Podcast: How Huy Fong’s Sriracha Went from Hot to Not

But a series of unfortunate logistical, branding, and business-relationship decisions have left the brand fighting to remain the undisputed leader in the category.

On this episode of The Insightful Leader, we retrace Huy Fong’s steps and consider where it faltered, and contrast that against a company that’s proven itself a formidable competitor in the sriracha space: Tabasco-maker McIlhenny.

Podcast Transcript

Laura PAVIN: Alright.

PAVIN: Hey, it’s Laura Pavin. So I recently asked one of my colleagues, Abraham Kim, to join me in the studio.

PAVIN: Okay, so try this one first. Tell me what you’re tasting.

PAVIN: I wanted to put him through a little test. In front of him I placed two crackers with identical-looking hot sauce on each one.

Abraham KIM: Oo, that has a bit of kick to it. Peppery, kind of lingers at the back of your throat.

PAVIN: Both sauces were sriracha, that spicy condiment you’ve probably had at your local Asian restaurant or may even have in your fridge right now. But one was made by McIlhenny, the maker of Tabasco, and the other by Huy Fong, which comes in that iconic rooster bottle with the green top.

Abe is familiar with both brands of sriracha. And right after he eats the first cracker, he thinks he has a guess.

KIM: That tastes like the Tabasco sriracha.

PAVIN: He says this with no hesitation, but says he’ll try the second before he makes the final call. He eats the second cracker and …

KIM: I do not like it. You know what … the strength of it, because it’s stronger to me.

PAVIN: This is strange, because Abe is more familiar with the rooster sauce, and he thinks surely he would choose the one he’s more familiar with. So he flips his answer. Huy Fong is the first one, while number two is the McIlhenny Tabasco version he doesn’t enjoy.

PAVIN: So the first one was Tabasco, so your initial instinct was right.

KIM: Oh, okay. It just didn’t taste familiar to me even though I’ve had it a million times.

PAVIN: Turns out Abe likes the McIlhenny. And I found this so interesting because it cut right to the heart of why I wanted to put him through this test in the first place. Because there used to be only one sriracha sauce, Huy Fong’s. And it was beloved by fans all over America, including Abraham. But because of some very important business decisions, that dominance may have slipped right through their fingers.

You’re listening to The Insightful leader. Today on the show: A tale of two hot sauces. Huy Fong, the company that blazed the trail for sriracha—in business and on tongues. And McIlhenny, the maker of hot-sauce heavyweight Tabasco. It’s a cautionary tale for companies that rest on their laurels when they’re ahead. And how a few simple—but consequential—problems with your supply chain and IP could very quickly give your competitors the upper hand.

That story, next

...

PAVIN: The origin of sriracha starts with Huy Fong, so you’ll hear that tale first. Tabasco-maker, McIlhenny, comes into play a bit later.

And real quickly, before I get into it, I want to acknowledge that you’ll hear a couple different pronunciations of Huy Fong in parts of the episode. I’ve heard it called WEE-fong and HOO-fong HOY-fong. For our purposes, after watching a video of the founder saying the name of the company, I’m going to go with HOY-fong.

Anyway, sriracha’s origin is as close to American Dream story as it gets. It all starts with the founder and inventor, David Tran. Tran is from Vietnam, and while living there, he started experimenting with making his own form of chili sauce, inspired by his travels to nearby Thailand.

As a refugee from the Vietnam War, he emigrated to the United States in 1979. And picking up where he left off, he launched Huy Fong Foods in Los Angeles, California with their flagship product, Sriracha Sauce.

James CONLEY: It is a special blend of jalapeno peppers, and garlic, and some sweet elements. But it manifests itself in something that has a very unique flavor.

PAVIN: That’s James Conley. He’s a clinical professor in the operations department here at Kellogg. He’s followed the story closely and has written about it. And Conley says that, that unique flavor that Huy Fong created with its Rooster Sauce? It comes from it being a fresh sauce.

CONLEY: That means it’s bottled and distributed soon after it’s made. That means you have to have peppers coming in, you gotta be putting in a bottle, the bottle’s gotta show up on the customer’s counter sooner rather than later. It’s not something you can store for 10 years.

PAVIN: Now, at first, Tran mostly distributed to Asian restaurants where he knew there would be a receptive audience. But it wasn’t long until the word was out about the special new sauce that tastes great on everything and comes in an iconic bottle with a rooster on the front.

