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CASE: E-412
DATE: 04/11/11

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CAIN & ABLE COLLECTION:
EVERY DOG HAS ITS DAY SPA
My grandma lovingly said, ‘That is the dumbest idea I ever heard,’ when I told her my idea to quit

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my job and start a high-end dog shampoo business.
—Candace Leak, founder

In December 2010, Candace Leak ruminated on the future of her business. Leak had
transformed her homemade pet shampoo from an idea into an enterprise consisting of 35 unique
products and almost $1 million in annual sales. Although she had weathered the 2008 recession,
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Leak had grown frustrated because her company was cruising along with no recent growth. Leak
also had experienced changes in her personal life. In 2009, she married her boyfriend, Tim Leak,
and they had a baby boy named Cole. Leak wanted to balance her family and business life,
which meant she could not work 80 hours a week anymore. Leak was at a critical crossroads and
faced the biggest decision of her entrepreneurial career.
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THE GENESIS OF CAIN & ABLE COLLECTION

During the early winter of 2003, a typical Saturday morning for Leak started with taking her
dogs Cain (a black shepherd/husky) and Able (a yellow lab) on a long walk to the creek to play
fetch and swim. Before re-entering her apartment, Leak would give her dogs a good bath. Like
most pet owners, she just soaked them in water and lathered them up, and, like most pets, her
dogs often resisted and vehemently shook off the suds. Out of curiosity, Leak researched the
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ingredients of her dog shampoo and discovered she had been scrubbing her dogs with harsh
chemicals.

David R. Dixon (Sloan Fellow 2011) and Professor J.D. Schramm prepared this case as the basis for class discussion
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rather than to illustrate either effective or ineffective handling of an administrative situation.

Copyright © 2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order
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 Cain & Able Collection E-412 p. 2

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She recalled thinking, “This is like laundry detergent; I wouldn’t put this on my own skin. Why
should I use it on the dogs that I love?”1 So Leak began using her personal shampoo, made by

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Aveda, on her pets. After some research, though, she discovered that that dog skin differs from
human skin—it is thinner and has no sweat glands.2 In humans, sweat mixes with secreted
sebum to form an acid mantle that helps protect from bacterial infections. Also, human skin is
acidic, with a pH between 4 and 5.5, but dogs have a much higher pH, from around 7 to 8.5, and
they also have fur to protect their skin.3 Leak began to ponder a gentle, all-natural pet shampoo

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product.

Leak began her entrepreneurial process by conducting Internet research and visiting small pet
stores to see if other customers had similar complaints. To her surprise, she found that many pet
owners were disturbed about the caustic nature of pet shampoo. She deliberated on the sole-
proprietor idea for a few more weeks before she broke the news to her family. They were less
than enthusiastic. Leak recalled, “My grandma lovingly said, ‘That is the dumbest idea I ever

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heard,’ when I told her my idea to quit my job and start a high-end dog shampoo business.”

Like most entrepreneurs, Leak faced an arduous road from idea to execution. For several
months, she wondered if she had the mettle to start her own business. She had passion, work
ethic, and a marketing degree, but she possessed few quantitative business skills. Leak briefly
contemplated hiring a partner with finance and accounting experience who could eventually take
over the day-to-day operations while she focused on strategy and management. However, she
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decided to hold off on this idea, given her financial situation.

Once Leak fully committed, she had to figure out how to bankroll this new venture. Austin,
Texas is nicknamed Silicon Hills because large technology corporations such as Dell, Apple, HP,
and Google have a major presence there. Although Austin boasted a respectable venture market,
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the available money usually went to Internet or manufacturing start-ups. Moreover, Leak had
recently moved to Austin from her very small hometown of Alexandria, Louisiana, so she did
not have a high-profile network of angel investors to draw from. With little encouragement from
her family and friends, Leak knew she would have to bootstrap the company with her personal
savings of $60,000.

The dot-com bust was one of the motivating factors for starting the business. I
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watched professionals in their 40s get laid off and unable to find another job. One
friend in particular lost his home and could not afford to put his children through
college. That, above all, made me realize that I wanted to be in control of my
own destiny.
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1
Interview with Candace Leak, March 3, 2011. Subsequent quotations are from the author’s interviews unless
otherwise noted.
2
“Quick Canine Skin Diseases Primer,” http://www.petalk.com/canine-pyoderma.html (May 21, 2011).
3
“Dog skin compared to human skin," http://www.dogforum.net/dog-healthcare/22360-dog-skin-compared-human-
skin.html (May 21, 2011).

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Permissions@hbsp.harvard.edu or 617.783.7860
 Cain & Able Collection E-412 p. 3

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Before launching the company, Leak worked in a marketing position at Acceris, a
telecommunications company.4 Her managers and peers at Acceris were no more sympathetic

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than her family. She recalled:

I felt discounted by my co-workers when I told them why I was quitting to start
my own business. They seemed sure of my ultimate failure. My last week at
Acceris was in November 2003, and it was completely miserable, I seemed

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ostracized from the group and felt like I let everybody down. What a way to go!

