Sarah Balle pulled a marketing campaign, paused an online partnership with The Warehouse and made desperate pleas to investors
Last week, Sarah Balle, Supie's charismatic founder, spoke publicly of her plans to expand beyond the big cities to the rest of the North Island. At the same time, the investor staking her family's $3 million against the future of online groceries was looking at the company's books.
She was seeing a hand-to-mouth distribution business with no cashflow, whose ability to pay its rent, its suppliers and the wages of nearly 120 staff depended on each day's orders. It was a company trying to take on two of the country's toughest, wealthiest, most dominant businesses in Foodstuffs and Woolworths.
And most alarming was a dramatic slowing of the rapid growth that Sarah Balle had boasted of just two months earlier, to the Icehouse Ventures Showcase at the Spark Arena.
READ MORE: * 'Devastated': Supie's Sarah Balle and her battle with the brands * Grocery reforms do nothing for cost of living, says early adopter * Calculating how much supermarket competition reform will save shoppers
It was after that gala dinner that the investor had stepped up. To the delight of Balle and her fellow directors, who had spent a year trying to woo smalltime investors with a few thousand here, a few thousand there, this single strategic backer had agreed to underwrite Supie's entire fundraising round.
"We are stoked," she had told other investors in September. "We have secured our entire $3m investment that will see us reach cashflow break even at approximately 4000 orders per week."
It was an unconditional investment – what could go wrong?
From the day it incorporated in October 2019, the challenge faced by online grocery retailer Supie was enormous. Since 2020, one in four new online retail businesses has failed. That’s according to data published by the Centrix credit bureau. Credit defaults are rising, and company liquidations are up 40 percent in the year to September, most of all in online retail.
Moreover, the highest rate of failure happens within the first five years of existence, says Centrix managing director Keith McLaughlin. (Supie had just marked its fourth birthday.)
Supie was entering one of the toughest markets in NZ business, taking on the two big supermarket chains Foodstuffs and Woolworths – so dominant that the Labour Government, the incoming National-led government and the Commerce Commission are all agreed on the urgent need to break up the duopoly.
And it was trying to expand at the worst possible time, in the middle of the country’s harshest cost of living crisis since the 1980s. "As discretionary spending continues to scale back, many retailers are beginning to feel the pinch," says McLaughlin.
Perhaps the surprise, then, should not have been the withdrawal of Supie’s $3m investor – but the fact they had committed to putting family money in the business in the first place.
Supie growth in early 2023
There had been signs for the past six months of the cashflow crisis swallowing Supie. In an update to investors on May 3, the company asked them for a minimum of $1m in commitments – immediately.
The company's proposed pre-money valuation was $6m, down from the previous year's $20m.
"Despite encouraging commercial progress, Supie has faced a challenging capital raise process over the last four months," investors were told. "There's no surprise an NZ-centric, technology-light business sits outside of the mandate of most start-ups and venture funds.
"The result is we are reaching the end of our cash runway without a lead investor committed. The cashflow challenge is accentuated, unfortunately, by our recent rapid growth."
Supie cash projection
Balle and fellow director Ben Kepes expanded on those difficulties in a recorded video-conference with major Icehouse investors, worried about the cashflow. She revealed the company had pulled a marketing campaign, and paused an online partnership with The Warehouse, in order to choke fast-growing customer demand that it didn't have the cash to service.
The difficulties weren't for want of hard work. Balle has told how she would work late and sometimes sleep on a sheepskin on the floor of her office, then get up again at 5am to resume work.
Reassuring investors that nobody was in it just for their own returns, Kepes pointed out the extent to which Balle was personally invested in the company: "Sarah's not 18 years old, yet she's been living at her parents' house for the past few years and borrowing her mum's car because she sold her car to fund Supie. So if her percentage was what motivated her she would have gone a long time ago.
"The focus on the mission that Supie is on, is what drives her, and what drives us, and that hasn't changed."
At that point, the company had 47,100 members, and the numbers of orders had grown 228 percent over the previous 14 weeks. It was preparing to launch in Waikato and the Bay of Plenty, and forecasting $22m revenue in the 2024 financial year.
Demand looked excitingly positive – but it was also burning $250,000 a month.
Icehouse Ventures had increased its holding in the company to 26 percent, but – with the exception of the family investor – declined to participate in the final $3m capital raise.
One approach for investment was made to the KiwiSaver fund manager Simplicity.
"We were made aware of it at the 11th hour and 59th minute," Simplicity managing director Sam Stubbs tells me. "So we had a look at it and, quite frankly, on our initial analysis of the numbers we simply could not see it surviving.
"It's a cool idea, and I very much feel for the founder, who put her heart and soul into it. But we can't put our members' money into something that is on the brink of failure, which this turned out to be."
Fixing the groceries market
How insurmountable is the challenge of breaking into the groceries market?
Icehouse Ventures had steadily increased its shareholding in Supie since March 2022, and chief executive Robbie Paul doesn't think the competitive challenge in groceries is unique.
"An important point is that all of the companies that we back are facing extremely fierce competition in whatever arena that they're competing in. Right? So it's no different," he says. "The competitor here is more visible and more publicly recognisable, but it's no more formidable than what software companies face or deep tech companies face or Peter Beck faces."
