When a Food Company Enters the Tank

New condiment - slawsa food company

This guest post was written by Julie Busha, Food Company Marketing Pro extraordinaire at Nicole Foods, the makers of America’s hottest new condiment: Slawsa. If you are an entrepreneur with a food product you want to market, take my advice: look at what Julie has done with Slawsa in a short time with a limited marketing budget, and do what she did! Julie is a pro at getting attention for her brand, even though the Sharks didn’t bite!

First and foremost, I do want to state for the record, that the experience of going on Shark Tank was a dream come true. How many other television shows can make such an impact on small businesses across America? Since my airing on Shark Tank, I thought I’d write a few tidbits of knowledge so that it may help my fellow food company entrepreneurs…or perhaps shed light to those outside our industry in terms of what to watch out for when investing in a food company. After all, the grocery industry is a highly competitive one, and the more food entrepreneurs can avoid mistakes early on, the more successful our ventures will become in the long run.

Sharks sometimes misunderstand running a Successful Food Company

I’d like to first make sure fans of the show know that ours is an industry based on volume, not margins. Our goal is not to sell a product once or a few times in a customer’s lifetime. On the contrary, we want to sell multiple times per year per household (also known as household turn) and as such, we generally will have a lower cost of customer acquisition rate to gain household penetration. While I was not scolded for my margins, I’ve watched time and time again, one of the Sharks in particular questions food company entrepreneurs for not having high enough gross margins (that’s sales minus costs of goods sold, then divided by sales) when in fact, they have better margins than the industry average, which is around 35%. Keep in mind, there are certain items in the store that need to operate off higher margins due to perishability, space requirements and placement, but 35% is the overall gross margin average.

This shark once quoted “you should be making it for $1 and profiting $3” (which translates 75% gross margins). With all due respect, that is a grossly inaccurate statement for our industry. Some smaller food companies choose to operate off slightly higher gross margins because they need to do so to get through start-up costs. Other small food companies decide to take lower margins because they need to be competitive on price in their category as it might be the only way to gain that valuable shelf space. They know that as their volume increases over time, those production (and freight) costs will decrease and they’ll eventually achieve those better margins.

I think one of the biggest missed observations by the Sharks deals with one of our industry’s highest costs…freight. We’re experiencing the highest fuel rates in our country’s history and while the Sharks have been quick to point out that there are logistical or cost issues with items that are perishable or refrigerated/frozen (refrigerated trucking is extremely expensive), I’ve yet to hear an argument about where the food manufacturer is based geographically being a point of concern. Keep in mind that 80 percent of the US population resides in the eastern or central time zone. That’s 80 percent of your potential customer base.

There are food companies that are going to be regional in nature, but the best investment from a logistical perspective is a food company that is centrally located on the eastern half of the country…especially if their product is heavier in weight. They will have the low-cost shipping advantage and will have an easier time going national. Shipping from points on the west coast to the east, or even from the extreme south to the northeast, should be a big concern and the food entrepreneurs should be prepared to explain how they plan minimize these costs. It’s likely they haven’t even thought of this hurdle because they are having trouble growing beyond their particular region.

I am fortunate enough that I have really been working “backhaul” partners to reduce my freight costs and with my point of distribution being an easy access to multiple interstates in the state of Tennessee, I feel I have that centrally located advantage. As I grow my company, I’ll have to crunch the numbers to determine if it’s better for me to have a co-packer or facility stationed in the west to service those customers or if it will be more cost-effective to barter with back-hauls to the west (which are cheaper certain times of the year because of the empty produce trucks headed back to California) to haul product to a warehouse stationed there and use that as a secondary distribution point. You always have to be thinking ahead and prepared for growth.

Proper Pricing an Investment Consideration

Where I worry with most food company entrepreneurs is the end price to the consumer. It might be tougher for a Shark, who may not necessarily do grocery shopping for their household, to get perspective as to what the average person will realistically pay for items across all categories. People are in fact watching what they spend. It’s a tough economy and you’re losing the majority of a population if your product is overpriced. Having a product that is exclusive to one segment of the population, whether it be a niche item or an extremely high end item, is a big red flag to me from an investment standpoint. Last season, I watched how two Sharks invested in a food company that was so very niche and so expensive, with a retail cost more than three times their standard grocery store counterparts, it doesn’t surprise me one bit that they are still in no more than 25 total points of national distribution over a year after their airing (from what I can tell from their web site).

How can a buyer at a major chain justify shelf space for such an item? I am so very proud that for $3-4 a jar, Slawsa is very affordable to the entire population. We are proof that a higher quality and more versatile item, with all natural ingredients and a more labor intensive production process versus pickle relishes, can be accessible to more than just the top 3-5 percent of the population. Because of the increased consumer demand for all natural ingredients, you also have to remember that larger food manufacturers are finding ways to transition their existing products to such standards….and its typically not that much more expensive to implement those changes. The demand is there but don’t forget you’re not the only one looking to get into that space…the larger food manufacturers now are too.