Tran designed the packaging himself, everything from the bottle shape, to the rooster logo, to that bright green cap. It was distinctive.

CONLEY: In 1990, he’s already moving to trademark the bottle, the cap, the rooster.

PAVIN: Everything is coming together for Huy Fong at this point. Tran almost single-handedly invents a new category of condiment, and by 2010, he is completely dominating the market, selling tens of millions of bottles. Bon Appetit named it ingredient of the year and the brand was so popular that people were buying t-shirts with the logo on the front. It was a phenomenon.

But fast forward just a little bit and things started to change. See, because sriracha is a fresh sauce, it means that you need fresh jalapeno peppers. And a lot of them.

Achal BASSAMBOO: As it grew, it needed a supply-chain partner to grow the peppers.

PAVIN: Achal Bassamboo is also a professor at Kellogg and collaborated with Conley on a case study of Huy Fong.

BASSAMBOO: So it decided that it would be outsourced, so it will not do it itself in house which makes sense. And it went with one supplier who was pretty big, which is Underwood.

PAVIN: Underwood Ranches is a farming company based in the central valley of California and became the primary supplier for Huy Fong’s peppers in 1988. And the partnership was a fruitful one. Huy Fong kept on growing, which meant they kept on buying more and more from Underwood.

But then in 2016, Underwood saw how successful Huy Fong was and started thinking, “wait a minute, are we getting a fair shake here?” And you can understand where they’re coming from, right?

BASSAMBOO: Peppers were the key ingredient in the sriracha sauce since the other things were all commodities.

PAVIN: Meaning, the garlic, salt, vinegar, all of that could be bought off the shelf. So, Underwood says to Huy Fong, “hey, since we’re providing the essential ingredient, why don’t you pay a little more for our peppers?”

David Tran and his company aren’t receptive.

BASSAMBOO: Huy Fong was not okay with sharing as much profit as it was, because as it grew, it wanted to get a bigger take. And there was this disagreement between Underwood and Huy Fong about the price of these peppers that led to the downfall.

PAVIN: The disagreement got so heated that the two companies went to court over this dispute and ended their business relationship. To add insult to injury, Underwood also did something else.

BASSAMBOO: Underwood decided to launch its own brand of sriracha sauce.

PAVIN: That’s right, Huy Fong’s former partner was suddenly a competitor. Because they already had access to the peppers, all they had to add was a little salt.

“But how is this possible?” you might ask. Didn’t Huy Fong legally protect itself against competitors making duplicates?

Well, there are a couple of things happening here: First, you can’t really patent the sriracha formula. It’s made from ingredients any of us could find in a grocery store and throw in a blender. Second, sriracha is the name of a region in Thailand, so also not trademarkable.

Now, David Tran did trademark the packaging and logo. But crucially, he wasn’t doing anything with that trademark. James Conley again.

CONLEY: David Tran, being this sort of altruist, decided not to enforce the trademarks that he owns. There’s plenty of other people that enter the category with even a rooster on the bottle. And he decided, “okay, look, their entering the category is only going to make my unique stuff better because mine is better than anyone else’s.” And so he agnostically decided to not really litigate.

PAVIN: I was curious to see how that decision was working out for Huy Fong. So I took a little detour on one of my grocery runs.

PAVIN: [SOUNDS OF GROCERY STORE] Okay, so I’m at the Woodman’s in Buffalo Grove, and, um, I’m looking at the hot-sauce aisle, and I am seeing um, quite a bit of imitators of the Huy Fong hot sauce. Like, we’re talking same-shape bottle, maybe a different color nozzle, some overtly are the same color green. Um, One has an ox on it, another has a tiger on it, but it’s definitely evoking the same sort of, uh, look that Huy Fong, um, started, so….

PAVIN: It’s even worse in other places. Conley showed me a picture from an Asian grocery store with a shelf full of Huy Fong knockoffs.

But okay, this isn’t such a big problem when you’re dominating the market. Maybe you really can bank on people choosing your sauce for the taste? That’s what they fell in love with in the first place anyway, right?

But now with the Underwood situation you’ve got a problem, because your main supplier just disappeared. So Huy Fong has to scramble and find a new pepper supplier and ideally more than one, so they don’t have the same situation as they did with Underwood. They want to diversify. But they’re also on a time crunch because remember that, as fresh sauce, you have to keep getting those fresh peppers. So they make a quick decision on three farms all roughly in the same region of Mexico.

