Preparing for high-volume food product sales: Are you ready for a co-packer?
Selling your food product to a high volume retailer means you’ll also need your food produced in high volume. Find out what a co-packer means for your recipe and how much capital you’ll need to determine if you are ready to go to high volume sales.
July 7, 2014 - Author: Diane Smith, Michigan State University Extension
If you are in the food product business and would like to increase sales and profits, selling to high-volume chain stores may be your answer. Before you make a commitment, however, consider how high-volume sales will change your product and production process.
If you currently operate out of a commercial kitchen or kitchen incubator, saying “yes” to a chain store will immediately make your production process a whole new ballgame. Up until this point, you have most likely been making your own product, as well as serving as the main distributor and sales force. In order to reach high volume sales, however, you may want to consider hiring a co-packer to make the product for you. The alternative, to rent or buy your own facility, buy new equipment and hire staff, requires capital and adequate cash flow, which may be difficult to accomplish on your own.
As you consider the avenue of a co-packer, you will need to be prepared to re-formulate your recipe, expend significant resources and plan for new storage, sales and distribution strategies.
Let’s look first at the recipe. The recipe will need to change so it can be commercially less expensive and less time consuming to make. For example, instead of using fresh tomatoes, the co-packer may need to use canned tomatoes to make your salsa or sauce.
According to one Michigan-based co-packer, the first step in working with your business would be to run a quick batch of your version of your product, at the cost of $250. The second step would be to make the product with you to perfect the recipe with commercial ingredients, costing you $1,500. Finally, the processor would produce a minimum run of 400 cases equaling 4,800 units of product, which costs anywhere between $5,000 and $7,000, depending on your product. So far, the total capital you would have invested in order to get your first order from the co-packer is between $6,750 and $8,750. This is a significant expense for your business that you will need to be prepared for before you ever say yes to a chain retailer.
After the product is run, if you do not have a distributor lined up to take it out of the co-packer’s warehouse, then you will also pay storage fees for your product until it is removed. If you plan to store and distribute the product yourself, you may be required to obtain a warehouse license and obtain a proper vehicle.
As you can see, the expenses for high-volume food product sales can be great, particularly in the start-up phase. Before you agree to any contract with a high-volume retailer, make sure you are ready for those costs.
The MSU Product Center, in partnership with Michigan State University Extension, provides business counseling for product production and marketing strategies that will help Michigan entrepreneurs commercialize high-value, consumer–responsive food products. For more information, visit the MSU Product Center website or call 517-432-8750.