THE PET PRODUCTS INDUSTRY

In 2002, 24.8 percent of U.S. households (or 26.3 million) kept pet cats, and 32.4 percent (or
34.5 million) had pet dogs.5 “U.S. retail sales of pet supplies totaled approximately $7.5 billion
in 2002 … and over the five-year 1998-2002 period, the pet supplies market increased by a total

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of 18 percent and posted a compound annual growth rate (CAGR) of 4.2 percent.”6 Of the $7.5
billion in pet supply sales, $149 million were classified as pet grooming products, a 5.7 percent
increase from 2001.7

Shaping virtually every aspect of this activity was the trend toward humanization of pets, with
more and more of the products resembling human counterparts such as fancy glass shampoo
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bottles, supplements for joint pain, and edible greeting cards. Also, a wide array of personalized
products such as monogrammed sweaters, embossed water bowls, and digitized collar tags
entered the market in 2002.8 Mass merchandisers such as Walmart and Target claimed an
estimated 27 percent of the pet supply market while chains PetSmart and Petco held a 26 percent
share. Independent pet stores had 23 percent of the market, and supermarkets and other outlets
(such as Internet sellers) possessed 14 and 10 percent, respectively.9
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Leak began identifying the other players in the pet grooming market. The Hartz Mountain
Company (founded in 1926) carried the most brand recognition. In addition to shampoo, it also
manufactured the Hartz flea and tick collar, the top-selling flea and tick collar for both cats and
dogs.10 However, many pet owners had come to view Hartz’s chemical ingredients as
dangerous, and the resulting consumer backlash in 2002 prompted the launch of Websites such
as www.hartzvictims.org.11 In 2005, the Environmental Protection Agency (EPA) reached an
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4 “Acceris Management & Acquisition LLC,”

http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=21853220 (21 May 2011).
5
Packaged Facts, “The U.S. Market for Pet Supplies and Pet Care Products,” MarketResearch.com, June 2003, p.
18.
6
Ibid., p. 3.
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7
Packaged Facts, “Pet Grooming Products Sales are Small but Growing,” Research Alert, 23 (21),
MarketResearch.com, November 4, 2005.
8
Packaged Facts, “The U.S. Market for Pet Supplies and Pet Care Products,” op. cit., p. 11.
9
Ibid., p. 55.
10
“Hartz Mountain Company Profile,” http://www.hartz.com/About_Hartz/Company_Profile/our_history.aspx (20
April 2011).
11
“About HartzVictims.org”, http://www.hartzvictims.org/about-hartzvictimsorg/ (21 May 2011).

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 Cain & Able Collection E-412 p. 4

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agreement with Hartz to phase out two flea and tick products after at least 7,000 pet injury
reports and 12 alleged deaths over three years.12

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In addition to Hartz, Lambert Kay and 8 in 1 pet products also posed barriers to entry, given
their significant market share and established brand names. John Paul Pet (the name was
licensed from the owner of Paul Mitchell human products) also planned to enter the luxury
animal market. Leak noted, “John Paul Pet had brand recognition and they were marketing as a

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high-end shampoo, but they definitely were not all-natural, so people truly concerned with
ingredients wouldn’t consider that product an alternative to mine.”

The closest competition seemed to be Earthbath, a pet grooming company that was, according to
the company, “developed and manufactured in California with only the safest, finest ingredients
from nature.”13 However, Earthbath seemed to focus more on marketing to professional pet
groomers rather than to individual pet owners, stressing environmental consciousness as much as

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pet safety. In addition, Earthbath had not positioned itself in the luxury market.

After months of research in 2003, Leak concluded that she did not have any true competition
because nobody focused on the high-end, all-natural niche market, as she intended to do. Macro
forces were also positive—total U.S. retail sales of pet supplies were expected to grow 5 percent
in 2003, followed by advancing annual gains through 2007, when double-digit growth was
forecast to push sales above the $11 billion mark.14 It seemed like a perfect time to enter the
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market. Unbeknownst to Leak, however, another entrepreneur noticed this window of
opportunity. Happytails, a California-based company with the same philosophy and strategy,
launched within months of Leak starting Cain & Able. She would soon recognize Happytails as
her main competition and become very familiar with their owners, products, and operations.
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PRODUCTION: THE DARK DAYS

Product formulation frustrated and challenged Leak in the beginning. Leak researched all-
natural bug repellants and skin remedies in her quest to amalgamate the first batch of shampoo in
her kitchen (goggles, smock, and all). She lacked the necessary experience and equipment, so
the first attempt resulted in a predictable disaster. The contents of the original bottle looked and
smelled like swamp water. Leak then decided to make her first hire in October 2003, a chemist
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with a PhD from the University of Texas, to properly mix the ingredients. Together they
developed several shampoo formulas that used only human-grade ingredients. Leak recalled, “I
tested every product first on myself, even putting the shampoo in my eyes.”

