The ambition to start a food or beverage company is a noble one. There are millions of consumers out there who want to have access to tasty and nutritious products without breaking the bank to get them. Perhaps you see a product line with some major issues that prevent people from buying it (cost, flavor, ingredients, packaging, branding, etc.) and strike out to make a better alternative. It is a noble path to choose, but the unfortunate reality is that, much like the small scale organic farmer, the odds are stacked against you succeeding with an upstart food or beverage company.
What Are the Roadblocks?
Data from a Nielsen survey found that only 15% of products launched today will be around in two years. That means a whopping 85% of new packaged consumer products will not make it over the array of roadblocks placed in their way, including:
A Competitive Market
In the first place you have to grapple against major corporations with billions of dollars in revenue, all with strong vested interest in keeping their market percentages. If you want to make soft drink, for example, you are looking to pull some market share from Coca-Cola, Pepsi Co, and others. In 2015 there was only 6% of the soft drink market available to upstart companies looking for an enduring revenue stream. Imagine the hundreds of soft drink companies founded each year with the same goals, and you can see why competition is so fierce. The same general principle goes for other industries, whether it’s poultry, dairy, cereals, bread, and so on. The reality is that there is very rarely a new, untapped market in the food industry.
No Long-term Growth Plan
A lot of small food and beverage companies fail because they do not have a long-term plan. Building a business takes countless hours of budgeting, product design, market research, and cultivating a long-term growth plan to succeed. Many entrepreneurs work themselves to burn out within a couple of years rather than build revenue slowly from a local market with strong and consistent demand.
Lack of Capital
The food and beverage industry requires plenty of operational capital with very thin profit margins for small businesses. A new company is forced to scale up as fast as possible in order to become profitable, but increasing sales is hard when profits are usually cycled back to retailers and distributors for promotions, advertising, and slotting.
Marc Rampola, the founder and former CEO of Zico Coconut Water stated, “I remember when I had raised $500k thinking, I am done now. Now I can run the Company. But that is not how it works.”
Given how little revenue is available in the early days, it is incredibly challenging to make your runway last until consumers find your brand and start spreading the good word.
Entrepreneurs With No Patience
Entrepreneurs are incredibly self-directed. It is one of the things that makes them successful – but it can also be an achilles heel when trying to build a business from the bottom up. All too often an entrepreneur with grandiose visions of short-term success will blow their marketing budget trying to land distribution deals in New York, Chicago, California, Texas, or Florida overnight. Investors will quickly lose interest when projected sales targets are missed, and the company begins the slow decline to bankruptcy.
Poor Design Choices
The fundamental questions of branding, product design, and visual acuity of a product are often done poorly. Whether it is lack of funding, slightly over-the-top packaging, or an issue with the tone and message of the brand, any and all of these can put a spoke in the wheel of a new business. First time buyers always make a decision based on visual cues, but getting the right package together takes more than a catchy name.
Industry Prejudice is Real
Many roadblocks exist within the structure of the food and beverage industry to limit new products coming in. Even if a startup can sign a deal with a major retailer it is no guarantee their product will be on the shelves. This is primarily because slotting fees give preference to the bigger companies, and a grocery store chain is not likely to risk replacing a strong selling item with something new just because you ask them too.
Price Points Are Imbalanced
A small company can never offer the same competitive rates as a larger company because of the question of scale. Every manufacturing cost related to making and packaging the products is costlier for a new business because they are making small batches. This imbalance is augmented by a tighter operating budget and sales that have yet to ramp up and remain consistent. These costs are swallowed by the consumer who is asked to pay more.
The Bottom Line
A lot has been written about the impact digital shopping will have on upstart food and beverage companies. Any opening for renewed competition on slightly more equal terms is welcome, but as of yet unknown.