KEL509

JAMES B. SHEIN

Dry Goods
Brandon Cornuke and Tim Joyce had come a long way by May 2009. The two first-year
Kellogg School of Management students had a business concept they loved and the promise of
$100,000 from friends and family if they decided to try it. The idea was to revolutionize the
American body-powder market with an aerosol spray for men called Dry Goods. In the months
the two had been working on their plan, Joyce had spoken to dozens of contract manufacturers
who could try developing a formula for Dry Goods and, if that worked, produce thousands of
units at a time for his new company. Four offers to manufacture Dry Goods were on the table
when reality set in for Joyce and Cornuke: they were about to commit tens—perhaps hundreds—
of thousands of dollars to the Dry Goods project before knowing for sure if their powder spray
concept was even possible.

Body Powder
“Body powder” is the generic term for a class of talc- or cornstarch-based powder products
used to reduce chafing and itching. Powders work by curbing moisture and creating a smooth,
protective layer on the surface of skin. Some powders also use menthol or calamine to further
soothe irritation. Traditionally, consumers apply body powder by depositing it directly onto their
feet, groin, underarms, or torso and often use it after showering, before or after exercising, or
when heat and friction cause the greatest discomfort.

Approximately 11 million body-powder users spent nearly $150 million on the product
annually in the United States in 2009.1 Gold Bond Medicated Body Powder, which retailed for
around $8, was the category leader and had a one-third market share by dollar sales. Johnson’s
Baby Powder, by Johnson & Johnson (J&J), maintained slightly more than 25 percent of market
share by revenue, with 8.7 million units sold annually. Remaining sales were generated by
smaller competitors such as Anti-Monkey Butt Powder (AMB) and Clubman Pinaud Talc.
Clubman had been in existence for nearly two hundred years, but AMB was only five years old.
Targeting bikers, truckers, and construction workers, AMB sold more than one million units in
2009.2 Despite the success of newcomers like AMB, growth trends in this category remained flat
and tended to follow inflation. Unlike other skin care products such as deodorants and lotions,
body powders had not experienced a major innovation in decades. They were marginally effective
and created a mess when applied.

1
According to financial reports filled by Chattem, Inc.
2
Interview with Andy Thompson, CEO and founder of Anti-Monkey Butt Powder, February 22, 2010.

©2010 by the Kellogg School of Management at Northwestern University. This case was prepared by Tim Joyce ’10 and Brandon
Cornuke ’10 under the supervision of Professor James B. Shein. Cases are developed solely as the basis for class discussion. Cases are
not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. To order copies
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transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of
the Kellogg School of Management.
DRY GOODS KEL509

Body powders were sold in large retail outlets such as Walmart and Target and through
specialty, drug, and grocery stores across the United States. Retailers were inconsistent in the way
they classified body powder, however; depending on the store location, consumers might find a
container of Gold Bond with the anti-itch lotions, deodorants, or foot care products. Almost
universally, however, body powders were placed on a store’s bottom shelf.

Background
Tim Joyce began his two-year MBA program with one clear goal: to start his own business.
In his application essay, Joyce had written, “I want to spend the next two years learning how to
build a great business plan, and the rest of my life building great businesses.” Unlike Joyce,
Brandon Cornuke entered business school hoping to graduate as a management consultant, but he
soon found a passion for entrepreneurship and product development. During the fall quarter of
their first year, Cornuke and Joyce met and began discussing potential business ventures. “We
believed we had the guts and the hustle to succeed,” Joyce later recalled. “All we thought we
needed was that killer idea.”

Joyce and Cornuke dreamed up dozens of products they felt addressed gaps in the market or
improved existing designs. One such idea was a body powder that solved what the two hopeful
entrepreneurs believed were the biggest problems with the category: messy application and
suboptimal performance. From there, the concept behind Dry Goods—an aerosol that would
allow clean application and superior adherence—took shape.

Market research confirmed that consumers wanted a longer-lasting body powder that would
not make a mess. Surveys and consumer interviews also demonstrated that a majority of body-
powder users liked the Dry Goods concept and would try it if given the opportunity. In fact, some
segments were willing to pay up to 30 percent more for the benefits associated with an aerosol
powder.

With a promising idea in hand, the two entrepreneurs now needed a way to prove their
product concept was viable. Cornuke admitted that taking the product from idea to prototype
seemed almost impossible in the beginning. “Neither of us had experience developing a new
product,” he recalled. “Who’s going to help a couple of business school students prototype, test,
and refine an aerosol that has no proven market viability and that, in the end, might not work at
all?” Even if Cornuke and Joyce could get someone to make Dry Goods, they had no guarantee it
could be manufactured and sold en masse.

