Food startup ran undercover project to buy own products

Bloomberg

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 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 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.”