Photo Credit: Olivia’s Croutons Company (one of my clients for bilingual Canadian labeling)
For three years, I owned a small food business (Cheese Companions, cheese accompaniments), and managed every aspect of it. As a marketer by trade, there was a tremendous number of lessons learned from this enterprise.
If you are considering starting a specialty food business or are at the first stages of your launch, this article is for you. I hope I can help some of you prepare better for what’s ahead. I hope you can avoid some of the mistakes I made. I am here to help!
I have organized my feedback in the main areas of business in quick bullet points: This article (part 1) covers pre-launch research, product development, production, and finances. Part 2 discusses marketing, sales, and distribution.
So, here we go!
A. PRE-LAUNCH EVALUATION
Being uniquely qualified, expertise & knowledge, training
- What is your motivation? Food is an unforgiving industry: 90% of businesses will fail. You MUST be passionate. Ask yourself: Why are you doing this? Do you know what will be your daily reality? Are you ready, for instance, to spend 50% of your time on the production floor, doing simple and repetitive tasks?
- Are you uniquely qualified? As a specialty food manufacturer, you will be facing the harsh competition of other small manufacturers and large food producers. Do you have the necessary industry knowledge to be successful? Or can you quickly acquire them? Check out this interesting article which explains how to identify the knowledge gaps and build a training plan in 20-hour chunks to fill the gaps: “Expertise: Why You Need It & How to Get it.”
Product selection & product niche
- Is there too much or too little competition? What is the size of the market? You’re working on your business plan. You are defining who your customers are and where they buy. You are identifying who your competitors are and what differentiates your product from them. These are crucial questions. One word of caution: don’t assume that the lack of competitors is a good sign. It may or it may not. It may reveal that there is little market potential. Dig deeper.
- Understand the potential of your category: Think about the way consumers use your product: how frequently (daily or occasionally), in which circumstances (celebrations, ordinary life, on the go), how much is consumed each time. The market size of ketchup is very different from your Thanksgiving cranberry sauce! A product used by the teaspoon once a month when you have friends over has a very different potential than food that you consume at every meal or daily in large portions. Ask retailers and manufacturers what their best-selling SKUs (Stock Keeping Units) are. For instance, it is difficult to have success with prepared food products. I have also been surprised to hear that fancy mustards were often the best-selling SKUs for the small food manufacturers who had products in other categories as well.
- Understand the challenge of creating a new category: You cannot be successful if your food product is not in the right location in stores. If your product is so innovative that you are creating a new category, you have an extra challenge. Retailers won’t necessarily place the product where you want or where the customer will look for it. For example, one of the food manufacturers I work with (labeling projects) has a great-tasting organic corn tortilla (Vermont Tortilla.) It’s fresh and delicious. But it needs to be refrigerated: not really where you typically look for tortillas! Another example: My product was a fruit-based cheese accompaniment. Retailers usually agreed to carry it in the cheese department, but if a store wanted to place it with jams, I could not expect that it would sell there, and I was simply declining to sell it.
- Understand shipping challenges: You will need to ship to distributors, retailers, or customers. Depending on the size and weight of your product, the type of packaging (glass, plastic, fragile lid), the required storage temperature (room temperature, fridge, freezer), your costs can vary extensively. Not to mention that retailers don’t like breakage and will prefer plastic to glass, for instance.
- Understand shelf-life: Another element that can make a huge difference in your chance of success is shelf-life. Whether your product has a 10-day or a 2-year shelf-life will have a significant impact on retailers’ acceptance and costs of returns.
- Don’t trust what you see on the shelves: It’s not because it is on the shelf that it sells. Ask retailers what sells. Or, just like I did, offer to work for a few weeks at a retailer to understand the business, challenges, and products’ turnover.
- Are you afraid to talk about your idea? Are you worried that someone may steal it? People seem to agree that the risk of launching the wrong product outweighs the likelihood that someone steals your idea. Ask around and carefully listen to feedback. I remember a retailer telling me that my product was too complicated to sell. For great taste, customers needed to choose the right cheese accompaniment to pair with a specific type of cheese. That did become a marketing and tasting challenge!
In conclusion, when defining your product, make sure that you understand the potential hurdles in every aspect of the business: production complexity, storage constraints, shipping challenges, tasting complexity, ingredient sourcing challenges, and more. That’s why it is so crucial to have or to acquire the necessary industry knowledge.
Further reading on market trends:
B. THE PRODUCT
Product Development, Scaling, Product Line, Food Science
- The challenge of finding partners: You are launching a small food business, but it is unlikely that you are an expert at everything. What is your background? In which area will you need to rely on others’ expertise and find partners? Finding partners is not simple: when launching Cheese Companions, I looked for months for a jam maker to manufacture my products, based on my recipes. I was in discussion with French, Quebec, and US companies. In the end, I was unable to find a partner with the right price structure, the acceptable batch sizes, or the right taste (based on ingredients they could source). I decided to do product manufacturing myself, even though it was neither my expertise nor my passion. Looking back, it was probably a mistake.
