First Post/ My Background/ Little Freddie/ Hillhouse

This is the first post for Sediment Capital. This blog is used to post my views on certain businesses/companies or general ideas. Please feel free to contact me or comment.  

Previously I joined an investing club a few years ago in Hong Kong and found the group deteriorated a lot. We went to the 2018 Daily Journal and we went to 2017 and 2018 Berkshire Hathaway and Markel annual general meeting. We also went to Bob Mile’s Berkshire system summit in 2018, which I can post later.

It seemed like as the HK investment group got larger, more presentations were based on consensus and there weren’t any insightful discussions or contrarian views. Diversity is not only about an acceptance of people with different looks, but it is also about accepting people with differing views and backgrounds; especially if they offer constructive and objective comments. I found the moderators to be quite stuck up in this regard of not letting members with alternate ideas to present their ideas and deciding who would be “worthy” enough of joining their next dinner or presentation. Some other members were disqualified due to their “titles”, and people who disagreed on a presentation on technical analysis were too afraid to call the presenter out. 

 I felt like the moderators were using the group as a networking tool rather than discussing great ideas. Really disappointing.I was quite happy to encounter a new group in Shanghai and was really impressed with a presentation on duty free shops. In fact I went on a trip with them to visit China’s liquor/Baijiu factories and distributors.

Just a brief background on myself- I studied materials engineering at RPI and sold municipal water pumps as my first job coming back to Hong Kong and worked at calculating tendering fees for a landscape contractor. I also took a 4 day class with B.G at Columbia which I found only moderately useful, but overly expensive. Then I became a distributor for infant/baby fruit pouches/shampoo/diaper creams and couldn’t calculated that we would have enough cash flow to last our company to breakeven. I worked for Infinitus, IPAM, mainly to get my license to register my fund in the future in HK.

In retrospect, I think I learned a lot from this experience as an infant distributor, and if I were to start over, I would now know that the best category to do would be fruit pouches after failing in baby’s clothes, infant formula, snacks, etc. I would have started with my own brand instead of distributing, and I would have found investors instead of using my own money. Investors who already have retail experience and some network would help a lot more than just providing the money.

If you take a look at Pepsi, because of its association with Yum brands, it is in KFC restaurants in China. Pepsi also managed to enter the magic kingdom, Disneyland, in Shanghai by being a partner of Tingyi Cayman Islands Holding Corp (0322.HK) and owning their shares.

Suntory, a Japanese beverage and liquor company acquired asc fine wines to get into China. Starbucks franchised out their stores to Uni-President Enterprises Corp (UPE, 統一企業) and when a milestone was achieved, they bought the shares so they owned their own stores.

When I was in the infant fruit pouch business, I was distributing a German brand. But one brand that stood out was Little Freddie. Little Freddie has a white matte finish for its pouch with a little green monkey as its logo. They use to have it produced in the U.K, but perhaps due to costs—they had it eventually manufactured in Eastern Europe. If you try Kraft Heinz, Gerber, or HIPP, they taste horrible. Perhaps their only advantage is scale. It seems like they haven’t made any effort to improve their products.  It is no wonder Hillhouse Capital invested in Little Freddie. As a distributor, I understood that for food products, the margins are lower but the turnover are faster. For baby’s skin/hair care, these products have a higher margin, but a lower turnover and takes about a month or more before parents buy their next box of lotion.

Organic fruit pouches, only use ascorbic acid or a more natural “variant” or preservative, which makes the shelf life last only a few months. Normally organic fruit pouches last 6-8 months maximum. This means that once it is out of the factory, it takes one month or more to ship to China and at least a month or two to get into stores. You really only have 3-4 months to sell it. If you don’t sell it by 2-3 months, you really have to lower the price or throw it out. Most baby’s retail stores would rather throw it out than poison a baby.

The genius in Little Freddie was (excuse me if some of the facts are wrong, this is from what I remember) that the founder was French, but his wife was from Hong Kong, so she spoke Chinese, and his dad was working for General Mills or Conagra. This gave him the contacts to food factories, and his wife could act as a sales representative by contacting people in China. Not only this, the founder was in banking before, so when he started, he had investors to back him up, and he started in 2014-2015. It has taken off like a rocket. How long will this trend last? When will bigger, more bureaucratic brands catch on to the fact that they have shitty tasting products? We will see. It’s also interesting to see all these big brands use a pouch maker GualaPack (https://gualapackgroup.com/).

You really develop an in depth knowledge when you are at baby fairs and stores all the time of who the winners and losers are in the industry. Sometimes the winners are justified, some winners do it in a manner which are dishonorable or use a sleight of hand.

Another brand I distributed was an American baby’s shampoo/lotion/bodywash brand. They got acquired by Mustela. I spent many, many hours, days, promoting their brand at retail stores and helped them enter J.D and Tmall(Alibaba’s brand store). I got cheated in the end but decided not to sue. I signed a letter which said that I would be the distributor for China for a certain amount of years.

In retrospect, I was foolish for bringing my American supplier to China. I had no idea that the Alibaba trading partner I contacted, which was just a boss with a 20 person office would trick us into visiting Pigeon’s owner. Pigeon was a Japanese infant brand and their distributor was a Chinese person who claims to have 900 employees and 3 factories. He blatantly knew I was the distributor and said that he wanted to be the new distributor. I knew my resources and connections weren’t as great as theirs and I thought my American distributor would honor our contract. 

I was naïve enough to let them (my supplier and the Alibaba trading partner) come in contact. I spent 2 years trying to get this Alibaba contract. I was not properly compensated for my efforts after this brand got acquired by Mustela, but it was a learning experience. It was very tough on me, and I even lost my girlfriend, but this was truly a learning experience that was felt up front instead of vicariously. 

Looking back, I wouldn’t trade it for anything else. It taught me the importance of partnering with people you can trust, the need for good inventory and financial management systems, and good people and products. I can't blame someone for screwing me over if I've been so naive. I'm looking forward and not thinking about this, but this was a major experience. 

If you partner with bad people or associate with bad people, you can’t get a good result. We were forced to buy products with some suppliers at an minimum order quantity when we didn’t have the previous ones sold and they forced us to buy products near expiry. 

In business, someone always gets the short stick in the supply chain. For coke, its the bottlers. For Alibaba, they learned well from Amazon, it is the warehouse owners in which they own the shares of. Being a distributor for infant products is not a good position. 

Some even put expired products at the bottom of the pallet! And any contract written by someone else, always favors them. So take a lot of time to get to know someone before you get to do business with them or marry them. I hope I don’t repeat the same mistake again. It was costly and painful.