It took Leak and the chemist about a year to perfect the product. During this time, Leak handled
the company’s administrative responsibilities, which she found tedious and loathsome. These
included setting up an LLC with the state of Texas, getting a sales and use tax license, and
managing the Website. Once Leak had a marketable product, she had to mass produce and sell it
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in order to become cash flow positive.

12
Elizabeth Weise, “Hartz Mountain withdraws cat flea, tick medicine,” USA Today Online,
http://www.usatoday.com/news/health/2005-06-08-hartz_x.htm (May 21, 2011).
13
“Our Story”, http://www.earthbath.com/about/ (May 21, 2011).
14
Packaged Facts, “The U.S. Market for Pet Supplies and Pet Care Products,” op. cit., p. 3

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 Cain & Able Collection E-412 p. 5

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Mass production proved difficult. Contractors did not take her seriously because she was a 26-
year-old female with no experience in retail, formulation, or distribution. For weeks, she could

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not find a single company that would manufacture her product. Finally, USA Packaging
consented but required Leak to pay $20,000 up front for the first production round to allay
concerns about her inexperience.

At her first industry trade show, the 2004 Superzoo in Las Vegas, Leak sold $20,000 of product,

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mostly to independent pet retailers in the United States. Astounded, Leak recalled saying,
“Wow, I’m rocking. Things are starting to take off.” Then, the reality of logistics came calling
when she returned to Austin. “Until this point, I’m boxing stuff up in my living room and driving
to UPS to drop it off. I don’t even have a big enough car to fit the boxes. How am I going to
make all these doggie gift baskets?” So Leak made her second hire, a recent graduate of the
University of Texas, to help her box up products and move them in his SUV.

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Leak soon learned that while getting people to like her products might be easy, order fulfillment
was not. A few months before the Superzoo show, she had signed up for a merchant account at
Wells Fargo, giving her small business the ability to take credit card orders. She had no history
of managing large accounts, though, so when the banker asked how much she would be charging
each month, Leak gave a very conservative estimate of $5,000.
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After the Superzoo orders, Leak had to pay wages, UPS, and credit card bills, all of which she
had put off because she knew she would have cash flow after the trade show. Suddenly,
however, Wells Fargo froze her account. The bank had charged the customer credit cards but did
not send Leak the money because she had exceeded her charge limit. “My immediate thought
was ‘who cares.’ I sent valid charges. I have signed orders from my customers. Send me my
money!” Finally, after days of haranguing Wells Fargo, the bank released the money and Leak
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fulfilled her orders. This event highlighted her need to hire someone with more experience
running a small business. Embarrassed after learning a tough lesson, Leak immediately changed
the terms of her merchant account to a much higher charge level.

THE MIXTURE STARTS TO COME TOGETHER

Leak continued learning, and her business flourished. She attended two trade shows in 2004 and
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10 in 2005, and began to make a name for Cain & Able among pet product distributors. After
her first year in business, 400 stores carried her products in seven countries including Japan,
China, and Germany. Her bread-and-butter customers were independent mom-and-pop retailers
such as Bark ’n Purr in Austin,15 Bark Avenue in Destin, Florida,16 and A Dog’s Life, in Aspen,
Colorado.17

The increase in orders once again exposed just how much Leak had to learn about the supply
chain management of running a small business. In March, 2005 she received her first mass
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order, from a large Canadian distributor, Petvalu, which supplied 360 stores. After the quote
process, the buyer for Petvalu gave her a spreadsheet to fill out. It seemed like a foreign

15
“About Us,” http://www.barknpurr.com/ (May 21, 2011).
16
“Welcome,” http://shopbarkavenue.myshopify.com/ (May 21, 2011).
17
“Our Mission,” http://www.dogslife.biz/testimonials.html (May 21, 2011).

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 Cain & Able Collection E-412 p. 6

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language. Leak elaborated: “I looked at this sheet and said ‘what in the hell is FOB? How am I
supposed to know my NAFTA classification code? How many shampoo boxes fit on a pallet?’

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Petvalu soon arranged to have a freight carrier pick up the products from her office.

This made me nervous, because I work out of my garage. Some freight carriers
won’t come through the community gates. It doesn’t even occur to me until about
two weeks before the ship date that I don’t have the space to put together 20

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pallets of products. Fortunately, I was able to get all of the products boxed up and
ready to go. The morning of the pick-up, I staged all of the pallets in the parking
lot just in time. My apartment manager fumed and said I could not use his
parking lot as a warehouse. Although this was a chaotic time for my business, it
was encouraging to think I had finally outgrown my one-bedroom apartment.

