com we're also available on Amazon and certain retailers across the US So just visit our website for the store locator.

26:49
Daniel Scharff
Buy them on Amazon, leave a review. A good one. We love it. Thanks, Jake.

26:53
Jake Deleon
Thanks a lot, Daniel.

26:54
Daniel Scharff
All right, let's hear from one more guest. All right, Matt, my friend, thank you for joining us today. Do you mind just letting everyone know who you are and what you do?

27:03
Matt Whiteside
It's great to be here. Thanks for having me, Daniel. Like you said, my name is Matt Whiteside, co founder and CEO at Circle Beverage. Circle Beverage. We specialize in functional and emerging beverage trends and we serve as a contract manufacturer and private labeler for high potential brands and retailers across the country.

27:20
Daniel Scharff
All right, so Matt, you know, the reason I wanted to talk to you about this is, you know, I've known you for a long time, I've been to your facility. I have a good understanding how you work and you do work with brands from our community. I think you're really a good representation for the kind of co man that brands in our community are looking for, you know, a good partner for them. And so as these tariffs are hitting and people are trying to unravel what the impacts are actually going to be, you're one of the first people that I turn to. I wanted to find out how you're thinking about it and what are the ramifications that people aren't even going to understand are going to happen.

27:53
Daniel Scharff
So first of all, can you just give me a little bit of like, how are you thinking about it right now? What's hitting your desk and related to all the tariff news?

27:59
Matt Whiteside
Yeah, definitely. So as a contract manufacturer, we sit in between kind of raw materials and retailer shelves, right? So we're typically receiving raw materials like aluminum cans, lids, sugar, acids, flavors, functional ingredients and processing those and turning those into finished products. And so the most immediate impact we're seeing is obviously certain materials that we consume in our production process potentially being impacted by tariffs. You know, you've seen headlines about empty aluminum cans potentially being impacted, certainly a number of the powder and functional ingredients that come from overseas. So that's probably the most immediate area. But I wouldn't say we're unique in that aspect. I mean, anybody who's doing food and beverage production is seeing those things yesterday, today and ongoing.

28:44
Daniel Scharff
And as a contract manufacturer, I mean you're not liable for the price increases on those products. Right. Like the brands are buying those inputs, they're shipping them to you and you're making the products for them. But I mean, mainly it's just if the price of their inputs are going up. Right. That doesn't impact you necessarily as much as person who's going to process all that stuff.

29:03
Matt Whiteside
It really depends on the nature of the contract with the brand or with the retailer for doing a private label project. This is that age old question that People in our industry ask of is it better to go turnkey with your manufacturer and have them manage everything for you, or is it better to manage the supply chain yourself and just pay your manufacturer a service fee? So we have both those types of relationships. And so if we're managing all the ingredients on behalf of somebody, then yes, we're actually in a tough spot because these tariffs take place immediately. But most of our contracts only allow for price increases to be passed through it. Let's say 60, 90 or even 120 day notice. So tariff hits today, I can't actually increase my price to the end customer for three, four months in some instances.

29:43
Daniel Scharff
That's so interesting to think about. That never actually would have occurred to me, I think, because I've worked with you before. But I think were procuring all of our own ingredients and sending them to you. But yeah, I think, you know, especially as you get to be bigger brands, then they maybe work with manufacturing partners who handle a lot more of that stuff for them. So that's pretty interesting to think about. Like, no, they just have a contract with you for the product and you need to go out and actually buy those ingredients. And if there's a big price increase, that actually, I mean, it's going to be hard for you to pass that along in the short term if you have a contract with them. Right.

30:12
Daniel Scharff
Where you're taking a little bit of a risk on the commodity or, you know, tariff prices, whatever happens.

30:17
Matt Whiteside
Correct. But then for a smaller brand who is sourcing everything directly, they're feeling the impact of that tariff immediately. Right. We're insulated from that, but certainly they're seeing that on day one.

30:26
Daniel Scharff
Would you ever, though, go to the brands and be like, look, yeah, I know we have this contract, but I mean, we need to talk about this because it's going to hit me in a way I can't really absorb. Can we split this cost or something like, would you plan to do something like that on specific materials?

30:41
Matt Whiteside
Like, let's say the sugar. We have a special sugar we're using that's imported. Right. If we know definitively that starting on yesterday, every pound of sugar is 30% more, we're absolutely going to at least ask the question to say, look, this was an unforeseen circumstance. We need to work something out here. Right. Because at the end of the day, we approach every relationship we have with a brand or a retailer as a partnership. So on the other side of that coin, where I'm sure you may be leading with the Questioning is around how do manufacturers look at our pricing, our service fees to our clients. And I think that's really the more complex piece is these tariffs are really shifting the supply and demand curves. And I think different manufacturers are going to have different responses to what that means.

