Zeffer’s founding CEO discusses growth challenges

Zeffer co-founding chief executive Josh Townsend is walking the tightrope, balancing his cider company’s Chinese expansion and family life.

The birth of his son six weeks ago “hit home” and made that balance a priority. But admittedly, an unavoidable reality of a fast-growing business is that it consumes a huge amount of time and attention, he says.

Although New Zealand has become a graveyard for struggling or failed craft beer and cider businesses, Zeffer has made considerable strides both domestically and internationally.

It was founded in 2009 and went from selling small batches at the Matakana farmers market to becoming the largest independent cider producer in New Zealand and China.

The business was co-founded by Mr Townsend, Sam Whitmore and Hannah Bower. Having discovered the craft beer and cider niche overseas, the entrepreneurs asked themselves why New Zealand didn’t have a similar market, given its abundance of top-quality apples.

Mr Whitmore, a winemaker, put down a few batches of cider at the winery in Matakana and the rest, as they say, is history (in the making).

Early stages
Mr Townsend went into the business with limited capital and focused hard on getting sales off the ground to drive cashflow for the business.

He says early entrepreneurs must put in the hard yards, believe in their business and have the passion to get a startup off the ground.

“There was three or four years of really hard work and minimal return. That’s just one part of starting a small business. It involved learning how to invest money and time, making sure there was always a return on investment and keeping capital waste to a minimum.”

He admits managing cashflow during rapid expansion can be dangerous. Forecasting is a priority as the company grows at 70% a year, he says.

“It’s important to have cash reserves, a good relationship with the bank, tight control of our inventory and the ability to rapidly scale up as required.”

Zeffer’s forecasted growth is one of the reasons Mr Townsend just opened a private raise with Snowball Effect that may widen to a public offering in June. Last year, it successfully raised $1.2 million in crowdfunding through the platform.

The largest investor in the company is the owner of Zeffer’s Chinese distributor, Sean Kelly. The second and second and third largest shareholders are Ms Bower and Mr Townsend. Zeffer’s senior management team also own shares.

Zeffer has a tight-knit working environment and the co-founders work closely together.

Mr Townsend says co-founding the business has its benefits and the trio have had a good partnership throughout the journey.

“We have always had a good awareness of where our skills lie and where out shortages are. Earlier on we made decisions as a collective and as the business has grown – we are now up to 12 employees – we have changed the structure.”

The company has introduced a board of directors that makes the big decisions but all three founders are still actively involved in the business.

“Sam is the cider maker, Hannah is like the Zeffer mum of culture and HR and I’m the CEO,” he says.

Mr Townsend says the main challenges of being a founding chief executive is ensuring he learns how to delegate and find the right people with the right skills to move the business forward.

“You can’t try to be an expert in every area of the business and you need to let go and understand that there are many good people out there who are experts. My role is to motivate and conduct, rather than micromanage.”

Mr Townsend was initially an executive director and only stepped into the role of chief executive in April this year. His appointment was decided by Zeffer’s board of directors and senior management.

He thinks it’s important there is an external process to make such appointments and says a founder should never be a CEO by default.

Mr Townsend says he gets “great value” out of having an established board of directors, whereby decisions are made in a structured and considered way by a range of people, not by a founder or group who are too close to the business.

The opportunity
MBIE's Investors’ Guide to the New Zealand Beverages Industry 2017 declared “cider appears to have stalled after solid growth” but cited “significant” export opportunities.

However, cider remains New Zealand’s fastest-growing alcohol category, and Zeffer is the fastest-growing cider brand in New Zealand grocery.

The company has about 1-2% of total cider market share in New Zealand and intends to build to this to between 6-10% in coming years.

Mr Townsend says while the craft beer market is heavily saturated and has had multiple acquisitions, the cider industry is half the size with fewer producers.

“The barriers to entry are much higher because starting a cidery is like setting up a winery, whereas craft beers require much lower capital input.”

Internationally too, the cider market is experiencing rapid growth at 25% a year over the past five years. The global market is forecast to grow by 730 million litres by 2021, with premium cider making up 34%.

In New Zealand, Zeffer is stocked in over 200 outlets, including most New Worlds, selected Countdowns, Glengarry and Farro, it is also sold in New Zealand’s leading craft bars.

Zeffer is stocked in more than 200 outlets in New Zealand. 

For the 2018 financial year, Zeffer achieved breakeven ebitda and its strategy for the next three years is to sustainably invest in growth that will result in breakeven or modest profits.

Initially, Mr Townsend was constrained by limited production and would sell what the company could make. Now it has scaled up to allow the business to grow, so the focus has switched to the sales side and driving the brand to achieve growth objectives.

He has therefore invested heavily in production, moving into a new cidery in Hawke's Bay, which allows the production of over two million litres of cider every year with minimal additional capex. Last year Zeffer made about 300,000 litres of cider– or about 1000 bottles a day.

For its financial year ended March 31, the company sold 80% domestically and 20% export. It expects that to shift to 30% export in the next few years but still sees huge growth in the New Zealand which will account for the majority of its sales.

The challenge
One thing keeping Mr Townsend up at night is the challenge of competition with big-name beer companies, which have the capital to push new cider ranges.

He wants mainstream consumers to up their game to premium ciders and further develop the premium/craft end of the category, which is where the growth is coming from.

“Consumers are increasingly aware of the story behind what they are buying, and they know the difference between craft and mainstream, so it’s just about aligning our story with cider fans and getting them to try Zeffer.”

Zeffer operates in a competitive retail environment and its intention has been to work closely with retailers in New Zealand and to provide a product which is different from the multinationals' offering.

“It has taken a lot of hard work to build our distribution in New Zealand and it’s probably been the biggest challenge to date but we are finally at a tipping point.”

The entrepreneur says he is battling a “perception problem” with cider that dates back a generation. Cider was once known as a “sweet cheap drink” but is evolving into a sophisticated alternative to beer and wine.

In the wider alcohol industry, the biggest problem is the limited number of consumers in New Zealand. That’s a reason Mr Townsend has focused on export.

“We have some great brands fighting it out for a very small consumer base and you only have to visit the US or China to see the opportunities a large population presents good producers.”

He says producers will need to build their export arms to stay in business as there are too many brands fighting it out for too few consumers. That results in price cutting and reduced margins making the business models for smaller producers unsustainable, he says.

He says New Zealand is a great base to test brands and products and get “battle-hardened” for the challenges of exporting.

Expansion
Zeffer has worked closely with NZ Trade & Enterprise to adopt a focused export model for its growth into China.

It has grown into the leading craft cider brand in China and is on tap in more than 100 bars.

The Chinese market comprises about 13% of total sales and Mr Townsend is aiming for it to be about 20% of total sales by 2021. He says 4000 kegs were shipped to more than 200 retailers in China last year.

Mr Townsend says exporting is “bloody hard work.”

“There are a whole lot of horror stories of what to do and what not to do so we are learning from that along the way.

“We learned early on from trial and error it was no good just sending stock and hoping it was going to sell and relying on a distributor to do the work. That doesn’t work in New Zealand so why would it work overseas?”

Mr Townsend says he has built a concise three-year strategic plan, which involves growing Zeffer into a $10m revenue company by 2021.

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