Joyce knew from prior experience working with Procter & Gamble (P&G) that to find out
whether Dry Goods could be developed and produced, he needed a contract manufacturer. Using
contacts he had gained at school, he spoke to several companies that potentially could prototype
and manufacture Dry Goods.

Contract Manufacturing
Hiring a contract manufacturer allows a firm to acquire products or components without
making specific investments in owning or operating factories. Contract manufacturers, for their
part, make products at a low cost by leveraging economies of scale and selling similar finished
goods to a variety of hiring clients. Typically, a hiring client will approach a contract

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manufacturer with a concept or design. In many industries, contract manufacturers will lead the
research and development (R&D) of the concept and build a production-ready prototype. If a
supply agreement can be reached, the contract manufacturer will then deliver finished goods to
the hiring firm.

Agreements and Contracts

Contract manufacturing can involve a number of contracts for R&D, intellectual property,
and future supply of finished goods. The financial obligations of the contract manufacturer and
the hiring firm can vary widely as a result of these agreements. A contract manufacturer’s goal is
to enter into agreements to profitably produce finished goods at high volumes (relative to the
industry). In the case of personal care products, contract manufacturers are eager to supply
products to large consumer packaged goods companies that sell the most popular personal care
brands (Unilever and P&G are good examples).

When a contract manufacturer is hired to develop a product concept, the manufacturer may
want to own the intellectual property or the exclusive right to make it over some specific time
period or by some measure of volume. For the manufacturer, this secures the opportunity to profit
from a product if it is successful in the marketplace. Alternative deals, particularly with startups,
will involve the hiring firm paying for R&D in exchange for the right to own the intellectual
property.

Supply agreements pertain to the manufacture and sale of finished goods at substantial
volumes. As with other agreements, there are many possible points of negotiation, including order
volumes, defective-item return policies, product liability insurance, lead times, unit costs,
manufacturing fees, and specific investments in equipment. The importance of these issues varies
based on the finished goods in question.

Aerosol Manufacturing
Aerosols are small particles of solids or liquids that have been pressurized and suspended in
gas. Although aerosols occur naturally, most people associate the term with commercial products.
The most common aerosols come in spray cans and are used to dispense products ranging from
paints, gels, creams, and lotions to medicines, foods, sealants, and lubricants.

Aerosols are usually classified according to the size of their particles. In general, the four
major aerosol subgroups are fumes, dusts, mists, and sprays. Fumes range from 0.001 to 1 micron
in size and consist of solid particles. Smoke is a common fume. Dusts are larger solid particles
(from 1 to 100 microns in size) and, unlike fumes, they tend to “settle out,” or come to rest when
undisturbed. Mists are small liquid particles (less than 10 microns in size), and sprays are larger,
often 10 microns or more. Paints and deodorants usually are sprays. The Dry Goods concept was
classified as a dust.

Commercial aerosol technology is relatively uncomplicated: particles and propellants (usually

carbon dioxide or nitrogen3) are combined in a can and pressurized. Dispensing the mixture is as
simple as pressing a release button. Companies manufacture aerosols by adding propellant and

3
While some consumers still associate aerosols with an ozone-depleting class of propellants called chlorofluorocarbons (CFCs),
virtually all manufacturers stopped adding CFCs to consumer aerosols by the time the U.S. government banned them in 1978.

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product concentrate to a container, attaching a valve assembly and an actuator, and pressurizing
the apparatus. Aerosol containers are often aluminum or stainless steel. Valve assemblies vary
according to the type of aerosol particle being dispensed but usually include a stem, gasket,
spring, and dip tube. The actuator is the specially designed button that delivers the aerosol in the
desired quantity, volume, direction, and spray pattern. Exhibit 1 shows a full schematic of
common aerosol components.

Choosing a Contract Manufacturer

Cornuke and Joyce thought they might need a contract manufacturer to develop and
manufacture Dry Goods. Still, they had no guarantee a manufacturer could successfully make Dry
Goods the way they envisioned it, let alone produce thousands of cans. Nothing exactly like Dry
Goods had ever existed before, and they did not know if the physical properties of their liquefied
powder might make it impossible to deliver the right benefits in an aerosol. Until the moment
Joyce and Cornuke tested their first can, they would not know if their concept was technically
feasible.

Even without a working prototype, Joyce and Cornuke were able to build financial models
that approximated the unit economics of Dry Goods (see Exhibit 2). Using assumptions gathered
from industry experts inside the Kellogg network, they estimated they would need to make at
least $3.00 per unit initially and $3.70 per unit at scale, after factoring in distribution costs and
returns and breakage expenses. A full-scale production run would be 200,000 units per order or
more.

