Why Artisanal Food Makers Find It Hard to Digest Growth

Getting onto the shelves of large retail chains can be a burden as well as a blessing

Life seems like a feast for artisanal-food makers lately.

Over the past few years, shoppers have been flocking to locally made, sustainable products—and that has caught the eye of big players. Huge retail chains are stocking organic fare from small outfits, and venture capitalists have started plowing money into the industry. They’ve backed small food businesses of all stripes, from Hampton Creek, which makes plant-based alternatives to meat and eggs, to Munchery, which delivers chef-prepared meals to customers’ homes.

Yet the sudden burst of customers and backers has brought food entrepreneurs a lot of headaches. Many business owners say they’re struggling with issues of scale, scrambling to source enough ingredients to meet demand. Unlike big companies, it’s tough for a small operation to source ingredients all over the world to ensure that they have access to supplies year-round and can keep shelves stocked. It’s also harder for startups to get favorable contracts with multiple suppliers to limit the impact of poor weather on crops or changes in commodity pricing.

Consider Lisa Murphy, founder of Sosu Sauces in Oakland, Calif. She just scored a big win: shelf space for her gourmet ketchup and sriracha on the shelves of Sur La Table stores throughout the country. But with one production cycle a year, pegged to the single Northern California tomato-growing season, she’s concerned about ensuring inventory and smoothing out supply and demand so that she has enough inventory but is never holding on to too much.

“Bigger stores don’t work on a seasonal schedule,” she says. “If a product on their shelves sells well, and then you can’t meet their inventory demands, they take your product out, and once you’re out it’s hard to get back in. It doesn’t make sense for them to save shelf space for you if you can’t give them inventory year-round.”

At the big table

These aren’t new problems in the artisanal-food businesses. In the past, however, companies were largely self-funded for the first several years, and they were content to grow slowly. Their customers tended to be farmers’ markets or small gourmet-foods stores, which were fine with seasonal availability of various products. Now, the combination of booming demand, the involvement of big retailers and large amounts of investment have led to a greater sense of urgency.

“For venture capitalists, the average lifetime of a fund is 10 years, but food and agriculture companies are in the business of thinking generationally, so there’s almost an immediate disconnect there,” says Kellee James, founder and chief executive of Mercaris, a market-data service and trading platform for organic, non-genetically modified and related agricultural commodities.

One of the most common mistakes small businesses make, food pros say, is trying to land partnerships with big retailers that are a poor fit for their products. “If you talk to enough food entrepreneurs, the common war story is, we got into Target within the first year and everyone gets really excited because it’s a big national retailer, but then they got kicked out six months later,” says Mike Shim, an investor in food and tech businesses as well as the co-founder of New Frontier Foods, a healthy-snack company in Burlingame, Calif., currently focused on seaweed snacks.

Minh Tsai took a slow approach to growth with Hodo Soy. PHOTO: BART NAGEL

Why? Sometimes the chain discovers not all of its stores want to stock the product, so it cancels the deal, he says. Sometimes the products do end up on store shelves but get poor placement and end up flopping.

Small businesses, Mr. Shim says, generally don’t think about stuff like that and are setting themselves up for failure. Instead of focusing on getting into the biggest chains, he believes, they should focus on getting into chains that are a good fit for their product and building strong relationships with them.

For many food makers, the solution is simply time. Ben Mustin, co-founder of MM Local Foods in Denver, spent three years getting farmers to agree to ongoing contracts with him for produce. He also worked with both farmers’ market customers and retailers likeWhole Foods and Lucky’s Market to accept seasonal shifts in inventory.

“It took a while, but eventually we got customers to be OK with the fact that when the peaches are gone, they’re gone, but maybe we have tomatoes now, or green beans or pears,” Mr. Mustin says. “Now it’s more of a positive thing, and sometimes even a selling point, where customers want to make sure to get the peaches while they can, and then they look forward to seeing what comes next, too.”

Staying at a simmer

Minh Tsai, founder of Hodo Soy of Oakland, now the fastest-growing organic-tofu company in the country, also took a slow route. Mr. Tsai, who has landed contracts withCostco, Whole Foods and Chipotle over the 10 years his company has been in business, only began distributing outside the West Coast this year. He says the company needed to find an organic way to extend shelf life—it now uses a special pasteurization process—and ensure it could produce enough volume before talking to national distributors.

Along the way, he ran into plenty of problems, such as a spike in the price of soybeans six years ago. “Farmers could get more than the price I had contracted for, so they dumped me and I had to go buy soybeans on the open market, which was much more expensive,” he says. He eventually had to hedge his bets by spreading his contracts among three farmers—one who supplies 80% of the soy he needs, and two who supply 10% each, but who can easily supply more if and when he needs it.

Many food entrepreneurs, Mr. Tsai says, get caught flat-footed by those kinds of complexities.

“There’s an urgency to be in the black in three to five years, and that’s practically impossible with a food business,” he says. “Maybe 5% of food businesses can do that. And also there’s no barrier to entry in a lot of these markets, and that’s led to a flooding of some product categories. How many more ice cream or jam or beer companies can the market really support? People don’t think about that, they think they can make it better and so they just go for it. That’s beautiful in a way, but we also need them to understand the operational and financial risks.”

Source:WSJ