🌶️ Sriracha: the rise and fall of a legendary hot sauce brand

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Read time: 3 mins 39 seconds

Today's post is about the crazy story of David Tran and his journey building Sriracha or Huy Fong's Sriracha.

They created the Sriracha category and make hundreds of millions of dollars a year without spending a single dollar on advertising. However, due to some internal conflicts and supply chain issues, the once dominant hot sauce brand has fallen off a cliff.

I went down a rabbit hole after watching my friend Peter Zhang's viral reel about the story, and I wanted to share it with you all since it has several lessons that are quite relevant and helpful for all consumer founders.

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The man who built everything (almost)

David Tran was born in 1945, a former major in the South Vietnamese army who worked as a chef. He fled Vietnam by cargo ship in 1979 with 100 ounces of gold (worth $20,000 at the time) and settled in Los Angeles.

Tran started Huy Fong Foods in February 1980, roughly a month after arriving. He named it after the Huey Fong, the freighter that carried him out. The iconic rooster in the logo is his zodiac sign.

In the early days, he mixed sauce by the bucket, packed it into repurposed baby food jars, and sold it out of a van to Chinese restaurants around LA. He made $2,300 in cash that first month and saw the early promise of what this sauce could become.

Soon after, he started doing the thing that defines him. He taught himself welding and machining, then built his own factories and his own production equipment.

For 40+ years of running Sriracha, he never spent a dollar of advertising. Not one commercial or billboard.

Apparently, it worked out:

Bon Appétit made sriracha its ingredient of the year. The bottle became a design object. Huy Fong became the #3 hot sauce in America, behind only Tabasco and Frank's.

A man who arrived with nothing built a vertically integrated billion-dollar company and outsourced nothing.

Well.. except the peppers.

You can weld a machine, but unfortunately you cannot weld a jalapeño.

In 1988, a fourth-generation Ventura County farmer named Craig Underwood started growing for Tran. Over 28 years, that grew from roughly 400 acres to about 3,000, and by 2006, Underwood Ranches was supplying around 95% of Huy Fong's peppers.

They initially had written agreements with price per pound and volume specified but as trust started to build, they moved to more informal oral agreements. 

Huy Fong advanced millions each season for planting, and Underwood grew a red jalapeño to spec at a scale nobody else was matching. They had a good system going for quite a while.

Starting around 2014, Tran decided it was time to vertically integrate and cut Underwood out for a much better margin.

He quietly set up a separate pepper company called Chilico, incorporated it in his sister-in-law's name, and began routing Huy Fong money through it. He also tried to hire away Underwood's operations chief.

At one point he flew a drone over Craig's fields to film the harvest 🕵.

In November 2016, the two sides shook on the next season for 1,700 acres, $18M in advances, business as usual.

Eight days later, while Craig was on vacation, Tran sent word that the price was now $500 a ton. For context, Craig's cost to grow them was $610.

And then Huy Fong sued him, for $1.4M they claimed they'd overpaid.

That went badly. A jury unanimously found Huy Fong liable for fraud for concealing what they were building and lying while they built it, and ordered them to pay Craig $23.3M. The appeals court upheld the verdict in 2021. Needless to say, that was the end of the partnership.

Huy Fong had a 650,000 sq ft factory two hours from Craig's fields and suddenly nothing reliable to put in it.

Production stopped in 2020. Then 2022. Then 2023. Then again in 2024, that time all the way past Labor Day. Meanwhile competitors buying peppers from the same regions kept shipping just fine.

Bottles hit $70 on eBay and some sellers even pushed leftover stock to $150+.

Huy Fong’s revenue went down 49% as the direct result of this supply shortage while consumers started flocking to its copycats.

Another challenge was that Huy Fong never trademarked "Sriracha."

Tran assumed he couldn't, since he'd named it after a town in Thailand. He also didn't want to since competitors putting "sriracha" on their labels looked like free marketing, and his sales climbed the whole time it was happening. 

Even though the rooster bottle and green cap is an iconic design, the word “sriracha” went generic and many brands like Franks’s, Tabascos, and Lee Kum Kee all launched their own sriracha product.

When his bottles vanished due to supply chain issues, the demand didn't vanish with them. Consumers were searching for sriracha and naturally pivoted to other brand items. 

Tabasco figured this out immediately. In September 2022 they bought srirachashortage.com and pointed it at their own sriracha.

By late 2023, per NielsenIQ, Tabasco had the best-selling sriracha in America and took the category from the guy who invented it.

Oh, and Craig Underwood launched his own sriracha brand called Underwood Ranches Dragon Sriracha using the original peppers with the money collected from the lawsuits. What a shocker!

There is a question almost every consumer founder eventually has to answer: what do you do about the one key part of your business you don't actually control?

I've watched versions of this play out all over consumer. Brands where one retailer is 70% of revenue and sets the margin every year. Apps that are really just a feature living on someone else's platform. Sellers whose breakout product quietly becomes an Amazon Basics SKU about eighteen months after it starts working. The dependency feels like traction the whole time it's growing.

Tran chose to reduce it, which I think was directionally right. He just did it in the worst way available. A shell company in his sister-in-law's name, an attempt to poach Craig's operations chief, a drone over his fields, and a price cut below cost delivered while the man was on vacation. That decision cost $23.3M, his supply chain, four years of empty shelves, and it gave Craig both the money and the motivation to launch a competing sriracha with the original peppers.

The other thread here is brand and IP. Huy Fong spent thirty years teaching Americans what sriracha even was, and never trademarked the word they were teaching. So when the bottles disappeared, the demand didn't go anywhere. It went to whoever had inventory.

Marketers split this into mental availability, how easily your brand comes to mind, and physical availability, how easily someone can buy it. You need both, because one doesn't cover for the other. Huy Fong had enormous mental availability, but it was just attached to the category word instead of their brand. People wanted sriracha, not Huy Fong.

Which is why brands spend real money defending category words. Take Band-Aid, for example. Even with a trademark, Johnson and Johnson still spends millions every year on marketing to defend the term and keep Band-Aid from becoming a generic noun. They also constantly send out cease and desist letters to brands that mention Band-Aid in their products.

What do you all think? Reply to this email, I read every one :)

Until next time,

Leo

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