Monitoring operations at a dedicated beverage manufacturing facility

While some food manufacturing businesses start out as well-funded spinoffs by giant companies such as Kraft or Nestle, many others start out as tiny startups with a simple idea and very little funding. The tiny startups often struggle for years, but sometimes they grow so big so quickly they actually threaten the giants. Beyond Meat, Chobani and Impossible Burger are good examples of this.

This post explains some of the more common food manufacturing options, and explores some of the different factors that you should consider before deciding which options are right for you.

Product Research and Development

The first stage of course is to decide on a single product or group of products. This is not as easy as it sounds, partly because literally thousands of new products come on the market every year, so the competition is stiff. But contrary to what most people think, having some competition is usually a good thing. It means there is at least some demand. Be sure you truly understand what category or categories your product fits into. You may have competition from more than one category.

What ingredients go into your product? What steps are required to produce the product (eg. baking, freezing, chopping, mixing, frying, smoking, etc.)? Is any special equipment needed? Can you make it in small batches, or will it require large scale production methods from the very beginning? If you make it in small batches, can your recipe be scaled up, or will that compromise the integrity of the product?

Food products are often trendy and consumers can be extremely capricious. Whatever’s hot today might be cold, or at most lukewarm, next year. But while some trends only last a year or two, others last decades. Before you launch your new business, you want to figure out which category you fit in — flash in the pan, long lasting and durable, or somewhere in between.

Once you’ve hit on a product and market, you want to come up with a reasonable estimate for how large the market is, and what market segments it includes. Is this a ten million dollar market, a hundred million dollar market, a billion dollar market, or a hundred billion dollar market? Is it growing, flat, or shrinking?

Focus Groups and Market Testing

Once you at least have preliminary answers to all the questions outlined above, you need to do some market testing. Typically that means focus groups, as well as small scale testing with friends, restaurants, farmers markets, grocery stores, and/ or other groups.

Often the market testing will lead to changes in suppliers, ingredients, proportions, production steps, timings (for example baking or mixing times) or other things. These adjustments are then often followed by further market testing and additional focus groups.

Small Scale Production (Commercial Kitchen)

Once you’ve nailed down the above issues, you are ready to start small scale production and sales. This usually means starting out in a small commercial kitchen, making your product in small batches and getting it out to consumers as quickly as possible.

Starting out with a commercial kitchen has many advantages. Since most kitchens are well equipped, you don’t have to buy much, or any, specialized equipment. You can usually rent the kitchen for just a few days a month, and then scale up to 5, 10 or even 20 days if and when you need to. Furthermore, most commercial kitchens do not require a long term contract, so you have tremendous flexibility. An additional benefit to a commercial kitchen is the fact that it is already licensed with the local health department and follows government regulations, removing another hurdle to getting to market.

Of course, there are challenges too. If you do need a lot of specialized equipment, a commercial kitchen may not work. And if your business grows quickly, you could outgrow the commercial kitchen within a few months. But that kind of rapid growth is rare, and many food businesses do not require too much specialized equipment, so a commercial kitchen is often a good choice.

Commercial Kitchen Pros:

  • Low cost
  • Flexible scheduling
  • Great for market testing
  • Licensed for food production

Commercial Kitchen Cons:

  • Limited storage (if any)
  • No onsite testing unless you bring your own
  • May not have all equipment needed
  • Not suitable for large scale production

Contract Manufacturing

The next step is usually some form of contract manufacturing. Most contract manufacturers (or “co-packers”) have minimum production volume requirements and minimum contract term commitments. For example, a minimum of 50,000 pounds of product per month for at least six months. That means you have to have enough cash and credit, and consumers ready to buy, to seal the deal.

Also most contract manufacturers specialize in one or two types of food, or food production methods. For example, one can find contract manufacturers who specialize in packaged breakfast cereal production, cheese, energy bars, candies, meat or poultry products, etc. Finding the right contract manufacturer can be time consuming and frustrating.

One option often overlooked is approaching a small/medium sized company that produces a similar product but is not a direct competitor, and asking them to contract manufacture. Often these companies are looking for ways to maximize their equipment and labor capabilities and are willing to partner under the right conditions.

Contract Manufacturing Pros:

  • Allows moderate scaling with modest capital investment
  • Lot and batch tracking
  • Most have onsite testing for bacteria, fungi, etc.
  • Frees founder to focus on sales and marketing
  • Often has onsite food scientist(s) and other professionals that can assist with troubleshooting
  • Many provide turnkey solutions that include storage and distribution

Contract Manufacturing Cons:

  • High minimums, especially a problem if shelf life is limited and sales are not established
  • Reduced margins due to higher production costs
  • Timing can become a problem. For example, if you get a larger order and the contract manufacturer is unable to schedule the increased production within your timeline.
  • Reduced control over your process
  • Many people will have access to your ingredients and process. If they are proprietary there is a risk of disclosure, even if it is accidental. Most contract manufacturers have standard non-disclosure agreements, but you should definitely have your business attorney review them before signing on the dotted line.
  • If certifications, such as USDA Organic or Non-GMO, are desired, this reduces the pool of options

Dedicated Manufacturing

The next step is usually dedicated manufacturing, but some firms stay with contract manufacturing for many years. Setting up a dedicated manufacturing facility usually takes many months (or even years) and requires fairly large amounts of capital (millions, or tens of millions of dollars typically). It is a big decision, and it has to be made carefully. We have seen small companies jump the gun on dedicated manufacturing, and then go out of business several years later. The usual reasons are starting up with insufficient capital, not designing the facility to accommodate rapid expansion, expanding too rapidly, selecting a location that doesn’t have the right labor pool, lack of experience running a facility, etc.

Dedicated Manufacturing Pros:

  • Complete control over the process, ingredient sourcing, etc.
  • Higher margins once you move far enough along the “cost maturity curve.”
  • Increased company value through ownership of hard assets (facilities and equipment)
  • Flexibility
  • Greater scalability (if properly designed, equipped and staffed)

Dedicated Manufacturing Cons:

  • High capital costs
  • Management, staffing and labor issues
  • Licensing and local regulations can be challenging
  • High level of expertise needed
  • Main stakeholders have less time for sales and marketing
  • Increased risk

Dedicated Manufacturing /Multiple Locations

The largest food manufacturers often expand from one dedicated manufacturing facility to multiple facilities. This only makes sense if you have a huge market, lots of demand for your products, and enough cash and credit to finance the expansion. Most large manufacturers have a large team of engineers, finance experts, managers and manufacturing experts when they finally go this route. Expanding to multiple facilities without the right team in place can be a huge mistake.

Large firms set up multiple manufacturing facilities for different reasons. Sometimes it is to get closer to your customers. Or to take advantage of a large clean water supply, lower tax rates, lower labor costs, or closer proximity to key suppliers. A large firm might set up several manufacturing facilities to reduce concentration in a particular region, to reduce risks from droughts, flooding, forest fires, power outages, or other conditions.

Find Your Own Path

There really isn’t any standard way to grow a food manufacturing business. Every business is unique, and what works for one firm might not work for another. One of our clients built a very nice business by bootstrapping. He started with a small commercial kitchen, selling to restaurants, online and through small trade shows. Once demand was established and revenue was consistent, he moved to a contract manufacturer. In this case, the product was unique but the process was not, so finding a contract manufacturer that did not have competing products was fairly easy once minimums were satisfied.

Another client had a unique product with such specialized equipment and such high demand that a commercial kitchen was impractical. Contract manufacturing was also not possible for the same reasons. She is in the process of constructing her own facility. However, this is a very unique situation with demand already assured.