- Understanding food science and food safety: You may have a delicious recipe, which your friends and family love. But it is a different matter to distribute your product to the world. You have people’s health in your hands. You need to get your recipes validated by food scientists to make sure that you can produce it economically and safely. You must understand concepts like sanitization, cross-contamination, cooking and cooling temperatures, storage, shelf-life, and much more. You may also save costs by understanding basic food science principles or even better let the food scientists do the work. Here is one example: it took me six months of production to realize that there was a correlation between sugar levels in my product and the temperature it could reach. Increasing sugar levels was saving time and money (energy). When I took the Harvard EdX food science classes “Science & Cooking: From Haute Cuisine to Soft Matter Science” (chemistry and physics), I realized that it was a very basic food science concept. Lesson learned!
- The challenges of scaling up and batch size: You cannot underestimate the difficulties of scaling. You won’t be able to use some of your original recipe’s ingredients in large batch production. Some ingredients won’t scale proportionally in terms of weight (e.g., spices). Some ingredients won’t “behave” the same in small and large batches (e.g., pectin). For instance, one of my original recipes had fresh ginger juice. I would grate fresh ginger and press out the juice. I quickly realized that it would take 5 hours of labor per large batch if I kept that ingredient. It was not feasible. But I had to taste six powder gingers to find out that only one had the same elegant fresh ginger taste. And it cost me US$900 for 10 kgs minimum to buy it! Again, that’s where food scientists who specialize in product development can help.
- Understanding ingredient sourcing: Ingredient sourcing is both very time-consuming and essential. Ingredient selection is key to the desired product quality and safety. Challenges are many:
- Impact on taste: Ingredient selection affects the taste of food> Examples include the fresh ginger mentioned above, in the fresh ginger example, or the difference between various types of dried thyme vs. fresh thyme, or wild blueberry vs. common blueberry;
- Delivery to your production location: Ingredients need to be either available at the distributor who delivers to your production location or coming from a manufacturer who accepts to sell you direct, at a quantity which works for you (minimum order size);
- Access to storage: whether at a shared kitchen or a co-packer, this can be a real challenge, especially for refrigerated or frozen products. Make sure to review the storage capacity of any co-packer or shared kitchen you plan to use.
- Understanding the “market cost of entry”: Even if you launch and operate on a shoestring budget, you will face many unavoidable expenses. Think about recipe development costs, packaging/labels printing, production material and equipment, raw materials/finished goods inventory, production labor, stationery and branding, licenses, maybe website development. I would say that if you don’t have a minimum of $15,000 to invest, don’t enter the food business!
- Limiting the number of SKUs: I have seen many small food businesses offering a broad product line. And I heard many saying that it was a mistake. Ultimately, when a customer is in the retailer’s aisle looking at your products, he will most often choose only one. And your retailer probably won’t accept you to have too much “facing” (shelf space). Consequently, a full product line means higher raw material and finished goods inventory, but not necessarily higher sales. However, it is crucial to understand which SKU sells the best. You should also realize that what sells the most on the shelf is not necessary what sells the most at tastings.
Product Food Labeling & Packaging
- Professional-quality packaging is a must: Packaging must sell the product for you when the consumer is in the store and cannot taste your product or hear you explain its benefits. It’s all about the first impression.
- Having the right message: Your label and package is the best opportunity you have to convey a convincing product message to customers. Don’t miss that chance. Be unique and stand out on the shelf. Secondarily, shelf-talkers can be very useful to expand on your message and your presence. But don’t rely on them: they may not stay on the shelves.
- Understanding food labeling regulations (nutrition tables, serving size): Don’t just look at a competitor’s packaging to design your own. I have seen many labels on the market that are not compliant with FDA regulations. Regulations include the definition of the serving size, layout in terms of position, font size, nutrition tables, health claims, and more. Your labeling expert can guide you. (Further reading on food labeling: USA & Canada Food Labeling: 2016 New Regulations)
- Avoid printing too much: It is tempting to save money by printing large quantities of labels right from the start. But trust me, it is always a mistake. You will end up doing some “tweaking”, making labeling changes, due to new regulations or retailers and customers’ feedback, or even dropping some SKUs in the first few months or couple of years. In the end, if you print large quantities of labels, you will end up throwing them and not saving any money.