But he does acknowledge Supie's challenge was right up there. It had a business model that really only operates at scale, and significant cash requirements to get to scale.
That's a question Newsroom raised with Balle a month ago. For instance, many in the sector believed the only way to make an online groceries business like hers financially sustainable was to have robots picking the product from shelves, rather than people. And that kind of investment requires real scale.
She was dismissive. "Automated picking is a business case we’re working on – but I’m 50/50 on what the business case would recommend in terms of investment, return, efficiencies and so on.
"Timing of this will be critical. Supie is financially viable and sustainable with our current infrastructure.
"I think the future labour market will determine whether automated picking will be necessary – with politicians supporting (and regulating) a high wage economy, labour for jobs such as picking and packing groceries becomes difficult to sustain financially and labour shortages for these roles may likely force businesses to automate."
Talking last month to Balle, and then this week to Robbie Paul and resigned Supie director Ben Kepes, none thinks the Labour Government's fixes to grocery competition go much beyond political hype.
Now, National Party finance spokesperson Nicola Willis says if she's made minister, she'll seek advice on how New Zealand can support a third entrant into the supermarket sector to "break up that duopoly", without that entrant too risking failure.
"Any entrepreneur needs to continue to assume that they can pull off the unimaginable, because if they assume the opposite, they might as well not be entrepreneurs." – Robbie Paul, Icehouse Ventures
What's the best way to do it? Rather than breaking the supermarkets, one approach is building up competitors through better balancing government procurement criteria. Before Balle called in the administrators this week, Newsroom understands she had been talking with officials about the $1b spent by MSD on food grants, or Te Whatu Ora's green prescriptions to encourage healthy eating.
It's true, the Commerce Commission discussed the possibility of forcing the supermarkets to divest some of their stores, or to break up their tightly controlled vertical supply chains that run from supplier, through logistics and wholesale, to retail. The last two Commerce Ministers have warned Foodstuffs and Woolworths that they will wield that big hammer if needed.
A provisional cost-benefit analysis by MBIE finds that forcing the two supermarket chains to sell some of their stores to make way for a third competitor had the potential to benefit consumers by $9.2b over 20 years, according to Cabinet papers.
But any significant step in that direction would be hard to justify on public interest grounds. Much-needed international investment in the New Zealand economy would flee overnight, alarmed at any government willing to force the sale of long-held assets.
Meanwhile, Supie follows Nosh, The Honest Grocer, This Local Piggy and other independent grocery start-ups into closure or liquidation.
Supie directors had placed all their hopes in the one family investor, who had committed to putting in the whole $3m if nobody else took part in the capital raise.
The investor got cold feet – it's understood they were concerned that growth had slowed over the past six weeks.
They had discussed the decision with Robbie Paul. "Every capital raise investment is usually made contingent on due diligence and on a fully subscribed capital race," Paul says. "The big challenge is herding cats to make sure you can achieve that fully subscribed raise. It usually works, but doesn't work every time."
After the Icehouse Ventures Showcase at the end of August, there had been about 100 potential investors who had expressed interest in Supie's capital raise. But those numbers had fallen away quickly.
It seems the family investor had signalled their interest in taking on the entire $3m in the hope that might give other investors confidence to also come onboard.
"The other part of fundraising is, if you can offer to a company the ability to create a bit of Fomo [fear of missing out] and a bit of momentum, that can work really well to compel others to make a decision," Paul explains. "Certainly the spirit in this case was, let's get this thing most of the way there and get the get the round done.
"And it didn't work."
Paul agrees that the two month capital raise was a very tight timeframe for the investor to assess the company's financials. "I would say a lot of circumstances have changed a lot more quickly than I've experienced or observed with other companies," he says. "That's both investor sentiment, executive perspective and cash requirements and cash runway."
But he says the lack of cashflow needn't spell the end of a company. "Even the most successful companies tend to dance with death and get to just a few days' cash runway, and then somehow come out the other side. Our largest ever cash return came from a company about 18 months after they were just 60 days cash runway away from laying off about 80 people. But they came through."
Not this time, though. As Friday's deadline arrived, the investor advised that the family wouldn't complete the buy-in. That was just two days after Balle had talked to Stuff about her plans to expand throughout the North Island.
By this time, the company's member was growing at more than 5000 members a month. It was consistently getting more than 2000 orders a week and aiming to double that again. Its annual revenue, though, was tracking towards a somewhat lower projection of $15.6m.
Christchurch-based Kepes and fellow director Hadleigh Ford, of Tauranga, resigned immediately to give Balle space to move quickly and decisively on the ground in Auckland, in appointing administrators and advising staff that they were out of a job.
"Sarah is exceptional," Kepes tells Newsroom. "Sarah got further in providing a viable competitor to the duopoly than anyone else has. She deserves huge, huge praise for what she did. She worked tirelessly to do that.
Balle had earlier provided Newsroom and the new Grocery Commissioner with a list of big suppliers who were refusing to take part in the government-mandated wholesale distribution, and instead charged a premium through their own distribution networks – Fonterra, Tatua, cleaning products manufacturer SC Johnson, and international food giant Mars which sells everything from confectionary and pet food to Ben's Rice and Dolmio sauces.
