Kitchen To Grocery Store: What Makes A Food Startup Work? by Knowledge@Wharton
Childhood friends Amy DiBianca and Sara Williams-Curran embody America’s changing attitudes toward healthy diets. Two years ago, the California moms, with no history of entrepreneurship, confronted the fast food world with a startup featuring organic, sugar-free lemonade for kids.
The Love & Leaf beverage story illustrates how innovative people have entered the kitchen to give birth to a boutique culture that in the past decade has spawned food-startup investment funds and incubators that even cater to kale.
The marketplace of food tech has exploded as more and more Americans reject a dinner table filled with artificial flavoring, gluten, growth hormones and high-fructose corn syrup. “The trends are toward sustainable, humane and local in a very strong way,” said Jim Ji, who founded the Good Food Business Accelerator in Chicago.
DiBianca and Williams-Curran didn’t have a long-term business plan in mind when creating their product. The actress and the educator were frustrated by the high-sugar content in juices offered their children at social gatherings and soccer practices. In 2013, the problem became life altering when Williams-Curran learned her then-three-year-old daughter suffered from Type 1 diabetes. The women who met 25 years ago in middle school in Palo Alto, California, took action: They formed Leaf & Love Organics, a company that sells lemonade at high-end northern California markets and Whole Foods stores in the Southwest.
“I’m not an anti-sugar mom,” DiBianca said. “Sugar is a part of life. It is part of childhood. But people don’t realize just how much of it kids get, and one typical juice box can use up the entire recommended daily intake.”
Sales of organic food have tripled in the past decade, and in 2014 alone, totaled $39.1 billion for an 11% increase from the previous year, according to the Organic Trade Association. Meanwhile, Credit Suisse analyst Robert Moskow told Fortune magazine that the top 25 U.S. food and beverage companies have lost $18 billion in market share since 2009.
… Conglomerates usually struggle to adapt but “if they don’t change they will be the Kodaks of 20 years from now.” –Jim Salma
Martin Ihrig, an adjunct professor of entrepreneurship at Wharton and practice professor at Penn’s Graduate School of Education, is not surprised by the shifting tastes of consumers, noting that Americans have become more suspicious of food grown and manufactured elsewhere in the globalized economy.
A rising awareness about how food is made and where it originates has created a receptive audience for localized products with a backstory such as Leaf & Love. “What we’ve seen in the last 10 years are little startups that come up with new and healthy products,” Ihrig says. “We’ve also seen it in the beer movement. People are increasingly tired of drinking just Budweiser and Miller. The big guys are really scared and buying craft beer producers because the palette is more sophisticated now.”
Slama says conglomerates usually struggle to adapt but “if they don’t change they will be the Kodaks of 20 years from now.” In February, Campbell Soup chief executive Denise Morrison laid out the difficulties for big brands at the Consumer Analyst Group of New York conference. Morrison said conglomerates are contending with “a seismic social shift” that is redefining the fundamental framework of selling food.
“We are seeing an explosion of interest in fresh foods, dramatically increased focus by consumers on the effects of food on their health and well-being and mounting demands for transparency from food companies about where and how their products are made, what ingredients are in them and how these ingredients are produced,” she told the audience. “And along with this has come a mounting distrust of so-called big food, the large food companies and legacy brands on which millions of consumers have relied on for so long.”
Good Time for Startups
Gary Hemphill, managing director of research at New York-based Beverage Marketing Corp., says that the trends expressed by Morrison give new product concepts leverage. Leaf & Love is part of the disruption of the food industry where small companies can bypass the traditional grocery store distribution chain by selling through Amazon or directly to customers with the use of social media to build their brand.
“Starting small is the key. If you don’t have the right product or package you can turn off a lot of people.” –Gary Hemphill
The women got their lemonade in about 170 California stores within three months of their first sale to underscore the possibilities for nimble entrepreneurs with a reserve of energy and passion. As the 40-something mothers begin navigating through the investment maze, however, they have learned that building a food business for the long haul is arduous.
“It is very easy for somebody to take a lemonade recipe and commercialize it and get it into a couple hundred stores,” says William Rosenzweig, Republic of Tea founder and dean and executive director of the new Food Business School at the Culinary Institute of America in northern California. Grocery stores encourage the introduction of new products, particularly when they can offer them with little financial risk.
In the past quarter century, Rosenzweig has encountered dozens of people with passion about their product as well as a strong support network of family and friends. But many times these budding entrepreneurs fall short on traits needed to be successful. “I’m looking for people who manage or punch way above their weight and experience,” notes Rosenzweig, who is also the founding managing partner of Physic Ventures, a San Francisco venture capital firm that has supported early-stage companies such as Revolution Foods and Yummly.
Learning the subtleties of the food industry takes time and patience because it operates within a complex web of stakeholders.