Hit the Shows for Success

If you’ve not spent any time at the Specialty Food Association’s Fancy Food Shows, I highly recommend you attend if you are in the industry. And go with an empty stomach as you will taste some of the best food in your life! I’m proud to be a member but going will give you an idea of the food items that are truly unique versus the ones that are a dime a dozen. How truly unique is this item?

There have been several companies on Shark Tank that are just one of dozens scattered across the country having the exact same item: a flavored, gluten-free or all-natural version of something we are already familiar with. But, then there are some that are truly unique….I’m thinking Shrimp Burgers, Gumbo Bricks, Wired Waffles, Veggie Pops and Slawsa, of course. Those are the gambles worth taking. Remember, buyers have seen it all and the “seasoned buyers” are looking for something different that has potential, as it adds variation to their shelves.

If all you have is just another flavor or an all natural version of something already in existence, plan on paying those slotting fees and major marketing dollars to sell it off. There may be less of an education to explain what a familiar item is, but you’re in a highly saturated market of similar items with lower prices…which, in my opinion, is a much steeper and taller hill to climb. You have to justify to the consumer the reason why they should pay more.

I would also be concerned of a food company pitching an investor that doesn’t have major retailer confidence already. Sure, there have been several food companies who have used their upcoming appearance on the show to get a verbal “yes we’re interested” and use that to pitch to the sharks. But, there’s no reason why there aren’t solid PO’s or a history of selling to major chains well in advance of the show…to prove the product’s validity with buyers. It’s ultimately the buyers that will take a chance on a new item or not and the best investors understand the buyer’s decision making process.

Food = Money?

I like to ask myself, is this product just a retail opportunity or are there food service opportunities as well? The fact is, food service is truly not a money maker….but integration into the food service sector can go a long way in growing equity and awareness of a brand. Getting Slawsa into hot dogs carts, stadiums and restaurants will drive trial (I considering it free sampling) and brand awareness amongst the consumer, who will then look to purchase the product at the retail site. Also, how likely is the product to be spoken about beyond the household? I’d personally like to see a baby food company enter the Tank. Mothers are extremely social and the ability for a small brand to grow big in that category due to their presence with bloggers could be astronomical with the right marketing program.

One of the reasons Slawsa has grown so quickly is the fact that it gets taken out of the house and is more communal in nature. Slawsa finds its way to grilling and tailgating events where it will get shared with new, perspective customers. It’s a social food and my customer acquisition cost is lower than those items that don’t get taken out of the household.

Market Smart

I found it funny that the Sharks seemed surprised when I said I didn’t rely on grocery store demos as a part of my marketing program. Don’t get me wrong, I love doing demos and will do them myself often, but anyone in the industry knows its generally one of the poorest ROI’s you can get. Unless you do them all yourself, you are usually obligated to contract with an agency that has an exclusive contract with that retailer to perform those demo… and it’s expensive to do so. No matter how well you arm them with information and preparation, unless you are in an insanely high traffic store (like a Walmart) and you’ve paired with another food manufacturer to split the costs (in my case a bratwurst company), you’ll find you will not get a return on your investment equal to the spend.

I can outsell hired staff by three times the product in half of the time because in 100% of the contracted demo’s I’ve personally audited, the staffers don’t share in your passion. I prefer to spend my marketing dollars on mass consumer sampling events where for the same cost, I can hit thousands of people. I am insanely strict with my marketing dollars and I expect to see a certain quantity of units sold at retail with every dollar spent, no matter that the platform. If these companies entering the Tank are using store demos as their only form of marketing and expect to go national, they’re going to suffer massive financial consequences in the very near future. Bottom line: have a clear strategy for marketing that is far beyond executing in-store demos. There is no one size fits all marketing approach and each brand needs a clear and integrated plan on how to achieve results.

I assumed that the Sharks would have seen value in my extensive background in marketing, retailer confidence and our current growth, but you know what happens when you assume, right? Having Slawsa sold in absolutely no grocery stores when I came aboard to having placement in over 4,000 stores when I taped (and currently in 5,000) took a great deal of effort, risk and sacrifice…as the growth of the brand came on the sweat of my brow. But like anything I set my mind to, I know my abilities. I take those risks because I have a direct influence over the results. I think most food entrepreneurs like to think their product can be “the next big thing” but they don’t have a clear vision of the steps to get there. It sure would have been nice to have a Shark go along the ride with me but you can’t change the past. You can only look toward the future.

To watch Julie’s video, click here
To check out slawsa.com or check out her indiegogo campaign, click here.
http://sharktankblog.com/slawsa-success/

About Rob Merlino

Entrepreneur, auteur, raconteur. Rob Merlino is a blogger and writer who enjoys the Shark Tank TV show and Hot Dogs. A father of five who freelances in a variety of publications, Rob has a stable of websites including Shark Tank Blog, Hot Dog Stories, Rob Merlino.com and more.

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