Armed with these estimates, the two students approached contract manufacturers with a
simple concept: take the most popular and effective ingredients in traditional dump-on powders
and deliver them through an aerosol. These ingredients were talc, cornstarch, zinc oxide, and
menthol. All the ingredients were accepted as “safe” by the U.S. Food and Drug Administration
(FDA), and all of them could be created in dust-particle sizes. But the zinc oxide and menthol
were considered “medication.” If Joyce and Cornuke wanted Dry Goods to be classified as a
“medicated product,” they would have to pay $10,000 for a U.S. Pharmacopeia test and an
additional $15,000 to test the long-term stability of the pressurized ingredients. Contract
manufacturers with R&D capabilities could handle this work. Medicated products required “drug
facts” labels and could also make health claims in their advertising and marketing. Alternatively,
Joyce and Cornuke could formulate Dry Goods with low concentrations of zinc oxide and
menthol (below FDA thresholds for medicated products). In this case, the product would be
nearly as efficacious, but Joyce and Cornuke could not make health claims regarding the ability
of Dry Goods to act as a skin protectant. Many marketers believe the freedom to make these
claims is a significant advantage. The market leader, Gold Bond, was classified as medicated, and
this put pressure on Joyce and Cornuke to pursue the FDA medicated status.

AEROMASTER

The offer from AeroMaster, a Philadelphia-based contract manufacturer, was compelling. It

was willing to work with a startup, and it liked the Dry Goods concept. Bob Sledge,
AeroMaster’s lead chemist, thought the product was feasible and knew how he would approach
making a Dry Goods prototype. In fact, AeroMaster already manufactured multiple skin care–
related powder sprays. Its manufacturing facility was entirely dedicated to making skin care
products and was approved by the FDA for production of over-the-counter medicated products.

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Still, Joyce was concerned about AeroMaster. It was a small operation with only a few
production lines and limited equipment. These constraints meant it could only produce between
60,000 and 100,000 units at a time; its defect rate would be around 2 percent; and its lead times
could exceed twelve weeks. Furthermore, AeroMaster would charge Joyce Labs $20,000 for the
development of the Dry Goods formula. Joyce consulted with Tony Derby, an operations expert
at Schering Plough. Derby had requested bids from AeroMaster on numerous contract
manufacturing jobs and found it “very expensive” compared to larger manufacturers. AeroMaster
gave Cornuke and Joyce a $1.79 unit price quote.

KING CUSTOM

King Custom manufactured components and finished goods for some of the biggest packaged
goods and personal care companies in the world. King could make anything from shampoo to an
aerosol like Dry Goods. Cornuke joked that “King could probably make a jet, if we asked.” Its
R&D lab was well respected by industry experts and would develop Dry Goods for free if it
retained the formula. Otherwise, King would charge $40,000 for R&D. Because of its vast scale,
King could make Dry Goods for $1.48 per unit and could guarantee a defect rate under 0.02
percent. It could also make any other brand extensions that Joyce and Cornuke might invent later,
such as shower gels, lotions, or shaving products. In addition, Joyce was pleased that King was
within driving distance of Kellogg.

Despite the obvious economic advantages of King, Cornuke was quick to point out that it
wanted a minimum order of 100,000 units and tended to focus only on clients who ordered more
than one million units per year. One of the biggest aerosol manufacturers in the United States,
King garnered most of its business from manufacturing non-aerosol consumer products. Cornuke
wondered if it would honor its promise of eight-week lead times for finished product delivery.

CHICAGO SPRAYS CORP

Chicago Sprays Corp (CSC) was a diversified aerosol manufacturer located just outside
downtown Chicago. It could also make Dry Goods for a competitive unit price—$1.58—with a
defect rate of 2 percent. CSC made a variety of spray products, such as paints and adhesives. Its
proximity to Kellogg meant that Cornuke and Joyce could attend weekly production updates.
Best of all, CSC’s minimum order of 20,000 units meant Cornuke and Joyce could have a
production run with their current funding. Unfortunately, CSC could not conduct R&D for Dry
Goods, so Joyce and Cornuke would have to formulate elsewhere. Also, the manufacturer was not
FDA approved, which meant Dry Goods could not be considered an over-the-counter product if it
was manufactured at CSC. Because of a current backlog, CSC could not guarantee lead times of
less than twelve weeks.