It seemed as if Cain & Able had finally set sail. In April 2005, Big Austin, the city’s leading

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small business development organization, gave Leak its Rookie of the Year award for the best
new small business in Austin.18 In May 2005, she moved into a much larger apartment with a
two-car garage to store her products and materials. However, she still could not afford to pay
herself a salary. From the outside, Leak looked like she had everything in order, but on the
inside she was a mess:
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People were calling me for advice saying “I’m thinking about starting a business.
Would you have lunch with me and tell me how you’ve done it?” How can I keep
from laughing? I’m extremely flattered, but at the same time, I should NOT be
giving anyone advice. Truthfully, I have no idea what I’m doing. I just figure it
out day-to-day. Talking to other entrepreneurs, I realize that most people were
like me. They knew one, maybe two aspects of running a business, but the rest
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was foreign. You learn because you have to. The alternative is quitting, and for
most people with an entrepreneurial spirit, that is not an option.

Leak also learned that start-up CEOs have many unglamorous duties. Cain & Able remained in
the red, so Leak could not afford to hire an administrative assistant. To file taxes during her first
year, Leak called the IRS, explaining that she had an LLC and asked which form to complete.
The agent said to complete Form 1325 for partnerships because the IRS considered LLCs as
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partnerships. Leak purchased tax software and spent eight frustrating hours completing the
forms. The IRS subsequently assessed a fine because Leak was the only person in her LLC, so
she could not file partnership returns. This rookie mistake and wasted time incensed Leak.

During 2005, Leak’s third year of operation, her booming sales extracted a personal toll. “I
realized that things were getting out of control and I needed to find balance. You will get so
caught up in the business and the stress and the finances and people tugging you, that one day,
you will forget to take a shower, or brush your teeth, or eat.” She enjoyed her nascent success,
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but she wondered if she would ever grow her business enough to sell it so that she could pursue
her other dream of starting a family.

18
“Big Idea Awards,” April 22, 2005, http://www.bigaustin.org/awards2005/BiGProgram_final.pdf (May 21,
2011).

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 Cain & Able Collection E-412 p. 7

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In 2006, the New York Times, Wall Street Journal, and CNN recognized Leak on several
occasions. The Sundance Film Festival featured Cain & Able products in the gift bags to the

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actors who starred in films for that year’s festival. In July, Home and Garden TV highlighted
Cain & Able on the show Pet Expo.19 Leak’s grandmother, who formerly had disparaged her
professional ambitions, believed that Leak had become an international celebrity. Leak also won
awards for the best pet product at two prestigious industry tradeshows in San Francisco and
Dallas. It was at these two shows that she got a close look at her competition.

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Happytails, which also had launched in 2004, became Leak’s chief rival in the luxury space.
Hapyytails’ mission was to provide “all natural shampoos, sprays and eco-friendly dog products
that solve common problems.”20 Leak knew the owners from industry events, and they often
discussed their businesses. The companies were the same size and faced similar challenges, but
they occupied a slightly different market space. Cain & Able spent little time working on
Website optimization, but Happytails mostly sold over the Internet, directly to consumers. Both,

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however, had significant presence in independent stores. Each company sold to more than 1,500
independent dealers in the United States, with more than half of these stores carrying both Cain
& Able and Happytails products. Would this shared shelf space prohibit her from a possible
joint venture with Happytails?

FRONTGATE AND THE HAUTE DOG CONTEST

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In July 2006, Leak had a big opportunity with Frontgate.com, a large online and magazine home
goods supplier. The company wanted to sell doggie bath baskets with her shampoo and a pet
shower caddy. She had everything to fill the orders except the plastic caddies. To complicate
things, she could not get a shower caddy vendor to return her calls. Leak spoke with a vendor
named Angie Simpson, who, according to Leak, very condescendingly explained they had an
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exclusive contract to sell their product to Target. Leak despondently hung up the phone.

Two days later, Simpson happened to check out Leak’s Website and learned about Cain &
Able’s Haute (pronounced “hot”) Dog contest to find the next doggie Super Model.21 Simpson
sent Leak a picture of her dog, named Indy. Seeing an opportunity, Leak wrote Simpson back
with some endearing comments about Indy, and in the subsequent correspondence, Simpson
agreed to send Leak samples of the plastic shower caddy. All of a sudden, the product exclusive
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to Target was now available to Cain & Able. Leak even received a 10 percent discount. The
Haute Dog judges awarded Indy an honorable mention in the contest.

The caddies arrived about a week before the products had to ship. Leak enlisted the help of her
parents and hired a few temporary, part-time people. Working late every night, they assembled
and shrink-wrapped the baskets and shipped them one day before the cancel date. It seemed like
a huge victory, but when Leak balanced her accounting books, she realized her revenues for the
project were only slightly above her costs.
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19
“Pet Expo 2006, Episode HPETS1-S06,” http://www.hgtv.com/special-presentation/pet-expo-2006/index.html
(May 21, 2011).
20
“Happytails Canine Spa Line,” http://www.happytailsspa.com/site/index.html (May 20, 2011).
21
“2006 Haute Dog honorable mention,” http://www.cainandablecollection.com/hauteDog10_results.asp (May 21,
2011).

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 Cain & Able Collection E-412 p. 8

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The shower caddy episode provided Leak with an important insight. She started focusing on
individual products instead of on costly gift sets and began discounting bulk orders. The less she

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had to touch a product before shipping it, the higher the profit margin.