- Choosing the right container for your product. Some factors to consider:
- Product differentiation;
- Container cost (in total cost);
- Consumer price sensitivity (larger product size means higher price);
- Shipping considerations (fragility and weight);
- Retailers’ acceptance (e.g., plastic vs. glass);
- Retail shelf display (does it present well);
- Food safety (can the retailer notice a defective package);
- Production considerations (compatibility with the labeling equipment).
- Choosing your pack size and packing unit: I encourage you to select standard outside cardboard boxes to pack your products. They will be less costly. Also, consider the pack size (number of products per pack) as retailers will look at your stock rotation based on the number of packs: the larger the pack size, the smaller the stock rotation.
Production & Food Regulations, Shared Kitchen & Co-Packer
- Choosing your production location: This is likely the most crucial decision you are going to have to make in the first few months or year running your food business. Are you allowed to produce at home? Will you choose a shared kitchen or a co-packer or have your own commercial kitchen? What will be the challenges with the selected production site in terms of costs, equipment, availability, storage, labor, food safety? What is the minimum batch size the co-packer will request? I had the chance to investigate several co-packers and shared kitchens, and to manufacture both at a shared kitchen and a co-packer. I can relate to the challenges food producers face!
- Understanding state rules for home-based food production (cottage food laws): Each state has its own regulations when it comes to what you can produce at home, and which licenses are necessary. Cottage food laws allow small manufacturers to make low-risk foods at home and to sell them at some venues. Check your state food laws here: https://forrager.com/laws/
- Production equipment as a key factor for success: Not all shared kitchens and co-packers are created equal! Understanding the equipment they have for your production (and storage capacity) is paramount. Having the right equipment will have a significant impact on productivity, cost, and food safety.
- Delaying capital investment: I read this advice from a start-up guru one day, and I agree with it: if you are building your commercial kitchen, delay investing in equipment as long as you can. Invest when producing otherwise becomes “really painful.” That will avoid spending vast amounts of money which you may regret later.
- The challenge of part-time workers: Whether you depend on a co-packer or you produce in a shared kitchen, finding the right labor is quite a challenge. Quality labor is crucial for food quality and safety and not always easy to find. And you may have the extra difficulty that you need part-time help due to your small production levels.
- Keeping good records: Records are mandatory for traceability. Training your labor to maintain quality records in the midst of busy production is essential. Checking that your co-packer maintains good records is also necessary. A surprise visit of the FDA at your shared kitchen for an audit CAN happen. It happened to me!
C. THE FINANCES
Capital Expenses, Pricing, Margins & Profitability
- Make sure that the numbers work now and then: You may start in your home kitchen, then move to a shared kitchen and then to a co-packer. You may distribute yourself and then get a distributor. Don’t be blinded by your passion. Make sure that you understand your margins and profits at each stage of your growth. If you realize that you cannot make any money, whatever growth you may have, it means that your food business is simply not profitable. It’s better to know it now, than when you have sunk $20,000 into the adventure.
- Don’t underestimate the margins and markups that every intermediary takes: The reality is that the life of a small food manufacturer may seem unfair. We are the ones bearing the cost of developing innovative recipes and products and manufacturing them, while the distributors, wholesalers, and retailers are taking higher margins on our products than we are (they have their costs as well!). If we close shop, they’ll simply sell the next passionate small food producer’s products! For that reason, it is crucial to make sure that your products’ gross margin is at least 50%.
- Make sure to understand basic product costing: Too many small food businesses make mistakes, such as confusing the terms markup and margin. Distributors, wholesalers, and retailers want a specific markup or margin on your product. You must understand those concepts. You must know how to calculate pricing at each stage of the food chain, from the manufacturer to the consumer.
- Be aware of the valley of death: I coined that term to describe the stage in the growth of the food manufacturer when:
- you are too big to still take advantage of some low costs (e.g., home production)
- but you are too small to take advantage of some economies of scale (such as ingredient pricing at the pallet size), and consequently, you have trouble competing on price and make a profit.
It is not an enjoyable place to be!
I hope this has been useful. Don’t hesitate to leave me a comment. Part 2 – Lessons Learned will cover marketing, sales, and distribution.
And if you are ever interested in some great products, the Cheese Companions’ business is for sale!
Disclosure: As an Amazon Associate, I earn from qualifying purchases.
- From Kitchen to Market – Sell Your Specialty Food: Market, Distribute, and Profit from Your Kitchen Creation, 6th Edition – Stephen Hall
- How to Make a Profit Creating & Selling Your Own Specialty Food Producers in the USA, Second Edition
- Starting a Part-time Food Business: Everything You Need To Know To Turn Your Love For Food Into A Successful Business Without Necessarily Quitting Your Day Job
- Good Food, Great Business: How to Take Your Artisan Food Idea from Concept to Marketplace
- Getting Your Specialty Food Product Onto Store Shelves: The Ultimate Wholesale How-To Guide For Artisan Food Companies