Ep. 3 Who's Going to Make Your Food Product?


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About:

In Episode 3 of Feast and Fortune, the Kevins, Co-founders of immi, share the thought process behind their decision to work with a food manufacturer (a.k.a. co-manufacturer) and the various options that food startups can consider using to make their food product. They also cover the tactical process of looking for and identifying the right manufacturer to work with.

They cover various topics including: the pros and cons of using a food manufacturer or a commercial kitchen, how you can best prepare for your manufacturer search, and the process of onboarding with a food manufacturer to produce your food product at scale.

 

Transcript:

KLee: [00:00:00] Hey everyone. Welcome back to episode three of Feast and Fortune.

KChan: [00:00:04] On today's episode, we're actually going to be talking about why a co-man is important and how you go about finding one.

KLee: [00:00:10] It's been several weeks now. KChan and I actually had a few weeks of travel over the past few weeks. We were doing some interesting work out in New York meeting with our branding design agency, actually going through a couple in a co-packer and co-man conversations across the U.S. And we're finally back home here in San Francisco.

So we're super pumped to get started today on this episode.

KChan: [00:00:34] So KLee, why don't we get started by telling people what a co-packer or co-man is?

KLee: [00:00:43] Yeah, definitely. So the easiest way to explain it is probably that a co- man or a co-packer is effectively the manufacturer in the food industry. Typically as a starting food brand, you're likely not going to be running your own factories, setting up a whole production line, buying equipment.

And so, across the U S and across the rest of the world in fact, there are hundreds of these co-mans AKA co-packers. I think the distinction there is a co-man, AKA a co-manufacturer is primarily specialized in producing your product, whereas the co-packer is kind of this bundle term, uh, where the co-packer will also handle some of the packaging and they can effectively kit, which is, you know, putting something together.

They'll kit together the product with the final packaging and pack it into perhaps a box or you know, aluminum foil or whatever type of packaging you typically would prefer for the individual units as well as the final output.

If it's a pack of six pack of nine, so on and so forth.

KChan: [00:01:49] So just for context, the, the co in co-man and co-packer, which are often used interchangeably with each other,  actually stands for contract.

So a lot of these, comans and co-packers are actually standalone businesses. So they're owned by someone who has a factory and they know how to create a specific type of product.

So if you were to go out there and look for a co man or co-packer, who makes beverages, they have all the equipment and they're probably bottling beverages for various different types of companies, and they're selecting: "Hey, which businesses do I think, I believe has the opportunity to grow? And I want to support them with their growth. So I'll bottle these beverages for them and you know, if they sell more then I get to bottle more beverages and I get to grow."

So they're actually very discerning businesses, who then take on these projects with a specific brands.

KLee: [00:02:40] And a lot of these co-mans or co-packers have likely been in business for decades. A lot of them are actually family run. And they sometimes may even have their own first party brands that a lot of us maybe aren't even aware of that we may shop and purchase at our local grocery or retailers.

But again, as KChan mentioned, these comans and co-packers - their primary business is to effectively be your contract manufacturer and produce for other brands and they will make a margin on that, which we'll go about. Uh, we'll talk about in a second.

KChan: [00:03:16] Yeah. So now that we covered what a coman and co-packer is, or, are, um, the next question is really like, why should we go ahead and use one and that that's one of the questions that we had to come to an answer for ourselves.

KLee, like what are your thoughts on whether or not to use a co-man or co-packer and what is a good type of business for, um, working with the co-man or co-packer.

KLee: [00:03:38] Great question. This is probably one of the first questions that any starting food brand is going to have to ask themselves, because there often is a natural progression where you as a founder or perhaps you and your co founder started out the first few months just formulating in your own kitchen.

Oftentimes your own home kitchen, and after you feel that, you know you're fine, your formulation is set in stone, or you're comfortable with how your product actually tastes, the next step is to think about, well, do I produce this in something like a commercial kitchen, which is a kitchen that has been outfitted with certain smaller pieces of machinery and equipment that can probably produce a decent quantity of your product per day or per month, but will never get to this scale or volume that a contract manufacturer or co-packer could actually produce.