THE CHAIN STORES

The T.J. Maxx Dilemma

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In October 2006, Leak landed a $75,000 order from T.J. Maxx. According to the 2006 annual
report of T.J. Maxx, the business was founded in 1976 and was “the largest off-price retailer of
apparel and home fashions in the U.S., operating 821 stores in 48 states at year-end 2006. T.J.
Maxx sells brand name family apparel, accessories, fine jewelry, and home fashions….with
stores averaging approximately 30,000 square feet in size.”22 Leak had not budgeted enough
inventory for this larger than expected order and found herself on the horns of a dilemma:

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If we completed the order to T.J. Maxx, it would have totally depleted our
inventory right before Christmas. I needed the money, but if I sold to T.J. Maxx,
some of my smaller stores might grow jaded and drop my products. The smaller
mom-and-pop stores were the bread and butter of my business, but I really wanted
to bust into the larger chain stores.
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Leak decided that she simply could not pass up the opportunity—the revenue it would generate
would make the difference between losing and making money that year. Small pet stores did not
like to carry the same products as chain super-marts. To keep everyone happy, Leak revamped
the look of Cain & Able’s products, changing the packaging just a bit. Then she used all the
existing inventory of the older packaging to complete the T.J. Maxx order. T.J. Maxx could get
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the product they wanted and the mom-and-pop stores would get the new, improved product. If
the small stores complained, she would tell them it was a one-time sale of closeout inventory.
The stress of being accountable to so many store-owners reminded Leak how much she wanted
eventually to sell her company. Despite all the worry around selling to T.J. Maxx, only one
small shop even noticed.

Whole Foods
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Whole Foods, headquartered in Cain & Able’s hometown of Austin, had the same dedication to
natural products. “Established in 1980 as one small store in Austin, Texas, Whole Foods Market
has become one of the world’s leading retailers of natural and organic foods, with more than 180
stores in North America and the United Kingdom. The company carries natural and organic
products because it believes that food in its purest state, unadulterated by artificial additives,
sweeteners, colorings and preservatives, is the best tasting and most nutritious food available.”23
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22
“TJX 2006 Full Online Annual Report,” http://thomson.mobular.net/thomson/7/2394/2625/ (May 19, 2011).
23
“Whole Foods Market, Inc. Corporate Overview,” Onesource, North American Business Browser,
http://businessbrowser.onesource.com/web/Reports/ReportMain.aspx?ftrId=UNIFIEDOVERVIEW&Process=CP&
KeyID=126105&Expand=BusDesc#BusDesc126105 (May 20, 2011).

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Permissions@hbsp.harvard.edu or 617.783.7860
 Cain & Able Collection E-412 p. 9

In 2007, Whole Foods posted $2.3 billion in profit on $6.6 billion in sales.24

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Leak had targeted them from the beginning as a potential customer. She secured a contract at her
local Whole Foods in 2005, but that was just one store. She saw the Whole Foods buyer,
Colleen Carter, every year at Global Pet Expo, but Leak had failed with every follow-up sales
attempt. Then in May 2007 out of the blue, Leak checked her voice mail to hear, “You probably
don’t remember me, but this is Colleen with Whole Foods…” Leak thought, probably don’t

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remember, are you kidding me! She immediately returned the phone call. Carter wanted an all-
natural, private-label pet shampoo to expand the Whole Foods 365 brand.

Leak had not previously private-labeled her products, but she felt prepared for the challenge.
Whole Foods’ dedication to high quality ingredients created tremendous paperwork for vendors.
She had to account for every ingredient—where did it originate, what was it used for, where was
the source? The administrative details took about six months to complete.

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The next phase was a food-grade audit of Cain & Able's manufacturing facility. Whole Foods
had only one set of auditing specifications, and those were for food. Leak’s shampoo would have
to meet the same requirements. Leak paid $2,000 out of pocket to hire a third-party auditor, NSF
International. Leak and the auditor flew up to Enid, Oklahoma to the manufacturing facility that
mixed and poured her products. After a long day with the auditor, the facility received a passing
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grade.

When it came time for packaging, Whole Foods’ requirements were just as onerous. Leak
worked with the marketing department for two months before they approved her shampoo
bottles. The products finally shipped about one year after the original conversation with Colleen
Carter. Leak claimed another moral and financial victory. Entrepreneurial pressures, however,
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continued to weigh on her, and Leak soon hoped to afford to hire someone to run the day-to-day
operations.

Petco: A Landmark Contract

When Leak started her business, her goal was to get Cain & Able into the two largest chain
stores: PetSmart and Petco. As soon as she had products, Leak went online and submitted them
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for review via the official protocol. PetSmart eventually sent Leak a standard rejection letter,
and she never heard back from Petco.

