Hampton Creek Ran Undercover Project to Buy Up Its Own Vegan Mayo | Hacker News Reader

Hampton Creek Ran Undercover Project to Buy Up Its Own Vegan Mayo

bloomberg.com

114 pointspgroves81 comments

> In at least some cases, Hampton Creek lumped in expenses related to buying its own products with wages paid to contractors, according to five former workers. All five said money they were given to buy jars of Just Mayo were treated as taxable income, making them liable for a higher tax bill than their actual earnings would require. One former contractor provided H&R Block tax records showing this to be the case. Another Creeker asked the company in an e-mail to separate the expenses from taxable income. But the request was ignored, the contractor said. Hampton creek declined to comment about the alleged practice.

Sketchy and unacceptable

Worse than sketchy - it's fraud. People should go to jail for this.

That's a bit extreme. Non-violent crime and all. A fine perhaps.

I'm not so sure. It is obviously fraud, and couldn't appear not to be that way for the perpetrators.

So if they only face fines it makes sense for them to weigh up the potential gains against losses - and its not just flat cash.

On top of that bear in mind that high sales figures will allow them to grow faster - you can't fine growth very easily.

Defrauding investors is a serious crime. Think of the widows and orphans and their pension funds. :-)

Lots of non-violent people go to jail for marijuana use as an example... Lots of violent destructive people never see jail -- you know the kind of people that forcefully take homes and money from people with the help of the sheriff because they knowingly sold homes to them that they couldn't afford..

This is the worst argument, though, if your point is to argue that these people ought to be in prison. Many non-violent crimes that people go to jail for are activities which should never have been made into crimes in the first place.

And if you extend this out, you start to wonder just how many non-violent crimes ought to be punishable with prison. The shoplifting example, for instance, might be something that should only be a civil penalty rather than criminal, as long as it isn't armed robbery.

It's hard to know where to draw the line, but if you want these people to go to prison, then don't highlight crimes that the majority of Americans now think shouldn't be crimes.

I'm willing to bet you'd put a shoplifter in prison for stealing a computer. This type of fraud is a much bigger theft.

I'd agree if it was just defrauding investors (assuming they valued the company based on this and had no knowledge of it) or the stores (assuming there were contracts forbidding it). But they also screwed their employees by paying out the expenses as salary. Personally I'm a bit less forgiving when it comes to employers defrauding employees. The power disparity and all.

Almost anyone in a highly competitive market doesn't play by the rules.

Isn't it sketchy when egg-carton has a chicken freely roaming the grass on it?

Isn't it sketchy to write cage-free when the chicken is in a dark large container clumped together with hundreds of other chickens?

They are selling a product that has to compete with billion-dollar businesses that already have plenty of sketchy and untruthful marketing.

They spent a meager 77k on this and somehow that is unacceptable.

It's just the same if not less worse than what their competition does.

It's sketchy to call egg-free-white-flavored-oil-mix Mayo. It's sketchy to put a giant egg on your egg-free mayo.

"While Just Mayo is egg-free, Hampton Creek Chief Executive Josh Tetrick also emphasized that it doesn’t use the term “mayonnaise,” only “mayo.”"

It's mayo, not mayonnaise you silly consumers.

http://www.wsj.com/articles/just-mayo-reaches-agreement-with...

edit: You know, of all the things I could comment I talk about eggless f'ng mayo. I wish I could delete this :)

I did mention that the sketchiness is at least on the same level.

In my opinion, sketchiness of the billion-dollar egg-dairy-meat industry is far above Hampton Creek marketing.

Yeah, I wouldn't disagree with that though I'm far from knowledgeable.

Meh. Mayonnaise is mostly emulsified oil anyway. The egg helps emulsify it and adds a bit of flavor, but it ain't like you're eating much egg on your sandwich or salad.

Which is fine; oil is tasty. I'm sure Just Mayo tastes fine.

The misleading marketing (trumpeting health benefits or - like our parent post - less animal cruelty) is fairly ridiculous though.

> The misleading marketing (trumpeting health benefits or - like our parent post - less animal cruelty)

If the product truly is free of animal products, then it is most certainly reducing animal cruelty compared with mass-farmed chicken egg mayo. Ethics aside, that is an objective fact.

Not to nitpick but how do you define animal cruelty? For instance, wouldn't increased farming lead to additional erosion and destruction of habitable land for many creatures? I've always heard that simply reducing the amount of animal products does not always correlate to an increase in benefits for wildlife. I'm asking this legitimately because I am ignorant about it.

