Editor's note: This "A Balancing Act" story is the 15th in a series for Food Dive, where experts examine trends uncovered in earnings reports and discuss strategies that impact the balance sheet. Previous articles in this series can be found here.
While it only takes a great idea to start a food company, it takes a lot more to make it succeed.
According to food and beverage brand marketing expert Tammy Katz, CEO of Katz Marketing Solutions, a critical and sometimes overlooked step is doing the homework to pinpoint market and product positioning and gauge the potential for consumer acceptance.
Katz also emphasizes the importance of creating a sound business plan, which helps determine if an idea is sufficiently profitable, as well as identify what funding or investment is needed upfront.
“Many startups jump right in with their recipe or prototype, which is premature,” she said in an email. "While an entrepreneur’s recipe and enthusiasm are a great start, it’s not enough. Startups succeed when the product is differentiated and appealing enough to be saleable, the business plan has a clear path to profitability, and sufficient startup funding is in place.”
Shira Berk, founder and CEO of Tribeca, NY-based Goodie Girl Cookies, started her company in 2010. The brand continues to gain steam, landing placement at a growing roster of national retailers, including Kroger, Target and Walmart. Most recently, Goodie Girl Cookies signed a deal with Starbucks, making 2-ounce sleeves of Mint Slims available along with Frappuccinos.
“You have to stay focused, surround yourself with a few good people who complement your skill set, and build relationships with other companies – learn from them and try to emulate what they’ve done right,” she told Food Dive.
So just how does an entrepreneur go about taking a product from Point A to Point B? And what kinds of resources are at hand along the way?
Food startups are a high-growth story
Big CPGs are losing the growth game to food startups. Consumers are voting with their wallets, and much to the dismay of large food makers, it’s the small guys that are driving sales and stealing away market share.
According to the study “Is Big Food in Trouble?” by management consultancy A.T. Kearney and research firm The Hartman Group, the top 25 food manufacturers’ share of U.S. food and beverage retail sales declined from 66% in 2012 to 63% in 2015. Small food companies grew revenue at 11% to 15% during this time frame, compared with just 1.8% growth for the top 25 CPGs.
The long tail – made up of more than 20,000 food and beverage companies below the top 100 – drove 49% of all CPG category growth from 2011 to 2015, according to the latest Nielsen Breakthrough Innovation Report.
Why such high growth for food startups? Why now? What’s different?
Consumer shifts lead to new breed of brands
“The emergence of food startups is coming out of the good food movement,” Dave Donnan, lead partner in A.T. Kearney’s Food and Beverage practice and study co-author told Food Dive.
“Many startups are coming on board to make foods that are less processed, with perhaps less sugar or salt,” Donnan said. “They may be locally grown or sourced. They’re organic, vegan or alternate proteins. If you look across categories and items, it’s this kind of innovation in good-for-you foods that’s driving a lot of the startups right now.”
Shifting consumer tastes, values and lifestyle choices have indeed prompted the rise of food newcomers with offerings of innovative and authentic products and sustainability-minded practices.
"While an entrepreneur’s recipe and enthusiasm are a great start, it’s not enough. Startups succeed when the product is differentiated and appealing enough to be saleable, the business plan has a clear path to profitability, and sufficient startup funding is in place.”
CEO of Katz Marketing Solutions
The result has been an entire cottage industry of nimble startups and food artisans cropping up to fill voids left by big consumer packaged goods companies, which, due to their enormous size and structure, are often unable to move as swiftly.
James Joaquin, co-founder and managing director of Obvious Ventures, which counts plant-based protein company Beyond Meat and artisan cultured vegan cheese company Miyoko’s Kitchen among its holdings told Food Dive he is helping companies build a brand and promise that consumers are getting nutritious, delicious food that’s 100% made from plants.
