23 Apr When to Walk Away
I see it time and again as a consultant with the Small Business Development Center and in my own consulting work, passionate people come in fired up about a business idea and have no idea if it is profitable. Its like there is a sense of nobility in not making money, as long as you are doing what you love. That is hopefully where my consulting services come in, but many businesses are farther along in the business cycle than just an idea. Unfortunately, the statistics don’t paint a great picture according to the Small Business Administration
- 2 out of 10 food businesses will close at the end of the first year
- 3 out of 10 will close at the end of their second year
- for those who make it past this, 5 out of 10 will close at the end of their fifth year
Despite these scary statistics, I have met with over thirty potential foodpreneurs just in 2018 who are considering, or are in their first year of business. Food business entrepreneurs are some of the most passionate people about their business I have met. Most truly are in LOVE with their product and just want it out in the world and in people’s homes. After all, food is love for many of us.
What I see is that the passion for the food can cloud the financial modeling and rational decision making that needs to happen before any resources are spent. Maybe it is denial or maybe just a lack of awareness or tools. Either way, if a business can’t keep its doors open, then there is no getting their food into people’s mouths. No money, no impact as one of my mentors likes to say.
To the outside observer, Joon Kombucha was a thriving business selling a lot of kombucha to wholesale accounts throughout Northern Colorado and had a well-known brand. Scott Compton, owner and founder, decided to close down the business in January of 2018 for reasons we will discuss. I appreciate Scott’s candor and willingness to share his story; what a great opportunity to learn from someone who has been there as well as pepper in my own thoughts on how to avoid some general business, and money pitfalls.
Two years ago Scott Compton, armed with a business degree and a sales background with a national food brand, was confident he knew what it would take to start a successful food business. As the first field rep for Honey Stinger for the Rocky Mountain Region, Compton found himself staring at the shelves at Whole Foods Market looking for missing niches within each category. He had started home brewing kombucha a few months prior and found a niche in the kombucha category that had room for competition in the market – only one brand was using honey as a sweetener. Given his knowledge about honey (he was working for a food brand with honey in the name), that local honey is revered as a natural sweetner and he had access to said honey, Compton wasted no time bringing Joon Kombucha to life. He started testing recipes at home in January of 2016 and attended his first farmers market with Joon in May.
Compton’s short term goal was to get into one big farmers market in Denver, test the product, get feedback, make tweaks and then work Joon into a wholesale food business. “Give yourself some time to figure things out,” he said. His long-term goal was to become a national brand in major grocery stores. Bootstrapping his business, he still wanted to do it right from the beginning and paid for the best people he could afford to design his logo, branding materials, website and farmers market materials. Compton actually started in bottles and then worked through the profitability scenarios and switched to kegs and growlers. He estimates he spent about $4,000 to get started (equipment, licenses, branding, farmers market fees, etc.) and just before entering the wholesale market in 2017 had spent a total of $8,000; about double what he anticipated.
Working with Denver County Health Department, he not only had to go through the normal application, but also had to create a HAACP plan outlining the critical hazard points in the brewing process and how he would prevent contamination or food borne illness issues. “The health department can’t build it for you,” he said, “you have to figure it out based on what you think they want and then get it back and make changes.” This was his first hurdle, but Compton’s easy-going manner helped him stay the course.
His next hurdle was creating a brand to help the product stand out among the other national and local kombucha companies in the market. “I see a lot of people fall short on their branding, which I don’t understand,” Compton said, “they are consumers themselves and they make buying decisions on branding done well.” He was fortunate to have a friend who wanted to get into product branding and designed his logo and assets for a nominal fee for her portfolio. Compton attributes much of his success came from the branding work she did. He recalled, “I had people walk up to me at every farmers market and tell me how much they loved my branding; they already liked my product without tasting it.”
Side note as I find that people interchange marketing and branding a lot. Here are just some of the differences. In general, branding should be done BEFORE going out into the world as a product, although I do recommend using a farmers market season to learn more about your target customers, make tweaks and then finalize your branding.
A move to Fort Collins in early fall of 2016 landed him a job as a delivery driver for LoCo Food Distribution, which definitely sped up his timeframe to get into wholesale accounts. He quickly made connections with coffee shops and restaurants which led to paying accounts.