Petco was headquartered in San Diego, California, and offered a selection of more than 10,000
pet-related products. It was one of the leading retailers of premium pet food, supplies, and
services and operated 790 stores in 49 states.25 In 2005 Petco recorded $1.99 billion in net
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24
“Whole Foods Market, Inc. Income Statement,” Onesource, North American Business Browser,
http://businessbrowser.onesource.com/web/Reports/ReportMain.aspx?KeyID=126105&Process=CP&Report=ANN
UALIS (May 20, 2011).
25
“PETCO Animal Supplies, Inc Corporate Overview,” Onesource, North American Business Browser,
http://businessbrowser.onesource.com/web/Reports/ReportMain.aspx?KeyID=189057&Process=CP&FtrID=UNIFI
EDSUMMARY (May 20, 2011).

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 Cain & Able Collection E-412 p. 10

sales.26 Also in 2005, Petco launched a small chain of boutique stores called La Petique. At a

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trade show, the La Petique buyer, Laura Nadel, approached Leak with interest in Cain & Able.

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Leak told Nadel that she hesitated to sell Cain & Able Collection to a Petco subsidiary because
the small stores, her main clients, did not like to carry the same products as the chain retailers.
However, she decided the benefits outweighed the costs since La Petique was such a small
division of Petco. Leak had made a landmark decision for Cain & Able.

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These boutiques were not around long, however. Petco ended up closing La Petique within two
years. Nevertheless, Leak remained an official Petco contractor with access to the vendor portal.
In 2007 she set a goal to create a new brand and get it into this mass-market channel. Leak spent
the first six months of 2007 formulating and designing a new brand to appeal to a wider
audience.

Leak became increasingly dissatisfied with stores putting her product into the spa category. She

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used essential oils, but these luxury ingredients confined her products as the grooming line for
only the very rich, and this worried Leak. She wanted to lower her price point and migrate from
this luxury branding while staying true to the all-natural approach.

For her Petco line, Leak moved away from the expensive oils and instead used more economical
plant-based fragrances (continuing to avoid harsh detergents, synthetic perfumes, and artificial
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colors). She also decided to sell this new product only by the case. The small stores often
wanted to purchase fewer than 12 units of a given product. Cain & Able valued superior
customer service, so Leak allowed this despite the additional labor costs. If Leak mandated that
clients purchase by the case (something large stores like Petco did anyway), she would lower the
shipping and handling costs of processing orders. To her surprise, the small store owners never
pushed back on this new policy.
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Leak named her new product line Dirty & Hairy Repel. She targeted consumers who loved their
dogs like family members but considered their animal more of an outdoor dog and thought
pampering their dog was silly. In addition to the pleasant smell and odor-neutralizing
ingredients, Dirty & Hairy Repel naturally protected dogs from bugs and fleas. She finalized the
new products during the summer of 2007 and scheduled a meeting with Nadel for mid-August:
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I was pretty nervous for the meeting. I knew I had to impress because there was
intense competition for Petco shelf space. To go the extra mile, I developed a
complete end-cap display designed for the three Dirty & Hairy products:
shampoo, conditioner, and odor-neutralizing spray. At the last minute I also
decided to bring along my KissAble dental line, which I had launched earlier in
the year—this was a great move. After some waiting, Laura and her boss, Peggy,
called me to the conference room. The meeting was professional, polite, and to
my surprise, fairly uneventful. At the end of it, Laura said they really liked the
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products and would order for the first quarter of 2008. I couldn’t believe it; after
four years of trying to get products in Petco, I had finally done it!

26
“PETCO Animal Supplies, Inc 2006 Annual Report,” Onesource, North American Business Browser,
http://businessbrowser.onesource.com/Web/Reports/AnnualReport.aspx?ReportID=GRC_11484333911936DEF&pr
ocess=CP&file=file.pdf (May 20, 2011).

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 Cain & Able Collection E-412 p. 11

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By December Leak had orders for Dirty & Hairy Repel and the KissAble products. The
KissAble products soon became one of the top sellers on the dental isle at Petco. However, Leak

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quickly encountered regulatory problems with Dirty & Hairy Repel. In 2008, several state
agencies contacted Leak saying she could not use the word “Repel” without registering with the
EPA, which would cost tens of thousands of dollars.

Eventually, Leak changed the label and quit making claims of “mitigating pests.” She renamed

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the product Dirty & Hairy Protect and simply said it was made “with citronella oil.” She would
have to hope that consumers would infer the purpose of citronella oil. Ultimately, this strategy
did not work, and Leak learned a tough marketing lesson. Sales of the product decreased by
about 50 percent the year after the name change.

Leak also learned an important point about selling in large chain stores. Petco took a higher
markup than she expected, so the first payment she received from Petco was lower than the

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invoiced amount. Leak looked back through her contract, and this time she paid more attention
to all the fine-print deductions—damage allowance, volume rebate, coop advertising—these
things all added up. Her Petco account was still profitable, but not by the margins she
anticipated. Going forward, Leak built these costs into her price matrix when she presented new
products. The Petco contract completely changed her business, as she began to migrate away
from small, independent stores to focus on the Petco account.
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The Pier-1 Christmas Nightmare

In 2008, Leak decided to expand her business by acquiring Happy Hound Biscuit Company.
Founded in 2003, Happy Hound aimed to make nutritious and uniquely decorated gourmet dog
treats. The treats were prepared using fresh ingredients and contained no preservatives. Baked
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daily, Happy Hound dog treats were shipped within 48 hours to retailers to ensure freshness.27
Lisa Lewis, the owner of Happy Hounds, was burned out from running this labor-intensive
business. Leak bought her company and then hired Lewis to do the baking while Leak handled
all the administrative matters.