“This is what any food startup needs to do – come up with a promise to the consumer that they can deliver authentically,” Joaquin said. “It’s something that’s really hard for the big brands to do because they have myriad … SKUs that are processed and packaged and don’t deliver the freshness, efficacy and ingredient stack that these new breed of companies are promising to the customer.”
So they aren’t left in the dust, big CPGs have taken to buying up successful food startups. Some recent examples include the 2016 acquisitions of Boulder Brands by Pinnacle Foods, Frontera Foods by Conagra Brands and Justin’s by Hormel. Other CPGs, like Campbell Soup, Kellogg’s and General Mills, are busy building their own food incubators to invest in startups and try and stay ahead of the growth curve.
From idea to incubator
It’s important for startups to take small steps and not get in over their heads. Sometimes scaling up too quickly – or worse, not knowing how to scale up when a big order hits – can lead to imminent failure or retrenchment.
New product ideas are great. Entrepreneurs exude enthusiasm. But startups typically require a lot more in terms of outside help and resources to actually make things happen. Enter the food incubator.
“An incubator is the first place you want to reach out to,” said Donnan. “A food incubator is a small organization, usually with a centralized kitchen. They offer training and development services in areas such as R&D, packaging and menu development, and networking opportunities.”
Most incubators also have central lenders to help with seed money too. Donnan cites The Hatchery in Chicago as one example. Food incubators are located across the country to help get new companies off the ground and turn entrepreneur dreams into reality.
Tech accelerators help startups scale up
Once a product has some substance to it — and is ready to roll out or grow rapidly — the next phase usually happens with the help of a tech accelerator.
“The accelerator takes you from concept to try to get you on the shelf. There are mentors on the accelerators who come from industry, such as retail and food manufacturing – people who have good connections,” said Donnan. He is also a mentor with Chicago-based tech accelerator 1871, which touts itself as “a community of startups, corporations, and community partners who learn from each other and innovate together.”
“The accelerator is all about getting product to shelf,” Donnan said. “Help is available on branding, communications, sampling and social media, for example. As a mentor, I make sure a startup has critical manufacturing capabilities through a contract manufacturer.”
“This is what any food startup needs to do – come up with a promise to the consumer that they can deliver authentically. It’s something that’s really hard for the big brands to do because they have myriad … SKUs that are processed and packaged and don’t deliver the freshness, efficacy and ingredient stack that these new breed of companies are promising to the customer.”
Co-founder and managing director of Obvious Ventures
“We’ve found are that certain retailers are very open to trying new products,” he continued. Donnan points to Whole Foods as a classic example, citing the retailer’s willingness to test new products in a small handful of stores. Product trials are typically accompanied by in-store sampling provided by the startup. After assessing performance, Whole Foods determines if they want to take a product regional and then potentially even nationwide.
According to Donnan, other grocers open to working with food startups include regional operators like Mariano’s, Publix and Wegmans, especially as these retailers look to differentiate selection and emphasize locally grown and sourced products.
Big dreams call for big money
Running parallel with getting product onto shelves is getting the appropriate financing to make it happen. Having likely tapped out personal funds (and perhaps those of family and friends), going the venture capital route is the next logical step.
As an accelerator mentor, Donnan helps startups put together their economics package, making sure the right price points and other metrics are in place to make the product work financially, and then helping them develop the pitches needed to get VC funding.
Capital investor Joaquin shared some stories of startups he’s invested in through the years. These include baby food brand Plum Organics, which, Joaquin said, had “a great exit story when it sold to Campbell Soup in 2013.”
Generally speaking, when a startup looks to VC to fund rapid growth and gives up a share of the company in return, the anticipated outcome is usually an eventual exit strategy — perhaps a lucrative sale.
“But not all the time does investor interest align with founder interest,” Douglas Raggio, managing director of early-stage food brand investor Bias and Blind Spots, told Food Dive. “A lot of founders I speak with don’t start their business to sell to a big CPG or major acquirer. Unfortunately though, if you get on the hamster wheel of high growth, you’re entering a casino where the options and successes and wins are limited to very few brands.”
