5 Most Expensive Mistakes of Food Start-ups (…and how to avoid them!)
Over the last 5 years of working with Start-ups and smaller CPG firms (and 27 years prior to that working with Fortune 1,000's...), I've noticed that many of the firms I've worked with, either as clients or students, have made (or were going to make...) many of the same critical business mistakes.
Often, I've been able to help them avoid these costly errors, but in some cases, it was simply too late. Regrettably, a couple of companies didn't make it -- but in each case, I could point back to one or more of these transgressions. So what are they?
5. Lack of Industry Knowledge
There's nothing wrong with learning by doing --but it sure can be expensive!! The retail food and CPG industries are some of the most efficient and well-established businesses in the country. If you want to be part of it, you should 'go to school' before you invest your 401K in trying to sell the next BBQ Sauce out there. And I don't mean get an MBA --that's not going to help a small business. Start with your Associations and trade shows --the Fancy Food Shows, EXPO East and West, Food Marketing Institute, etc. Attend and see what's out there --some of them can be expensive --but remember, the knowledge you will gain will save you tenfold as you start your own business.
Let's say you want to make that BBQ Sauce -- start by going to a conventional grocery store and looking at the section (category) -- take some photos with your phone. Look at the number of different offerings, price points, and bottle sizes. This is going to be your competition --so you should know a lot about them. Look at the packages --if most of the section is nice 14 oz. bottles, don't expect your gallon jug is going to do real well. Look at pricing - and there will be a variance -- the 'big brand's, private label --all in certain range. Then look at the upper shelves (usually)-here you'll find smaller and niche brands- brought in by distributors (not sold in direct) - and their shelf tags will most likely be a different color. What is the taste spectrum -- sweet, spicy? Any flavors being discontinued and marked-down? If it's ‘Honey Mustard’ on the markdown rack -- and that's what your recipe is, you may want to reconsider.
Research your independent and upscale stores, as well -- because that's where you'll be starting. Note price points and number of facings (how many of each product has it's own space on the shelf). Talk to the store managers and, if you can, the owners. They are usually very helpful to new product entrepreneurs and can share tips for you before you even put the sauce into a bottle. And if you’ve been in business a while, when was the last time you really looked at your category – and particularly at a store where you are not in distribution –maybe even the other side of the country when you were on vacation?
4. Time Management
You might think this is just a 'big company' problem and you'd be wrong. Among my smaller clients and students, it's one of the biggest hurdles -- and one of the hardest to deal with. Perhaps it's because we are entrepreneurs, there's a tendency to want to do it all -- and the idea that we can... What quickly happens is that, if you are lucky enough to see your business grow, your time demand increases exponentially.
The more orders you get, the longer you have to spend in the Commercial Kitchen and then you need to add to delivery time and demo time and sourcing ingredients and.... Well, you can see what happens --and this happens very quickly too.
Getting your Time Management in order can save you so much money -- and more important, 'time' --which you can never have enough of. First off, I counsel clients to take advantage of technology where you can – get assistance on-line, automate as much of your production as you can and most important –invest in people to help you get things done. Building a business is as much about finding the right people, as it is the right product. There are a number of other time-savers and you can Google any number of books and software products to help you!
Remember, try to do the stuff that only you can do and off-load as much other time consuming chores as you can afford.
3. Packaging
It must be because we are called the “Packaged Goods” industry that so much can go so wrong with this aspect of the business. And this is not just the nemesis of smaller companies and start-ups –oh no, this issue leaves even some of the Big Guys scratching their heads. Basically, you have a product or products and you need to get them into something so that your consumers can take them home –it’s not rocket science. However, there is a science… first, check back to #5 –it’s amazing how many start-ups don’t look at what is already out there in their own categories –and yes, it’s nice to have something unique –but it’s better to be able to find a co-packer that can handle that size of bottle, for instance, than to have to lease the machinery to accommodate your ‘unique cut glass’ BBQ Sauce Jar…
Understanding packaging and the role it plays, early on, will save you tens of thousands of dollars down the road. Think your boxes fit nicely into a master case of 24 units –doesn’t matter, that’s way too many units per case for most categories – and your distributor will tell you –try 12, maybe even 6 because we only want to drop off cases at a store and, god forbid, if we have to cut into one of your cases, well, that’s extra $$$.
