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Poking the Yolk: How to transform your food product concept (Part III of IV)

October 20, 2016

By Bruno J. Codispoti, Founding Partner, BrandFusion; Co-Founder at Crazy Uncle Cocktails

Here’s the third instalment in a four-part series featuring material from my book Food Fight Inc.: An Entrepreneur’s Journey and Subsequent Lessons on Trying to Make Money in the Grocery Business, scheduled for release in early 2017.

Connecting with Supply Partners

Even if you’re not prepared to make a binding commitment to launching your product concept, simply knowing that you have a willing and capable supply partner network (contract packers and suppliers of raw material ingredients and packaging) waiting in the wings is advisable. More importantly, you’ll be able to zero in on the associated start-up costs, nail down a realistic COGS (cost of goods) range, understand minimum production run requirements and plan ahead using their lead times.

This type of information is indispensable if you’re to appreciate and accurately gauge your mission’s financials and the feasibility of having your product manufactured as you continue to probe the market for interest and opportunities. Consider that, if you begin to see encouraging results, or receive interest from a retailer, making important decisions with unsubstantiated financial estimates will most likely backfire. What if it costs you double than what you expected to have your product made? What if the minimum run is more than you can comfortably sell within nine months and you end up sitting on a mountain of expired inventory? What if your recipe or packaging format has to change dramatically in order for the contract packer to produce it on a large scale?

A clear understanding of what you’re working towards will also allow you to plan for a smoother evolution on the road to market. It will also minimize the amount of backpedalling if what you’ve been hoping to bring to market isn’t possible to recreate from a contract packer’s capability standpoint. To boot, it’s free to speak with supply partners, source samples and secure quotes; just be sure to get any third parties to sign a basic NDA (Non-Disclosure Agreement) so that you protect your concept from being copied should your discussions end abruptly. Search the web for local manufacturing associations who might be able to pair you with the right sized outfit. For example, the City of Toronto has a food and beverage program that focuses on assisting local contract packers to build and promote their businesses. Our contact at the city, Michael Wolfson (a.k.a. ‘The Fonz’ in our office) is always ready and willing to hear about our newest product mission so that he can introduce us to the appropriate local manufacturing partner.

Full disclosure: It can be a delicate and awkward dance to court and carry conversations with a supply partner, particularly a contract packer, too far in advance of your launch for fear of being copycatted. It is, however, well worth the fancy footwork and stomaching the slight feelings of uncertainty as it’ll help push to authenticate your mission and to radically improve your aim once it’s time to pull the trigger.

Kitchen Co-ops

There’s a deep and scary chasm between having to carefully whip up small batches of goodness in your home or office kitchen versus commissioning someone else to having your product mass-produced. Setting aside the risks and demanding obligations that come along with hiring a company to run your product, building orders out of a non-sanctioned kitchen comes with a serious accountability for food safety—not to mention that most big retail chains will require a facility audit before giving you a ticket to ride. In order to preserve foods using acidity, regulation requires the pH to be 4.6 or below. Sell just one improperly pasteurized mason jar of your wicked chimichurri marinade or use too little citric acid or potassium sorbate, and the Canadian Food Inspection Agency can shut you down like a culinary outlaw on the most wanted list.

Do yourself a big flavour, Google ‘communal kitchens’ or ‘kitchen incubators’ or ‘kitchen co-ops’ in your area. Case in point, the celebrated host of this blog, Food Starter (foodstarter.ca), is a fully decked out facility in Toronto, operated by a non-for-profit board. A relatively new, but quickly growing service, these useful establishments provide a proper food-regulated manufacturing space, complete with professional equipment, ingredient and finished goods warehousing, experienced production staff and savvy industry pros to help your budding business connect the necessary dots until you can become self-sufficient.

Producing your product out of a food-licensed communal kitchen may be prohibitive to making decent profit margins, but consider that your cash outlay and overall financial accountability will be dramatically more digestible. And, if your mission goes sideways, there’s very little aftermath clean-up to concern yourself with. More crucially, if you can build a workable financial model using temporarily inflated COGs, you’ll be laughing all the way to the bank once you graduate to using a more traditional, permanent and cost effective manufacturing set-up.

