Archive for August, 2019

More thoughts after my week with Tera Johnson of the Food Finance Institute and several local businesses….

In tech people like to talk about the “attention marketplace” – that we’re competing for click-throughs and page views. Competing for attention is also true of retail and product marketing. No longer is it good enough to get onto the shelf or into the corner location. You need to fight for people’s attention and do marketing and promotion. To grow quickly, you will need cash to invest there and build sales, which hopefully will remain stable and repeatable at your target price once your promotional efforts have driven customers to try your product.  Tera said often: you have to drive trial.  Do demos so they’ll taste, do Temporary Price Reductions (TPRs) to get people to buy it just to try it, do couponing.  All of that costs money and is not easily financeable with debt because it isn’t asset backed.

What is financeable with debt is equipment.  What I learned in this class is to be aware that equipment often comes with “environmental costs” – that new sink needs a bigger drain. That new oven needs a bigger hood/ventilation system. That killer new processor needs tri-phase power that your space didn’t have.   Equipment can be a big capital investment, and using outsourced manufacturing can be a pragmatic step in growing quickly – it might be less optimal and efficient but it lets you avoid raising the capital and building the line until you’ve proven out the sales.   Grow sales on co-packing and then you’ll have the cashflow to support the debt to buy the equipment and build your own line.

In tech as an investor I’ve learned to want companies to “stick to their knitting” – really narrow their focus/target their customer. It’s too easy to try to “boil the ocean” and get nowhere.  Food is different because cashflow management is such a big thing.  In food, it can be company-saving to diversify.  The immediate cash generation of direct-to-consumer can be a key part of floating the company through the long receivables periods of growing a wholesale business.  The stability of wholesale can help balance the variability of a direct-to-consumer -be it popups, farmers markets, or a retail location, maybe catering.   Those can be important compliments that help smooth out both cash and capacity utilization of space, equipment, labor.   Building out a product in food service before tackling wholesale can be part of both market testing and cashflow building and perhaps brand-building if they’re willing to promote you.

To be successful in food you will have to manage your partners.  It’s not enough to get a distribution contract, you will need to monitor that they pay you they way they’ve promised to pay you and when they promised to pay you.   You will still need to hire brokers to get your product on the shelf and you will need to manage them. You will have to do your own promotion and marketing.   You will have to pay the distributors for your own data. When you hire copackers you will need to monitor the quality of your product that they produce.  Expect to inspect.  Don’t shoestring it and look for partners to save you:  this is you growing your company and managing it actively.  Buzzwords to study up on: copacking, 3PL (third party logistics), cold storage.

It’s important to understand financing, because it’s an essential part of growth.  Food companies need to grow in steps because growth involves expensive changes in both distribution and production – you’ll need to ready (study up to ensure the cost of those changes will be covered by the growth they enable), steady (model cashflows, be realistic and organize financing) and go!

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