Hot-sauce lovers may want to stock up. Huy Fong Foods, maker of the iconic rooster-labeled sriracha, said it would temporarily halt production this summer, according to new reports.
Once again, Huy Fong has a supplier issue. Huy Fong’s supplier issues started in 2017 when it cut ties with its longtime pepper partner, Underwood Ranches. Ever since the breakup, Huy Fong has yet to crack the code with alternative pepper suppliers. This time the problem is that the red jalapeno chilis it uses aren’t red enough.
Huy Fong’s supply chain woes presents an important lesson about the need for businesses to nurture partnerships, find compromise, and properly cover supply chains. It also puts a bright spotlight on why working with strategic suppliers is so critical when your brand is on the line.
Taste The Heat
Just seeing the bottle of Huy Fong Sriracha makes you taste the sweet, tangy heat. The iconic bottles feature a rooster logo, a green cap, and fire engine red sauce inside.
The ingredients are simple: chili, sugar, garlic, salt and distilled vinegar. But you can’t confuse it with any other condiment as Huy Fong’s Sriracha stands apart. Documentaries and songs have been devoted to the beloved sauce. It’s been the subject of countless brand collaborations and it has influenced items as random as board games, candy, lip balm, socks and shoes.
The forthcoming sriracha shortage will prove difficult for many of the sauce’s most loyal consumers.
But with that brand recognition also comes lots of competition. After Huy Fong split with its supplier, other brands stepped in to fill the void. Tabasco even launched a website dedicated to helping people find substitute sriracha. Even Huy Fong’s former supplier, Underwood Ranches, launched its own competing product.
A Lose-Lose Lawsuit
Nearly four-fifths—78%—of every bottle of Huy Fong’s Sriracha consists of pureed red chili peppers.
For decades, those peppers were grown by Underwood Ranches, which is based in California and was conveniently located near Huy Fong’s manufacturing plant. However, in 2017, the partnership soured, with each partner suggesting that their counterpart had been dishonest in their business dealings. Accusations and hurt feelings led to a contract dispute that ended up in court. The findings? Huy Fong Foods was found to be in breach of contract, and Underwood was awarded more than $23 million.
On the surface, Underwood was the clear winner. But in reality, it was a lose-lose situation. Underwood Ranches had thousands of acres of pepper fields but no customers. Huy Fong Foods had a 600,000-square-foot factory without a crucial supply of high-quality peppers. And the real losers? The loyal customers who had grown used to putting the famed sriracha sauce on just about everything. The sauce was seen selling for up to $100 a bottle.
After leaving its key supplier, Huy Fong needed to find new sources of peppers and turned to other growers in Mexico. But those other sources haven’t always been as plentiful, hot, or red as needed.
Meanwhile, Underwood has gone on to produce its own hot sauce, Dragon Sauce, that rivals its former partner’s sriracha.
Trust And Communication
While many procurement professionals would argue that Huy Fong’s supply chain woes stemmed from a risky sole-source relationship with Underwood Ranches, I argue that the strategic relationship helped fuel Huy Fong’s success for half a century.
Rather, I submit the downfall was poor communication and an incomplete contract, which led to lost trust.
The official court documents put a unique spin on how lost trust and a lack of clear contracting practices were to blame. The proceedings read, “It has been said that some contracts are not worth the paper they are written on. But oral contracts stemming from previously written contracts and long-standing business practices based on custom and trust are as valid as contracts that are worth the paper they are written on. When such a contract is breached, there are consequences.”
And in this case, the consequences of letting untrusting behaviors slip into a business relationship not only cost Huy Fong millions of dollars in a lawsuit settlement, but also haunted Huy Fong with continued supply chain shortages from less reliable suppliers.
The importance of good communications and trust in strategic business relationships is underscored by a McKinsey & Company study. The report states that effective internal communication and trust (38%) outpaced alignment on parent and partnership objectives (35%) and plan for restructuring and evolution (27%) as the leading causes of joint-venture failure.
Trust and communication go hand in hand, and it’s important for companies to communicate their concerns and be prepared to move past them.
As the McKinsey study’s authors write, “Inevitably, points of tension will emerge. For instance, companies often disagree on financial flows or decision rights. But we have seen partners articulate such differences during the negotiation period, find agreement on priorities, and reset timelines and milestones. They defused much of the tension up front, so when new wrinkles—such as market shifts and changes in partners’ strategies—did emerge, the companies were more easily able to avoid costly setbacks and delays in the business activities they were pursuing together.”
The Heat Is On
Huy Fong Foods will have to strengthen its supply chain to ensure that the hot sauce is on tables and in cabinets nationwide.
On the surface, the conventional wisdom from procurement professionals is to turn to multiple suppliers to fill the gap from Underwood Ranches. This is exactly what Huy Fong has done—which obviously has not worked so well in preventing shortages again this year.
My advice? I’d submit the answer is to go back to the basics and try to re-create the magic they had with Underwood Ranches based on those early years of trust, transparency and mutual interest that led to over 25 years of mutual success. However, I’d recommend Huy Fong turn to a formal relational contract.
Whatever the answer, if Huy Fong doesn’t sort out their supply chain issues soon, our food in the coming months will taste a lot more bland.