Going to Market with an Organic Co-Packer

By Ron Rash


To bring a new product to life is an exhilarating experience…as long as it is successful. According to a study of slotting allowances by the Food Marketing Institute, up to 80 percent of new products introduced will fail due to reasons including everything from financing issues to poor advertising and market research to product design flaws. Aside from all these, however, one of the most important factors that can determine the success or failure of your product has to do with the co-packer or contract manufacturer you choose and your working relationship with that partner. Many common pitfalls can be avoided through detailed research and due diligence up front.

Advantages of Using a Co-Packer
While some companies invest in their own privately-owned manufacturing facilities, the cost and learning curve involved in this leads many to partner with a co-packer instead.

The benefits of co-packing have become more widely recognized and popular with both large, established companies and smaller or start-up operations. Some advantages include:

• Reduction or elimination of start-up costs as compared to building one’s own factory.

• The packer will likely be able to offer product development capability, product efficacy testing (stability, food safety, shelf-life, etc.), computer programs that predict nutritional labeling information, and knowledge of packaging materials.

• Direct control of overhead costs associated with production. These costs are either identified directly by the co-packer as a charge, or are part of their turnkey product service. It may be that these costs need some refinement and negotiation, but these are agreed on ahead of time.

• The co-packer may already be packing the same or similar products to the one brought in by the marketer and this could help save time and money.

• A reliable co-packer will have knowledge and practical experience with regulatory certifications, the ability to buy and maintain inventories of critical raw materials and ingredients, and vendor support to help ensure the proper maintenance and ongoing performance of the physical production facility.

• Many packers have internal design teams and long-established contacts with other vendors that can assist in bringing the product to market including packaging experts, broker sales companies, customer contacts, etc.

• An established co-packer will, in all likelihood, be able to purchase raw materials and ingredients at much better prices than a start up company with its own facility. Some will offer warehousing of finished materials (at a cost of course), and some will even offer freight forwarding services.

• The packer will likely be familiar with the latest Good Manufacturing Practices, Hazard Analysis and Critical Control Points (HACCP), product liability insurance needs and more.

Possible Pitfalls of Co-Packing
Although there is a long list of benefits of working with a contract manufacturer, there are also very important elements to consider that could cause issues at some point in your partnership.

• The marketer must share confidential information. It’s your job to make sure that your formulations and other information are legally protected.

• Though oversight of the manufacturing process aids the marketer greatly, nonetheless he/she yields primary control over the process to the co-packer.

• The co-packer will control the production schedule for all practical intent and purpose.

• There will always be built-in limitations to contend with (but if needed, you can move new products or even current production, within contractual limits, to a new packer).

• The packer may manufacture many similar, competing products, creating another internal conflict of scheduling and information security concerns.

• A packer’s finances can change dramatically and quickly. It is important to know what liens can be placed against your finished products, or against unique materials you may have supplied in advance of production, and what recourse you have.

Finding the Right Co-Packer
Now that we have identified many of the advantages and possible pitfalls to consider, let’s tackle the issue at hand, which is finding and qualifying a packer for your new product.

The size and scope of the packer, and where that packer is in its company’s life cycle, can be very important. The larger packer may have more stability, and more experience if long established, but it may also be less flexible. Larger packers tend to want large minimum runs, which may be an issue for small start-up companies.

Like real estate, the question is location, location, location. It is often thought that it’s best to have the packer geographically close to you. It certainly helps to be on hand for production runs, problem solving, product evaluation, etc., but it also limits your options in choosing a packer. Certainly, if you can find the right packer “close to home,” then it certainly could make a lot of sense; however, it’s also important to consider how close the plant is to key raw materials suppliers. How close is the plant to your intended customers? How close is the plant to good freight lanes? The money and time saved by being close to home can quickly be eaten up in high freight bills for inbound and outbound shipments.

Thoroughly research the packer under consideration regarding its reputation for quality control, consistent operations, reliability and dependability. Try to find out some of the products packed at that facility and then check out those products in the marketplace. See if the owner of that product can be contacted for a recommendation. Certainly ask the packer for references, but develop other references not provided by the packer. One way to do that is to contact the references provided by the packer and then ask the references if they know other companies that use the same packer. You can also ask other
entrepreneurs.

Almost every state has a business unit that keeps lists of companies and what they do, as well as any funding that is available—a double score. There are several state sponsored directories and online services that can lead the marketer to a producer.

Examples include:

• Alibaba Manufacturing Directory (img.alibaba.com)

• Private Label Sourcing (www.privatelabelsourcing.com)

• The Private Label Manufacturing Association (www.PLMA.com)

• Green People (www.greenpeople.org/FoodManufacturer.html)

• The Contract Packing Association and others

Before Contacting Prospective Co-Packing Partners
Before getting on the phone and contacting prospective partners, make sure you have the following homework done.

Have a business plan. Have someone you trust look it over with a critical eye; someone with real-world experience in business. Some options are your CPA, your business mentor, your banker or an investment advisor. Your business plan should include a very good executive summary, product positioning and need in the marketplace, a well thought-out proforma income statement, uses of cash and balance sheet and more. SCORE is a good place to start (www.score.org) or the Small Business Administration (www.sba.gov).

Also, have a co-packer vendor agreement ready to go. Or at least have a checklist to review against the packer’s standard agreement. Some things you’ll need to know are:

What are your product needs?

• What are the product specifications and formulas?

