Manufacturers Are Strategic Partners Then there are the Surge partnerships with companies wanting to distribute their products such as Pastime Foods. Pastime Foods has provided an MOU commitment of $720 million in top-line sales ($1,500 per store across 40,000 stores) per year. I spoke with the President and CEO of Pastime Foods, Tim Riedel, to get a better understanding of what this Memorandum Of Understanding really means. This is what I took from that phone conversation.
Pastime Foods has a relationship with a convenience story buying group/trade organization. Pastime Foods would introduce Surge into this arrangement giving the potential for Surge to be placed in tens of thousands of locations. Why would Pastime be willing to do this? The reason is simple – these trade organizations need a minimum order per store to bring in vendors. By becoming co-sponsors with Surge, Pastime Foods can gain wide distribution while lowering their initial set-up costs. Here is a hypothetical example. If you are rolling your product out across a proposed 40,000 store locations and if the minimum order is between $300-$500 per store, that can be an overwhelming start-up cost for a smaller sized company. But by having 2 or more firms band together when approaching the buying group, this will allow each company to split the initial set-up costs while gaining the same nationwide distribution.
But an MOU is not legally binding. 40,000 stores would be huge, but what if that plan falls through? MOU is like a letter of good intentions. Investors should watch for any potential announcement of a definitive signed agreement to replace the MOU. A binding contract would have infinitely more value than an MOU. And that agreement does not explicitly mean that those 40,000 stores are forced to place Surge products inside each location. It is my understanding that the buying group endorses and makes available through their own channel the Surge products and services. The next step is to see how many store owners order in Surge-branded and partner products.
Let’s assume that a definitive agreement gets signed and announced. Let’s further assume that 40,000 stores are rolled out in 2019. If the $1,500 in revenue per store is reached across 40,000 stores starting in 2020 – what sort of profit might this generate?
I will use a 2% gross profit margin This will result in $14.4 million gross profit The 9.55x multiplier results in a market cap of $137.5 million or 3.2x the current size Again, keep a close eye for any potential announcement that the MOU has been replaced by a signed contract with the trade organization. Keep a close eye on how many stores sell Surge products. And finally, keep an eye on how the products and services are received.
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