Investing in "The AirPods Effect"

YOU CONTROL MY FATE

I'm in a bind.

A real conundrum.

There's a startup that drew me in with "The AirPods Effect"

I'll break down what that means, and why this startup checks a lot of boxes.

But it doesn't check all the boxes, and I'm torn about investing.

I'm going to fully harness the power of the crowd - at the end of this article you'll get to vote on my investment decision. 

WHAT IS THE AIRPODS EFFECT?

In 2016 Apple released the first version of their AirPods.

I was hesitant about purchasing them - my wired earbuds worked perfectly fine and didn't require charging.

Ultimately, I gave in and got myself a pair. It was life-changing. 

While it didn't seem like there was much user-friction with wired earbuds, the second I tried AirPods I instantly recognized all the shortcomings of a wired connection.

From that point on, I could never go back. 

If I lost my AirPods 4 days in a row, I would purchase another pair on the 5th.

The ‘AirPods Effect’ relates to a product that is such an amazing user experience that the consumer can't go back to what previously existed. 

AirPods is one of the best modern examples of this, as that segment of the business brought in $14.5B in revenue for Apple in 2023 (more than the revenues of Spotify, Twitter, or Shopify).

AIRPODS → MAYONAISSE

Another example of the AirPods Effect comes from an unlikely place - mayonnaise. 

Up until 2014, mayo was sold in jars. 

You'd have to unscrew the lid, get a knife, scoop some mayo, and apply it to your food.

You then had to worry about getting food in the mayo jar, as well as dealing with your now dirty knife.

Hellmann's introduced a squeeze bottle that transformed the user experience.

Just pop the cap open and squeeze. No cleanup required.

Again, back when I was using jars I didn't even think that the user experience was that bad. I merely accepted that there was no alternative.

But once I tried the squeeze bottle, my life changed…okay that's too much, BUT I could never go back to jars.

A SQUEEZE BOTTLE IS BORN

Ashley Davies had the same experience as myself with the Hellmann's squeeze bottle, and wanted to take it a step further. 

What other products could be revolutionized by changing their container?

The AirPods Effect had to work on more than just mayonnaise.

As a mother of two kids, Ashley's mind drifted to the daily morning sprint of getting breakfast ready.

Making pancake batter and pouring onto the griddle doesn’t seem like that much of a hassle, but is that just because we don’t know that a better solution exists?

One day Ashley took pancake mix and put it in a cleaned out mayo squeeze bottle. It worked nearly perfectly.

For busy moms, this hack could be turned into a product. There’s value in an instant solution that doesn’t require cleanup afterwards.

Running with her new idea, Ashley launched Happy Grub - a kid-friendly pancake mix squeeze bottle.

The product took off, Ashley was featured on Good Morning America as well as Gordon Ramsey's Food Stars.

And there are a lot of good things going for Happy Grub:

For starters, sales.

Revenues nearly tripled in 2023 leaping from $261k to $757k.

Part of this is a result of their incredible distribution. I'm extremely impressed with how quickly they've managed to get into big-brand stores.

Costco, Stew Leonards, and Walmart have all opened their coveted shelves to Happy Grub, and from 2021 to 2023 the brand went from just 1 store to 2,000+. 

Typically, large retailers will test new products regionally before rolling them out nationwide. I called Ashley Davies to get an understanding of how they were able to fly through these tests so quickly and get nationwide distribution.

She boiled it down to two key things - first, Ashley mentioned that big-box retailers love that Happy Grub is made with real ingredients, which is a major push for large retailers.

Second, consumer-packaged goods (CPG) are commonly measured by how many units are sold within a week at a location. While it varies by product, selling 3 units per store, per week is what some advise as a positive indicator.

Happy Grub is selling 7-12 units a week, meaning that these squeeze bottles are flying off the shelf. It's easy for a retailer to justify a national rollout when the product sells so quickly.

So there are a lot of reasons to be excited about the growth prospects of this company, but let's take a look at what's holding me back.

MO MONEY, LESS PROFITS?

Chief among all, is how unprofitable Happy Grub is at its current stage.

Happy Grub recorded a widening $1.8M loss in 2023, larger than the $1.1M loss in 2022.

I'd expect a CPG brand at this stage to be unprofitable, but that amount seems to be higher than normal.

Digging into their financial statements, there's three reasons for this.

• Salaries - Happy Grub spent $704k on salaries in 2023, which is unsustainable for a company with $746k in revenue. Ashley clarified with me that there we once 28 full-time employees on the payroll to help demo the product in Costco during their rollout. They’ve since slimmed down to a team of 4-5, and are closer to the $200k range for payroll.

• Bad Margins - Happy Grub tripled sales but actually made less in gross profit ($54k vs $56k in 2022). Part of this was related to promotions & discounts to incentivize growth, but I would've liked to see improving margins to see the path towards profitability. An average gross profit margin in the CPG space is 20-35%, yet Happy Grub is far below that at 7%. Ashley did mention that a looming partnership with Sam's Club & Target could give them the scale to bring down average costs, but I want to caution that profit margin will essentially need to triple for the unit economics to work out. Not impossible, but a tall order.

• Marketing Costs - the company spent $635,000 on marketing in 2023 to drive their $757k in revenue. This doesn't sound efficient, but I actually think it's not bad at all since they need to establish their brand. If 3 years from now they're still spending $635k to get $757k in revenue I'll be concerned, but in my opinion this is just a short-term drag on profitability. Ashley mentioned during our call that they’ve essentially slashed their marketing & PR budget.

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Given a $1.8M loss on $757,000 in revenue, I'd expect it to take several years to reach profitability (if at all).

Ashley is of a different mindset, and is confident on hitting profitability this year. 

Somehow, Ashley believes that Happy Grub can go from $1.8M → $269k in operating costs this year. I was skeptical, as there’s only so much you can slash - things like warehousing costs and insurance can’t really be cut, and these two line items alone amounted to $80k in 2023 costs.

But as we are towards the end of 2024, ‘projections’ are more accurate since 8 months have already been accounted for.

I’m inclined to take Ashley at her word - and if she’s able to pull this off she may go down as one of the GOAT (greatest operators of all time).

It seems like the risks of profitability are priced into the valuation of Happy Grub, which sits at a reasonable $4.95M. 

The upside is just as present as the risks are. If Ashley’s projections hold true, you are sitting on a business that you paid 1x revenues for in 2025. 

YOUR VOTE DECIDES MY FATE

So to recap, the positives in Happy Grub are its unique product (AirPods Effect), tripling sales, and distribution mastery.

The negatives are mainly profitability risks and potentially lofty projections. 

I need your help on deciding what I do next. If you're reading this newsletter, that probably means you're a smart cookie.

And I need smart cookies to help me figure out what to do with this one.

Place your vote down below - if the majority supports Happy Grub, then I will invest in the company.

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