老干妈 Lao Gan Ma — Chili Oil US Growth Strategy
老干妈 Lao Gan Ma (LGM, for short) is a popular Chinese chili oil brand and has recently started gaining popularity in the US as somewhat of a “cult favorite” in mainstream America as well as being a staple for Chinese diaspora households. The brand has even begun to make its way to the shelves of Walmart. Yearly global sales are estimated to be as of 2016 $655M.
The backstory for LGM is an entrepreneurship classic, LGM means “Old Godmother” in Chinese, and legend has it that LGM (real name, Tao Huabi) began her business as a noodle shop but realized that people sometimes came just to buy the chili oil, so she “pivoted” (to use Silicon Valley speak) her business to selling chili oil, and the rest is history. She’s supposedly worth a hot $1B US now O_o.
While Siracha, Tobasco, Tapatio, and Cholula all have their use cases, LGM and its signature use of real chili flakes add another dimension to food that the other sauces are simply not able to achieve. A friend recently raved about how good it was on baked salmon, YouTube videos demonstrate that slathering LGM straight onto white rice is a tasty food hack when your fridge doesn’t have much going for it.
I think that LGM has the chance to become the next Huy Fong (of Siracha fame) foods in the US. But what’s the roadmap to get there? Let’s take look at three of the four Ps of marketing (Product, Promotion, Place) to see what levers could potentially be used to spice up their growth.
LGM sells around 10 types of chili-based condiments in the US. LGM is produced in China and I acknowledge that any changes in the recipe to target the US market would have potential operational, cultural, taste, and financial challenges. Let’s set those aside for now and identify areas where LGMs products could be improved.
- Peanuts. LGM products all contain peanuts or are manufactured on equipment that may be contaminated by peanuts. Peanut allergies affect around 0.6% of the US population and the symptoms are often severe (including death). That sounds insignificant (after all, couldn’t you just not sell to people with peanut allergies?), but having peanuts as a stealth ingredient (in a condiment that doesn’t scream “peanuts” ala peanut butter), can hinder widespread distribution, especially in restaurants. More on this later.
- MSG. LGM products contain MSG, a controversial ingredient that is negatively associated with Chinese food. I think it’s a bit unfair for Chinese food to have this negative association, after all, two of my favorite American foods (Chik-fil-A chicken and Doritos) are MSG-laden as well and they hardly get any of the bad press for MSG as Chinese food does, but perception is the reality.
Removing peanuts and MSG from the ingredient list would significantly improve the marketability of LGM. But would it retain that magical taste?
- Hero product. I was at 99 Ranch Market yesterday grocery shopping and decided to pick up some LGM. There were so many types of LGM and I honestly couldn’t remember the difference between the Spicy Chili Crisp, Fried Chili in Oil, and Hot Chili Sauce — reading the ingredients list didn’t really help as they aren’t much different. They were all also occupying similar amounts of shelf space which didn’t make things any easier. Huy Fong produces other sauces outside of their signature Siracha sauce, but everyone knows that Siracha is their pride and joy. I’d recommend that LGM try a similar strategy, to highlight one of their sauces (perhaps the Spicy Chili Crisp), as a “hero product” and promote the heck out of it instead of equally investing in each of their products. This would have the dual benefit of making consumer decisions easier and making marketing stories easier to tell.
2. Online Presence. LGM USA’s Twitter and Facebook pages have <25 followers, there is a huge opportunity here to build more brand awareness with a small amount of ad spend. The goal of any digital campaigns would be to build brand awareness (no direct conversion funnel). There’s also a potential opportunity with food influencers on YouTube as well, a quick search yields a surprising # of semi-viral videos featuring the product.
PLACE (DETAILED ANALYSIS)
And finally, the last and most important piece of the puzzle, place, or distribution. To better frame this, I thought about the success and business model of Siracha. Every time I go to a Vietnamese restaurant (and often other Asian restaurants), there is typically the familiar red bottle and green cap with Rooster logo sitting on the table smiling at me.
Given the extent of Siracha bottles I see everywhere in restaurants, I would venture that a sizeable chunk of Siracha’s revenues (if not the majority) come not from B2C sales (selling in retail channels), but from B2B sales (selling to restaurants).
Siracha does very little in the way of advertising (they’re famous for that)— but if you think about it carefully and expand the definition of “advertising”, their B2B channel (restaurants) is in effect, a hyper-effective form of advertising for their B2C channel. You go to a restaurant, stare at that bottle of Siracha for an hour and maybe even put a smidge on your food, then the next morning you stop by Walmart, you buy a bottle so that you can put some on your morning eggs :) because you remember how good it was with the Pho you ate last night.
