Vodafone xone Innovators Series: 1Above's Stephen Smith on finding a niche, growing pains and lessons from exploding phones

To mark the arrival of the Vodafone xone business acceleratorIdealog is interviewing heaps of established New Zealand innovators, as well as the founders of the 10 startups selected by Vodafone to receive mentorship, funding and the potential benefits of working with a global network. In this edition, publisher and editorial director Ben Fahy talks with Stephen Smith, the CEO of fast-growing travel recovery drink 1Above about the success so far and his bold plans for the business. 

Ben Fahy, Idealog’s publisher and editorial director: No doubt you’re probably in an airport somewhere. Part of the job I imagine when you're selling a flight drink. What's the elevator pitch for 1Above?

Stephen Smith, CEO of 1Above: We are rapidly growing and what we've been trying to do is really raise the awareness of how bad air travel can be for you, but obviously offer consumers a solution so our products help with, I guess with hydration, circulation, immunity and also helps to reduce the length of any jet lag.

So what makes it better than water? I call myself an optimistic cynic so I want to believe but like to have some proof. What is the science saying? What are the special ingredients here that we are talking about?

We sourced a natural bark extract called Pycnogenol. It doesn't sound very natural but it is and this company in Switzerland, a pharmaceutical company, have done over 100 studies over 40 years around our functional claims, so we have been clinically proven to help reduce the length and severity of jet lag, clinically proven to help increase the circulation and blood flow, clinically proven to help boost your immune system because you are five times more likely to catch a cold or flu when travelling by aircraft.

On top of that we have all the vitamins and electrolytes that you need to help with hydration.

You came in a couple of years ago as the CEO but before that I hear there was a bit of a dramatic mid-air epiphany that led to this business being created by Roger Boyd. That was a while ago now but how long did it take to start and what is that origin story?

So Roger was at Fonterra and he was in very senior roles, but he was in the developing markets for Fonterra doing a lot of travel. He spent a lot of time living in Asian countries and South American countries and he went on a flight where a gentleman passed away unfortunately. The doctor who tried to keep this gentleman alive sat next to Roger for the remainder of the flight and the doctor was just talking about how people underestimate the effects of flying and how there should be some more products available for people, so that is how it all started. Roger spent a couple of years researching it and found this Pycnogenol product and then left Fonterra and started the business back in 2010.

Was it an untapped market? Obviously there are huge numbers of people who are flying and that's increasing. Was there nothing there at the time and have you found a relatively free market to put this product into?

Yes. To one of your first points, the market is large. There were 3.6 billion air tickets sold last year, that will double to over seven billion over the next 10 to 20 years, so that's a really good place to be. 90 percent of people have some sort of effect from air travel whether it be circulation issues, or recovery from jet lag.

There are other products on the market for jet lag, there's a homeopathic tablet and it's been on the market for a very long time, but there's no product that offers the range of solutions that we do and there's no product in the world that is putting pycnogenol like we do.

New Zealand is often thought of as a good test bed for companies; an opportunity perhaps to roll out a product in a developed market and see how it performs. The Economist pointed out last year that it's common in digital businesses but it might be slightly overstated elsewhere. But did it happen this way? Did you test the concept here, find some demand locally and then take on the world or were there always global ambitions for this product?

I think when Roger started there was always a vision to take it across the globe. I think like it all startups, it had its challenges. The model that Roger really had at the start was to have our own kiosk at airports and we had one at Auckland Airport, which people may have come across. That was a very very good piece of business for us. We did open up kiosks at Sydney and Melbourne and soon found out that it was much more difficult for us to be running retail operations of our own, outside of our own country. At the same time I joined the company and started to have a look at the numbers that we were doing in retail convenience stores out of Auckland Airport, Sydney and Melbourne through a couple of our key partners. One of them is W.H. Smith in Australia and our partner in New Zealand was a French company called Lagardère Group. They had the Relay stores out of Auckland Airport but they also manage the duty free up there as well.

It was a big French company, they've got about 4500 locations around the world and the numbers that we do out of those airports, at any one point in time, between 10 and 15 percent market share of those coolers at the airport.

There’s the category of water and then there's 1Above basically. We are outselling local market-leading brands out of those airport locations so I started looking at the numbers and I thought, 'well at the same time we're having problems with running our kiosk operations in Australia, why don't we just sell through W.H. Smith and scale through Lagardère Group?'

I’m glad we did, because those two customers have given us access to about 90 percent of the world’s biggest airports. They're highly aligned customers to our products, highly aligned products are there for the people that are travelling through the airports.

