Many successful to-die-for specialty cookies, cheesecakes, coffees, sauces, spice blends, confections and thousands of gourmet foods and beverages have begun in the kitchen by zealous entrepreneurs armed with only a recipe and passion for their product. In the early and often heady stages of launching a business, owners can easily be consumed by day-to-day operations and oblivious to what lies ahead.
Put aside, for a moment, business plans (though useful), well-intentioned advice from friends, bankers, CPAs and lawyers, and sundry "How to Start a Business" seminar and book promoters. Few of these so-called experts have ever run a food company. The following opinions are gleaned from my 35 years in sales, marketing, operations and management roles in large and specialty-gourmet processed food companies. The vital issues a would-be specialty food or beverage impresario, and any niche product marketer, should concentrate on:
Choose the Best Distribution Channel
No matter how wonderful a product is, it's valueless until someone buys it, which means getting the item into the hands and mouths of consumers. There are two ways to distribute, retail and wholesale. Each has its pluses and minuses. Initially, decide on and stick with one channel unless and until it fails. Expand into other channels as resources allow.
- Retail means direct to the consumer, with no middleman, broker or distributor between seller and buyer. Retail specialty food channels include setting up a brick-and-mortar and/or online store; home parties; farmers markets; roadside stands; mall kiosks; fairs and similar events; and publishing a catalog. Retailing generates instant cash and higher gross profits, typically twice that of wholesaling, and enables total control of product quality from production to delivery. Downsides of retailing: sales volumes will be limited, as will product exposure and shelf placement, actual in-store and virtual online.
- Wholesale means selling the product to another entity, usually gift and gourmet stores and chains, gift basket makers, distributors and brokers. Wholesaling typically leads to faster and wider product exposure, placement and sales volumes, but at a price. Wholesale customers pay in 30 to 90 days, usually demand large discounts and costly promotional terms and conditions, and they may even require unique packaging. When a wholesaler assumes title and ownership of a product, the producer loses control of where, when and in what selling environment the item appears.
Set a Price
As a rule of thumb, price the product at least five times the aggregate cost of every physical item that goes into it: ingredients, packaging, etc. If the marketplace won't support a selling price based on this ratio, move onto something else, because sooner or later financial failure is all but guaranteed.
Make an Early Profit
Obtain the necessary business licenses and then home-produce and sell the product as fast as possible and practicable in the chosen market channel. This activity will reveal at least three things: whether strangers (as opposed to fawning friends and family) will actually buy it; if a profit is possible; and needed adjustments.
Inexperienced entrepreneurs often mistakenly believe that they'll "make it up in volume" later, and that losing money in the early stages is "normal." That may be true for medical, software and hi-tech start-ups, but not for specialty food products. If a profit is elusive early on, it probably won't exist as the company expands and matures.
Treat Cash Like the King It Is
When figuring preliminary profit from initial gross sales, subtract out these costs, at the very minimum, to calculate a "net":
- Raw materials. Capture every out-the-door expense: ingredients, packaging, labels, pallets, stretch wrap, supplies like tape and dunnage.
- Labor. Pencil in the time it takes to manufacture or prepare "X" number of units of product for sale, and multiply it by the realistic hourly cost of hiring workers at the local prevailing minimum wage, plus 25% for mandated benefits like payroll and unemployment taxes and workers comp. Divide this total by the number of sellable units to arrive at an imputed per-unit labor cost of production.
- Sales, promotion and marketing expenses. What did it (or what should it) cost for collateral materials (brochures and sell sheets), a web site, tasting samples, signage, displays and conventions, ads (Internet, print, electronic media) and and so forth?
After allowing for the above, there should be a fat profit. If not, other business overhead – legal and accounting, insurance, rent and utilities, general office and other expenses – will likely eat up the chance of financial success.
Hold onto cash and plow the early profits back into the business and grow it. Cut costs wherever possible without sacrificing quality. Borrow, judiciously and incrementally, only if it's absolutely certain that the injected capital will make business zoom. Never bet the ranch on a young enterprise because there are too many unknowns.
Plan for Growth
Satisfying large customers and filling a sudden deluge of orders is like being in heaven when prepared, and in hell if not. At the first inkling of success, immediately start devising methods, tools, techniques and contingency strategies to ramp up production overnight. Think way ahead, and out-of-the-box. For example, consider plugging a sudden labor gap by "hiring" an organization looking for ways to raise money, like a high school debate team; improvise devices and systems to speed manufacturing and packaging; research co-packers to make the product instead of manufacturing it in-house.
Network and Learn
Attend the Fancy Food Show, an international who's who and what's what of the specialty food industry. Read the gourmet trade magazines. Study the competition. Forge friendships with allied trades and complementary products.
George Daleiden - I was a science major in college and later a career member of the Institute of Food Technologists. I worked in the processed food and ...
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