Mark P. Maguire, a consultant with the Wharton Small Business Development Center, has seen good intentions collapse in the face of overwhelming odds. “They make it in the basement and they try to sell it,” says Maguire. “Then when they get some critical mass” the entrepreneurs are hit with reality: “Have you registered this? Do you have your L&I? [Labor and Industries state requirements.] Are you making it in your basement or a food kitchen? All those things come into play.”
Those issues are just the beginning. Trying to sell a product online involves expensive marketing, Maguire adds. Oftentimes, food entrepreneurs don’t have the funds or connections to make it work.
“There’s the whole repertory process, getting the ingredients, getting the labels done,” said Maguire, who has worked with dozens of small business entrepreneurs in Philadelphia. “All that is very expensive. By that time they’ve invested a lot of time and money and heart and soul in this thing. They can see the potential, but they run up against all these barriers, and many times they have to give up.”
In other words, it’s not enough to have a quality product and master the kitchen-to-grocery store delivery system. It has “multiple interdependencies with health and sustainability and social equity, politics, safety, medicine, nutrition, public health – – food touches all of these fields,” Rosenzweig points out.
The long-time lecturer at the University of California, Berkeley’s Haas School of Business added that there is a bit of alchemy to selling food. “You are connecting on a level that is much deeper than just transactions,” Rosenzweig notes. “With food, you touch people. You touch their hearts, you touch their souls, you get through their bellies and you get to their essence. There’s something very magical and spiritual about being in the food business.”
The Leaf & Love women had no idea what it took when working to get their product to families craving a sugar-free juice alternative. They hadn’t earned MBAs at Harvard or Wharton or gone through incubators and accelerators. They had not considered the business in the full-throated context of entrepreneurialism.
However, they have learned to satisfy all the players, from brokers, to distributors to retailers, in the natural food industry through old-fashioned trial and error, with a little luck mixed in.
“There has been a very steep learning curve and an emotional curve,” said Williams-Curran, a one-time schoolteacher and vice principal who used stevia extract to create a sugar-free juice her kids enjoyed. “Amy is incredibly tenacious and resilient and has so much stamina. She is the motor behind what we’re doing.”
DiBianca is better known as the actress Amy Stewart, who has appeared in major television dramas such as Bones, Chicago Hope, Crossing Jordan, Desperate Housewives, ER, Lost, NCIS and the West Wing.
Without investor funding to develop a marketing budget, Leaf & Love has tried to distinguish itself from other organic lemonades through grassroots campaigning. The women have become partners with Juvenile Diabetes Research Foundation, Childrenwithdiabetes.org and Insulin for Life as DiBianca and Williams-Curran say they offer the only organic, sugar-free lemonade for kids on the market.
“With tech companies we know that if done right there can be a very high upside. With food businesses, there is a lot of uncertainty around scalability.” –Martin Ihrig
In doing so, Leaf & Love has cleared some of the early obstacles confronting food entrepreneurs. “You have to convince consumers and retailers that this is a worthwhile product,” Hemphill says. “You’re making this argument against a sea of other products that are constantly flooding the market.”
Rosenzweig, the venture capitalist, entrepreneur and educator, calls the unmet need standard essential to sustainability. “This has to be part of something that is a trend and not a fad.” But it is not enough to fill a void within the food industry. “It has got to be delicious. It has got to be ‘craveable.’ It has got to be something people will buy over and over again. It has got to be where people are going, so it has got to anticipate these cultural trends and needs.”
Serendipity led to Leaf & Love’s initial distribution deal. Williams-Curran met a food broker who was intrigued with the homemade lemonade. The broker got the women a meeting with a buyer for Andronico’s Community Markets in the San Francisco Bay Area. The popular five-store market is the kind of operation that chains Whole Foods and Sprouts have modeled.
That initial meeting eventually blossomed into a distribution deal from United Natural Foods, Inc. The women had originally sold their product through Amazon.com in an arrangement known as Fulfillment by Amazon. The online retailer stores and ships a company’s product and takes a cut in the sales.
But as Leaf & Love gained popularity, a broker introduced the women to an Amazon buyer, who struck a deal to buy the lemonade directly to offer it for sale.
“It is a little refreshing to these buyers to see these two moms on a mission to offer something to the diabetes community,” DiBianca said. “We don’t have this slick background to get the cheapest product for the biggest profit. It is hard to cut corners when feeding your own kids.”
Leaf & Love’s operation is run out of the house while the women juggle caregiving and careers. They are the ones on the assembly line at the Los Angeles-area processing and packaging plant to ensure every batch of lemonade is close to Williams-Curran’s original recipe.
Last year, Leaf & Love’s owners were buoyed by events at a natural food expo in which DiBianca recruited her five-year-old son to help hand out samples at their stand. The artisan lemonade was nominated for an “NEXTY” award that recognizes companies for innovation in the natural products industry as well as those with a strong vein of social and environmental values.
So far, the women have spent $100,000 to $150,000 on the enterprise, surprisingly little considering they already are selling lemonade. They’ve since altered the company’s name, logo, and brought in a childhood friend as a co-founder to develop marketing.
