XO Marshmallow raises capital to enter grocery retail
Chicago-based XO Marshmallow is raising its first capital round to expand manufacturing and reformulate products for grocery shelves. The move aims to leverage its direct-to-consumer base while addressing supply chain vulnerabilities exposed by competitor failures.
Lindsay Shanks, founder and CEO of XO Marshmallow, is raising capital for the first time to build out manufacturing capacity for the Chicago-based gourmet marshmallow brand. The company generated just under $5 million in revenue last year, with 90% of sales coming from direct-to-consumer channels. Shanks is reformulating products to remove corn and extend shelf life from four to 18 months, a critical step to facilitate entry into grocery retail. The company self-manufactures in a 10,000-square-foot facility outside Chicago because no co-man exists for this style of marshmallow, a constraint that contributed to the failure of competitor Smash Mellow due to capital and manufacturing issues.
Shanks aims to leverage her 10-year direct-to-consumer community to drive grocery sales without cannibalizing high-margin online revenue. Tara Bosch, founder of SmartSweets, advised that grocery and direct-to-consumer channels serve different functions, noting that SmartSweets eventually reached a 70% wholesale to 30% direct-to-consumer split. Bosch suggested targeting natural channels first, as they are more forgiving to early-stage startups regarding merchandising costs compared to mass retailers. She argued that grocery retail acts as an impulse buy channel and does not cannibalize direct-to-consumer sales.