New York Times | Posted: 08/24/2015
Everyone knows someone who has dreamed of starting a food business. That next-door neighbor who thinks his chocolate chip cookies are better than Tate’s Bake Shop’s. The niece whose friends beg for her homemade hot sauce and who wonders how it would stack up against Trappey’s or Texas Pete.
It used to be that those dreams pretty much stayed dreams. Successful Mrs. Fieldses were few and far between. But a combination of factors — playing against the backdrop of a growing food obsession and concerns that time-honored food brands can be high in sugar, salt and fat — have changed all that.
New companies are flourishing, encroaching on market share and gaining national distribution as shoppers reach for products that tout themselves as novel, local, rarefied or containing better ingredients.
Total sales are still dominated by big brands, but the investment bank Jefferies reports that the brands lost market share in 42 of 54 categories, from baby food to yogurt, over the last five years as new products gained. Think of Chobani yogurt, which went from no sales to more than $1 billion in revenue in less than five years.
Mark Ramadan and Scott Norton are hoping to ride that kind of trajectory, after graduating from an elite university and then changing careers. An international relations major, Mr. Ramadan headed off to a job at the blue-chip consulting firm McKinsey & Company, while Mr. Norton, who majored in economics, headed east, to Lehman Brothers in Tokyo.
Then Lehman went bust, and Mr. Ramadan decided that McKinsey was “just not what I wanted.” So they decided to dust off a project they had kicked around in an entrepreneurship class they had taken as students at Brown University, a concept for a company called Sir Kensington’s that would sell ketchup, mustard and mayonnaise.
“We were always interested in food, and we found that in condiments, especially ketchup, nothing had evolved really in the last century,” Mr. Ramadan said. “Ketchup had been made from high-fructose corn syrup, powdered spices and tomato concentrate forever, and we figured there was an opportunity to change things a bit.” Sir Kensington’s, which hit the market in 2010, is concocted of actual tomatoes, tomato paste and organic sugar, among other ingredients.
In the case of a little natural-soda company called Zevia, Paddy Spence, its chairman, knew he would be taking on what is perhaps the most entrenched aisle in the grocery store, where Coca-Cola and PepsiCo have dominated for years. Mr. Spence was no novice, being a veteran of Kashi foods and the founder of Spins, a research and analysis firm that tracks organic and natural businesses.
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Zevia soda was named the fastest growing “natural” product by the research firm Nielsen before 2008, when the Food and Drug Administration approved a stevia extract as a food additive. (The soda was sold as a supplement until then.) Mr. Spence said sales have increased sevenfold since he bought the business in 2010. Zevia, like the other private companies in this article, would not disclose sales figures.
One reason for the success of small businesses like his, Mr. Spence said, is that sales are no longer tied to grocery stores, which small food companies often have to pay to get marquee shelf space or a corner in the refrigerator case.
Some of Zevia’s sales are through Amazon; other small companies sell directly to the consumer. Also, social media makes it easier to build a brand from scratch, and some small food businesses have slicker websites and more clever brand identities than their much bigger competitors.
And then there’s Whole Foods, which for decades has relied on offering shoppers items they can’t get anywhere else. The company’s decentralized structure allows store and regional managers to incorporate small lots and batches into their mix, a boon for small companies.
Most important, though, there are investors eager to finance new food businesses. Major Silicon Valley firms like Khosla Ventures have put money into such businesses, and Silicon Valley-style “accelerators,” like AccelFoods and CircleUp, raise early-stage financing and offer management and administrative consulting to small food businesses.
Sir Kensington’s has just received its first outside financing: $8.5 million from Verlinvest, a private investment company that, with other companies, holds a major stake in AB InBev, the beer giant whose other stakeholders include the owners of Heinz.
“This is a phenomenal time to be a food entrepreneur,” said Ryan Caldbeck, a co-founder and the chief executive of CircleUp. It typically invests in companies with $1 million to $10 million in revenue, like Twisted Cherries, Go Lo Foods and Smari Organics, an Icelandic yogurt business. CircleUp has raised $50 million for small food and beverage companies since its founding in 2011.