Normal spending patterns seem to go out the window a little bit at airports. It's the only thing that can probably explain Toblerone purchases and I can't resist a cheeky McDonald’s breakfast when I'm there. But people are also spending a hell of a lot of money on their health, so it sounds like the perfect combo. I was listening to a Guardian podcast recently about the madness of the water industry and they called it a case of “capitalism at its most hyperactive and brazenly inventive”. There's hundreds of different coconut waters, smart waters, expensive water from icebergs, etc. You've said you're competing with that. Is that a sign that things have gone a little bit mad, or are you just catering to the demand that you are seeing?

I think everybody is scrambling on top of each other to find a point of difference. The biggest craze at the moment is the various alkaline levels within water and it is a race to the bottom in some respects. There are just so many premium water brands on the market. We're definitely competing with them but what makes us different is that we are truly different.

When we go into one of the retail partners they often take out a water brand for us, because they are probably already carrying three or four water brands. Not only that but the other things that some of these bigger brands face, is that they are available on what we call the higher street, as well as the airport. So what you find is that the high street pricing is so much more competitive and the airport retailers try to compete with that.

The fact that our own product is not available in the high street, there is no ability to compare any pricing, but also the fact that it’s truly different. There are great water brands around, don't get me wrong, but I think they are scrambling a bit for what makes them really different.

Stephen, the product already comes in various forms: tablets, concentrates, small bottles and big bottles, depending on how long you're travelling, so you could possibly call it the Powerade of the air. It also helps with hangovers so I guess that's doubly true. But is there scope to extend this beyond just air travellers? Could it compete with some of the sports drinks on land? Maybe 1Above could be the official sports drink of the All Blacks one day. 

We've got some pretty ambitious plans. As you mentioned, we get a huge following around hangovers because of the pycnogenol that we have in our products. We're looking at various options at the moment to not only produce more travel-related products but also potentially looking at a product that gives access to more people on an everyday basis.

I take it every day myself, so does my wife and so do a lot of my friends and family. I'm not doing as much drinking as I used to do, but certainly if I've had a couple of Lion Reds, I would make sure I had a couple of 1Above’s the next day.

There are definitely other plans. One of our strengths is that we are a very focused product and it's very easy for us to manage that but also once you build a bit of brand equity and you're building these relationships with customers, there is an expectation that you continue to innovate and so that's what we will be doing over the next 12 months. We do have some plans in place already.

Well, you mentioned Lion Red, and you spent a lot of time in the marketing department with Lion. What did you learn from working at a bigger marketing led company like that and how has that helped you and 1Above?

I spent five years as marketing director at the brewery side and then I went over to Australia and in both Australia and New Zealand I had senior sales and marketing roles. That’s what Lion always promoted. They wanted you to make sure you got some cross-functional experience. I’m a marketing person at heart, but I also had experience from the sales perspective. Lion has very good systems and processes around developing clear portfolios and brand strategies and really digging down deep to understand a brand’s positioning. The great thing about the work Roger did was that he came from a marketing background so a lot of the great brand work was already done. I’ve been trying to find ways to take it to the next step. And more recently we’ve been undertaking an evolutionary brand identity process, which we’ll be launching into the market soon.

1Above comes in a beautifully designed bottle. The branding has a premium feel to it. You’ve got Lydia Ko on board as an ambassador, you’re involved with Team New Zealand, and your Facebook page is filled with high-fliers, excuse the pun, endorsing the product. Time and again I’ve seen products where the emotional aspects of a brand are more important than the functional aspects of the product. Having spent a lot of time in the world of drinks and marketing, how important is that branding and marketing to the success of 1Above?

It’s very important. We’re a premium product and we’ve got a premium presentation and we’ve got a very strong functional benefit. If you take it back to my beer days, the demise of mainstream brands in New Zealand has come at the expense largely of craft brands. They have a much better emotional story, but also a better functional story around the craft, the hops and barley and the processes they use to position their craft brands. That’s largely what we do in the functional drink space. There’s a brand truth behind what we’re doing. Roger was on a flight. Someone died. We’ve found a product that can help differentiate and can help deliver on the claims we're making. Emotionally, what we’re trying to do as a business is help people arrive ready, to get more out of their holidays, more out of their business trips. If they use our products they’re going to get more out of their time when they travel. Travel can bring on wonderful experiences, particularly if you’re feeling healthy enough to .enjoy yourself. 

If you can’t afford business class, this is poor man’s business class. How about that for a slogan?

I’ll get back to you on that one Ben.

Stephen, you’re about to launch a new brand and new packaging. Can you explain the thinking behind that and why you needed to change things up a bit? 

