Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Galaxy Desserts – USA
Prepared by George Foster
Galaxy Desserts was created in 1998 when Jean-Yves Charon merged his small bakery, Paris Delights, with Paul Levitan’s The Cheesecake Lady, to focus on the emerging trend of high-quality, all natural single-serve desserts and pastries. Best sellers include Triple Mousse Cake, Chocolate Lava Cake, Crème Brulee, Lemon Tarts, and Butter Croissants. Starting out as a local bakery, the dessert duo steadily grew the company to the national level, exceeding the US$ 20 million revenue level by 2010. Galaxy’s desserts were repeatedly honoured with Outstanding Dessert and Outstanding Baked Goods awards by the National Association of Specialty Foods, appeared multiple times on the Food Network, and were included on Oprah Winfrey’s Favorite Things shows in 2002, 2003, 2005, 2006 and 2010.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
Charon: “My training was as a pastry chef in France, and as I started my first bakery, I noticed that no one in the US was focused on individual desserts and pastries. At the time, US bakeries were mostly producing large cakes, so there was an opportunity to be the leader. At the beginning, getting new customers and distributors was almost like shooting fish in a barrel. My training was also in producing croissants, and this represented a small part of the business. The biggest change in our business has been that we used to produce a lot of desserts with some croissants on the side, and now the croissants represent the majority of our business.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Levitan: “First, partnering with great companies was key for us, as was our decision to produce for private label customers. Our rationale was that by becoming a great private label partner for national customers, we could generate the volume and cash to continue to build our brand. That strategy worked.
“Second, we were able to differentiate ourselves from many of our competitors because of Jean-Yves’s talent. He is an amazing pastry chef with a great business mind, a rare combination. I love the title that Jean-Yves chose for himself when we started Galaxy: Founder and Pastry Chef.
“Third, our desserts and pastries were truly exceptional. We had that rare combination of desserts that not only looked stunning, but were absolutely delicious. Add the fact that they were all-natural and kosher-dairy certified, and we had a winning combination. After having been chosen five times as a finalist for an industry award recognizing the Outstanding Dessert in the US, we took home the gold in 2003 with our Chocolate Truffle Marquise Mousse Cake.
“Finally, having raised US$ 1 million in equity financing in our first year, we had some resources to enable us to differentiate ourselves from the “Moms and Pops” of the industry. We designed and built an innovative and memorable trade show booth (which we still use today), and we looked much bigger than we actually were in our early years when interacting with buyers at our trade shows, which included the Fancy Food Shows and International Deli Dairy and Bakery Show.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Levitan: “The key parts of the entrepreneurial ecosystem for us were markets, funding and workforce. With over 36,000 grocery stores in the US, we had a large market to attack, and that was just on the retail side. Funding was always a major issue for us as we grew, especially in years where we were not profitable. We were able to tell our story, find the right partners, and raise money several times without giving up control of the company. It was also important to have a great banking partner for debt financing, and, despite having to sign a myriad of personal guarantees over the years, we feel like we found that partner as well. We moved to Richmond, California, from San Rafael, California, in 2005 with about 90 employees, all of whom moved with us. Richmond’s central location, large labour force, and designation as an Enterprise Zone were key factors in choosing this location.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Levitan: “Capital was always a challenge. With a small, entrepreneurial company, there were always more opportunities to pursue – for business, for expansion, for equipment – than we could afford. We had to pick and choose carefully, and learned over the years that to say ‘no’ was often more important than saying ‘yes’ to a project or customer.
“Regulation has also been a challenge. The California Worker’s Compensation system, as one example, is an extraordinarily expensive, inefficient and misused system, which puts us at a cost disadvantage versus our out-of-state competitors.”
Q5: Large companies can play an important role in the scaling of early-stage companies with high growth aspirations. Describe the key areas where interaction with larger companies helped promote your company growth.
Charon: “Building our croissant business with Williams-Sonoma has been great for both sides. We certainly could not have done it without them. They found the best croissants in the US, and we gained access to their millions of loyal customers. In fact, Oprah discovered our croissants in the Williams-Sonoma catalogue, and we were fortunate that the orders resulting from our Oprah appearances all came through the Williams-Sonoma infrastructure (call centre, website, order processing system, etc.). We would have had an incredibly hard time trying to handle that type of volume ourselves.
“In 2006, we began working with two national retailers on private label programmes, each starting with our Butter Croissants. We executed so well, and both launches were so successful, that we expanded to multiple SKUs with both. Like we did with Williams-Sonoma, we were able to collaborate on ideas with these key strategic customers, each of whom genuinely enjoyed working on new ideas with us. The volume which resulted from our private label customers helped us to automate some of our processes, making us a better manufacturer.
“Also, in the early years, we negotiated favourable terms with some of our largest suppliers, which helped us manage our cash flow.
“We sell premium desserts and pastries, and we cannot compete with the large companies on price. We have tried to carve out a niche in the market where we can produce artisan-quality products in volumes that can supply national customers.”
Q6: Describe any challenges and potential problems that you have faced in interacting with larger companies. How did you address these challenges or potential problems?
Charon: “We were able to sell one of our most beautiful desserts, our Grand Sequoia Mousse Cake, to a national retailer in 2001 under our own brand, in packaging that we thought was fantastic, and at a price we thought was a ‘can’t miss price point’. As it launched, we had trouble finding it in the stores, and we sent our staff to some of the stores to try and find the desserts, and to encourage the stores to make sure to place them on the shelves.
“The buyer for this chain was, for lack of a better word, tempestuous, and his reaction to our efforts was quick and severe. He called me and said, ‘Get your people out of my stores’. He never ordered again, and we were unable to sell to this retailer again until 2006, when a new buyer took over our category.
“I guess you could say we handled this by being persistent, never giving up and waiting out the ‘bad guy’ until an opportunity arose again. With about 20% of our sales, this is now our biggest customer.”
Q7: Your revenue growth to date has been focused on domestic growth. What are the main reasons for this focus?
Levitan: “The US market is huge, and we still feel like we have only scraped the tip of the proverbial iceberg. Everything we produce needs to be shipped frozen, so our shipping costs are a barrier to supplying international customers.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Levitan: “A high moment was when Oprah Winfrey discovered us in 2002. She had ordered our croissants through the Williams-Sonoma catalogue, and subsequently selected them for her ‘Oprah’s Favorite Things’ show to air during Thanksgiving week. We had no idea what to expect, but made a few thousand extra boxes of croissants to prepare for the volume. The onslaught of orders that ensued was exponentially larger than what we had prepared, and we were off to the races. Over the next five years, many of our new customers (retailers and foodservice alike) came from our Williams-Sonoma and Oprah Winfrey connection.
“A low moment was in 2005, when Galaxy went through the acquisition process with a large US food manufacturer, and had an attractive valuation and a signed letter of intent. The due diligence process was very detailed and intense, and at the end of the process, the potential acquirer decided not to proceed with the deal. It was apparent to us that we needed to make significant changes in our management team, as the red flags we had been worried about were exactly what prevented this deal from taking place. It was a dark, stressful time for us, as we admitted that our team was not working. We made the personnel changes in early 2006, and immediately resumed our growth path. In retrospect, the low moment was exactly what we needed to position the company for its subsequent success.”