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Scaling, Co-Packing, & Costing
CPG MBA
July 25, 2023
Welcome to the first edition of the CPG MBA Expert Series, where we talk with experts from the consumer packaged goods industry and share industry insights to help entrepreneurs as they grow their businesses.
This week, we’re bringing you some sweet tips on everything from scaling to costing with Kirsten Anderberg, Chief Financial Officer of Fresca Foods. Kirsten has nearly 2 decades of CPG experience and over 30 years of professional experience running finances… so obviously we had to ask her some questions.
A lot of new businesses come out swinging only to quickly fail. How do entrepreneurs make sure they succeed?
“Start with an Excel model. Put the numbers down to see if it makes sense because if it doesn’t make sense financially, you’re going to put a lot of energy and emotion into something that might not have a chance to be successful. Model the revenues and the expenses as well as your cash flow. A lot of entrepreneurs don’t model the cash flow well enough, and it goes back to the question of how much money do you need to invest in inventory or for design, packaging, or printing costs.”
Here’s the catch. When building your model, be conservative.
“I have to forecast for a year or three years from now, so I’ve been doing this for a long time and I would have to say there’s some certain customers I take their forecast and cut it 50%, knowing they were being very optimistic.”
It sounds like people regularly underestimate their spending. How do entrepreneurs make sure they build their model as accurately as possible?
“I call it the margin walk: what’s the retail price on the shelf all the way back to what it costs to make it. What I find that people forget is to put all their labor hours in their costing models. Your time is valuable—if you are making the product, you need to include your time in that. It’s not just your hours—it’s your payroll taxes, it’s your health insurance, it’s your worker’s comp insurance… it’s the fully loaded cost to do business. It’s not just the hourly wage rate and overtime.”
“Another thing in costing is throughput, which is basically how fast can I make a product from the time it starts getting mixed to the time it gets packaged on a pallet. What is that timeframe? That is really hard to pin down and identify sometimes.”
So, where should your margins be, you ask?
“You need to be at 40% before promotions, before G&A, before anything else. If you’re not at 40% now, it’s going to get eroded over time.”
Okay, so say you’ve managed to get on the ground running, and things are looking good. Your ecommerce DtC sales are growing, and you think it’s time to make the shift into retail. Where should you start?
“Every retailer is unfortunately different; there are some brokers that you can work with that can help be your advocate. Find the right partner who knows how to do that right and knows the path. And I’d say you can find good brokers to help you.”
Brokers maintain existing relationships with retailers, and you’re paying them for a couple of years as your products get launched into that business. If you find a good one, then it’s well worth the investment.
When is it time for a company to start considering making the move to a larger co-packer?
“It really is about the distribution into retailers and how fast you can do that. You need to have the money to fund your inventory.”
In other words, your company has to be at the point where it needs to suddenly scale (e.g. going from 30 stores to 100 stores) and being at a smaller kitchen would be uneconomical because of decreased efficiency.
In other words—only move to a larger co-packer when staying at your current co-packer just doesn’t make sense anymore.
If a company switches co-packers as part of their expansion, how do they know their product will be produced to the same standard?
Although we wish we could say that larger co-packers are, by default, more trustworthy, that isn’t always the case. Certificates of analysis (COAs), or the detailed instructions on how your product is made, are great, but they’re no guarantee.
Your best option is—you guessed it—networking. While organizations like the PLMA are great starting points for finding co-packers, the best connections are made through the people you know.