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From Issue #43 May 22, 2014

Growing Pains

Small-scale food producers hit the challenge of scaling up.

By Amy Westervelt Twitter icon 

Lisa Murphy of Sosu Sauces

Two years ago Lisa Murphy was working in sales for an augmented-reality startup and spending most of her free time having friends over for dinner. “I was having a July 4th barbecue, and I’d spent all this money on quality beef and buns and mustard, but when I went to get ketchup I realized really my only choice was the super-sweet stuff,” Murphy says.

So she did what any Bay Area foodie would do: found a recipe online and made her own. It was delicious, and Murphy became a bit obsessed with perfecting her ketchup recipe. She hosted another party a few months later at which she had her friends try 10 different flavors of her homemade ketchup and pick their favorites. Two flavors won out: lemongrass and spicy chili.

Murphy bought jars and had a graphic designer friend whip up labels, calling her company Sosu Sauce and her products Thaichup and Srirachup. Then she started taking jars of the stuff around to local gourmet grocers.

“When I first started out and I’d ask people if they wanted to try my ketchup, they’d say, ‘Ugh, ketchup? No, thanks,’” Murphy says. “There’s this whole perception of it as this cheap, kind of gross commodity product.”

Eventually Murphy’s ketchup won spots on shelves at five Bay Area stores, enough to convince her to quit her day job and devote herself full-time to Sosu.

She had been buying her tomatoes from farmers’ markets, where vendors would sometimes have hundreds of pounds of over-ripe tomatoes that no one else wanted and that Murphy could pick up for about 50 cents a pound. “But sometimes they wouldn’t have any, and I realized that just wasn’t going to work, so I started looking for farmers who could contract-grow for us,” Murphy says.

Then she hit the wall that is becoming all too familiar to those in the booming artisanal foods industry: there are very few medium-sized farms in the United States. The vast majority of farms either focus on wholesale restaurant and farmers’ market sales or grow exclusively for large brands. As more and more Web sites launch to connect artisanal food producers with customers that’s becoming a big problem.1

Pie chart

In the last two years, the online food business has exploded, with sites like Good Eggs and Farmigo offering a sort of online farmers’ market experience; Munchery and Plated going after the high-end, organic prepared foods market; and, of course, Amazon Fresh aiming to take a piece of the action from regional grocery delivery services like Fresh Direct, PeaPod, and SPUD.

The rise of various tech-enabled distribution systems, in combination with the public’s increased comfort with purchasing groceries online and a loosening of food-safety laws to allow for the commercial sale of homemade food in various states, has made it easier than ever for home cooks to turn their passion into a business.

The traditional food business would require an artisan food producer to give up 40 percent of its profits to a retailer and 20 percent to a distributor, not to mention 5 percent to a broker; a site like Good Eggs takes about 25 percent all in. Easier, cheaper access to customers and distribution has helped lure hundreds of chocolate makers, coffee roasters, bakers, sauciers, and picklers out of the woodwork.

Which is great — except that they inevitably hit the same obstacle that Murphy did. The first year she tried to contract for a crop with farmers, she found only two farms that could produce the amount she needed at the price and quality she required. She signed up with one for peppers and one for tomatoes. Convinced she’d have roughly the amount she had contracted for within a few months, she went out and did what she does best: sold her product. When she picked up an order from Whole Foods, she felt like the business was really taking off.

Murphy expected her contracted farm to deliver 50,000 pounds of orange tomatoes; due to a bad harvest, it could provide only 8,000 pounds. This was the variety she uses for Thaichup, which is what Whole Foods had ordered. “We had to tell them we couldn’t fulfill the order,” she says. “It was pretty terrible.”

All your tomatoes in one basket

Rather than throwing in the towel, Murphy learned her lesson. Not just about diversifying her risk, but also about how farms and farmers work. Many of the new entrants to the food business, particularly in the Bay Area, hail from the tech industry. Burned out by the fast pace of Silicon Valley, they retreat to farms or kitchens to build tangible, simple products. But old habits die hard. It’s tough to go from a world where people in the same room will IM each other to one in which a handshake is a contract and no one answers their cell phone during the week.

“It was a lot of work, but I’m glad I did the legwork — I went to the farms and I talked to the people there,” Murphy says. She found one of her new contract tomato growers simply by asking around a nearby farm town. “Some of these farmers we work with are not as tech savvy, so face to face is how they do business. You go out, go to their farm, meet them, then they decide to trust you and you work together.”