YANGTZE CANCO

Yangtze CanCo, a Chinese manufacturing company in the Jiangsu Province, had unique
access to inexpensive plastic and aluminum components. It was thus able to produce Dry Goods
for $1.17 per unit, with a minimum order of 45,000 and a defect rate under 1 percent. Yangtze
also had the advantage of being able to scale Dry Goods to any order size. Shipping cases from
China to the Dry Goods distributor would cost an additional $350 per pallet of 2,000 units and
would make the total Yangtze lead time ten weeks. Producing Dry Goods in China would not
create any barriers to selling the product in the United States, though Suzhou did not qualify for
the FDA’s over-the-counter designation. Like CSC, Yangtze could not conduct R&D for Joyce
and Cornuke.

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Joyce and Cornuke would have a hard time attending production days in China, and Joyce
wondered whether the aluminum cans might be dented in transit, noting that the journey from
Jiangsu to Chicago would be long.

Alternatives
Although hiring a contract manufacturer seemed the fastest path to get Dry Goods to market,
Joyce and Cornuke also discussed alternative ways to use their idea. Because it seemed safer than
starting their own business, they contemplated looking for traditional R&D or brand-management
roles within an existing company that made similar products (such as J&J or Chattem) and
deploying their idea from within that organization. This “intrepreneurship” model seemed less
risky, but it presented two obvious drawbacks. First, Cornuke and Joyce doubted that a large
company would give either of them free reign to chase an unconventional idea like Dry Goods.
Second, neither entrepreneur wanted to give up full ownership of the product. “We loved making
command decisions about the direction of the brand,” Joyce said. “We had our own vision—one
that corporate behemoths might not see.”

Early in their planning process, Joyce and Cornuke had briefly considered trying to raise the
capital to buy their own production facility. The initial cost outlay and the fact that they had an
unproven product and no manufacturing expertise, however, combined with the unavailability of
suitable co-packers, made this an unattractive option.

Finally, Joyce and Cornuke wondered if perhaps an innovative company might be interested
in licensing the idea. A Baltimore-based athletic-equipment manufacturer called Under Armor
seemed to be the kind of company that could be interested in expanding into the personal care
market with a new product targeted toward high-performance athletes. But sharing their idea
without first acquiring a patent would be risky, and to patent Dry Goods, Joyce and Cornuke
would need a working prototype.

Decisions
The choice to hire a contract manufacturer seemed monumental, even frightening. Joyce and
Cornuke could walk away from Dry Goods now and look for full-time jobs during their second
year. They could also try to take their idea to a company with the resources and know-how to
develop it. Or they could roll the dice, start their own company, and choose a contract
manufacturer that would give them the best chance at success. (See Exhibit 3 and Exhibit 4 for
data comparing the manufacturers.)

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Exhibit 1: Diagram of Aerosol Components

Exhibit 2: Dry Goods Unit Economics

Estimated retail price per unit $10.99
a
Target retailer margin 45%
Cost of goods sold per unit Unknown
b
Distribution costs per unit $0.78
c
Returns and breakage 2% of wholesale price
a
Joyce and Cornuke would sell to retailers at wholesale prices; the two had learned that retailers usually expect to earn 40 to 50 percent
margins on personal care products like Dry Goods.
b
Distribution costs included warehousing the product and shipping it to retailers. At scale, this number would drop to $0.53.
c
Estimating returns and breakage at 2 percent of wholesale was industry standard.

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Exhibit 3: Offers to Manufacture Dry Goods

Minimum
Co-Packer Location Price/Unit Order (Units) Lead Time Defect Rate R&D Fee
AeroMaster Philadelphia $1.79 60,000 12 weeks 2.00% $20,000
King Chicago $1.48 100,000 8 weeks 0.02% $40,000
CSC Chicago $1.58 20,000 12 weeks 2.00% n/a
Yangtze China $1.17 45,000 10 weeks <1.00% n/a

Exhibit 4: Unit Price by Volume of Dry Goods Produced (in U.S. dollars)
Order Volume AeroMaster King CSC Yangtze
20,000 n/a n/a 1.58 n/a
40,000 n/a n/a 1.56 n/a
60,000 1.79 n/a 1.55 1.17
80,000 1.77 n/a 1.53 1.16
100,000 1.75 1.48 1.52 1.16
120,000 1.74 1.47 1.50 1.15
140,000 1.72 1.47 1.49 1.15
160,000 1.70 1.46 1.47 1.14
180,000 1.69 1.45 1.46 1.14
200,000 1.67 1.44 1.44 1.13
225,000 1.66 1.44 1.44 1.12
250,000 1.65 1.43 1.43 1.12

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