From Forbes Trep Talks
By Susan Adams
Read full transcript below, or see the article on Forbes.com
Rhys Powell runs Red Rabbit, which produces nutritious kids’ food made from scratch. Based in Harlem, it serves 100,000 meals a week in 165 pre-schools, Head Start programs, private schools and charter schools in New York City and Westchester County. Now 37, Powell founded the company in 2005 after a stint on Wall Street trading equities. His first idea, selling nutritious kids’ meals to private school parents, hemorrhaged cash. A business-to-business model, selling to private schools, worked better. Then in 2011, an investor offered to put $500,000 into the company and Powell decided to change tacks. Instead of serving privileged private school students, he started selling low-cost, nutritious meals to public programs where he must keep his food costs under $3 per meal. The company employs 100 people and expects 2016 revenue of $10 million. In this interview, which has been edited and condensed, he talks about his early mistakes and the rewards of a career post-Wall Street.
Susan Adams: Tell me about your background.
Rhys Powell: I grew up in the Bahamas and came to the U.S. when I was 17 to study computer engineering and computer science at MIT. I left there to work on Wall Street as an equity trader.
Adams: How did you go from trading equities to starting a company that makes lunches for kids?
Powell: I was disenchanted with the financial industry and wanted to do something more tangible that was helping my community. The idea came from a friend of mine who was struggling to provide healthy food for his four-year-old daughter. Being the most food-conscious person in my social group, he asked me for help. When we did a little research, we realized no one was addressing the problem.
Adams: What’s so difficult about making an organic peanut butter and jelly sandwich on whole grain bread?
Powell: He could do that on Monday but by Friday he wanted to make something different. Parents want to give their kids variety.
Powell: Every parent I spoke to said this was a struggle.
Adams: Was your idea to deliver meals to parents at home?
Powell: No, our idea was to deliver them to private schools. A lot of them don’t provide school lunches.
Adams: What was your business plan?
Powell: We had an online portal where parents could order meals and pay for them with their credit cards and have them delivered to their kids’ schools. In that plan parents were our customers and schools were our passive partners.
Adams: How did you put together the menus and produce the food?
Powell: We used a nutritionist and a chef. We had a small office in my apartment and we rented kitchen space out of a food incubator.
Adams: What were your startup costs and where did you get funding?
Powell: The first year we spent about a quarter million dollars. Most of it was self-funded.
Adams: How did you do financially in the first year?
Powell: Terribly. We lost all our capital. We couldn’t get our economics to work.
Adams: What were you doing wrong?
Powell: Sales were sluggish and costs were high. We invested in the wrong things. We gave parents the ability to choose their menus. That required a substantial investment in technology. We had a custom website at a time when custom websites were expensive. That was a huge waste of capital. Six months in we learned that none of the parents used the menu selection process. They would much rather we chose the menus for them.
Adams: How did you adapt once you realized the business wasn’t working?
Powell: The biggest change was understanding that schools were a better customer than parents.
Adams: How did you persuade schools to serve your meals?
Powell: Through relationship-building and trust. We shifted toward schools that had meal programs already. Our sales pitch was that we could provide them with healthier, tastier meals than they were currently providing.
Adams: What was your first big break?
Powell: A Manhattan school called City and Country. I was the lunch lady there for two years, from 2006 to 2008. Every day I set up a lunch table and served meals to 80 kids. I got to work with kids and teachers and school administrators every day and it shaped our new business plan.
Adams: You were running a company. Why didn’t you hire someone to serve the lunches?
Powell: It was the most fun part of my day and the most fun part of starting my business. If I hadn’t spent those two years in the school, I wouldn’t have loved it enough to face the challenges and stick with the business.
Adams: What did you love about it?
Powell: Coming from a computer science background, I didn’t understand what it meant to feed someone. Food is how we build bonds with people.
Adams: How did the business do?
Powell: Not well at all. We were no longer losing money hand over fist but we hadn’t come up with a viable business model.
Adams: How did you turn things around?
Powell: By 2010 we were able to streamline operations, we found a product that pleased people and we started to pick up customers one by one.
Adams: What’s the toughest thing about the business?
Powell: The perishable nature of the product. Inventory management and sourcing are critical. Your margins fluctuate based on how well you stock your inventory. A few cents here or there or a few extra pounds of food can determine your success or failure. You have to control inventory.
Adams: How did you get a handle on that?
Powell: At the food incubator where we started, they stressed the importance of it to me, but I didn’t grasp it at the time. My computer science background finally started to kick in and I was able to build tools that tracked food costs.
Adams: How well was the business doing once you got control over inventory and sourcing?
Powell: Our revenue was $1 million and we were profitable. But it was a lifestyle business for me. I paid myself $80,000 a year but we weren’t set up to scale. In 2011 we got approached by an angel investor who wanted to pay a half million dollars for a minority stake.
Adams: What did you do with the investment?
Powell: We decided to become a social business and try to change the model for how food is served in schools across the country. We expanded our model to move away from private schools and work with charter schools, Head Start programs and pre-k programs, to serve kids not just for convenience but where we would be providing them with the best meal of the day and maybe their only meal of the day.
Adams: How did you change the way you ran the company?
Powell: The biggest challenge was taking a meal we priced at $5.50, and bringing it to under $3, while not compromising on our nutrition philosophy.
Adams: How did you bring your food costs down?
Powell: That’s our secret sauce. One example is, we make our own muffins from scratch, baked fresh daily. The muffins have five or six ingredients, like flour, butter, milk and fruit. Because we make it ourselves, we’re able to bring down the costs dramatically, relative to selling a pre-packaged muffin, and it’s better for the kids.
Adams: That’s a lot of additional labor. Isn’t that expensive?
Powell: Yes, but it doesn’t compare to what you pay for processed muffins.
Adams: What’s your margin on a lunch that costs less than $3?
Powell: It’s thin but it makes for a healthy company.
Adams: How will New York City’s minimum wage hike affect your business? It’s going from $9 to $15 by the end of 2018.
Powell: We pay above the food industry now but it’s going to affect our wage base. We’re going to have to find other ways to create efficiencies. I’m less concerned with that than I am excited about what a $15 minimum wage means for the people in my community. It will be a good thing for a lot of people.
Adams: What’s the toughest challenge you face with hiring?
Powell: To make sure folks are aligned with our mission. I hired a kitchen manager for his experience, thinking our culture was strong enough to get him to buy into it once he got here. Instead this person had what I’d call a negative multiplier effect. Every decision he made led to inefficiency and friction.
Adams: Have you tried to get into regular public schools, beyond charters?
Powell: I would love to. We approached them in 2011 and the response we got was no.
Adams: How much can you grow if you can’t get into the New York City public schools?
Powell: Our competitor Revolution Foods serves mainstream schools outside of New York City, where the systems are very different. We would be able to serve those public systems.
Adams: Revolution Foods is a big national company now, and there are other businesses doing what you do. Can you compete?
Powell: We can compete in a few places. Our meals are cooked from scratch and we haven’t compromised in any way. In New York City we’re very connected to the communities we serve. We develop our menus based on feedback from parents, kids and teachers.
Adams: What do you miss most about Wall Street?
Powell: There’s a certain self-fulfilling aggrandizement that comes from working on Wall Street. You think very highly of yourself and society tends to support that view. It’s not so much that I miss it. It’s exactly I why left. I don’t even think it’s a good thing. But it is comforting.