They plan to introduce a new flavor and package design in time for back-to-school sales in the fall. They also are considering the production of adult sugar-free lemonade.
In the past six months, the company has shown signs of maturity with Amit Pandhi joining the board of directors. Pandhi is chief executive of Arctic Zero, a frozen dessert company that is part of the organic food movement. The moms also recruited George Todd, president of natural food brand Chosen Foods, to become a formal advisor.
“There are days when I say I can’t do this anymore,” Williams-Curran said. “It is such a mountain to climb. But the feedback keeps us going. People have no idea what goes into a product when they’re at the grocery store.”
The women remain committed even as they begin to understand the complexity of the beverage industry.
“A certain amount of ignorance is great,” DiBianca said. “You don’t spend all your time focused on the disasters in your life. It’s not part of your education — why it won’t work. It’s about balancing some of that optimism with gumption and audacity.”
Starting Small Is the Key
The women have held informal talks with national brokers for such major outlets as Costco and Target. But their nascent company doesn’t have the funding to produce the vast quantities needed to serve a mass market.
Instincts are serving the women well, according to Hemphill. Startups don’t become national brands overnight. “Starting small is the key. If you don’t have the right product or package you can turn off a lot of people. It’s not that difficult to get people to try the product. You have to make sure the one you put on the market is the right product and brand.”
When wearing his VC hat, Rosenzweig wants to see same-store sales for a three-month period before determining whether the product has a chance. “Success is the same person buying your product every week,” he said. “So many companies I see have this idealistic view that they are going to be able to grow into an acceptable margin. And that’s just really, really tough. You have to establish that people will buy your product for the price that delivers a sustainable margin…. If more people did a rigorous and discerning assessment they would realize that what they are working on should be a hobby.
DiBianca and Williams-Curran don’t know where the organic juice market will lead them. Some boutique startups hit the food lottery when sold to conglomerates. Such was the case last year when U.S. snack powerhouse Mondelez bought Enjoy Life Foods.
DiBianca and Williams-Curran worry about the integrity of their juice if they were to sell to a big brand because they’re in this for children’s health.
And rightly so. “I would be concerned about what will happen with my creature in the future,” said Arkadiy Sakhartov, A Wharton management professor. “There is a temptation for a bigger company to enjoy an economy of scale, bringing other types of synergy to what they just bought.” The parent company’s intentions are pivotal to a startup’s future. It could turn out poorly for the entrepreneurs “if this is just a short-term strategy, buying the brand to sell some product and then selling that brand afterward,” Sakhartov said.
The marriage fell apart in the case of once-hip California Pizza Kitchen, which was bought by PepsiCo in the 1990s. The small chain used fresh ingredients and flavors that catered to West Coast sensibilities. PepsiCo introduced frozen toppings and other cost-cutting changes that hurt its reputation. PepsiCo eventually sold the chain in a money-losing investment.
Sakhartov says food giants need to recognize cultural differences as much as the artisan manufacturers.
“Their age, size, their culture, their target audience” are different, he said. “Their consumers are different even if the parts are overlapping.”
These differences make a merger acquisition challenging. Sometimes, executives must resist the temptation to exercise their power over their boutique subsidiaries. “If the big brands buy those smaller innovative food companies they’ll have to be careful to give enough freedom to the brands to keep the authenticity and the story that comes with it,” says Ihrig.
Growing the Food Ecosystem
Leaf & Love can practically feel the giant’s shadow.
“We know the big guys are coming and can replicate it tomorrow,” Williams-Curran said.
The owners’ experience is not too different from others with a family recipe or tasty idea that leads to launching a business.
Emerging food ecosystems have surfaced across the country in conjunction with America’s obsession with organics. Slama, who partnered with Whole Foods to create the Good Food Accelerator, was at the forefront of the movement in the Midwest when launching FamilyFarmed.org to promote eating locally.
In Los Angeles, food entrepreneur Michel Algazi has created a thriving environment to support the burgeoning food startup scene.
“I think it is the center of the universe for food,” he said of southern California.
Algazi is the founder and chief executive of the business accelerator Foodcentricity. Last year, he co-founded LA Prep, a 56,000 square-foot building with 54 food production spaces that are rented to individual companies for a year with the idea of speeding up the process of getting an idea to market.
Algazi, who grew up in Mexico City and fell in love with diverse tastes of the capital, guides budding entrepreneurs through what he describes as four “pain” points.
The first is decreasing the time it takes a company to get its product to market. Algazi said the average amount of time is 18 months. Second, a program such as LA Prep allows small businesses to pool resources as a cooperative to gain leverage in buying ingredients at a discount. A third issue is understanding the machinations of the complex food industry. But the final point — finding investors — is perhaps the most vexing.
“Working capital and growth capital is hard to come by,” Algazi said. “Banks don’t lend to these people.”
Ihrig questions how scalable food startups are in comparison to technology companies. “With tech companies we know that if done right there can be a very high upside. With food businesses, there is a lot of uncertainty around scalability.”