In our monthly “SKU View” series, Food Entrepreneur is tapping the expertise of mentors at SKU, a consumer products accelerator based in Austin, to deliver timely insights on issues that affect early-stage food and beverage brands.
AUSTIN, TEXAS — Outsourcing production to a co-manufacturer offers numerous advantages. It is cheaper than purchasing equipment or building a manufacturing facility. It also is more efficient than producing batches in a commercial kitchen.
Numerous factors must be considered when selecting a manufacturing partner, said Richard Riccardi, a SKU mentor and investor in early-stage consumer packaged goods brands. For more than two decades Mr. Riccardi co-owned and operated Food Source, a custom food processor of frozen entrees for retail grocery stores and national brands and sauces for restaurant chains.
He offered perspective on how startup founders may select and maintain strong relationships with co-packers.
Food Entrepreneur: How do you know if your business is ready for a co-packer?
Richard Riccardi: Initially there is virtue to starting out self-manufacturing. You really get to learn about your product and the trials and tribulations of making your product, which will make you more effective when you engage in co-packing relationships. You have control over the supply and control over the supply chain.
You must have a co-packer when you’re ready to do real business with a retailer. They will expect that you are in a reliable facility. You will need a reliable co-packer.
A good co-packer is hard to find. Where do you even look for one?
Mr. Riccardi: The easiest way is to talk to people who have referrals.
You need some elbow grease. You need to do some research. You’re looking at industry lists — which plants are FDA regulated, which plants have certain food certifications, trade associations, state food processors associations, etc. Then you get to work. You must be willing to spend a lot of time on Google.
Another way to find a good co-packer is to look at which co-packers your competitors use. For example, if you are a member of GFCO (Gluten-Free Certification Organization), you can look at a database to find this out.
What are some questions you should ask to find out if a co-packer is right for you?
Mr. Riccardi: “Do you have experience making my product? Is what is required to make my product within your capabilities?” For example, if you’re a salsa brand, you want to make sure they have made salsa — or something close to it, like soup — before. If they say, “I’ve made cookies, but I’ve never made salsa before,” that’s probably not a good fit. It’s not a big leap to go from salsa to soup, but it’s a huge leap to go from cookies to salsa.
“Do you work with companies my size?” You need to be with someone who is accustomed to working with a brand that is your size. One brand I worked with had someone who had the size to make their product, but the company was too small for the co-packer. It’s usually not sustainable for a small brand to be with a large co-packer.
You can ask for references from some of their other clients, but usually not at the outset.
What are some red flags or signs a co-packer is not right for you and your business?
Mr. Riccardi: A co-packer is not forthcoming. If they won’t let you come inside their plant, walk away.
They won’t give you a component cost. If they give you an overall price but won’t tell you the component cost, that’s only a recipe for problems later.
They won’t share their formula. Sometimes you have given them your recipe and your packaging, and they may need to massage the formula a little to make it work. But if they won’t tell you the revised recipe, walk away.
How do you keep your co-packer happy and eager to work with you?
Mr. Riccardi: You’ve got to realize your co-packer is not a bank or financial institution. They’re a maker of goods. You’ve got to pay them.
You’ve got to treat your co-packer as a partner. They are almost like an employee. They’re working for you. If they were an employee, you would take the time to onboard them, train them and meet with them regularly. All of this is an investment in making your co-packer more successful in working with you.
You may have unique raw materials with demand challenges. If you’re not helping the co-packer with those challenges, they’re not going to be successful. It’s just that simple.
I worked with a brand that did those things for me. They said, “Here’s the supplier, here’s where you get it the materials and here are the lead times.” Those companies made me so much more successful for them.
What other tips do you have for maintaining a good working relationship with a co-packer?
Mr. Riccardi: It’s all about your relationship — a relationship built on trust, information sharing and mutual support. They support you, and you support them.
My business dealings were always based on the relationship, not the contract. The contract needs to cover the important terms, but the key is having a relationship. If you’re so tied up on the contract, and not the relationship, it probably won’t be a good partnership.
For example, I worked with Adnan Durrani, the founder of Saffron Road. We negotiated the co-packing contract, which spelled out the important terms. But after that, we never looked at the contract again. If a business issue came up, we said, “Let’s get on the phone.” We worked out everything we needed to work out. We had an immense sense of comfort working with each other.
The only provision that matters is how fast you can terminate this relationship. Anything else, you should assume you can work out by talking to your partner.
If you haven’t used co-packers before, you should be talking to your peers who have co-packing relationships to see what the good, bad and ugly of the relationship is.
Should you let your co-packer invest in your brand?
Mr. Riccardi: I would be disinclined to have that kind of relationship. There are potential conflicts of interest, especially if there is a dispute with the co-packer. As a brand, you need the freedom to move around to different co-packers. When the co-packer has an ownership interest in your brand, that becomes much more difficult.