So are the suppliers guilty of shutting down competition, or are their hands tied by the need to keep the big supermarkets happy? Kepes says: "The supermarket sector is incredibly complex, with a distinct lack of competition at many levels. And that makes every player within it nervous and encourages behaviour that isn't good for competition."
He won't brook any excuses from the big suppliers, but he's more forgiving of the challenges facing smaller local producers. "It's not a level playing field. If you look at a multinational food producer, they're probably not being bullied by the duopoly in New Zealand, as opposed to a little artisanal craft producer. So different strokes for different folks. But the fundamentals are the same – our supermarket sector is broken.
"There are some absolute structural things that mean that getting to scale to compete with the duopoly is very, very hard or impossible. There were lots of things – changing buyer behaviour, supplier concerns, duopoly activity – all of those things mean that we were trying to solve a really, really hard problem."
The investor has since gone to ground; it's understood they're not even talking to Supie and the administrators. Supie officially went into voluntary administration on Monday, with PwC’s Richard Nacey and Stephen White appointed as administrators.
Should Balle have seen this coming, in order to limit the harm to low-paid staff, to suppliers, and to somewhat less vulnerable investors? Robbie Paul doesn't think so. "Any entrepreneur needs to continue to assume that they can pull off the unimaginable, because if they assume the opposite, they might as well not be entrepreneurs.
"Often it works. And sometimes it doesn't. And that is the messy nature of entrepreneurship."
Nacey tells the Herald that administrators are contacting about 400 suppliers who have outstanding payments and stock due, starting with suppliers of perishable products in the hope that stock can be returned. The cost price of stock on hand at Supie is between $800,000 and $900,000, he says.
Aside from five staff members assisting with the administration, all staff contracts were terminated on Monday morning. That's more than 110 people out of a job, without pay for the past two weeks, or annual leave or notice payouts. "We don’t have enough funds in the company to continue employing staff," Nacey says.
The Council of Trade Unions was calling for investors to pay workers what they are owed. "These are low-paid workers already dealing with a cost of living crisis who are now being robbed of their final pay and their annual leave," said union secretary Melissa Ansell-Bridges. "Many of them are now concerned they will not be able to pay their rent."
On Wednesday, a donor, whose identity has not been disclosed, deposited $150,000 in the bank account of Supie's sister company, to cover the past two weeks' wages.
Other companies will also be affected. Supie had been working increasingly closely with The Warehouse, selling groceries to provincial and South Island consumers through its online sales platforms, and stocking The Warehouse's Market Kitchen home brand.
The Warehouse has been seen as the other potential in-market challenger to the two supermarket chains' dominance. After Foodstuffs and Woolworths blocked a previous attempt by The Warehouse to expand into groceries, by buying up Warehouse shares, it's been re-entering the grocery market more incrementally over the past two years.
Warehouse Group chief executive Nick Grayston says the Supie news is another stark reminder of how challenging it is to offer affordable groceries and to change the market in New Zealand.
"We won’t be quiet about what we see is a lack of fairness," he adds. New Zealanders are struggling with high grocery prices, they need more than a list of priorities – they need more competition and to bring grocery prices down."
'No one's coming to help'
Sarah Balle had always argued that the Government should regulate to support local grocery retailers, rather than sponsoring the entrance of big overseas players like Aldi and Lidl and Iceland, which would inevitably sell cheap overseas supplies rather than support local producers.
But if that had previously been the argument, Supie's collapse brings it into doubt. If The Warehouse and Supie can't break into the groceries market, then what New Zealand company can?
Kepes admits as much. "It's going to take a deep-pocketed external or international party coming in, to really force competition. Our experience to date would back that thesis up."
US-based Costco has opened a big warehouse in west Auckland, and depending on how that trades, may consider opening one on the outskirts of Christchurch. But that doesn't help most New Zealanders access cheaper food.
German-founded Aldi has made an impact since opening in Australia but, despite the entreaties of the Labour Government, has shown no interest in crossing the Tasman to the small New Zealand market.
And what seems certain is that any attempt to break up the two supermarket chains – one a publicly listed Australian company, the other a co-op of families who own their own New Worlds, Pak'nSaves and Four Squares – would be met angrily. The supermarkets would mount a legal fightback that would keep the country's commercial and competition lawyers in lucrative employment for years.
That was the view Balle took, in the recorded video-conference in which she put Supie's case to investors who were rightly worried about the company's cashflow.
She noted 10 years of court action taken by the two supermarket chains to stop district liquor licensing plans – and only two hours of beer and wine sales were at stake in those cases.
How much harder and longer would they fight any vertical separation or retail divestment? If New Zealanders want true competition in grocery prices, she said, don't look to The Warehouse, which sells only 1000 core products. Don't rely on on overseas chains like Aldi or Lidl opening up in NZ towns and cities.
"No one's coming anytime soon. The government's not going to do anything. Without a Supie, we'll still be stuck with a supermarket duopoly for the next decade. That's just a fact."
