So You Want to Start a Food Manufacturing Business?

Maybe you walked through your local grocery store and know exactly what they’re missing. Maybe you know of a lucrative product category that’s experiencing growth. Or maybe you just like food - after all, everyone eats, so it must be a good market, right? Whatever brings you here, welcome to the exciting world of food business entrepreneurship! 

There are a few things we should get out of the way now. Recipes cannot be patented, and healthy margins can be difficult to achieve because of high product and distribution costs. What does this mean? It means you should be realistic about growth, focus on your unit economics, and know your business plan. These words of caution are primarily to disavow you of any belief that you should expect multi-million dollar funding rounds before releasing a product, as you might see in other industries.*

That said, packaged food businesses are exciting, tasty places to operate as an entrepreneur. They present the opportunity to introduce people to a new flavor, culture, or type of food, and your product has an effect (however small at first) on agriculture and farm labor through its supply chain. There is something intimate about food - sharing a meal with family and friends - that your product represents, and when people invite you to their table they let you into this fold. 

What is your product going to represent to your customers? Who are they? You should get to know them intimately through discussions, focus groups, surveys, and community outreach. Understand what they’re looking for and why they value your product. There is already a lot on the market; why is your product different?

In the beginning, your work is to determine the product-market fit and articulate your value proposition. Once you know your value proposition, insulate yourself from competition. Your salsa isn’t just better tasting, but uses higher quality ingredients, communicates a message that resonates with consumers, and is healthier. Taken together, these factors make your product much harder to imitate. Once you have a product (or product idea) that resonates, the challenge is getting out into the world. So, how do you position your product for your customers?

Price

Consumers are price sensitive, especially at the grocery store. Of course, there are exceptions, like these $50 strawberries, but for the average consumer - and especially at supermarkets - price is a key driver in purchasing decisions. Imagine yourself at your local store, looking at ready-to-eat soups. There are the cans of soup for $2.50, slightly nicer looking cans for $3.50, and glass jars of soup for $6. What would make you choose the $6 soup instead of the cheaper ones? 

If your product will cost more than comparable products, you need to demonstrate value to the consumer that they are willing to pay for. Maybe your product seems more authentic or promises a certain lifestyle. You can test consumers’ willingness to pay through surveys and by using tools like MTurk, which allows you to collect hundreds of responses in a matter of hours. If consumers don’t get at least as much value from your product as it costs them at the store, they won’t buy it. 

Proximity

No matter how delicious, tantalizing, and revolutionary your product, consumers won’t buy it unless they know about it and can easily access it. Since there are so many easily accessible food items at the local grocery store, there is little incentive for consumers to go out of their way for most new products. And unlike when buying appliances, consumers are not going to put in significant effort reading reviews and doing comparison shopping to decide on which soup to buy. You’re automatically out of consideration if you aren’t on the shelf at their store. If you’re doing ecommerce, you face the same problem - consumers need to see your brand in search results and advertisements or they won’t know it’s an option.

Taste

Let’s assume that you made consumers aware of your product, were on sale somewhere they shopped, and earned some initial customers - congratulations! But consumables are a recurring business. Once you have won the battle of getting into consumers’ carts, you need to convince them to come back again and again. How do you do this? Taste. Above all else, consumers want tasty food. You can produce the healthiest, most sustainable product ever made, but if it tastes like carpet you won’t have recurring business. When they try your product, customers expect incredible flavors, textures, and aromas. If your product falls short, just like a recipe that turns out bland, they won’t look back. 

If you get price, proximity, and taste right, you have much to look forward to. Customers will make your product a recurring staple, and introduce it to their friends. You might even get them to champion it at local grocers or their workplace. But this begs the question - what is your goal in starting a packaged food business?

Long Term Goals

We mentioned above that food products have marginal costs and require distribution (not to mention some of your products will expire). This makes it relatively expensive to get into the hands of your customers. It also means that you will probably expand from a few select markets to more widespread distribution as your operation scales. At some point, you’ll need to think about what to do with your business. We believe there are two main ways to approach this, and many shades of gray in between.

One option is to keep your business in the family. You continue to scale the business without selling ownership to other investors. This allows you to control its growth and product offerings. Eventually, you will be able to pass the business down to your children. In order to remain relevant as consumer tastes change, you may need to rebrand and reinvent yourself every few years. This isn’t impossible, but getting it right time and again is challenging. And if you don’t accept outside capital, every rebrand represents a major risk to the longevity of the business. 

Another option is to build your brand to sell it. There are a handful of large food CPG companies that own many of the brands on store shelves and several more that specialize in certain product categories. Companies like Pepsico and General Mills are incredibly efficient at sourcing ingredients and scaling businesses to a national level. If you build your small brand and demonstrate traction, these larger companies might be interested in buying you out. And since they have their own supply contracts and production facilities, they are more interested in your brand and how much revenue you generate (and have the potential to generate) than your profitability at this early stage. 

You can also pursue other avenues in the middle. For example, you could accept capital from angel investors that share your values and are looking for long-term accretive growth strategies, leaving you in control for decades or longer while also acknowledging this won’t always be a family business.

Whichever way you go, having a clear vision for your brand is critical. It informs how quickly you grow and scale, and how you position yourself in the market. With these initial thoughts in mind, welcome to packaged food entrepreneurship!

Footnotes
*With the exception of food tech, such as lab-based meat, which can be patented and projects exponential growth, potentially attracting investors before commercialization

General footnote: While the principles in this guide may benefit other types of food-based small businesses, such as caterers, home bakers, commodity purveyors, and food truck operators, this guide is primarily targeted towards packaged food product manufacturers.