And things settle down a bit: production and business are humming along. But then Huy Fong runs into another snag: the weather.

From 2020 to 2022, that region in Mexico suffered a severe drought, which greatly impacted the pepper harvest.

BASSAMBOO: And that led to big problems.

PAVIN: Achal Bassamboo again.

BASSAMBOO: Since this is a very short-shelf-life product, you cannot rely on inventory too much, you have to make it fresh. So if the weather is not there, the input is not there, that means that you will have shortfalls or stock outs for a short term until this raw-material input is resolved.

PAVIN: And peppers are seasonal, so there are long stretches of time before that next round of peppers is going to be able to come in. So while Huy Fong did diversify the supply chain in one sense, Bassamboo says it wasn’t enough.

BASSAMBOO: Diversification is essentially the idea that you have multiple people, so that if one doesn’t work out, you go with the other. But in this case, all of the suppliers were still in the same area. So when the area didn’t work out for one, it’s not really diversifying because the bad weather would influence all of them.

PAVIN: And Huy Fong can’t really scramble their way out of this one, so they have to halt production, which leads to their product going out of stock.

ANCHOR: Do you like hot sauce? A popular one is coming at a higher price lately. Sriracha in short supply on store shelves.

ANCHOR: It’s been more than a year since a sriracha shortage was announced in the U. S., and it doesn’t seem like supplies are going to ramp up any time soon.

SHOPPER: It’s like 200 bucks? No way, right?

ANCHOR: Yes, Ina Jungin Lee is referring to the current price of sriracha sauce online and at some locations across the country.

PAVIN: The thing that this stockout does is it creates a massive vacuum, one that competitors would love to fill.

One competitor seizes the moment particularly well, by leaning into a playbook. A playbook developed over the course of more than a century. A playbook that completely contrasts with that of Huy Fong’s.

That’s next.

...

PAVIN: Okay, so Huy Fong’s got these ongoing supplier issues, it’s stopped production, and there’s a stockout.

The stockout is a boon for Huy Fong’s competitors. Especially for one. Enter: McIlhenny.

JINGLE: It takes a very special island, a very special sun, and some very special peppers to make the one, Tabasco, Tabasco, the original liquid pepper seasoning.

PAVIN: McIlhenny makes Tabasco Original Red Sauce, one of the most universal hot sauces in the world. It has other Tabasco-branded products, but its flagship is its Tabasco Original Red Sauce. It’s the one you’re probably picturing right now. Anyway, McIlhenny is founded in 1868 by Edmund McIlhenny. And it makes Tabasco Original Red Sauce—with something unique.

James Conley again.

CONLEY: This product has to be aged. So all during that time they’ve learned how to use aging to make the product very consistent.

PAVIN: The peppers used in a bottle of Tabasco Original Red Sauce must be aged for three years before that bottle can end up on grocery shelves. That gives the sauce a distinct taste—and one that would be hard for just any competitor to come in and replicate. It builds its supply chain up to support that, and spends decades upon decades making that supply chain as bulletproof as possible.

CONLEY: The source of the peppers is even more tightly controlled. One-hundred percent of the peppers that go into Tabasco hot sauce, the seeds for them are grown on Avery Island, which is their home in Louisiana. And then they send those seeds all over the world, to three different continents, to get a diversity of pepper sources that are from the same seeds, but they hedge against the climate risk.

PAVIN: So, they’ve got a distinct, recognizable product and brand, and a product that’s less vulnerable to climate headwinds.

And now you probably are starting to see where this is heading. So back in 2014, McIlhenny actually did launch its own sriracha sauce, under the Tabasco brand. It’s simply called Tabasco Brand Sriracha Sauce. It did that during the time Huy Fong was still in full control of the market. So Tabasco’s sriracha doesn’t make a splash or anything.

But in 2020, there is suddenly that opening, where Huy Fong’s rooster sauce starts running into all those troubles. It was enough to make any competitor salivate. Though, to be fair to Huy Fong, it would take more than just any competitor to seize that market share.

Achal Bassamboo again.

BASSAMBOO: Was Huy Fong’s downfall just an easy way for anyone to come in? No. You would need, if you want to be number one, you would need to have this distribution channel, the logistics and operations, and McIlhenny was perfectly placed at that particular time.