Ben Mustin, of MM Local Foods in Colorado, says it’s not just that farmers like to do business face to face, but also that many of them have been burned by startup food companies. “A lot of food startups here in Colorado, for example, will enter into agreements to buy a certain amount — and it’s usually a handshake agreement — and then when produce is cheaper from the Central Valley in California or from Mexico, they’ll decide to buy cheaper and the farmer is left high and dry,” Mustin says. “That breeds a healthy skepticism of new companies.”

MM Local cans and preserves produce from a variety of farms in Colorado, and Mustin says that when the company started five years ago, “it was on us to prove our bona fides to farmers, to prove that we’d buy all the tomatoes we said we were gonna buy.”

In the first year, farmers would sell only whatever they had left over to MM Local. By year two, Mustin says farmers would agree to sell them what they were already growing, but wouldn’t grow anything particularly for his company. “Finally by year four and five, farmers started coming to us and asking how much we wanted and agreeing to contracts,” he says. “It took a lot of time to build trust there.”

The man and the machine

Once Murphy had more or less solved her supply issue, she turned her attention to improving operational efficiency. “We do everything by hand, including labeling and filling jars, which really increases our costs and makes it difficult to scale,” she explains.

To address this issue, Murphy first went the traditional route of looking for a co-packer — a manufacturer that already processes and packs other, similar products. She discovered that two types exist: one kind works only with already processed foods, like a paste or purée; another sort works with fresh food. Because she needed both kinds, she would have to arrange transportation between two or more companies. “Logistics-wise that’s a nightmare,” she says.

Murphy has gone back to the drawing board and is reconsidering leasing her own production space, but that’s a capital-intensive proposition. Her company raised $100,000 on Kickstarter a few months ago, but $70,000 of that has already been spent on ingredients for her whiskey-barrel-aged sriracha, due to hit shelves in October 2014. That leaves $30,000 for equipment, but Murphy says that at a bare minimum, building her own production plant would require an investment of about half a million dollars.

“Fundraising for a food company is really different from getting investment for a tech company. With tech you see companies valued at five to 10 times their revenue, but in the food business your valuation is two times your revenue, period,” she says. “That means I’d have to give up a big chunk of my business to get the sort of funding I’d need to build my own plant.”

The tortoise and the hare

While the new batch of food artisans wait for everyone from investors to the traditionally slow-to-innovate food industry to catch up with them, consumers can’t get enough of their new and improved food selection. In fact, Americans’ appetite for niche foods is so large that giant consumer packaged goods companies like Kraft and General Mills are spending billions to develop new product lines and acquire successful small food companies.

The investment firm Jeffries reports that for the first time in decades, large packaged food brands are losing market share to niche brands, and Americans — particularly Millennials — are more willing than ever to try new foods and new food shopping experiences.

Mustin points out that while technology has, in some ways, connected consumers more closely to local farmers and smaller food producers, and created new distribution and retail models for those producers, it’s also in danger of re-creating the same old food system issues in a different space.

“One of the cool things is that the online marketplace does allow more people to opt-in to local foods,” he says. “But it’s also potentially problematic — food is so visceral, and, like, what’s the point of re-creating a farmers’ market online when what’s great about a farmers’ market is that it brings the community together, gets people outside, and lets people really interact with food?”

Back in the early 1900s, we Americans bought all our groceries from small, local markets. There were hundreds of thousands of them and they sold fresh, local food. But because they were in the habit of letting customers keep a tab, and mostly offered free delivery, their prices kept creeping up, eventually to a point where A&P’s “economy store” — the first store to resemble the supermarkets we know today, introduced in 1912 — was able to take hold and quickly put many small, local retailers out of business.

Technology has now removed many of the hurdles that once made buying bread from the baker and produce from the farmer too expensive, and eliminated much of the need for supermarkets altogether. But some are cautioning against too much of an emphasis on the time or cost savings delivered by these new models, and against the development of distribution systems that eliminate the need for person-to-person interaction altogether.

“Maybe convenience shouldn’t be the core value of our food system,” Mustin muses. “It was for a long time, and I don’t know that that was such a good thing.”

Photo of Lisa Murphy courtesy of her. Tomatoes photo by Kevin Lawver.

  1. Also see Cara Parks’s “Hoe Down” (August 1, 2013), in which she looks into the business of making tools for small-scale farm operations. 

An independent journalist based in Oakland, California, Amy Westervelt writes about health, technology, and the environment for a variety of publications, most recently The Wall Street Journal, Fast Company and Forbes.

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