How to start a food company with $5,000
We get a lot of inquiries about starting a food company. It’s really great to see people that are really passionate about their favorite recipe or new food concepts, and we got a lot of help along the way.
Like many of you, we didn’t come from the food business, and had to learn a lot by trial and error. We also found people that answered a lot of questions that aren’t common knowledge outside of the food industry. So in an attempt to give back, we thought it would be helpful to provide some answers to frequently asked questions if you’re trying to start a food business. Here goes our first attempt – we’ll add to this over time!
1. How do I get started?
The best advice we can give is to start small, prove out your concept, then try to take it to a bigger level. Don’t sink your life savings into anything without having really strong signs that what you’re doing is going to work.
You can read our story here: http://www.jdfoods.net/ourstory.php. Our start was a little unconventional, but a lot of what we did can be followed by other people – like using social networks and online technologies to build a following (little things like Myspace profiles, Facebook fan pages/groups, setting up a twitter account, putting up a blog – these are all free and a great way to keep in touch with people you meet and turn them into raving fans). We actually launched Bacon Salt as a side project – but it turned into a full-time pursuit of bacon-flavored interests.
Many food companies we see start at farmer’s markets and outdoor markets – these are great indicators of how successful you can be and a great place to test the demand for a product. A website is also easy to set up these days – at first, we used www.1and1.com to register our domain and set up our web presence. They have lots of website templates you can use. For a shopping cart, we use something called 3dcart, which is relatively inexpensive and has lots of great features. Many use Paypal as well – although we had a less than stellar experience with their shopping cart once we started getting lots of orders (anything over 50 was difficult with Paypal at the time, although perhaps they’ve made some improvements since 2007). They also take a cut of each transaction, which 3dcart doesn’t do although you still have to pay the credit card companies. But they do have a free version here if you’re trying to save money and don’t have a lot of items.
A few other essential resources:
- To get a UPC #, go to www.gs1.org.
- To make a barcode, go to http://www.seagullscientific.com and download their bartender program, which has a free trial. Or you might get lucky and be able to find a designer who knows how to make barcodes.
- Craigslist is a great place to find graphic designers. It’s cheap in most markets and free in many.
- Friends are key. We had friends who did a lot of stuff for us early on, including desiging our logo, building our website and more.
- Network – this is an overused term, but getting to know people in the food industry is key. We’ve met people early on that today continue to be our advisors, mentors and friends.
- Google Adwords, Myspace MyAds, AdReady and Facebook Advertising are all cheap and highly effective ways to get the word out in a highly targeted fashion.
2. How do I manufacture my product?
Our answer to this question depends on what you’re trying to do with your product – do you want to sell it at farmer’s markets and on your website or put it into grocery stores?
It’s often OK at first to make the product on your own if you’re thinking that grocery stores would be much further down the line. Many people start off like this, and then expand to either commercial kitchens or build their own.
We opted to contract manufacture our products from the beginning because we realized that we knew next to nothing about manufacturing a food product – as evidenced by our failed kitchen experiments to mix bacon drippings and sea salt together and call it Bacon Salt. We also couldn’t afford to pay for expensive equipment like bottling lines, filling lines, etc. etc. nor did we have the space in Dave’s garage with all of the kids bikes and miscellaneous toys. And we didn’t think a garage in the burbs would meet all the quality standards that we expected would be required by grocery stores.
There’s a really great website called Private Label Sourcing that helps you find manufacturers for all kinds of products. Thomasnet is also pretty decent. You might also contact a local college’s food science program as well as your state’s department of agriculture, which often have programs to help food companies get started. Finally, you can try contacting companies that make similar products, even if they’re somewhat competitive with what you’re trying to do – many of them have excess production capacity that they sell to make private label or branded goods.
When we look at vendors, we generally try to find companies with a lot of experience with private label manufacturing – other vendors often don’t know or can’t hit the types of price points you need to hit to make it on the shelf cost-effectively. The private label manufacturers also have R&D services they can offer. If you have your own recipe, keep in mind that your recipe will likely taste a little different when you’re making it using heavy food processing equipment – it will likely take some time to get it where you want it. If you don’t have your own recipe but want to develop one, make sure you know who owns the recipe you develop together and how you can get ownership of it (which often requires money or volume commitments, but the last thing you want is to be held hostage by a manufacturer).
3. How do I get my product into grocery stores?
This is probably the hardest part of the whole food business.
There are two ways you can get on the shelf – through a distributor (who delivers food items to grocery stores), or direct to the store. High volume items can go direct to store chains, and store managers at small/local grocers are often OK getting items direct. Lower volume and specialty items typically go through specialty distributors. We do a little bit of both, depending on the market and how well our product sells there. See the next question on pricing for more information.
One of the most effective ways we found to do this is to talk directly to store managers in small stores like IGA’s, etc. – the best thing to do is get in your car and visit them! Tell them about your product, show that it’s sold well elsewhere, and many of them will put on their shelves. Occasionally, a store in a major chain can make local decisions (Whole Foods is one example, although be sure you don’t fall into their unapproved ingredients list before approaching them). To stimulate sales, do some in-person demos – no one can sell your product as well as you can. You can also call specialty stores – we started with a lot of grilling and gourmet food stores that we found using YellowPages.com.
The major grocery chains are much tougher to get into – there are buyers and category managers at their corporate headquarters that often require cash slotting or free goods allowances to get on the shelf. It’s an unfortunate fact of life in the grocery industry. We’ve been asked for everything from one case per store up to $1 million in cash to get into major grocery chains. More information on slotting can be found here. There are grocery brokers that help sell your product into these chains – they tend to shy away from “pioneering products,” but once you have some traction they can make introductions that you could not make on your own. Here’s a list of some of the major brokers out there.
4. How do grocers price products?
As we’ve mentioned, there are two ways you can get on the shelf – through a distributor (who delivers food items to grocery stores), or direct to the store – and different pricing considerations for each. A distributor will typically add a 25 to 30% margin to your products, and a grocer will then add a 30 to 40% margin (at least in our categories). The norms are 25/40 and 30/30, meaning when a distributor adds a 25% margin, the grocer usually takes a 40% margin, and when a distributor adds a 30% margin, the grocer takes a 30% margin.
Quick note on margins – if you sell a product for $1.00 to the grocer, and they add a 40% margin, their cost is NOT $1.40. It’s actually $1.67. Why? Because 60% of that number is $1.00, which is your price, and the grocer wants to take 40% of the whole number, which is $.67. Here’s the formula you can use to calculate it – just plug this into a spreadsheet program like Excel and plug in your numbers. =Yourprice/(1-marginpercent). So in the example above, you take 1.00, divide it by (1 minus .4) and get the marked up price.
5. How much will it cost me to get started?
That depends on what scale you’re launching on, what type of product you’re thinking about and many other factors. It really did only cost us $5,000 to get started. Unless it’s a special product that can only be custom-manufactured and requires a lot of startup capital, the rule of thumb for us has been to spend as little as possible until we knew we had a hit on our hands – mostly because we didn’t have any money relative to a big food manufacturer or established company.
Hope those are some helpful tips to get you started! Best of luck in your new ventures.