Old packaging

New packaging

When Roger first started the company he was hoping to have kiosks around the world, as well as being in retail. So when you have your own kiosks and your own staff there, they can do a wonderful job explaining the product. When it’s in retail environments around the world and the packaging doesn’t tell them enough about what it’s doing, that’s a problem for our business. Because consumers try to understand what it is and the packaging doesn't tell them enough about it. So we all sat down, we did a bit of consumer work and we talked to a few of our customers and they agreed. In the US, particularly, they’re a little more straightforward and they want products to be really clear about what they’re doing and how they’re going to help.

We spoke to a branding agency called Jones Knowles Richie. I used to work for them in London. They’ve recently rebranded Budweiser. They do most of the work for Stella globally, and they also work on Guinness and United Biscuits. They’ve got a really strong pedigree in rebranding. So that brief went into them and one of the big changes we’re making is we’re changing from 'flight drink' to 'travel recovery drink'. A lot of people were a bit puzzled about what it is and what it does. So we're making it much more simple. And making it much clearer what the functional benefits are. So when you pick it up, turn it over and very clearly it’s spelled out what the product is and how it helps.

Do you feel like that’s an area of weakness among some New Zealand businesses hoping to sell their wares to the world, the idea of sales and marketing?

I’ve spent a long time in alcohol and I know we’ve got some of the best wine brands in the world. But in the US, I struggle to find a New Zealand wine brand on a restaurant menu. America has fantastic wine brands. It’s a really good example of sometimes in New Zealand we sit back and say ‘aren’t we clever. Don’t we have the purest, the greenest, etc.' Even in the milk side, I worked in the dairy side in Australia, there are many, many European countries that have unbelievable dairy products. So I think often people just need to get out and just understand that side of the world a bit more. Whenever you’re launching into some of these bigger markets, you need a point of difference and if you don’t you’re going to really struggle.

You’re at around $3 million in revenue annually. You’re in around 35 airports. You’re growing pretty rapidly, at around 125 percent. And planning on being a $12 million business in three years. As well as being increasingly popular with travellers, you’re also pretty popular as an investment. What attracted you to that form of capital raising? And what will you be using the money for?

We have just recently raised some money. We raised just over $2 million. The bulk of that was raised privately, and we raised it from our existing shareholders, in particular Movac, who have been a great supporter of ours, but also K1W1, who are the Tindall family, as well as our longstanding shareholders. That got us most of the way there. We needed to get to about $2 million to run the model properly, so we decided to go out to Equitise and give crowdfunding a chance. And everything the Equitise guys said would happen, happened. We raised about $300,000 in three weeks through that platform. It was a pretty interesting experience for us. You get a big push at the start, then it goes pretty quiet and then you get a big push at the end. In that quiet stage you’re wondering whether you’re going to get across the line or not and it can be quite unsettling, but the Equitise guys always kept us informed. One of the reasons we wanted to give that a go was we saw the Equitise programme as a way tor raise some capital, but it’s also a great marketing vehicle for us. I think we were the first consumer good to go on to Equitise and now we’ve got a couple of hundred new investors in the business, but from my point of view, a couple of hundred new 1Above fans who will hopefully use the product every time they fly.

Everyone loves a good stuff-up story. Those mistakes are sometimes quite defining moments for entrepreneurs or businesses. Do you have any favourite stuff-ups, or maybe from Roger? I know he’s said in previous interviews that he’s been guilty of taking on too much, or thought he could do it all. What kinds of things stand out for you that you’ve learned from? 

Probably over the years, it’s just about focus. There have been a number of mistakes over the years. They generally came from trying to do too many things at once, or rushing something to the market. If you were sitting in Samsung’s shoes right now, I bet they wished they took a few more months to get that new Samsung product out to market, but my understanding is that they rushed it, so that’s always been one of my challenges. As a human I’m always in a bit of a rush, but one of the big things that Lion really pushed was a behaviour called ‘disciplined thought, disciplined action’, so that’s what I’ve tried in to bring to this business. One of the challenges you have in a growth business is that you’re often chasing revenue pretty hard and sometimes you make the wrong decisions because you’re chasing, I wouldn’t say desperate for the revenue but something’s come at you and it’s shiny and attractive and you go after it and when you’re going to some of these bigger markets, any mistake you make in North America is a big mistake for a small New Zealand company. We’ve had a few stock challenges. Sometimes we’ve pushed too much stock or the wrong type of stock into a customer, so a month down the track there are conversations about 'hey, this particular SKU isn’t selling as well as we like, or we’re holding too much stock at our warehouse, so what are you going to do to help?' All those are painful experiences. But in the broader scheme of things, there’s a really good book about the Honest Tea journey. It was purchased by Coca-Cola but I read that book and pretty much everything that happened to the Honest tea guys is happening to us and the experience they had that we’ve either had or expect us to have at some point. And it’s the magnitude of those errors that you try to minimise and you make sure that you never make the same mistake twice. We had a session as a team the other day and said let’s get all the fuck-ups on the table right now from the last 18 months, let’s have an honesty session, we got them all written down onto a whiteboard, let’s put a line through them and never do them again. So we recognised not only the good things that are going on, but also some of the challenges.