And we're talking, you know, factors of 10 factors of a hundred. It is a drastic difference in volume when you go, when you try to decide, should I produce this in a commercial kitchen versus a co-packer?

The other evaluation is that if you go to a commercial kitchen where you try to take your formula, you use the equipment and a commercial kitchen and produce your product at a slightly larger scale, you still actually have to run your own production line, which means you likely will need to hire part time workers too, or full time workers actually who just manage that entire, you know, all the equipment they may have to QA the, that stands for quality assurance. So they need to make sure that each piece of food actually came out the way it was intended.

And you'll often find that running your product out of a commercial kitchen can sometimes feel like a smaller version of running your own manufacturing plant.

There are different issues you're going to have to deal with a lot of times if you aren't familiar with the equipment and a piece of equipment breaks down, you're going to spend a lot of time trying to troubleshoot or hire external help to fix those machines.

You'll also need to manage a line of workers and, unfortunately there's just really high turnover in the production line worker industry. And so I've seen a lot of companies struggle, where they had a large purchase order, but two of their factory line or two of their commercial kitchen line workers quit literally the day before, and so the founders had to go to the commercial kitchen, operate the machines themselves.

Now I know I listed a bunch of negatives there with a commercial kitchen. There's also a few positives. Some of the positives are that with a commercial kitchen, you can effectively get started right away with producing your product at a, at a higher scale without having to go pitch to a coman or a co-packer.

As KChan mentioned, a lot of these comans and co-packers get a lot of business already. They're often at full capacity producing for a number of different brands. So if they're going to take a chance on producing a product for you, that means they have to dedicate line time, which is effectively time that their equipment is running to you as a brand.

And so they have to trust that you are able to grow alongside them or else if they'd spend all this time getting set up with you and then you can't market or sell your product and you die within six months, it's a huge waste of their time.

So with a commercial kitchen, you don't really have to deal with any of that. Typically you are paying a monthly rent. It's almost like you're leasing the rent or the equipment. But you're effectively leasing space. And usually what happens in a commercial kitchen is that a number of different brands are all sharing the equipment together. So they're kind of sharing the costs, and subsidizing it in a way for each other

KChan, what are some of your thoughts on, I guess, the question that you just asked?

KChan: [00:07:23] So, so for us specifically, um. We were trying to figure out ourselves, where do we go? Do we go with a commercial kitchen first or do we go with a contract manufacturer? And honestly, the commercial kitchen was immediately attractive to both of us just because the speed to getting up and running just seemed a lot faster.

You get a couple of health permits, you find some employees, you have your formulation, and you can start producing, getting your products in front of people, and there's definitely a lot of value to that. The challenge though for us was really that a lot of the things that we needed for our product specifically just couldn't be produced in a commercial kitchen.

I think in the case of if you're baking bread and your bread has a shelf life of a week, maybe two weeks, it's probably pretty reasonable to use a commercial kitchen. Or, if you're making a sauce where you don't need very specialized, expensive equipment in order to bottle it and pickle it and keep it shelf stable, it could make a ton of sense.

In our case, because we were looking to make an instant ramen, which is a very specialized food product that requires a massive line that can deep fry the noodles after sheeting and slitting it. Then as a package, it has to maintain a certain level of moisture content. It has to be below a certain percentage of moisture specifically.

And we just couldn't do that in a commercial kitchen. There was just too much inconsistency with the, with the process if we were going to do it. And there would be a lot of manual work because, in a commercial kitchen, you can just imagine there's a bunch of workstations and tables and a lot of the work is actually manual versus a contract manufacturer who will oftentimes have conveyor belts, moving product from one setup to the next setup.

Frying the ramen, packaging the ramen, getting the ramen. Depending on the size of the contract manufacturer, there will be almost no manual handoff between those steps. So while we initially did want to use a commercial kitchen because it was a great way to de-risk the business, we ultimately didn't have a ton of options that would make sense in terms of using a commercial kitchen that had the equipment that we needed.