Eggs in commercial products either come from free-range, barn, or cage chickens. The vast majority are from caged chickens, although this is slowly changing. Caged chickens are locked in a tiny cramped cage, sometimes strapped down with their beaks removed, and are usually pumped full of chemicals.

That's pretty fucked up, the only way this could not reasonably be considered cruelty is if you assert animals have no emotions and science seems to disagree with that notion. Free range is much better, the chooks can roam around in the open doing chicken stuff. I eat free range eggs.

Environmental damage from increased farming is only a major factor where specific habitats are being destroyed, eg Palm Oil in Indonesia. Even then, it's a lesser evil than directly harming individual creatures.

The largest producer of mayo in the USA and UK, Hellman's, uses only free-range eggs

> Ethics aside, that is an objective fact.

It's actually not an objective fact. Compare two scenarios:

10 acres of rainforest were clearcut to grow palm oil to make the mayo

1/2 acre of grassland in Iowa that was previously used for corn is allocated to raise pastured happy chickens, rotated with market heirloom grains. They are allowed to live out their natural life, and are fed even after they stop producing eggs.

Which of those scenarios has more animal cruelty? In one situation you are essentially committing genocide of an entire microecology, in the other you are giving some animals an incredible life, and eating part of their waste stream, eggs which are not necessary for their survival or happiness, and in fact are over-budgeted in their genetics to allow for predation.

Veganism is an OK heuristic for animal cruelty, but it's far from perfect. It's often better than nothing, but a vegan Whole Foods diet may well cause more animal harm than someone living near the poverty level in, say, Korea, eating some animal products, but also making much more efficient use of land. Vegans love to pretend land use doesn't matter, but land use = animal displacement.

Eating more plants can be a great way to reduce cruelty. But Vegan\ism\ as a hard rule is more about religious purity than it is about animal cruelty.

Signed,

Someone who ate entirely vegan today and most days

Just Mayo does not include palm oil

While it might be a fun thought experiment to find situations where a non-vegan dish includes less animal cruelty than a technically vegan dish, for 99.99% the people reading this and in 99.99% of the real world situations they ever be in, choosing the vegan dish will mean choosing significantly less animal cruelty.

A common pro-vegan argument is actually less land use for growing feed crops for raising livestock.

I never said Just Mayo includes palm oil.

And I'm not really impressed by your made up statistics. Again, if you actually cared about animals you would actually care about the numbers, and not just make up fake percentages to make your decisions seem better.

It's not hard to find vegan diets that destroy more habitat per calorie than many meat-based diets. Look at hunting for example, which is often a net positive for animal habitat.

You may be interested to learn that mayonnaise is one of the most highly regulated foods in the US. When your product consists of ingredients as basic as eggs, oil, and vinegar/lemon juice, the name "mayonnaise" loses its meaning very quickly once corners start getting cut (aka the profit motive to reduce costs).

what you are saying is known as the "fallacy of relative privation." yes, it's not as bad as another imaginary company's potential trespass, but that's neither here nor there.

I'm just saying it would be stupid of Hampton Creek to play by the rules. They don't have the money and they don't have the long standing tradition of their competition's products.

It's sketchy because the alleged actions are basically tax fraud. It's also unethical because Hampton Creek were taking money from the pocket of the contractors because they were making them pay income taxes on money they didn't actually earn.

Did you actually read the parent comment? This goes way beyond any deceptive marketing practices.

For the record, I'm one of HN's many (oft mocked) libertarians, but even as a hands-off kinda guy, this is a step too far. They "laundered" the money through their contractor's pay, because they didn't want it to show up on their financial statements.

So it's not the deceptive marketing (you're right that this is more or less par for the course), it's the lies and fraud they allegedly committed to hide the deceptive marketing.

it is not tax fraud, it is fraud on the employees and investors. What they did was allowed by the IRS but they lied to the employees and investors about doing it. If a company forces you to buy a uniform with your own money that is legal, if they then decide to give you bonus for the exact amount the uniform costs that is also legal. The fraud is that it was not told to employees that it would be done that way, it was told they would be reimbursed for the expense and they did this to hide the reimbursement which should be investigated by the SEC

Not the SEC's jurisdiction. Probably the DOJ.

Likely also the FTC

It's not really clear that anyone was criminally defrauded. The investors could opt to sue in civil court though.

It probably largely depends on the state but I wouldn't be surprised if it's not legal to require an employee (contractor or otherwise) to make purchases like that out of pocket. There's a world of difference between requiring a uniform or professional tools and buying hundreds or thousands of dollars worth of your product.