LGM would be wise to follow a similar strategy and invest heavily in selling-in to restaurants to build brand awareness that would fuel their consumer channel. Imagine how strong brand awareness for LGM would be if every Chinese restaurant in the US had a bottle of LGM at each table!
Chinese Restaurant Market
Let’s run some back of the envelope calculations on the costs and benefits of giving every Chinese restaurant in the US free LGM for one year to build brand awareness. Warning, there are quite a few assumptions baked into my models here of which small modifications could change the overall profitability of the initiative quite significantly, but my main point is to not
First, I’ll start with some baseline statistics on Chinese restaurants in the US as the potential total B2B market for LGM. According to this article, there are 41k Chinese restaurants in the US generating around $17B in revenue. That’s around $414k per restaurant, which seems reasonable.
I’ll also assume the average person spends around $12 each time they visit a Chinese restaurant (ballpark estimate for a dish+app+drink from a low/mid range place). Divide the 17B revenue by the $12 spend and you have around 1.4B Chinese meals served in the US. In addition, let’s “takeout” takeout orders from the equation (takeout orders don’t let you see the bottle on the table — only way to get around this is to have the small Heinz-ketchup like packets thrown in but I’ve rarely this for Siracha), I couldn’t find a great stat from a brief 30 minute foray into the internet, so I’ll assume that 50% of orders are eat-in (may be aggressive).
I’ll also assume that the average American eats Chinese once months and 12 times a year and they all eat at least once in the restaurant. This gets us to around 118M people who are reached by Chinese restaurants. This number actually seems fairly low, my hunch is that the 41k/17B number referenced above are likely understated. With that being said, I’ll use these numbers for now but keep in mind that they are likely conservative and represent the bottom end of what is possible.
If you run digital marketing campaigns, you get a metric called “impressions” which is literally when an ad is shown to a potential customer on their desktop or mobile device. It’s harder to measure in the physical world, but what I want to try to understand is if we can measure the effects of a bottle of sauce (LGM/Siracha/Tabasco) on a dining room in terms of impressions in the digital world.
If you got to any Chinese restaurant and eat-in, you spend about an hour or two at the table with the sauce containers staring you in the face at least part of the time. Those are “impressions”. What’s more is that there is the possibility that you actually try the sauce on your food which is essentially hypercharged impressions! I’ll ballpark around 20 “impressions” for every visit.
Now we need to some numbers on how the costs of giving free LGM for one year to every Chinese restaurant in the US. To do that, we need to understand the cost structure of one LGM bottle and how many servings are in one LGM bottle. Here are my estimates below (admittedly, I don’t know much about the margin structure of the packaged food business, so these numbers may need some tuning).
If there are around 9 servings a bottle and around 47 people per day eating-in at a restaurant, using 1 bottle per day per restaurant seems to be reasonable. After all, most people aren’t too keen on spicy food to begin with.
I’ll also assume that we can convert 5% of the people exposed to LGM through restaurants into actual purchasers. With these numbers in mind, we can evaluate the profitability of a campaign and also get a CPM number to compare to digital advertising.
Two takeaways from this data:
- CPM is around $0.53, which is very low. Typical Facebook rates for CPG companies are closer to $5.
- The profit is negative, but it doesn’t count future purchases of B2C and B2B sales that LGM could make, which we can factor into an LTV (lifetime value) calculation. If we add these in, the LTV looks something like the below. It’s positive!
The main story here is that B2B distribution can be a powerful marketing tool for condiment brands in terms of generating both B2C and B2B demand.
Here is a link to the Google Sheet that has all the assumptions and calculations that I used.
I acknowledge that I employ a boatload of assumptions in all the above calculations and any changes could significantly affect the overall profitability of initiative. However, the point of this exercise is more of a thought experiment to try and quantify how B2B distribution can create a flywheel effect that boosts further B2B and B2C sales.
Finally, I will note that there is a significant operational challenge in making LGM useful in restaurants. Siracha can be squeezed out, but because LGM has chili flakes in it, it can’t be easily put into a squeeze bottle. Here are three options I thought of to solve this problem.
- Create a squeeze bottle with a larger opening to allow chili flakes to flow through.
- Modify the current glass bottle so that a spoon can fit through there.
- Send restaurants a reusable LGM container that they can easily put fresh batches of sauce into.
Until next time :).