A company that Obvious Ventures currently invests in is Good Eggs. Joaquin describes the company as going after a new way of delivering groceries to the consumer.
“They’re marrying convenience with a set of organic and artisanal foods that you would normally find at a farmer’s market,” he said. “The combination of the fresh, healthy groceries delivered directly to your door is a very disruptive approach. And Good Eggs is building a whole new brand in grocery by taking this angle.”
“A lot of founders I speak with don’t start their business to sell to a big CPG or major acquirer. Unfortunately though, if you get on the hamster wheel of high growth, you’re entering a casino where the options and successes and wins are limited to very few brands.”
Managing director of Bias and Blind Spots
But with VC backing, food startups can get too big too fast, and that can be a problem. Good Eggs had this problem, Joaquin said.
“They actually expanded too fast into lots of cities, which didn’t work for them,” he said. “So they had to retrench back to serving solely the Bay Area. That’s when Obvious Ventures came in as an investor.
“The new CEO is now focused on making the economics of the business work and improving the customer experience. It comes right back to delighting the customer. Business in the Bay Area has since more than doubled. And now that the Bay Area is working, Good Eggs is once again looking at expanding to other cities.”
Do homework and seek help to avoid pitfalls
Good Eggs provides a good example of how every new startup has its share of trials and tribulations. The key is trying to avoid pitfalls and setbacks, navigate the unknown as best as possible, know when to seek help and keep pushing forward.
How much do food startups look for outside help along the way to building their brand and getting on store shelves? Katz responded, “Usually not enough.”
“It’s important for them to leverage their expertise, which is often the product and formulation or recipe. But get help in areas in which they are less familiar, like brand positioning, developing a business plan, pricing, distribution and sales strategy,” Katz said. “There are experts who have done this so many times that can guide food startups to success and help avoid pitfalls.”
“A lot of startups are focusing on vegan, gluten free, GMO-free. But in the end, the food still needs to taste great. It doesn’t matter what things it doesn’t have. What’s important is what it does have. It has to have taste and texture — attributes that make it a good alternative food.”
Lead partner, A.T. Kearney’s Food and Beverage practice
Donnan said one of the biggest challenges in working with food startups is when entrepreneurs confuse something that they’ve created and like with something the consumer will like.
“A lot of startups are focusing on vegan, gluten free, GMO-free. But in the end, the food still needs to taste great,” he said. “It doesn’t matter what things it doesn’t have. What’s important is what it does have. It has to have taste and texture — attributes that make it a good alternative food.”
To this end, Katz points to the importance of concept- and taste-testing, indicating that startups “must not only get consumer feedback on their idea, but run a test market to gauge — and hopefully confirm — the product’s appeal both with consumers and retail buyers. You want your product to sell off the shelf. Entrepreneurs must monitor the test market carefully and objectively. Then refine plans based on how the market responds.”
Building a brand one cookie at a time
Like many food startups, Goodie Girl Cookies began with an idea in a home kitchen – make a great-tasting cookie that happens to be gluten free by using all natural ingredients and wheat flour alternatives.
“I had a vision. But for me, the important thing was figuring out what I wasn’t able to do or learn quickly enough,” founder and CEO Berk told Food Dive.
Despite the company’s meteoric rise in recent years, Berk told Food Dive that it was all about taking small steps. As she states on the company website, “Just like in baking, building a business is about finding that perfect blend of ingredients, taking the right steps, in the right order, to create something amazing.”
After outgrowing the home kitchen, Berk moved into a commercial kitchen and entrepreneurial incubator. Here, she networked and learned.
“It’s about becoming a member of a community where ideas are shared and people help you launch your company,” Berk said. “It’s more than a place to bake cookies. I gained access to resources and became connected with other entrepreneurs in the field who had actually done this before.”
With Berk’s background in PR and marketing, she’s passionate about the creative side of building the business and brand, but needed to look outside for help on the production end.