KLee: [00:09:43] Yeah, and another point actually that we haven't mentioned yet is although we didn't really have a choice in this matter and we were effectively forced to go find a co-packer right from the get go, you really want to also evaluate yourself: how fast do you want to grow as a food brand?

Because you can bootstrap and you can actually get pretty far just by going to a commercial kitchen, selling smaller batches and ramping up that way, and then you can transition into a co-packer later.

Or, for example, if you do decide you want to go a venture backed route, or you feel like you have enough personal savings where you can drop a lot of money on initial production run order, which is in layman's terms, it's effectively a minimum order that you have to make when you work with a co-packer.

So they might request that each production run will be 100,000 units, and if that's going to cost you $100,000, that's a lot of money to front. And that's why a lot of starting food brands don't go the co packer route because they just don't have those kinds of savings in their bank balance to be able to fund such large minimum order quantities.

KChan: [00:10:54] And that's, that's not to say that KLee and I had had a bunch of money laying around to, to go with either a co man or co-packer, but you know, we needed to figure out how to, how to conjure up some of that capital in order to, to go down this path.

KLee: [00:11:08] Yeah. And future episodes, we'll talk about the fundraising process, but for today. yeah as mentioned, we just talked about the different pros and cons of deciding between an option, like a commercial kitchen versus a co-man / co-packer.

KChan, can you talk us through how a food brand should consider preparing for the search if they were to evaluate using a co-packer?

KChan: [00:11:35] Yeah. Yeah. So there's a bunch of things, as KLee mentioned, capital is, is a really important consideration, but diving a little bit deeper into the technical specifics of how to get a food product produce, we were fortunate enough to have a bunch of guidance from experienced food manufacturers or people who have launched food products with commercial manufacturers, contract manufacturers before.

And they actually suggested that we start to get intimately familiar with the process of how is this actually made in a factory setting.

For instant ramen that is really about understanding the different types of equipment and machinery that's used to produce this product.

Um, and we of course went back to trusty old YouTube to learn.

Interestingly enough, if you Google: "food name", like how is spaghetti made in a factory, or how is ramen made made in a factory? There's a bunch of these Chinese videos who are, where these businesses are looking to sell equipment to contract manufacturers. So they actually demo how food is actually run through their systems.

So we were fortunate enough to find a bunch of YouTube videos, in Chinese actually, of people producing these products using the specific types of machinery that we need.

KLee: [00:12:57] One other way you can do research as well is to talk to food scientists who specialize in the type of food that you're producing. For us, we were lucky to have a few food science advisors, and one of them actually had specialty making noodles in the past.

So he was able to help us better understand what type of equipment we would want to look out for when evaluating co-packers and also what are some of the various processes that some of these noodle manufacturers might utilize.

And we took that as a starting point to then create a manufacturing presentation. I'll actually let KChan and talk about this.

KChan: [00:13:37] Yeah. So the, the manufacturing presentation is really designed to save you time. What you should include in this presentation is an overview of the types of machines that you would like to use, and what capabilities you expect from a contract manufacturing partner.

It's important because you're going to have 50 to a hundred, maybe several hundred conversations, and sending this document around enables you to really make sure that you're being productive with your time, as well as if you're going to engage with other partners or ask advisors or ask friends who are familiar with manufacturers.

This just gives them an easy way to reference your needs because otherwise you're going to be talking about the same thing hundreds of times with different folks.

But in terms of the actual presentation: include the machinery, include your forecast about how much you expect to make, include details on the specific problem.

And what we found to be particularly helpful was to include a bit of background on our company to really tell the story, sell the vision to these contract manufacturers. Because at the end of the day, they're,  people and they're looking to find a business that's worth supporting, with a clear vision and with a clear growth strategy and how to grow.

And so those are all really important components of what you should share with various contract manufacturers in this presentation.

KLee: [00:15:03] Yeah. One thing that can't be emphasized enough is that these co-packers, you should treat them almost like their investors. If you are pitching an investor, you would be selling your team background, why you are the perfect team to execute against this product in this space. You would also be selling the vision of your company and how you believe you're going to be the next huge food brand, next iconic brand in this space. They all want to be associated with the best brands because when you grow, they also grow.