I buy the explanation on checking quality. This is a big problem with packaged foods from grocery stores, especially if your product is new. Maybe demand padding was a partial motivator but hardly the only one.

I really like Hampton Creek products (I'm vegetarian, and my girlfriend is vegan, but Just Mayo is a high quality product regardless of whether you eat eggs or not). I'm honestly excited to see it show up in local stores, and have been known to go to stores that I know stock it specifically to buy it. But, this is pretty sketchy behavior.

I guess investors will be forgiving if the growth of the company ends up catching up with the faked numbers, which seems to be what's happening, but I dunno if the stores will be as quick to forget. Then again, if demand catches up quickly, they may not mind, either.

> but I dunno if the stores will be as quick to forget.

Why would the stores be mad about this? It seems like Hampton Creek has basically sent them a jar of Mayo for $5 and then turned around and bought it back from them for $10. (I'm making these numbers up but I'm assuming the stores aren't selling this Mayo at a loss.) Stores should be happy to do that all day long.

edit: I guess part of the reason they did this was to deceive the stores into giving them more shelf space. I could see that rubbing stores the wrong way.

This is yet another young company that I've heard of which is being driven by a desire for quick growth by trying to short-circuit the natural growth of their product.

LendingClub: misrepresenting financial standing of borrowers. Theranos: their new test is as accurate and more efficient than existing tests. Zenefits: dodged proper training of employees.

All of these seem to be inline with spurring growth. Is the expectation of quick return and/or increased valuation (no down rounds) driving companies to make these poor decisions?

Lending Club: Not only that, they also misrepresented the terms of the contract and legal clauses present in them by falsifying the date of loan forward to one that was after they made changes to their language (I believe Jeffries was the counter party). Blatant securities fraud.

edit: since I seem to be the target of downvoting by people presumably with a stake in LC, here are some sources.

"he falsified dates on $3 million of loans that were bought by Jefferies"

http://www.bloomberg.com/news/articles/2016-05-10/jefferies-...

http://ftalphaville.ft.com/2016/05/10/2161309/the-legal-twea...

http://www.wsj.com/articles/inside-the-final-days-of-lending...

'It's easier to ask for forgiveness than permission' seems to be a feature of American startups.

I mean, that's basically Uber's business model.

AirBnB as well.

toss in manifest destiny while you're at it.

They're defrauding retailers by manipulating the results of their trial runs, resulting in larger buys and wider distribution than they would have obtained otherwise.

I would be surprised if the retailers didn't have language in their agreements prohibiting this type of behavior. If the product ends up having high sell-through rates, this is just a clever growth hack, and it's a win-win. However, if the product doesn't sell after they tricked a retailer into putting a large quantity of product on shelves nationwide, it could easily end in litigation. Especially if these test runs and subsequent retail orders were material to the investment decisions of their backers.

Also: if they engaged in these practices, it probably isn't the only unscrupulous thing they've done. A fish rots from the head/where there's smoke there's fire/etc.

Perhaps naive, but how is this different from spending investors' money on traditional or viral advertising? Seems like either way they are spending money to create demand. Is the only difference how it shows up in accounting? I wouldn't feel too bad for their business partners---Safeway was still making a profit, presumably, just as an advertising company instead of a retailer.

One salient detail that's a bit difficult to pick out of the article: Hampton Creek gave cash to contractors with instructions to use that cash to purchase Just Mayo. However, they recorded (some of?) these cash payments as wages on those contractor's 1099s, meaning those contractors had to pay taxes on that "income" when in truth this was (at best) a business expense.

What I don't get is why the contractors didn't just claim the expense on their taxes to striaghten it out?

My comment is based on the single report substantiating the larger story in the article. I think you ask a reasonable question. Maybe the particular contractor had an axe to grind. Maybe the bookkeeping was a mess but for reasons of incompetence rather than fraud.

I think the larger picture is troubling, but I can also see a scenario where each of the pieces that builds up to that case has a plausible and benign explanation. I don't think there are enough details in this article to conclude one way or the other.

Because their expenses would have to total at least 2% of their AGI in order for them to deduct them.

This means someone making $50K would need to buy $1000 worth of Just Mayo or other qualifying unreimbursed expenses.

It reminds me most of print newspapers "circulating" more copies of its paper than actually needed by readers, so that they can charge a higher price per ad towards their advertisers.