• Are there special ingredient needs? What materials will you supply?

• What is your price strategy? Is it competitive with similar products?

• What type of packaging do you want? What size and how many servings per unit?

• What do you want in the label design?

• What is its shipping classification?

• Are there special handling and storage needs?

• How will your customers receive the product in their warehouses?

• What type of pallets are needed?

• What are your product testing needs?

Also ask yourself beforehand:

• Is technical and legal assistance needed?

• What are your insurance needs?

• What are your internal staffing needs?

• Do you have financing in place?

Protecting Your Formulations
Before talking with anyone, make sure to have non-disclosure agreements (NDAs) prepared and ready to be signed by potential packers. The packer may have its own, but insist on your version wherever possible.

Also, the most contentious part of any packer negotiation can be who owns the formula. In real-life terms, the “kitchen formula” you bring in is just that and it is only a starting point for the packer. The packer will certainly concede that this type of formula belongs to you. It is the commercialized formula that both you and the packer want to own. The reason for this is that this represents the packer’s stock-in-trade, how the owners make their living. The packer will expend considerable resources to commercialize the formula.

The best way to own the formula, and to have the packer concede ownership, is to pay the packer for that work. The packer may insist on it anyway, but the marketer then has the right to demand ownership. That should be non-negotiable. Another way to protect your formula is to contract special blends with a vendor that ships blended flours, blended spices, special oils, unique flavor profiles and the like to the co-packer under an NDA with you. Be smart—employ both methods.

Other Keys for Success
• Ask for and document all relevant paperwork. Ask to see their GMP written procedures, ask about GMP and food safety training, review their licenses, HACCP and food safety plans, and plant audits. Confirm that their kosher, organic, Halal and other certifications are up to date and authentic. Get everything in writing.

• Don’t expect too much in regard to non-compete agreements. Chances are the packer already produces many similar items, and to sign a non-compete with the marketer would alienate them from existing business. There are exceptions, but it is highly unlikely that the marketer’s product is unique to the packer.

• Review equipment closely to be sure the packer can produce the product you want. Remember that if you demand unique packaging, closures, labels, etc., the packer will likely have to raise prices substantially for equipment purchases, labor, changeover expense and other cost items.

• Negotiate a small test run (even if not in the exact package the marketer will eventually use) for product testing and shelf-life study.

• Negotiate a price for a confirmation run to be sure the product meets your specifications. Also work out smaller runs than the packer’s standard minimum for the first couple of orders as you will need to establish the product in the marketplace.

• Be sure the packer can “scale up” production to meet needs as the brand grows in volume, and for seasonal spikes. Make sure the packer is committed to the contract customer over his own brand, and that the marketer’s orders will be delivered on time if the order provides the agreed-upon lead time. Be sure to get it in writing.

• The packer will want you to supply all unique materials and ingredients. This is standard practice so that the packer does not get stuck with these items in the event of brand failure. Some examples are exotic ingredients, labels, pre-printed shipper cartons and so on.

• The packer will only be responsible for product not produced according to specifications.

• The packer will want you on hand for the first production run. Many companies attend every production run.

• One tactical piece of advice is to get a bid for a “turnkey” price (except for the labels, unique ingredients, etc.), and then ask for a “toll” pack quote where the packer quotes only on his labor, overhead, and profit in one fee and your company supplies everything else. This will give you a good idea of the margin the packer takes on ingredients and materials. This will come in handy if the eventual bid is a hybrid of the two methods.

• Obtain in writing a firm cost for all work before any production begins. This is critical to having a price structure that you can rely upon. Get as much detail in the price proposal as possible—how much for ingredients, packaging, labor, etc? A bill of materials for your product is essential. You can download a template for about $8 at www.klariti.com/bill-of-materials-bom-template

• Know what your recourse is if something goes wrong. Who will pay for the mistake? Get it in writing and be specific.

• Have your product specifications ready before production, and have the packer sign for receipt. Be specific regarding physical properties of the product, color standards, weight standards, nutrition profile, ingredient declarations, etc. Specify pH, striation limits, piece size, moisture content and other important physical component targets for the product.

• Remember, volume talks, and fancy talk walks. The higher the volume, the better the price will be. The packer may want some sort of guarantee before he/she gets very aggressive on pricing. Be sure to work into the contract a formula for price review based on volume and time intervals; quarterly is the norm.

• Be very specific about payment terms and get everything in writing.

• Find out who performs third-party plant inspections for the packer and if that company is well rated in the industry.

Developing a Successful Relationship
One thing that that can help overcome many issues is to develop a relationship with the packer—even before getting down to formulas and bids. Tour the plant, get to know key people, ask questions and compliment the owner, his staff and the operation (if you can’t do that sincerely, then you are in the wrong place anyway). Make more than one visit if the first visit goes well and don’t be in a hurry. Your persistence and patience will pay off.

Overall, you can save valuable time and resources by making the time and effort to find a qualified co-packer. The key to success in this area is hard-nosed due diligence.

Ron Rash is a partner in Organic Foods International, LLC (OFI), a consulting firm that offers retailer and vendor services ranging from complete program development to brand positioning, and product development to sales and marketing services. Ron has helped pioneer private brand organic products in the conventional grocery channel and has also held executive positions at Maxwell House/ General Foods, Bake-Line/Keebler, Hain-Celestial, International Nutrition, and Wizard’s Cauldron, Inc. You can reach Ron at ron@organicfoodsinternational.com.