Before establishing your SRP (suggested retail price) range, visit the retailers on your target list to determine what the realistic SRP ceiling is. Also try to find out what the retailer’s targeted profit margin range is by asking a willing department manager, or more conveniently, by asking the contract packer you have standing by. Gross profit is calculated by subtracting the COGs from the selling price. To calculate profit margin, divide the gross profit number by the selling price (e.g. a product with a $3.99 SRP and a COGs of $2.79 will have a gross profit of $1.20; divide the $1.20 by the selling price of $3.99 to get your profit margin, which in this scenario would be 30% for the retailer).

Tattoo this formula on your forearm, as this will be your equation to calculate both the retailer’s financial objectives as well as your distributor’s (and / or wholesaler’s) and of course your own. For example, if the SRP ceiling for your product is $3.99 and the retailer requires a thirty percent profit margin, you’ll need to charge them $2.79 if they are buying from you directly. If you’re going to market using a traditional turnkey distributor with DSD (direct-to-store) shipment capabilities – who will purchase, warehouse, re-sell and ship your product for the $2.79 in the above example directly to retailers – they’ll want anywhere from 17% up to a more likely 30% profit margin which suggests that you’ll now be required to sell your product for as low as $1.95 to the distributor versus selling it directly to the retailer for $2.79. Note, for certain retailers (i.e. food service, convenience and gas stations), more often than not, you’ll sell your product via wholesalers, who will require a more affordable 12% to 15% profit margin.

Can you make money selling your product for $1.95 based on the COGs associated with producing product out of a communal kitchen, or do the numbers only jive when you plug in the reduced COGs scenario associated with running product out of a more traditional manufacturing facility? Don’t fret, remember that we’re moving to poke the yolk and to move wisely and slowly until we’re ready to take on more.

For your first legitimate selling adventure, consider selling directly to the consumer and cut out the retailer’s, distributor’s and/or wholesaler’s profit margin. To start, consider selling your product in smaller, more flexible venues that will allow you to squeeze a dollar or two more out of the SRP to temporarily buff up your gross profit. Look for an intermediary selling-step that will allow you to watch, learn and to stay afloat financially until you can graduate to the big leagues. Use this phase to get a manageable and firm grasp on consumer interest and challenges, potential volume and profit, product issues, and most importantly, your comfort level. Use the opportunity to tweak, tinker and modify your product and your sales pitch.

Having already courted a contract packer prospect, you’re now ready to advance out of the communal kitchen incubator and to start fulfilling the growing customer orders with your longer-term supply partners. Remember, with each step up, you’ll need to generate and bank more profit margin to feed the growing number of hungry mouths at the supply chain table. Although, as your operations, capabilities and the economies of scale improve over time (we’re talking a few years here), you’ll likely tire of feeding too many mouths, double back and restructure to sell retailers directly in order to maximize your profits. But until such time, plan on setting and serving a crowded dinner table. 

Let it Simmer ~

  1. Do you have suitable supply partners waiting in the wings? Do you know how much they’ll charge you per unit, what their minimum run is and what the overall start-up charges will be? Are they willing to amortize the start-up costs into the unit price over a period of time to make the leap more financially digestible for you?
  2. Move wisely and move slowly with a calculated risk. Think sustainable and scalable. Consider reaching out to a ‘communal kitchen / kitchen incubator / kitchen coop’ to poke the yolk and start your journey.

 There are quite a few meaningful and more manageable food venues to begin selling your product in than with a traditional grocery retailer. To test the waters and validate your concept’s potential, before breaking the bank and your back on investments linked to gearing up for larger production runs, consider offering a single, medium-sized, regional retail chain a short-term exclusivity. To be continued in Part IV: Preparing for the Big Leagues.


Article written by Bruno J. Codispoti. Bruno is the Founding Partner, BrandFusion, as well as the Co-Founder at Crazy Uncle Cocktails.