It's totally different. It wasn't disclosed to investors and distorted the results in their favor. It probably violated vendor agreements. They purposely cut the paper trail to hide it because they knew it was sketchy.

How does buying your own products create demand?

> How does buying your own products create demand?

Buying your own products at retail can create demand for retailers to buy it at wholesale if it is on the edge of viability considering non-shill purchases only, because it can make the difference between the total sales at retail being enough for the store to stock the product at all (where, then, they will buy enough to cover both shill and non-shill purchases) and them not stocking it at all (in which case they'll be buying none of it.)

Reddit: faked accounts to seed activities

AirBnB: scraped and spammed craigslist

OrderAhead: faked phone in orders to restaurants not participating

LendingClub: faked financial viability to lenders

Zenefits: faked hours for accrediting licenses

Homejoy: faked out investors

And Theranos?

Different class.

Part of being a modern startup means you have to break the rules to catch up with established competition. If you get big before the law catches up with you, you win.

See: Uber. Flagrantly illegal, but it's gotten big enough to pressure governments rather than the other way around.

"Startup = growth"

How is this different from other guerrilla marketing tactics? If I'm a small company just starting operations, of course I'll do whatever I can to make myself look to be more in-demand. Not defending the accounting or payment/expense irregularities, but if they were only spending a small amount that could otherwise be spent on advertising, I would consider this an effort to help them take off in the marketplace.

They lied to investors about it and won financing based on the results of falsified sales data.

I'm not endorsing fraud, but if they spent only $77K (or twice as much) to carve their product some shelf space against Kraft or Conagra with their billion-dollar marketing budgets, I would look at their action in a different light. Without knowing the true intent and just based on the limited info presented in the article, IMHO, this is not in the same league as what Theranos was doing.

They have shown themselves to be deceitful, so how can you have any trust in that $77K number?

http://www.businessinsider.com/hampton-creek-ceo-complaints-...

Let's not forget, no one really has any idea what is in their "mayo." They've been caught lying about ingredients and their "huge" database of flavors

This is not at all surprising if you know anything about putting a product into retail: Big box retailers have suppliers pretty much literally bent over a barrel (unless you are PG, General Mills, etc).

If your product does not sell through (volume in units) to their satisfaction in ea. / every store or region, typically you will be contractually bound to do almost all of the following:

* You will pay them to buy all product back

* You will pay logistics / restocking fees to remove the product

* You will have to figure out how to put all that product back onto your books.

Compound that with a highly perishable, refrigerated product - and of course this happens all the time.

^Edit for punc ^^ edit for detail

This is all true and it is even worse in many cases. Wonder what those "don't return this item to the store" notices are about? Most big box retailers have automatic refund percentages and penalties built in so every returned item gets placed in the trash compactor and the manufacurer eats the cost plus a penalty. Too many returns result in escalating penalties.

> Compound that with a highly perishable, refrigerated product

AFAIK, "Just Mayo" is not a highly perishable, refrigerated product. It is a refrigerate-after-opening product sold off regular, non-refrigerated grocery shelves, just like normal mayonnaise.

Isn't this the same company than ran afoul (no pun intended) of the FDA for labeling their non-mayonnaise product as mayo?

I bought a jar of their stuff about two years ago. It was essentially thickened vegetable oils and a sizable heaping of salt and coloring. I was unimpressed, to say the least, considering how far vegetarian and vegan alternatives to meat and dairy have come in the last decade.

Hampton Creek are flat out dishonest. They have a product that is not mayonnaise, but they call it mayo. Furthermore, their product does not include any eggs but they had a huge image of an egg dominate their entire label. The entire product was based on a lie and I am not surprised they tried to mislead their investors and distributors as well.

I am all for removing animal products from the diet but that does not excuse lying to the consumer. If you think you have a great egg-less mayo like sauce, you should be proud of the fact that is egg-less and make sure the consumer knows it. Not hide it.

And no it does not taste anything like mayo. It has a weird spicy taste. Mayonnaise is not supposed to be spicy. Some people may like it, but the people that are expecting the taste of mayonnaise will be quite disappointed. I am willing to bet that a lot of food has been thrown in the trash because of this little marketing trick.

What about bacon fat mayo, which is made with bacon fat instead of the traditional olive oil?

Or how about Hellman's which almost certainly doesn't use olive oil, instead using some cheap vegetable imitation, should that be allowed to be called Mayo?

In Japan they use apple cider vinegar or rice vinegar, should that also be labelled as "rice-vinegar based mayo-like sauce"?