31:19
Matt Whiteside
And that's where I think brands, especially within the startup CPG community, you're going to have to be thoughtful about what they're hearing, seeing and agreeing to with their manufacturing partners.

31:27
Daniel Scharff
Yeah. And I really appreciate you having this discussion with me. So, you know, I had asked Matt kind of like a leading question because I'm just trying to understand how this is going to play out for the brands that currently think that they're safe because they are US based brands that maybe don't import as much and they're seeing it impact their competition, but not them necessarily. And just trying to play this through in my mind, I'm like, yeah, but everybody is going to try to switch up their supply chain like the same way that, okay, they're the tariffs that impact the auto industry. Right. What they expect is that then the foreign carmakers start building plants inside the U.S. Or using more, you know, U.S. Teams. But of course like the prices are going to go up then in the US for stuff.

32:05
Daniel Scharff
And so it seems like of course that's going to happen with people like you as well. Right. Because you're an entrepreneur, Matt. Like, you know, I really respect you as an entrepreneur. You have a dream. You started Circle because, you know, you were working for other people before doing this kind of stuff and had a dream to actually build your own stuff, which is an amazing thing. And when you have all these additional brands now who can't manufacture in Canada or Mexico because they can't absorb those costs, or brands that have been manufacturing abroad before and shipping finished product here, when you have 2, 3x the volume of people coming to talk to you know you're going to make some changes. Right. So can you tell me a little bit more about like, you know, that is coming? Right.

32:44
Daniel Scharff
If nothing else changes, what would you do in that scenario?

32:47
Matt Whiteside
Yeah. So I'll speak specifics about what we doing at Circle Beverage and then can provide maybe a more macro view. But we really put long term partnerships as a strategic foundation of our business. I mean, we're not worried about weekly or quarterly earnings. We're focused on long term partnerships where we can be the permanent manufacturer for the people that we work with. So we really view tariffs as transitive. We're not looking to make a penny profit in A near term because of certain political environment, whether it's good, bad or the rest.

33:14
Matt Whiteside
So when it comes to people that we currently work with, brands that we've established partnerships with, that we're hoping to work with for the entire run that they have as a brand, our goal is actually to do our best to insulate them from any uncertainty because we only win when we ship cases. And if these brands have enough to worry about with all the other impacts out in the supply chain. And so as much as we can, we're going to insulate and try and support them because at the end of the day our is dependent upon that. The other side of that coin though is new business. So any new brands or products that are approaching us, the reality is that tariffs do shift the supply and demand curve in the short term.

33:48
Matt Whiteside
So to your point, there's less production capacity available for products that are sold in the US than there was two days ago. So we certainly have to be thoughtful about what we're saying yes to, why we're saying yes to it. For instance, if we're getting a call from a brand that is wanting to move production from Mexico into the US in response to tariffs, we have to look at that and say is this really long term business or are they just moving this year in response to the tariffs and it's going to leave as soon as the tariffs are gone. And so are we going to look at that and perhaps price it more premium knowing that it's likely short term in nature? Absolutely.

34:17
Matt Whiteside
And I think that's just the reality of it is a manufacturer like us, we're not going to go out and build a new factory because of tariffs. Right. We have to look at this in decades when we're making investments and any administration could come in next and change the tariffs. And if I built a new factory in response to the tariffs, I'm stuck in a tough situation. So we and many of our peers in the industry are not just going to go build new capacity because of the tariffs. So what that means in the short term is you have less capacity than the demand that's out there.

34:45
Daniel Scharff
Yeah, I think there's a lot to unpack there. First of all, thank you for taking that view towards brands, which I mean, it's like you were saying, you know, they should have that same partnership view with you even if they technically have a contract with you where you have to just bite it with the cost of that increased sugar like it is a partnership. And it's always like, yeah, I mean, but you're also going to remember that when you go back to renegotiate their pricing, if they really tried to, you know, stick you with the bill on that in this situation that everybody should understand is out of kind of everybody's control. Right. It's not your fault if the sugar spikes 30% because of tariffs.

35:19
Daniel Scharff
So I think then having that view back on the other brands is a really beautiful thing too because, yeah, I mean, that's the best thing, right? Like, you find somebody you want to take to the dance and dance with them, you know, forever. Right. So you get to like really do volume with them and get great at making their product over the long run, really efficient, find ways to bring the cost down together, all of that stuff. So I think that's awesome that you really want to insulate your partners that you have these relationships with over some of this. Let's say maybe short term volatility, maybe forever kind of volatility. We'll see. And then.

35:49
Daniel Scharff
So but for the new business, that makes sense because at the end of the day, you're going to have just a certain amount of capacity left for these new partners, many of whom are coming to you. And yeah, like from an economics perspective, yeah, you're going to be like, okay, I have this very limited, like, I need to, you know, grow my business and have money to invest in things. And you're going to be either probably charging more than you would have otherwise or less likely to make certain kinds of concessions or less likely to build in the kind of volume discounts that might, you know, really haircut your margin when you have so many different suitors. Right. Looking for that capacity. So makes a lot of sense to me. And I think it's kind of like a musical chairs game, right? Like, I.