PAVIN: More than other competitors, McIlhenny is in a good spot to seize on this moment of weakness for Huy Fong. They have a really strong supply chain, so they just tell their worldwide suppliers to start growing the jalapenos you need for sriracha. And because the sauce can be made so quickly, they have no problem increasing their output of sriracha. On top of that, Bassamboo says that Tabasco being a legacy brand gave it a leg up on all the other contenders for the market.

BASSAMBOO: Let’s say I go to a shelf that is full of Srirachas, and I need to pick up one. I will try to also use the fact that I know Tabasco, I know McIlhenny, which means they make good sauce. If I have to do a substitution, then I’ll do it with a known brand rather than an unknown.

PAVIN: Which is how we arrive back to Abe and my little taste test. Someone who was a long-time fan of the sauce seemed perfectly happy with the Tabasco version. In fact, he kind of liked it better.

KIM: [CHEWING] You know, all around, tingly. Nice kick, but not too powerful. So I can appreciate …

PAVIN: That’s a big problem for Huy Fong, because they can’t just rely on the taste of their product to win out. Not anymore, at least. And that’s showing up now in their dropping market share.

...

PAVIN: So what should have Huy Fong done differently? What lessons should any brand with a supply chain take away from all this?

For Conley and Bassamboo, there are three main things.

First, David Tran probably should have managed the relationship with Underwood more strategically, when it started asking for more.

BASSAMBOO: Did he understand that if I come out of this meeting, and it doesn’t go how I want it to go, where will this end up? Like the fact that he could have given more to them, whatever they were asking, at least in the short term to make sure sriracha doesn’t go off the shelf.

PAVIN: There was probably a way to not burn that bridge so quickly, Bassamboo says. Especially considering Underwood was the main supplier. The lesson for companies there is: make sure you’re on the same page as your supplier, so you both feel like it’s a fair shake.

But also, make sure you don’t put all of your eggs in one supplier’s basket. That makes any kind of fallout with them so much more catastrophic than it needs to be. That’s point number 2: you need to diversify your supply chain, truly diversify. Take a page out of the McIlhenny playbook, and make sure you’re hedging for different types of risk.

And finally, if anyone can make your sauce and enter the market quickly, you better make sure your branding is protected, which might mean litigation. Conley explained that because Huy Fong let competitors copy so much of their packaging for so many years, there’s nothing really they can do now.

CONLEY: With trademarks, you have a duty to police the market place, and the court assumes you’re going to be watching and enforcing. And if you choose not to enforce after five years, someone who is using a mark that could be confused with yours has a right to keep using it. And I think he’s beyond that now.

PAVIN: Protect the brand, and protect it early. I should say here that Huy Fong has not gone out of business. They’re putting products back onto shelves. But it’s hard not to feel like they squandered their initial success. And now they’re far from the only players in the market.

And that’s where things stand for Huy Fong. Precarious.

…

PAVIN: There is one more thing I want to leave you with from all of this. About Huy Fong’s ability to weather this storm.

When Huy Fong’s sriracha was first on the scene, they built some real brand loyalty, and people did seek them out as the original, even when there were some competitors.

For my part, I feel kind of loyal to the sauce. Which is odd, because I don’t even like hot sauce. But for years, the bottle has been on the tables I’ve shared with friends and family, throughout good times and bad. A staple in my family’s pantry.

So I asked Bassamboo: Could nostalgia or brand loyalty help the sauce rebound with consumers?

He said that yes, that means something to one generation of customers. A generation that will turn over.

BASSAMBOO: That customer base that realizes there is an original sriracha and then there are all these knockoffs, if I may say that. Once that passes, if you think about my kids or a younger generation, they don’t even know Huy Fong. For them, all these are the same.

[CREDITS]

PAVIN: This episode of The Insightful Leader was written by Andrew Meriwether. It was produced and edited by Laura Pavin, Jessica Love, Fred Schmalz, Maja Kos, and Blake Goble. It was mixed by Andrew Meriwether. Special thanks to James Conley and Achal Bassamboo. Want more The Insightful Leader episodes? You can find us on iTunes, Spotify, or our website: insight.kellogg.northwestern.edu. We’ll be back in a couple weeks with another episode of The Insightful Leader Podcast.