Mayonnaise is almost never made with 100% olive oil. It will dominate the flavor (sharp/grassy/bitter). A dash is fine, but a neutrally flavored vegetable oil like canola, rapeseed or sunflower oil is typically used.

From Wikipedia:

> According to Trutter et al.: "It is highly probable that wherever olive oil existed, a simple preparation of oil and egg came about — particularly in the Mediterranean region, where aioli (oil and garlic) is made."

So, no. What you are talking about is some imitation Mayonnaise-like sauce which should be law not be allowed to be called "Mayo". Because that's what the legal system is for: protecting the traditional definitions of foods from people like you who think some sort of cheap Canadian imitation flower seed oil should be allowed to be used in a traditional recipe like Mayonnaise.

And this is why the EU PDO is useful. If you have a product with such a designation, you know some of it's qualities.

If i pick up feta, I know that it's made from sheep or goat milk, but if I buy Greek salad cheese or Feta-style, I have no such guarantees.

Admittedly, some of the designations are a bit off, such as not being able to make Stilton cheese in the village of Stilton.

> Or how about Hellman's which almost certainly doesn't use olive oil, instead using some cheap vegetable imitation

Use of olive oil isn't the norm for commercial mayonnaise; commercial mayonnaise that uses olive oil is prominently distinguished. Vegetable oil is the norm.

> “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”

Wow! :) Shady! :)

As far as displacing Hellman's, good luck with that.

http://webcache.googleusercontent.com/search?q=cache:uWZnLEm...

When the tax benefits of the farming industry start to fall, the prices will go up, and the Hellman's may become a niche product.

This is just engineering and science at it's best. Produce food that tastes the same but has a much smaller production cost. The energy conversion from soy to chicken egg to mayo is less efficient than soy to liquified soy with some protein emulsifiers (not that it's made out of soy, I just picked soy randomly).

I guess that's one definition of dogfooding!

Scrolling away from the video prevents it from playing on the news sites I usually visit. Not Bloomberg!

"Don't try to get away from that video by scrolling down to the article, we'll keep it in the corner for you!"

Thanks bloomberg. Adding their video player to ublock.

I don't see any problem with this. If it's illegal, then prosecute them. If it's not illegal, then it's up to the shareholders to hold the executives responsible. I don't see how consumers were defrauded or deceived in any way. Major food producers pay huge buckets of money to be on those grocery store shelves. And we know the major food producers have been trying to put Hampton Creek out of business since it started. I like Just Mayo and I say good for them.

A friend at a mobile gaming company once had to run an analysis on the cost/benefit of spending her company's money in one of their game to drive it up the top grossing charts. The question was whether high placement on the top grossing charts could drive a lower CaC (the cost being the 30% of spend that goes to apple) than buying similar amount of users through FB ads.

Soooo... did they do it?

They have placed themselves on the wrong side of the line between growth hacking and actionable fraud.

Worst yet, when Josh Tetrick (CEO) was called out on it, he tried to justify it rather than coming clean and promising not to do it again.

He'll be lucky not to be sued by investors since funding was granted based on falsified data.

I love the mindset of this founder for utilizing this tactic. I'm okay with it as long as the LTV exists.

Reddit faked comments in the early days. SocialCam juiced user invites before Apple banned the practice.

I see this as no different. I do however believe they should have outsourced the calls more efficiently utilizing something like upcall.com.

This founder believes he has the vaccine of sorts to a ton of waste and if the result is a product that will reduce consumption because it's environmentally friendly, I'm okay with him being a bit vicious with it.

Also for QC, you usually buy a statistically small number of units.

You can't do this type of fake demand tactic though without letting the investors know. I think that's murky territory.

Homejoy did something similar buying fake reviews and juicing yelp reviews.

So there's always a fine line, really it's important to make sure you have lifetime value on the product.

If you're going to order your employees to do questionable things you'd better make sure they're treated right. You would think it goes without saying...

Upon rereading this it may seem like I support what is ostensibly fraud and I should make it clear that I do not. I just wanted to note that mistreating (and in some cases apparently defrauding) someone who can testify against you is probably not a smart move. It speaks to their ignorance, stupidity or perhaps narcissism.

I'm finding it hard to be troubled by this.

If real customers will not buy the product then it will fail, no matter how much the company tries to fake it.

It's not that different from gaming the system to get on the Best Seller list.

Or how movie studies get their films to rank high so everyone thinks it's the thing to watch.

Or to mess with amazon sales rank.

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