So much investment flowing into small food businesses worries Will Rosenzweig, the founding chief executive of Republic of Tea and an investor himself. He said too many small companies are spending too much time raising money and not enough time improving their businesses, which is a reason he helped found the Food Business School at the Culinary Institute of America.
“There is a deep, rigorous and usually unappreciated need in the food business to determine whether something is a hobby or really a business,” he said. “There are a lot of people who have a family recipe who think, ‘Paul Newman started a business after sharing salad dressing with a neighbor and suddenly had a $3 billion company.’ ”
One small company that Mr. Rosenzweig is watching is Cherryvale Farms, which he describes as “a 21st-century Betty Crocker.” Lindsey Rosenberg founded the company, which makes mixes for foods like banana bread and brownies, in 2010, after her parents came home from a trip with a mix they had picked up that required the addition of just one ingredient. “It was kind of like Bisquick but better,” said her father, Michael Rosenberg.
Ms. Rosenberg saw the product, and a light bulb clicked on. “I was doing entertainment P.R. in Hollywood — you know, celebrities and calls at 2 a.m. — and was, what should I say? Burnt out,” she said.
She left her job and six weeks later had a prototype and was in production, using a Hobart mixer in a commercial kitchen space she rented from 9 p.m. to 1 a.m. Her mother, Marsha, helped package the mixes on the family’s dining room table. The boxes were designed by Mr. Rosenberg, who is a technology marketing consultant.
The first retailer to pick up the mixes was New Leaf Community Markets, a small natural-foods grocery chain. Then Cherryvale moved into 70 Whole Foods stores. Today, the mixes are made in a commercial kitchen and packaged in a warehouse (“I got forklift-certified,” Ms. Rosenberg said).
In March, Cherryvale shipped the first order that Ms. Rosenberg had not personally touched. The mixes are now in almost 1,200 stores nationwide, but so far, the company has not taken on any outside investment. “We are bootstrapping at this point, though I’d call the boots cement shoes,” Ms. Rosenberg said jokingly.
The same year Ms. Rosenberg founded Cherryvale, Neal McTighe started Nello’s Sauce, a line of pasta sauces. “I had no background in the food business,” Mr. McTighe said. “I have a doctorate in Italian language and was focused on teaching and that sort of career path.”
Instead, he ended up in book publishing at a major university and found himself daydreaming about the time he had spent in Italy as a student and, more particularly, the food he had eaten there. He developed a red sauce similar to one his Italian great-grandmother had made and started selling it. He sold $750 worth online the first month. “I had no business training, but I just jumped in,” Mr. McTighe said. “It was scary, it was exhilarating. Just wonderful.”
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Four years later, the thrill of doing it all himself had worn off, and he hired a small contract manufacturing company willing to do small batches. His sauces are now sold in some 350 stores. A few friends and family members have invested in Nello’s, and Whole Foods gave it a $30,000 loan a few months ago to support development of its biodynamic marinara sauce, made from heirloom tomatoes.
The new sauce, Mr. McTighe said, is a good example of what a small company can do that a big company can’t.
“If they’re going to do a production run or invest any energy, they need minimum runs of 500,000 to a million jars, and there’s not enough supply of the ingredients to do that,” he said. “We’re going to do a limited release, probably about 20,000 or 25,000 jars, and consumers will be excited about it because it’s something special.”
Mr. McTighe and other entrepreneurs said that managing growth while preserving quality is the biggest challenge facing a food entrepreneur. In Ms. Rosenberg’s case, for example, Cherryvale’s growth meant moving away from all-organic ingredients. The mixes are now vegan, thanks to a less expensive plant-based substitute for the powdered eggs she had been using. “As we grew, our margins were shrinking, and we decided that our customers cared more about other things,” she said.
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Sir Kensington’s is developing a food service business, and its condiments may be found on room-service trays in Ritz-Carlton hotels and at Bareburger restaurants. But it has pulled back from some retail outlets and is now in about 4,000 stores.
“We didn’t know how to support our distribution, we didn’t have the financial resources to support our distribution, and we didn’t know we needed to support our distribution,” Mr. Norton said.
Mr. Ramadan added, “We decided it was better to be No. 1 in some stores than No. 10 in 100 stores.”
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