One of the advantages to purchasing Happy Hound was that company’s existing relationship
with PetSmart. In 2008 PetSmart was one of the nation’s leading retail suppliers of products,
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services and solutions for the lifetime needs of pets. PetSmart had annual sales of $4.2 billion
and operated more than 700 pet superstores in the United States and Canada in 2008, as well as a
large catalog business and the Internet’s leading pet product Website, www.petsmart.com. In
addition, most PetSmart stores featured styling salons that offered quality pet grooming
services.28

Before purchasing the baking assets, Leak and Lewis flew to Phoenix to meet with the PetSmart
dog treat buyer. Leak hoped to get a large order for the fourth quarter and secure a meeting with
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27
“Treats are the trick,” Austin Business Journal, January 17, 2005,
http://www.bizjournals.com/austin/stories/2005/01/17/smallb1.html (May 21, 2011).
28
“PetSmart, Inc. Corporate Overview,” Onesource, North American Business Browser,
http://businessbrowser.onesource.com/web/Reports/ReportMain.aspx?ftrId=UNIFIEDOVERVIEW&Process=CP&
KeyID=171182&Expand=BusDesc#BusDesc171182 (May 21, 2011).

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 Cain & Able Collection E-412 p. 12

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the PetSmart grooming and dental buyers. Unfortunately, those buyers would not accept
appointments with Leak, and the treat buyer unexpectedly backed out of the contract, crushing

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Leak’s hopes for another landmark contract.

At the same time, Leak negotiated a contract with another large chain store. She recalled:

Before Lisa’s first day, I pre-sold 15,000 units of my new dog cookies to Pier 1

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for Christmas. When Lisa reported for her first day of work, she broke down and
started crying, saying that she just could not work in a bakery anymore. We had
orders to fill, so I had to throw on the oven mitts and start baking.

Leak hired two more full-time minimum-wage employees with cooking experience. One did all
the baking and the other did the decorating. Leak then employed a friend to package the treats.
During crunch times she enlisted her parents’ help. It took a full eight weeks to ship the Pier 1

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order, but by the time they completed it, Leak realized that purchasing the bakery had been a big
mistake. She spent 80 percent of her time running the division, but it contributed only 10 percent
of the profits. She laughed as she noted, “not getting the PetSmart contract was a true blessing in
disguise!”

Leak flashed back to her revelation about moving away from gift sets. She realized the bakery
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required her to touch the products too many times to make a profit. At the same time, she had
grown the business, people loved the dog treats, and she had invested a lot of money to establish
the bakery. Maybe if she held on just a little longer, she could learn to run the bakery in a more
productive and cost-effective manner. Leak also hoped that she soon could afford to hire a full-
time CEO so she could live a more normal life.
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THE BIG DECISION

By 2010, Petco, with over 1,000 stores, accounted for 40 percent of Leak’s business. After the
2008 recession, many of her smaller customers went bankrupt, and the Petco contract saved Cain
& Able. However, Leak worried that she had hit a stalemate. She had not seen much growth
since 2008. After the 2008 recession, Leak made a few cutbacks (she finally closed the dog treat
bakery and cut down on the number of trade shows), allowing her to weather the storm. In fact,
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Leak did not have to let go of any employees and still made a profit in 2008 and 2009, while
many other companies in the pet industry were closing.

Leak felt conflicted. On the one hand, she reflected,

I was working for myself and making my own schedule. This was wonderful with
a new family. I didn’t have to rush back to work six weeks after having my son in
November 2009. I took three months off, and the business ran just fine without
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me. When I went back to work, I only worked three days a week. Orders were
coming in and shipping out and we were making money. I was paying myself a
meager salary, but I was also reinvesting money into the brand and building my
equity. I was also working less than 20 hours a week. For the first time in years I

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Permissions@hbsp.harvard.edu or 617.783.7860
 Cain & Able Collection E-412 p. 13

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took a vacation— well, actually, several vacations in 2010. I never had to worry
about taking time off because the business could run without me.

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The other hand, however, caused Leak great angst:

I started selling products in the second half of 2004. The first year, total revenue
was less than $100,000. In 2005, it was a little over $300,000. In 2006, we

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doubled and revenue was approximately $600,000. In 2008, we grew almost 40
percent and did around $900,000 in sales. However, we stagnated in 2009 and
2010. To get over the million-dollar hump, I needed to grow the business—more
trade shows, PR, new products, etc. But, I didn’t want to work more. I was
enjoying time with my family and didn’t want to miss out on these precious years
of my son’s life. I was very fearful that the business would start to decline and
then dwindle out. I had to do something!