Most foodprenerus don’t have this advantage and may not be natural sales people, so I asked Compton what his advice is for any food business trying to get their product on a shelf or in a food establishment. Here is our compiled list of what do do (and not do) that we created:
- A great branded sales sheet with your contact information
- Product sample – make sure it is the best representation of your product
- Just go in and ask for the manager – don’t try to set up a meeting ahead of time
- Be nice to all the staff – anyone you talk to could be your advocate for getting you in there; if no one is there, say “thank you” and come back
- Respect their time – once you get a face to face, be to the point and don’t go on and on
- You will probably get a “no” at first – don’t get pushy and try to make the sale anyway
- Leave your samples with your contact information – if you were friendly they will remember you when they need a new salsa, bagel, cookie, kombucha or whatever
- Do your research on your competitors – don’t ever bargain on price, but tell them what makes your product different and why they should carry it
- Be yourself – if you are introverted don’t try to be the life of the party, be authentic
Compton quickly built up his required 10 accounts and $1,500 in monthly sales to go into distribution with LoCo Food Distribution and peaked at 20 accounts with about 12 who were really active. He continued to have a presence at the farmers market as well. When people move into distribution the myth is that now the distributor’s sales reps will do all the work to move your brand. Mainly distributors are product delivery companies with some sales people who have hundreds of products in the catalog. Your product may not float to the top unless it is really filling a niche or trend. “If you think you don’t have to pay attention to your product anymore that is totally wrong,” Compton added, “you still need to be selling into new accounts and turning them over to the distributor.”
At this point, you may be asking yourself “so what happened? Everything is going the way I want my food business to grow.”
A side note on knowing expansion and capital infusions. I describe a food business’ growth trajectory, not as a dip (aka the valley of death) and then a relatively straight line upwards, but as a set of stairs with multiple valleys of death. The chart below is rather simplified, but gives a good visual overview. Each time a business scales up from one level, say from Cottage Food at a farmers market to small-scale wholesale, they need a new cash infusion. In that example, now they need a new set of licenses, may need process authority testing done, need to purchase SKUs, new labels in batches of 5,000 instead of 50 and a ton more ingredients and packaging. The higher up in the stages a food business grows, say from small wholesale to distribution, the bigger the cash infusion and the longer it takes to get. Anticipating how much and when it critical, and not getting the capital when you need it can be the thing that sinks a business.
Getting into distribution also meant he had to have three times the number of kegs because a third were in the kitchen, a third were at the distributor and a third were in the coffee shop. This all required a big cash infusion. “Every time money came in I bought a new piece of equipment or a new kegerator so I could get a new account or I needed to buy more ingredients,” Compton recalled, “maybe I should have slowed down, but I felt if I sat around I would get surpassed in the market; my category is competitive and it was only a matter of time.” It is hard to know when to GO and when to stay the course. Compton also had big ideas for going into retail next with a canned kombucha. He even had some mock-ups made and was in discussion with some breweries with mobile canning capabilities.
Compton had done the financial forecasting five times, five different ways and knew what he would need in cash to grow. “Cash was a lot harder to get than I thought it was going to be,” Compton said, “I thought if I made a great product and had a great business plan, the money would come.” He could have made four times the amount of kombucha on the equipment he had in the commissary kitchen he rented, but it was time and money, or lack of, that got in the way. He was caught in a viscous loop. “Part of the reason I decided to shut Joon down was because I looked into the future and realized it would be another two to three years of working and doing the kombucha business on the side before I could even make enough money to make it a full time thing,” Compton recalled, “by that point, I was just exhausted and tired of working three jobs to make ends meet.”
He is the first to admit that he likes kombucha and liked brewing it, but it wasn’t his love or passion. You may be thinking to yourself, “well, that won’t be my story because I love making my product.” I agree that passion can help get you through the rough spots and keep you moving despite the exhaustion, AND sometimes you have to decide if the entrepreneurial lifestyle is actually the one you want to lead.
Side note on entrepreneurship. I haven’t found one business owner who isn’t consumed by the business for the first few years; it definitely isn’t for everyone. Whether you just have an idea or are in the thick of things, ask yourself the following questions. Knowing yourself, what kind of entrepreneur you are and your money situation ahead of time can help you make better decisions about when to grow, how to grow and what kind of help you need.
I asked Compton what his advice is to others considering starting a food business. He said “do it and be smart about it. Make sure you have support, both financially and emotionally. It can become very lonely as a solopreneur.” When I asked if he would do it again, he replied, “yes, I’ll take the lessons I learned from this and use them later.”
Scott Compton is now a sales rep in the Front Range area for Stand Creative Studio that provides graphic and website design, SEO services and social media management. We wish him the best of luck in this and his future endeavors!