When Innocent Smoothies sold a £30m stake to Coca-Cola in 2009, there were cries of sell-out and predictions of the ethical smoothie brand being swallowed up by a multinational culture. But co-founder Richard Reed explains how the company broke corporate tradition, kept control and has gone from strength to strength…
Richard Reed strolls into our studio smiling, on time, dressed in jeans, T-shirt and a tailored jacket. It’s the Innocent way: “I only do suits at weddings and funerals.” He lies on our here’s-one-we-prepared-earlier satsuma bed as if it was the most natural thing in the world, and starts chatting happily about music to photographer Ray, who is perched 10ft above him on a ladder. A stranger walking in might not have thought that this man, asking the photographer, ‘So who is the most beautiful person you’ve ever shot?’ is one of the trio that founded arguably the most successful UK brand of the new millennium. Our stranger might not also have believed that only three years ago, this man faced a crisis that threatened to unravel the company.
“Our biggest year ever was 2007,” Reed recalls. “In revenue growth we’d gone from 16 million [pounds] to 36 to 76 to 100 million. It felt incredible – we had targets and kept smashing them.”
But the following year, Innocent’s luck turned, in spectacular fashion: “Everything did a 180 degrees: a competitor, Tropicana, launched against us. They did a proper FMCG launch at scale and overnight got the same distribution that it had taken us seven years to build
– we lost a lot of market share. At the same time the market itself retracted with the credit crunch. Smoothie sales were like the canary in the mine for the state of the economy – they were one of the first things that people cut back on, so there was a big contraction in revenue.
“Added to that the price of fruit reached a long-term global high and then with the economic crisis the exchange rate collapsed – we buy all our fruit in dollars. It was just this perfect storm of less revenue, higher costs and the market contracting. We lost a lot of money and had to make people redundant. We also started getting negative press, which had never happened before – we were so pleased we got smoothies into McDonald’s and one article said it was like ‘finding out your uncle is a paedophile’. It truly was our annus horribilis.”
Finding investment for Innocent Smoothies
Reed and his partners realised they had two routes: “We could retract the business, which would mean making half the UK team redundant and cancelling international [operations], and we probably would have limped our way through. Or we could go for investment and put it into growth. That’s what we did.
“We fundamentally always believed this was a short-term crisis. We’re in the business of making tasty, natural, healthy, ethical food and drink – and people weren’t suddenly going to not want that but there was an economic reality we had to confront.”
Innocent put its business plan together in summer 2008 and the pitches were sent out on 14 September – the day Lehman Brothers collapsed. Reed laughs: “Our funding manager rang and said, ‘Congratulations, you’ve started fundraising on the worst ever day in finance’. And we were going out with a business that was losing money and the revenue was going down.”
Innocent went out with 18 pitches, received eight offers and three that “were good”. But the company chose the biggest drinks manufacturer in the world. Was this not at odds with its original vision? “We did the deal with Coke for a variety of reasons. One was that we really liked them. They were decent, honest, straight-talking guys. They said, ‘we love the brand, we love the philosophy, we would like to invest, let’s talk about how we can make that the best possible relationship’.
“We’d had VCs smelling blood and putting in incredibly punitive terms; some companies wanted to stop us giving 10 per cent of profits to charity and others were looking for majority control of the board. Coke’s view was that they valued the business based on what we had done and the potential. And they were the only company completely supportive of 10 per cent going to charity.”
But what about keeping operational control? That must have been a difficult one to negotiate? “Coke said, ‘Look, you do things in a different way, you should be able to continue being that business and doing business as you see fit’.”
The deal was signed in April 2009 and structured around share ownership with voting rights kept separate. Richard and co-founders Adam Balon and Jon Wright kept operational control and, in 2010, Coke became the main shareholder. “Coke have one seat on what’s called the investor board and the other three seats belong to Adam, Jon and I. If there’s a decision that has to go to the investor board, we have majority control.”
This all sounds well and good, but the basic facts are that Innocent is a pioneering company with a disruptive, entrepreneurial spirit and Coca-Cola is a huge corporate. There must have been some integration hiccups?