You're giving all your business to them. They're going to make a lot of money. So treat them like an investor.

KChan: [00:15:37] As KLee mentioned there, they're taking a tough risk by supporting an unproven business and a startup. So we actually, we actually ended up going to several contract manufacturing businesses and ended up giving them the same pitch that we gave them when we were fundraising.

It was the exact same story and it was actually highly effective in terms of getting them to buy into our vision and really wanting to support us.

KLee: [00:16:00] And if you're, if you choose not to fundraise, that is 100% okay. There's plenty of food businesses that have grown to extremes without any kind of fundraising whatsoever.

But definitely practice your pitch with your friends, with your co founder, your family. And make sure you have that nailed down so that when you enter some of these conversations, it just feels really natural to you.

KChan: [00:16:22] So now that the, your presentation, the next step is going about finding these comments and reaching out to them.

Oftentimes, as KLee mentioned, they're mom and pop operations. So sometimes they don't even, actually, most of them don't even have websites. It's just a phone number. So you know, how, how do we go about finding them KLee?

KLee: [00:16:43] Yeah. This is one of the most frustrating parts of any food company, and I don't think I've met a single food founder who has said, "Oh, I loved this search process."

Partially because as KChan just mentioned there, a lot of these people operate... They're really old school. They just, they don't bother to have any kind of listings online. It's typically a lot of word of mouth or you get really lucky, you find some third degree connection who had worked with this contract manufacturer in the past.

So for us, what we did initially was... Similar to how we created a spreadsheet when we were doing formulation, we created a spreadsheet to track all the leads that we could find anywhere, either online or through referrals from our food scientists or other people in the industry.

And then we treated this lead list almost like a sales funnel in a way where we would categorize someone as, okay, this is a lead, or this is someone who had, we had emailed and we had qualified, so someone from their team got back to us and okay, now we're the next step, which is we send them a manufacturing presentation, and now we're just waiting to hear back from someone senior who is a decision maker.

And we had this entire spreadsheet with hundreds of different contacts. I think a good starting point actually is literally type on Google comans for whatever food product you're making. You'd be surprised. I think our initial list of a hundred or so co-man leads was actually just from this search Google search process.

And then from there you just get really creative because when you talk to someone and they say, "Oh, I can't do this because I can't hit this product specification."

Then you simply just ask them, "well, you've been in this industry for a long time. Would you happen to have any friends who run other co-mans? Or would you happen to know any other industry connections who would know someone?"

And you'd be surprised at how many solid leads you can find simply from these word of mouth referrals.

KChan: [00:18:40] And you'd be surprised as well, that yellow pages, which is probably the most old school form of trying to find something was actually a pretty useful resource for us in terms of getting in touch with various noodle manufacturers.

And as KLee mentioned, sometimes we called these noodle manufacturers or pasta manufacturers, and they would say, "well, we can make something close, but not quite. But I have a friend, or I have a friend whose cousin like owns another factory."

And they were actually super happy to help us make these intros. And so you end up stringing along, going from manufacturer to manufacturer. Slowly canvassing the entire ecosystem of manufacturers who can make your product.

And the feedback that we got is that unfortunately, there's no silver bullet for this process of finding manufacturers.

It's very much a slow process of picking up the phone and calling each person one at a time, understanding what their capabilities are. And if it doesn't work out, you just kind of move on to the next one. And it is a grind. It's definitely a grind. And unfortunately, there's no shortcuts.

KLee: [00:19:55] If you also want to take it even more old school, there are a number of different trade shows you can attend in person. One of them, one of the bigger ones in the industry is called PLMA, the private label manufacturing association. They run one of the largest trade shows for manufacturers.

And so the last one actually just happened in Chicago, and it is a pretty hefty initial price, something like $500 but if you really think about the cost of that and the possibility of finding a co-packer who could bring your product to life. It's well worth it.

So definitely go check it out. Get one of the books that lists all the manufacturers, go up and down the aisles and talk to people in person, and you'd be surprised at what you can find at some of these trade shows.