“For me, the challenge came with production,” Berk said. “I did every single thing possibly wrong.”
Through the incubator, Berk was introduced to a bakery consultant who helped smooth out many of the production issues. “That was the catalyst,” Berk said.
The next move was to a bigger commercial kitchen with proper baking equipment she needed to scale. It was here that someone introduced her to a Whole Foods buyer, who became interested in her product, and Goodie Girl Cookies broke into Whole Foods Northeast region.
Berk said her “game-changing” moment came in 2015 when she won a booth at the Fancy Food Show, an annual event held in New York City. There she met her current manufacturing partner, family-owned Toufayan Bakeries, which provided access to the commercial bakery infrastructure needed to scale production and distribution. Single-year sales went from around $20,000 to $1 million, Berk said.
Berk now spends her time running day-to-day operations, handling creative functions and developing retailer relationships, while her bakery partner handles all manufacturing, sales and distribution. Unlike many startups who head down the traditional VC route, Berk is finding success in a family-run operation.
"Entrepreneurs must realize that sometimes their backyard is big enough. You can build a footprint and following by starting locally.”
Founder and CEO of Goodie Girl Cookies
The path wasn’t always smooth-sailing, though. Berk recounts a few of the company’s missteps. She told Food Dive that she said “yes” too early to some major retail accounts.
“Goodie Girl didn’t have the brand equity needed yet in some markets to be successful, for example, when we sold into Costco in the Bay Area,” she said. “The buyer loved our cookies. Production wasn’t an issue. The issue is that consumers didn’t know who we were.
“In retrospect, I would have focused harder in my own backyard. We’re now available in a lot of states, but there are huge pockets across the country where we’re not. Entrepreneurs must realize that sometimes their backyard is big enough. You can build a footprint and following by starting locally,” said Berk.
Recipes for success
What words of wisdom do these experts have for food startups and budding entrepreneurs?.
“Develop or improve the concept so it’s different, appealing to consumers, and profitable,” Katz said. ”Stay focused on retail and consumer needs, not necessarily how much you personally like the idea or formula. And don’t overestimate big companies’ interest in copying you. Most entrepreneurs are surprised to learn that ideas that are less than about $10 to $25 million are ‘too small’ for big companies to bother with. This gives entrepreneurs a huge opportunity to innovate and thrive. But by all means, get help in areas where you don’t excel or choose to spend your time. Mistakes can be costly and eat up your time.”
Raggio said what’s most important is where a startup builds value.
“What’s valuable about your company? It’s not because you taste better. It’s not because you have better ingredients. Value can be a distribution channel, key sourcing relationship, differentiated packaging or keen insight. I ask founders to fill-in-the-blank: ‘What I found is…’ If they can complete that thought with their unique insight on their unique product in their unique space, then that’s value.”
"People want a good story. It’s what’s going to differentiate the product and build up brand equity and messaging. It’s what venture capitalists are looking for. They’re looking for something unique and different, something that has an emotional connection to it beyond the product.”
Lead partner in A.T. Kearney’s Food and Beverage practice
Donnan said having a great back story helps.
“Maybe it’s a story about the artisan, the ingredient, the entrepreneur creating the product. People want a good story. It’s what’s going to differentiate the product and build up brand equity and messaging. It’s what venture capitalists are looking for. They’re looking for something unique and different, something that has an emotional connection to it beyond the product.”
“Understand that there is a tsunami sea change happening at the consumer level. Consumers are changing their eating habits at a pace we’ve never seen before. The next generation absolutely is not buying the brands of the previous generations. This creates enormous opportunity for more startups to create new, better, world-positive food products,” Joaquin said.
The "A Balancing Act" series is brought to you by BMO Harris Bank, a leader in commercial banking. To learn more about their Food & Beverage expertise, visit their website here. BMO Harris Bank has no influence over Food Dive's coverage.