80% of food startups fail....why?
First of all, what is a startup and how are we defining failure?
A small business has been traditionally defined in the United States as one with 500 employees or less. In 2020, small businesses made up 99.9% of all of the businesses in the United States (YES!!). But that .01% is usually what we see. Think big companies like Target, Amazon, Nike, Apple, etc. So why? Why this disproportionate amount across the United States, but particularly, why the disproportionate amount in food?
For the sake of this article, failure is defined as the business that does not continue selling products or providing services after their initial market launch. Let us say this for clarity, just because a (or your!) business failed according to this definition, it doesn’t mean it didn’t provide value or that you are a failure. Now that we’ve got that self-worth check-in cleared up, let’s dive in:
When producing a consumable product there are 4 main reasons why businesses don’t make it after the first 5 years:
1) Initial Investment
It takes money to make a commodity. Food is absolutely essential, yes. Valued, needed and fulfilling, yes. Inexpensive to make, ESPECIALLY when you make a high quality food item that doesn’t cut corners? Not as much. This is opposed to other industries like non-alcoholic beverages (50+% gross profit) (Segal, "Profit Margins for the Beverage Sector") , tech (57+% gross) (CSIMarket, "Technology Sector Profitability") or even candy (sugar is cheap! We'd rather not talk about it but if you’d like to see this multi-billion dollar industry here is the link). With raw ingredients, packaging, labeling, labor, logistics and certifications etc. the initial investment in a natural, good for you product can range from 5k-35k before you even go to market, so before you decide to invest thousands in the launch of a product, it’s best to test it small scale (shoutout to the farmers markets that gave us our footing!).
2) Barrier to Market Cost
When was the last time you walked through HEB, Target, Sprouts and thought “how in the world did all of these products get here?” For each major retailer they have a handful of go-to distributers. Distributors are the companies that transport the product from the warehouse to the various retail locations.
This factor does leave a lot up to who you know and what they need. Certain distributors are contracted with certain retailers so you sometimes have to decide which distributor you want to work with before deciding “I’d like to be in XYZ store.” And the agreements, not always, but often tend to move slowly.
Simply put, it’s not always the retailer that decides if you are on the shelf, it’s the distributor who determines if they will carry your product on their trucks. With this, comes costs: stalking fees (fee to be placed on the shelf), free-fill (providing a case pack or two of free product . . per store…per variety), and investment in their in-store promotions and marketing. That’s tens of thousands of dollars of investment before you see a return… perhaps years later.
The product simply wasn’t mean not scale, it's hard to go from home-kitchen to retail shelves. Ingredients may not behave in the same way once produced in bigger batches. Things crumble, can’t sustain heat/cold, there is yield loss, shelf life changes. Another issue with scalability is sourcing issues: simply not a reliable supply-chain. Fluctuations in commodity pricing (think peanuts: every year the crop changes, the demand changes, the price changes), add in a reliable FDA-approved facility and machinery/equipment needed to produce and package...
4) Founder Conflict
It's a long-term partnership. Differences in vision and strategy can tear teams apart, especially when communicated poorly. Lucky for us there is nuttin' but love here!