Packaging has a lot to do with usage. Are you creating a single-serve snack –or an ingredient that will need to hang around a while? Look at how similar products are packaged and learn –there is a reason that bars all come in that Mylar-like wrap around –and while yours might look better in a cardboard box with plastic window, take a hint and save some bucks.
You can also avoid another rookie error in the area of ‘package design’ (and I have friends who do it for a living…). You can spend $10K to design a container, that for the food industry, legal and regulatory dictates about 50% of the room available on the package. You need to have a nutrition statement and ingredient list. An address… The weight of the item. A UPC Code. Perhaps, a ‘Best By Date’? Does it contain nuts? So, if you have a logo and want to show some of the item or an illustration/photo of the product in use, well you don’t have a whole lot of room for ‘design’. And if you have preparation directions – or want to sell in Canada, (all of the above ‘en François’ too) well, you’re pretty much done.
2. Under-Capitalization
This one issue sinks the most ships –not bad product or poor packaging –just not understanding how much money you will need to grow your business. And businesses rarely stand still –you are either growing or dying.
In fact, I have a Workshop that’s named the “Woody Allen” after a line from his movie “Annie Hall”. He is talking about his relationship and says, “A relationship is like a Shark. It has to keep moving or it dies. What we have on our hands, here, is a dead Shark!” Businesses are exactly the same and money is the blood that keeps the circulation going.
When I started NexxtLevel and began working with smaller companies that needed to raise money, it was a steep learning curve –but the first thing I noticed was that most entrepreneurs grossly underestimated the amount of investment it would take to get a successful food company off the ground and those in business 1 or 2 years were still running on thin margins and erratic cash flow.
With Start-up clients, we usually work on a Business Plan –and realistic financials – and generally, I like to let them conjure up some numbers and see what they look like. If, at the end of the spreadsheet, it looks like $100K expenditures over 3 years – I casually triple it. Yep, 3X –unless the client has a really good foundation in the business they are going into –because they will need every penny of that extra 200% cash flow in the first three years of the business.
1. Pricing
The Numero Uno of costly mistakes that I’ve seen all exist in one area – pricing. And not because you have to be so price sensitive vis-à-vis a competitor or anything. It’s about understanding how and who makes the money (even if you’re still foggy about the ‘why?’) and therefore, how you have to able to price your product. Even if you’ve been selling locally for a couple of years, if you don’t have sufficient margin built in to hire a distributor and broker, as well as actively promote your product with TPRs and Demos, it’s very hard to scale.
Starting out, many founders ‘underprice’ or ‘overprice’ the product. By ‘under’, I mean not putting enough margin into the product to be able to afford a distributor or a sales rep. And ‘over’? Well, let’s just say you can most awesome tasting gluten-free, non-gmo chocolate truffle and if it costs $20 a pop, you do not have a business!
Founders have a nasty habit of not counting their time and contribution into the mix. You start out doing everything – sourcing raw goods, production, packaging, delivery, accounting, demos –but to have a clear picture of your ‘business’, you need to pay the person doing all that work – YOU! Yes, when you work up your financials, you need to have a person or persons ‘on the books’ with a reasonable salary –regardless of whether or not you are actually taking a dime out of the business.
As your business grows –even slowly – you should be continually forecasting how and when you could reduce your Cost of Goods thru increased volume and, hopefully, efficiencies. When you get to the point where you need a Distributor (who is going to want a 30% margin…) – you should have been able to reduce your COGS by 10 -15% to make that ‘hit’ a lot easier!
Like to Know More?
If you’d like to know more about the approaches of successful start-ups –not only in food and CPG –but other businesses as well, please visit my website: http://www.NexxtLevelMarketing.com Feedback? Would love some –please send a note to: Steve@nexxtlevelmarketing.com and let me know if you’ve found some of the same things or something completely different. Last, but not least, let me encourage you to GROW that business and live your DREAM!!
G. Steven Cleere is the Founder and Chief Brand Developer at NexxtLevel Marketing, a CPG Consultancy. Steve was Founder and President of TradeMarketing, Inc. in San Francisco, serving major consumer brand clients and retailers for over 20 years before starting his new firm, specializing in smaller and medium-sized CPG firms that want to ‘scale’.