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Leak analyzed the pet grooming industry. A few years after she had launched her business,
several high-end, human-focused companies had entered the pet arena. This genre included Pet
Head by Bed Head (owned by Tigi Cosmetics) and Martha Stewart Pets. Just as all young
industries do, the pet industry began to consolidate. By 2010, the pet industry had grown by 40
percent, and competition crowded the market. The American Pet Products Association predicted
the total U.S. pet product market would grow from $48 billion in 2010 to $51 billion in 2011.29
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Leak determined that she had four options: (1) hire a CEO, (2) sell the business, (3) merge with a
competitor, or (4) raise venture capital money. First, she considered hiring someone to manage
and grow the business. Good talent abounded during the recession—she talked to several MBAs
from the University of Texas who had run start-ups. Any of those candidates could successfully
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take over all responsibilities. Plus, her husband Tim made enough to support the family himself.
But, Leak would have to quit paying herself and offer equity in the company to attract a talented
CEO. She mused about how long it would take the new CEO to reach maximum effectiveness.

Once again, Leak contemplated selling the business. She valued her family most, and selling
would allow Leak to put some money in the bank and quit working. However, by the time Leak
paid off her business loans, she would have only about $150,000 left over. She was not sure if
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that was enough to compensate for all her sweat equity. She also was not sure if the major
players in the pet industry would pay top dollar for a business with sales hovering below $1
million per year. Leak recalled, “In 2010 I had private-investment firms contact me at least once
a quarter interested in purchasing all or part of the company. I always ask them how much
revenue they are looking for. They always answer the same: $5 million to $10 million a year in
sales with EBIDTA [earnings before interest, depreciation, taxes, and amortization] of about 20
percent of gross sales.”
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She also considered merging with Happytails. A merger would help push them closer to the $5
million to $10 million revenue range for selling. The Happytails owners expressed a similar goal
to sell, but would they change their mind if business started booming? She also wondered if it
would be smarter to merge with a company in a different product space, such as pet supplements
29
“Industry Statistics & Trends,” http://www.americanpetproducts.org/press_industrytrends.asp (May 21, 2011).

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 Cain & Able Collection E-412 p. 14

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and vitamins. Did Leak really need to inherit more shampoo and grooming products? Happytails
also operated in many of the same stores. Would these retailers feel OK with the merger, or

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would they choose one brand instead of continuing to carry both? However, maybe the
increased market share would help her finally penetrate PetSmart, making the small stores
inconsequential.

Finally, Leak considered raising money:

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I talked to friends and family, and I also talked with a business associate that is
part of a VC firm. I figured I needed to raise at least $250,000. This way I would
have money to hire more employees, add more products, and attend more trade
shows and do more advertising. However, I knew investors wanted assurance that
I would work at least full-time, so this defeated the purpose. I also knew I would
need to give up some of my equity in exchange for the capital.

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Leak thought about how far she had come and she laughed, thinking about wearing her chemist’s
goggles while mixing shampoo in her kitchen. She now had two babies whom she loved—her
son, Cole, and her company, Cain & Able. Leak could not give her full attention to both, so she
would have to make this daunting decision very soon.
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No
Do

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 Cain & Able Collection E-412 p. 15

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Exhibit 1:

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Timeline for Cain & Able

January 2003 - Use Aveda on own dogs, have the idea for natural shampoo
October 2003 - Create LLC and hire chemist

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September 2004 - First trade show, sell $20,000
April 2005 - Win Rookie of the Year award in Austin (best new small business)
May 2005 - Move from 1-car-garage apartment to 2-car-garage apartment
January 2006 - Move out of apartment into office space

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June 2006 - Best of PetFinds at the Dallas Gift Show
July 2006 - Featured on HGTV
August 2006 - Best Visual Presentation at the San Francisco International Gift Fair
- Contract with T.J.Maxx/ Homegoods
April 2007 - Contract with Whole Foods to private-label 365 brand of pet shampoo
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October 2007 - Recognized in Newsweek
November 2007 - Recognized in the Wall Street Journal
August 2007 - Contract with Petco
May 2008 - Buy assets from Hungry Hounds / open bakery division
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June 2008 - Contract w/ Pier 1

January 2009 - Recession hits / close bakery division and sell all equipment
November 2009 - Cole is born – take off for three months
February 2010 - Back at work – economy is still slow; “feels like we’ve hit a plateau”
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December 2010 - Decision: hire, sell, merge, or raise VC money?

Source: Interview with Candace Leak, March 3, 2011.

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Permissions@hbsp.harvard.edu or 617.783.7860
 Cain & Ablle Collection E--412 p. 16

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Exhibit
E 2
Cain
n & Able Bioo

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No
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Source: Caain & Able com

mpany biograph
hy 2007. Obtaained during innterview with Candace Leak March 3, 2011.

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Permissions@hbsp.harvard.edu or 617.783.7860