At first glance, Lynnae's Gourmet Pickles, one of the contending businesses on this week's "Shark Tank" season premiere, looks like a pretty good business. They've seen very impressive growth in their first year.
But according to the Sharks, their pricing and product choices mean the business is set to crash into an inevitable ceiling.
The very personable Lynnae Schneller and Ali Cullinane, friends from Tacoma, Wash., based the product on a secret family recipe from one of their grandmothers. The business showed potential, with $144,000 in sales in its first year and products available in 26 states. Plus, they had a meeting with Target lined up.
That charm didn't last long, however. When they asked for $125,000 for a 20% stake, the Sharks broke down step-by-step why Lynnae's Gourmet Pickles didn't have the growth potential to be a major player.
Price is the problem.
The pair's gourmet pickles sell for about $6.99 at retail and $4.00 wholesale, they said. In comparison, an average jar of pickles costs $3.00 to $3.50 in supermarkets.
The moment that price differential was revealed, the Sharks started to turn.
"You've just walked into a huge risk," investor Kevin O'Leary said. "Why would Target put a $7.00 jar [on shelves] when the market's at $3.00?"
The pair's defense is that their price is in line with other specialty retailers. But they had a hard time explaining why their product is so different from any other. They also couldn't explain how they'd get past making a product that can be pretty easily imitated or replicated by someone with deeper pockets for cheaper.
"Do you have anything that's so differentiated people are going to say 'wow'?" Mark Cuban asked.
They said they appeal to a "gourmet, high-end audience," but that market simply isn't that big, the Sharks said. And, beyond competitors, anyone with the time and initiative can make pickles on their own at home for a tiny fraction of the price of buying them.
It's a matter of time before they get crushed.
The business fundamentally has a ceiling, Mark Cuban told the pair.
The pair described their strategy as attempting to "explode into the market" and get a lot of distribution quickly. But the Sharks believe they won't be able to get anywhere near challenging a big competitor without getting knocked out.
"You guys hustle, which is great, and you're creative. But the big guys aren't paying attention to you because you're at $144,000 in sales," Cuban said. "You don't matter to them. But as you grow — and you will — they'll start paying attention, and they'll make a decision. Do I buy them? You're not big enough. Do I crush them by just putting out a comparable product? Probably."
You usually can't overcome pitching to the wrong audience.
The pair have a nice and growing business, but not one with the sort of nationwide and rapid growth potential that these investors look for.
"You aren't worth more than $600,000," O'Leary said. "And I don't think you can sell these pickles for $7.00 at Target."
In this case, personal preference also played a major role. Sharks Lori Greiner and Robert Herjavec backed out in part because of business concerns, but also because they simply don't like sweet pickles.
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