“They think we’re slightly strange, eccentric Brits and, yes, it does feel slightly different going round Fruit Towers than it does going round Coke HQ but we have little to do with them. We have board meetings for two hours four times a year and that is it. They have never once sought to exert influence over us but they fall over themselves to help us.”
It seems the most perfect partnership, but what has Innocent learnt from its new best friend? “The most nebulous but coolest thing about them is they walk into any commercial situation and, instead of thinking, ‘How can I get the biggest slice of the pie?’ they think ‘How can we make the pie bigger for everyone?’ They try to do that before worrying about their slice. Secondly they, like us, believe in the principle that trust is sufficient rather than legislate for everything and then try to catch everything in legal documents. They do business on a handshake.
“And I think they have learnt from us, too. Where we contribute the most is our thinking on sustainable agriculture. We have invested heavily in a team of agronomists and sustainability experts who have worked with our partners to find a better way for farmers to grow crops. It protects the local bio-diversity, protects workers’ rights and gives the country the ability to trade its way out of poverty. We’re pretty good at that and have done more, in proportion to our size, than any other company in the world. So it’s exciting when Coke come to us and say ‘we’d love to share your thinking’.”
After the investment
Initially, Coke bought 18 per cent of the shares for £30m [it now controls 58 per cent]. How has Innocent used that investment? “First, we’ve understood that our consumers are finding it difficult and so it’s funded keeping our prices low. Then, marketing support: one of our mistakes was that we got the brand well known but we needed to get smoothies established as the best value and easiest way to get two portions of your five a day. Thirdly: innovation – over that period we launched veg pots, which will turn over £17m this year from a cold start three years ago. And in March we launched orange juice, which has gone from zero to retail sales of over £30m this year. We’ve just launched apple juice, that is doing even better against target. Finally, we were able to continue to fund the losses in our international operation so that we got up to scale. It’s been a slow, hard grind but it’s come good. Over the last 18 months, we’ve gone from having 11 per cent market share on the continent and being a weak number three to now having over 35 per cent and being a strong number one.”
This year Innocent launched in Spain and Hungary – Reed found out about the latter when he was on holiday and saw the drinks at an airport. Innocent’s manager for Germany, Austria and Switzerland had found a distributor and started selling to him. Was he annoyed? “Not at all. It was a brilliant way of finding out. One of our core values is to be entrepreneurial and to trust our team to make smart decisions and he has done it right.”
Does Reed think Britain is still a good place to be an entrepreneur: “Absolutely. The UK is an amazing place to do business – you don’t need to ask anyone’s permission, you don’t have to get a licence, you can just get on with it. Entrepreneurialism transforms society and all you really need as an entrepreneur is a stable economic environment and to be left alone.
“The economy is in a dodgy place. We’re in this situation because the banking industry lobbied aggressively for derivative trading to be unregulated. It’s the insane industry of derivative trading and the credit fault swaps that caused the collapse. This tiny bit of the industry created a global recession and to not then fix it would be insanity. We could possibly do more to incentivise people to invest in start-up companies. EIS relief was transformational – without it we wouldn’t have got our funding and we wouldn’t have invested in other companies. An entrepreneur shouldn’t expect things to be easy – the whole point of being an entrepreneur is that you hear yes when everyone else hears no – but not getting access to funds is an annoying reason to not get going if you have a great idea.”
As Reed looks towards 2012, what are his thoughts? “2011 has been good with pockets of excellence and pockets of weakness. We’re facing the same challenges that everybody is facing, the headwinds are getting stronger. We have revised forecasts down – we’re going to grow by 25 per cent but we had forecast 35 per cent. And there are things specific to us – our marketing campaigns, although really well received, didn’t get the turnaround we hoped for.
“However, I’m optimistic about 2012 – we’ve got new products launching and also, because we’ll see some profit next year, 10 per cent can go into our foundation, which can then start upscaling what it does. Once you’re up and running as a charity, there are EU grants you can apply for but if you’re new they won’t put money in first. If we spot a new charity that we think will do the work, we’ll provide the money. It’s like seed capital and means that £1.4m [committed to Innocent’s foundation to date] has allowed another £5.6m to be raised. The foundation has helped over 500,000 people in the countries that the fruit comes from and we’re very proud of that.”