KChan: [00:20:46] There's also a couple of universities which also have lists of co-packers, so I believe Cornell and Davis have specialty food production lists.

Which unfortunately didn't have noodles for us, but they had a bunch of other great stuff. So those are definitely worth checking out. Calling universities is also a great, a great way to, to potentially get in touch with co-mans. I know that a lot of the professors who teach these courses oftentimes have relationships in this space.

KLee: [00:21:16] And so if you do happen to find a co manufacturer, there is a pretty standard process with some of the mid to large size co-packers.

The smaller ones perhaps like the smaller family ones, they, they may just be able to work with you very quickly, but for some of the larger ones, there is often a process that involves something like:

Both parties have to agree to sign in a mutual NDA just to ensure that all IP protection is set in place. Then from there you might undergo something like a feasibility test where you would ship over a sample of your finished product, your nutrition facts, your ingredient label, and it's often scary to send something like this over, but it's actually a pretty standard.

Almost everyone who has worked with a mid to large sized co-packer will have to go through this because the co-packer needs to make sure that your current formulation will actually work with their production equipment.

Your MNDA should put the protections in place so you, you don't need to worry about that. The other thing too is that a lot of these co-packers have probably seen every variation of every formulation under the sun.

Again, their primary business is to produce and manufacture the product for brands and not necessarily take these formulations and make their own.

So from there, after you do the feasibility test, you'd be able to then work with the co-man and decide is there any additional R&D that is involved from their end?

And hopefully some of these many larger manufacturers have their own internal R&D or food science teams. And you'll also at this point want to put some more protections in place, whether that's some sort of contract that states that if you are doing R&D with a co-man. You need to own that IP at the end of the day.

So there's going to be a bit of negotiation here from there. You would likely spend a few months, hopefully not that long, but doing some R&D work to customize your formulation, and then you would do a test run.

And then that test run is just like, we think we have a formulation that works. Let's do a proper run on our machines, but nothing, not as large as a production run, but just small enough where we can get some samples out, see how they look, see how they taste.

And then from there, once everyone is comfortable and you undergo a manufacturing agreement, then you could do a production run, which are larger sized runs of your product.

They typically will have a minimum order quantity. That should be negotiated upfront.

KChan: [00:23:42] Just double clicking on the R&D piece a little bit because that's sort of where we're spending a lot of our time. Once you have your formulation, you'd be surprised because you actually need to do additional work with manufacturer just to make sure that your formulation can be supportive with their equipment.

Oftentimes, it's like some somewhat trivial things where you want a noodle that is around one millimeter in thickness. But they only have cutters, which they consistently use, which are 1.5 millimeters in thickness.

And in order to support that, they actually have to stop the assembly line and switch out the cutters or buy a new cutter if they don't have it, and that becomes problematic with their manufacturing schedule.

And so things that are otherwise really simple could be problematic. And so this R&D time that you're spending with the co-man is really to figure out, okay, what can you do with the formulation or the actual process in order to get your product properly made with their machinery?

We've heard stories of people saying that they needed their protein powders , to be shaken two times, three times, but their machines can only do at one time. And that was problematic and they had to go find a new co-man. So the R&D process is actually very, very important step, and that's why it's such a time consuming thing that could take months.

KLee: [00:25:05] So hopefully from this conversation you are able to come to a decision as to whether or not you want to start working with a co manufacturer or decide, Hey, maybe it's a better fit for us to start with the commercial kitchen and then graduate eventually to a co-packer.

KChan: [00:25:22] And don't be scared if you start going down this co-man path and find that it's a very, very long journey.

You can expect to take around six months to land a co-man and start developing a relationship with them doing R&D. It's a very lengthy process and that is what we've come to expect and that's what other people have told us as well.

KLee: [00:25:43] Like KChan said, there's no silver bullet, no magic answer here.

A lot of it is just brute force, cold calling, negotiations, waiting. So everyone goes through it and don't feel bad if it's several months and you still haven't locked someone down.

It's just part of the process and part of the journey.

Thanks again for listening to this episode of Feast and Fortune, and we look forward to having you listen to the next one.