36:27
Daniel Scharff
This is the kind of time where you want to make sure you have a chair. Right. Like you don't want to be switching around probably in the next couple of years.

36:34
Matt Whiteside
That's a really important point. Daniel. I say this a lot. Any brand that's ever had a contract negotiation with me, I think would support it, which is we want to be as serious in a relationship as the brand is willing to get. Because again, the business for us is built in decades, not po by po. And so these times, I do think, are a reminder to everyone that the economy is not stable. Any individual, any. Any set of circumstances can shift quickly. And sometimes a risk I think, that CPG brands see in committing to a manufacturer because you don't have as much flexibility to move or whatever gets actually negated in these situations because this is where you want to have a seat.

37:06
Matt Whiteside
And like I said, many manufacturers like us are going to do our best to protect our committed partners because their survival is our success in any business and industry, but especially in ours. If you're transactional in nature and all you care about is getting the cheapest price on your next purchase order, you're the first brand that the manufacturer is cutting or is moving on to greener pastures. Right. If you act transactionally, it's a two way street.

37:28
Daniel Scharff
Very interesting stuff. Matt, I have one more question for you. So you know, with all the car stuff that's happening, I'm trying to use this analogy and thinking about how it's going to impact like equipment that people might need because okay, with the cars, like okay, new car prices coming from abroad are going to be a lot higher, which probably means even the domestic stuff is going to go up again also because of supply and demand. And so everybody's like, yeah, if you have a used car, it's going to be hard to buy new stuff. Hold on to your car now and you're going to want to make sure you keep that thing running because new car prices are going to be a lot higher. What about equipment then for a co manufacturer like you?

38:01
Daniel Scharff
I remember, you know, you guys put in a new line a couple of years ago that greatly increased your capacity. Okay, fantastic. But like also I worked with you and we needed to work together to get a new piece of equipment. Right. To do a new SKU and like, you know, someone had to buy that and it came probably from abroad in, you know, many instances. So how is that going to impact your ability to get equipment, to work with brands, to get new equipment, like new stuff that they need because. Right, that's all going to be impacted pretty significantly.

38:30
Matt Whiteside
Yeah, so I mean at surface level it's just going to increase the price substantially. You know, there are several components of manufacturing machinery that just don't get produced in the US anymore, especially on the control panel plc, hmi, the electronics of the machinery. Much of those subcomponents do come from overseas. So at a minimum you're looking at, right, anywhere from 20 to 50% increases on those items in the last 24 hours. I have reached out to some of our equipment manufacturers because frankly we're looking at further investments irrespective of the current situation. And the initial feedback I'm receiving is many of these equipment manufacturers see that there's carve outs for specialized equipment that either fit within Agricultural, cpg, obviously those types of industries. I have not read that directly but my understanding is there's more carve outs than the general populace is realizing.

39:17
Matt Whiteside
So I think it's yet to be seen on what is that impact. But if you just take the percentages that have been shared and add them on top of a multimillion dollar production machine, you can imagine how much that shifts our appetite to bite that investment off.

39:29
Daniel Scharff
So yeah, I don't know if there's a real lesson learned for brands there, but probably one about like hey, if you're going to need some real customized stuff, I don't know, maybe rethink that one. Think about going, you know, with products with a more standardized process where the machinery is probably in abundance.

39:44
Matt Whiteside
Yeah, I think that it's one of many reasons. Back to your analogy of having a chair at the table. It's just another reason to find a good partner and commit to them, really be a long term partner. Because really where the cost of machinery and whatnot starts hitting a brand is if the manufacturer is paying 30% more for their fixed assets. That has to that comes through in margin over time. Right. So you want to really be with someone that's committed to your long term success is not going to be baking in, you know, new machine capex margin, all those things into your piece price.

40:15
Daniel Scharff
Words to live by. All right Matt. Mr. Whiteside, thank you. Appreciate you as always. If you're ever indianapolis, stop by, check out our friends at Circle Beverage. Thanks a lot my friend.

40:26
Matt Whiteside
Thanks everyone. Thanks Daniel.

40:31
Daniel Scharff
All right everybody, thank you so much for listening to our podcast. If you loved it, I would so appreciate it if you could leave us a review. You could do it right now. If you're an Apple podcast, you can scroll to the bottom of our Startup CPG podcast page and click on Write a review. Leave your company name in there. I will try to read it out. If you're in Spotify you can click on about and then the star rating icon. If you are a service provider that would like to appear on the Startup CPG podcast, you can email us@partnersartupcpg.com lastly, if you found yourself grooving along to the music it is my band. You can visit our website and listen to more. It is super fantastics.com thank you everybody. See you next time.