Common mistakes founders make when approaching contract manufacturers
So, you’ve outgrown your home or commercial kitchen and you’re casting around for someone to contract manufacture your wonderful products.
Where do you start?
Well, you could always make an enquiry via their trade organisation to start the conversations, but we thought it might be helpful to consider the situation from the perspective of the MD of a contract manufacturer or packer, so that you’re aware of how they see the world.
We spoke to someone who was to the point and held no punches. This is what they had to say - take note and be sure not to make these 10 common mistakes!
“New start-ups Founders often assume that we will be interested in their as of yet un-marketed products. Nothing could be further from the truth…
If you aren’t already making the product, have proven sales and a route to market we won’t want to hear anymore about it. The exception is an existing brand that wants a range extension; I know they have a brand, a route to market, experience and the money to back it up.”
“A shocking number of people approach us and are horrified to hear that we don’t do everything for them.
These people assume we will store, market, sell and distribute their product for them. I had one lady say to me, ”but I am busy, I haven’t got time to set up the business. I want you to do that for me”! Naturally, that didn’t get any further…”
“Do not approach mults and potential customers without your product!
Loads of people think that Waitrose will be interested in their terribly exciting idea, but have nothing more than a picture of it – it ain't going to work.”
“Do not assume once you have your stock, that this industry is easy money – Levi Roots is the complete exception.”
“Usually, a lovely boutique product isn’t suitable for mass production.
If you have a unique cooking process with special ingredients and your own fancy jar, then you are best off producing it yourself (bare in mind point 8). Once a manufacturer has started down a certain route, they are usually limited in what ingredients they can use and what packaging options they can fill. Most equipment locks you into a certain way of doing things.”
“The timelines shock people.
It is likely to take well over six months from the first meeting to actually having a product ready to sell.”
“The costs also shock people.
The smaller the production run, the more change-overs we have. So, if I run all day on the same product I can make 10-12,000 units. Every change over takes one and a half hours for cleaning etc. So if I have four change overs in a day of eight and a half hours, I have only about two hours production time and that can mean as few as 3,000 units being made. But my labour and overhead costs are identical. Go figure.”
“Many people who are making their own products in their kitchens are completely unsafe and are completely unaware of food safety requirements.
Be sure to speak to your local EHO before you start producing.”
“Having a great tasting product is only about 10% of what you need!
Potential customers must want it.
If must be affordable.
It has to look good.
It must be safe.
It must be legal. Loads of people make entirely false claims, and ‘local’ is one of the most abused words going.
You need to understand the cost structure of the industry and what is meant by margin – this is not the same as markup…”
“Margin works thus:
If a store says they need a 35% margin on the products they sell then take your selling price (say £1.00) and divide it by 0.65. The correct formula is cost price/(1-margin). For the example shown, you would calculate 1/(1-0.35)=1.538. So if you sell to them for £1.00 they will sell it for £1.54 (NOT £1.34 - That’s the big mistake).
It starts with the producers selling price and margin. Then, there is the brand owner’s margin (that’s your margin) and this can be anything from 15% - 30%, but you should aim for 40%+ with volume. Next is the distributor/wholesaler who typically would want a 25% - 35% margin. Then there is the small retailer, who wants between 25% - 40%, with 30% being typical. If you supply a mult they will typically want 40%+ margin, but remember they are distributing to stores for you and you may be able to supply direct (although increasingly they want you to use an existing wholesale supplier). There will also be a huge number of promotional costs with mults to keep in mind. There can also be a master distributor that supplies the mults and other distributors.
You could get a situation where you buy a product for £1.00 from a producer. Add on your margin of 30%: 1/(1-0.3) = £1.43. Then you sell your product to a wholesaler who puts on their 28% margin: 1.43/(1-.28) = £1.99. An independent store buys the product and adds their 30%, so 1.99/(1-0.30) = £2.84 selling price. To make matters more interesting I have very few products that are sold to brand owners for less than £1, usually it is much higher, because their volumes are so small.
If any of the margins bother you, get over yourself – that is how it works, and you aren’t going to change it.”
So, there you have it - you have been warned! Good luck.
- Paddy Willis, CEO and Co-Founder of Mission Ventures.