Fresh Finance – An Update on Freshii Inc., a Canadian 2017 IPO Story

About two weeks ago, one of us had the opportunity to see a talk by the CEO of Freshii Inc., Matthew Corrin. Viewed as one of the few exciting Canadian IPOs this year, it IPO’d at $11.50 a share on January 31st and quickly ran up to about $15. Unfortunately, it has had quite a painful ride since then. The latest was a press release on September 25th where they lowered guidance for next year and beyond (including reducing expected 2017 openings by 60!). While we understand these things happen, particularly with a fast growing company (and find some action to be prudent, like ending a partnership with Target that wasn’t working very well), the challenge is when Mr. Market is banking on them growing like a weed. Following the September update the stock is now down to $5.70.

We like looking for bargains here and find IPOs are usually not the place to find them, since Company’s understandably try to IPO when things are going very well and investment bankers are eager to flog the shares to excited buyers. But we think its worthwhile sharing some of Matthew Corrin’s thoughts, and maybe at 50% off of the retail price in January, there might indeed be a bargain here for someone brave enough (let us know what you think)! Regardless, Freshii has been quite the growth story and we feel it is always worthwhile to listen to and learn lessons from people who are executing.

Freshii Chart.png

Source: Google Finance

Freshii CEO Talk at Small Business Conference Day Calgary - Matthew Corrin – Key Highlights

  • Freshii Founder. Started at 23.
  • Influenced by: Summer internship @ David Letterman, and worked for New York fashion designer Oscar de la Renta
  • Goal: Wanted to take a food category and scale

Key principles

  • #1 Talk Is Cheap. Execution Sets You Apart
  • #2 Launch Fast, Fail Fast, Iterate Faster
  • #3 Numbers Rule. If You Can't Measure It, You Can't Manage It
  • #4 Build A Company With A Killer Culture, Not A Culture That Kills A Company
  • #5 Pick Your Battles
  • Started with family money (dentists), no previous restaurant experience
  • Pitch: We want to energize breakfast/lunch/dinner
  • Differentiated by healthy --> challenge is definition of healthy changes continually. “Originally sandwiches, then salads, now “avocado on quinoa” --> Solution: Wants to be the Zara of fast food. Zara goes to the top fashion shows to see the trends, then comes out with their own line 45 days later. Freshii goes to small trendy places with huge lines in California/Europe/etc, then brings the product to market and uses their scale.

Freshii’s innovation = copy fast + use scale. They focus on scalable trendy food ideas. Their goal is to run their stores efficiently and benefit from scale (bulk food, advertising benefits, etc) and build/maintain a brand known for healthy fast food. They try to launch fast/fail fast. OK with failure so long as it’s fast

Growth - First 100/200 stores faster than McDonalds/Starbucks, explained as due to:

  • Global health/wellness trend
  • Millennial push to adopt new brands
  • Entrepreneurship push

Building a global brand – Freshii founded in 2005. By 2008 it was already in 4 countries and now 20. Wanted to build a global brand, not a Canadian brand. “The longer we waited to go to the U.S., the longer we would build bad habits”  --> E.g. Quickly expanded to Chicago to test concept.

How do you build an international food brand? Strategies:

  • Subway = same everywhere
  • McDonalds = 80/20 rule. Big Mac is #1 everywhere but they have local influences on shop design and food.
  • Similar same but different --> Chinese often think KFC founded in China.
  • Freshii’s approach – Benefit from chain via scale but focus on hyper-localization through local marketing and feedback and development with local franchise partners.


Q: Lowest point in Feshii’s history? - Went from Day 0 --> IPO by raising less than $4M through the process and are proud of the limited capital used. However, this was very challenging and were often short on capital (implies risk of failure). Richard Branson “I think that there's a very thin dividing line between success and failure. And I think if you start a business without financial backing, you're likely to go the wrong side of that dividing line.” And they were conscious of this.

Q: Comments on stock down since IPO – IPO @ $11.50 Jan 31 2017. Up to ~$15. Down to $5.41 Oct 22 2017 - Announced revision of outlook on Sept 29. Annual net new openings of 90 - 95 stores (including stores opened on an enhanced basis, or “e-stores”, as described in the Company’s Q2 MD&A), down from 150 - 160 stores. From a front-door openings perspective, the Company opened 21 new locations and closed 21 locations in Q3 2017, resulting in net new front door openings of 0 in the quarter. 18 closings related to ending Target partnership. Stock explained as down due to:

  • Closing certain stores in some markets that just weren’t working while having opening and development delays (partly appears to be scaling issues, with store openings occurring in many markets, Canada, UK, U.S. east and west coast).
  • To paraphrase - Nothing has changed in the business but our bumps in the road are now seen publicly. Stock not reflecting value and I have to divorce myself from share price including deleting my daily alerts.

Q: Pivotal point? – Going from linear to exponential growth - First store opened, customers said “I had this idea”. Problem is there are many talkers in innovation, we execute. Executive team is millennial with background at brands that I view as exceptional. Hire good people then empower them. To do this we foster a culture that is direct/accountable, not for everyone. Franchise partners = we are in business for them.

Q: Do franchisees market? – Two advertising buckets – local 1.5% of sales, global 1.5% of store sales.

Q: How do you expand internationally? – We assume every market is different and empower our franchise owners. Ties in with Numbers Rule – each team has analysts. Can’t blow a year if you catch it in a week. Tough lesson from previously – at 7-8 locations in 2007 we were looking at numbers monthly and was surprised by results one month.

Q: Keeping culture? – Check in with franchise owners, are they happy? Do they want to open more stores? 30% of new locations are existing franchise owners. What we do well is listen and ask questions. E.g. we survey franchise owners on changes.

Performance notes:

  • Paid off debt at IPO ($15M demand loan).
  • Cash burn - Had $29.5M of cash at March 26, 2017. $25.2M as of June 25, 2017. However, actually had positive OCF before W/C changes.
  • Dual share structure - CEO still controls the company while only owning 5M of the ~30M outstanding (his class B’s count as 10 votes, i.e. 50M shares). Immediately prior to the closing of the initial public offering, the company (i) filed articles of amendment to, among other things, (a) amend the authorized share capital to provide for Class A subordinate voting shares and Class B multiple voting shares, (As at March 26, 2017, there were 5,248,017 class B multiple voting shares and 25,233,152 subordinate class A voting shares issued and outstanding. Class B shares have 10 votes, whereas class A shares have 1 vote per share.