At least you haven’t got exploding bottles of 1Above. That’s a positive I think. 

Exactly. We’re a product that has a shelf life. It gets shipped all over the world and quality is one of our biggest focuses. We can’t have any shopper or any consumer having a bad experience with one of our products because you know they won’t come back.

You've got a niche product there that obviously has a point of difference. You mentioned new products before. And sometimes you can see 'mission creep' or 'feature creep' and new things come on and take away from that core product. Is that a balance you’re walking constantly?

Yeah, we are. We realise we’re a niche product in a niche channel. One of our biggest challenges is just the speed at which customers come on. So by the time we have our first conversation with them to the time we’re actually shipping products can sometimes be up to 9 to 12 months and for a growth business managing cash flow and cash burn, all those sorts of things, that can be quite heartbreaking at times. But that’s because these customers sometimes move very slowly. So we have to find ways in our business to expand beyond airports. In the US or Canada, we think the drug channel, or pharmacy will be one of our bigger plays outside of airport retail, as well as online. So often you can balance through a channel choice as much as innovation or new products. So there are a number of channels we can go into that we don’t have any scale in today, which is really exciting for us.

So you’ll be out hunting in the jungle for the next big breakthrough substance, or do you have people on board to do that for you?

We’re pretty happy with pycnogenol. And, along with the combination of different ingredients, it can take us into many different spaces, so that’s what we’ll be focusing on for the time being. We don’t need any secret sauce, we just need to find the combination of ingredients with pycnogenol to give us the next big product.

There are often restrictions at airports, as I’m sure we’ve all experienced first hand. But sometimes restrictions can be good for businesses. The old phrase is creativity loves constraints. How have developing a product specifically for that market changed the way you’ve designed the product and incorporated different features?

For us, the constraints that airports have in some ways worked in our favour. The one thing you have to be conscious of operating in the airport space is liquids. Sometimes they can’t be varried onto planes. In places like Changi [in Singapore], you don’t get screened until you’re at the gate. So we have tablets. The other constraint within airports is the amount of storage that’s available for retailers. In my beer days a customer would have a warehouse and you’d ship pallets of beer to a customer and they’d draw that down as they needed it. For us, we’re often shipping lots of smaller orders into those stores and airports, coupled with the security it needs to go through there. We’ve learned all those sorts of things and you just have to roll with it. The good thing about being in that space, as you’ve mentioned before, is duty free is pretty highly discounted channel, particularly in liquor and tobacco, but in travel retailing or convenience retailing, there’s never any real discount going on, so you can get relatively good margins if you strike the right deals.   

One of my colleagues has got a phrase, you’re drinking what you’re thinking, which is the power of the mind to dictate what we think is happening, maybe in our mouths. You tell people wine is expensive, they’ll enjoy it more. Have you had to deal with any cynicism from the non-believers? Or is it a case of once you go 1Above, you’ll never go back?

There are always sceptics around for sure.  What I ususally do is I’ll buy you the first one, and if it works for you, you if it works carry on buying it. And I don’t get too many people coming back. The challenge for products like ours and sometimes with other products is that if you have a Red Bull you should get an automatic functional delivery so you’re going to feel pretty energised, or a V, or whatever it might be. If you have a glass of wine or a beer, you’re going to get a lot of different taste sensations, or the alcohol is going to kick in and you’re going to get a nice glow on. With our product it’s a little bit more challenging about when those effects are felt and most people tell us that, for instance, around circulation that their feet don’t swell anymore, so a real effect is that they can slip their shoes on at the end of a flight. Other people say they’ve lost the haze they normally get when they get off a flight. Other people say they feel incredibly hydrated. We get a range of feedback from our product and it hasn’t happened very often, but when someone’s come along and said this product’s rubbish, or whatever it might be, there is a temptation to go on and defend your brand, but what we do is let our consumers defend us and most of those people are pretty much get told from other people about their own experiences with our brand.

You can’t beat a good endorsement.

So we let our fans take care of that for us. We need to be very careful about the claims we make so we are very careful about that. We can’t be saying we’re a medical product, we can’t be saying we’re going to cure anyone. That’s not what we’re there to do. We’ve got a functional promise and an emotional promise about helping people arrive ready and feeling positive about their travel experiences. 

Stephen, thank you. Sounds like 1Above is on an upwards trajectory. Enjoy your flight.

Thanks so much.