Road maps to market

Like Lisa Gjersvik, project director at AURI’s Waseca office, and Charan Wadhawan, AURI food scientist in Crookston, have been with AURI since its first years. For over a decade, Gjersvik has shown food entrepreneurs the road map to the marketplace, forked with business plans, market research and distribution strategies. Wadhawan does the nutritional analysis and formulations that can turn a favorite family recipe into a shelf-stable commercial product that meets today’s rigorous labeling and quality standards.

Both have seen entrepreneurs successfully launch new food products, but they have also seen some who have failed. Their combined wisdom, from the business and technical aspects of commercialization, is worth thoughtful attention.

First Steps

When entrepreneurs come to you with ideas for new food products, what is the first step you advise them to take?

Gjersvik: I encourage them to spend time assessing their intended market before they get caught up in product development, processing and distribution — it can save them a lot of headaches later on.

Wadhawan: Concept development is the first and most important step. Is there a market? Does the entrepreneur have technology to develop the product? If not, AURI helps him or her get there. Should the product be co-packed? Do they have the right mode of distribution? For developing the actual food product, the entrepreneur needs to have a reference point and set preliminary parameters for ingredient costs, nutrition profiles and processes.

How do you evaluate whether an idea has merit and market potential?

Gjersvik: I use common sense first. Are there truly any unmet wants or needs in the marketplace that the product can fulfill? If not, there’s no potential. Simply being different than the competition does not mean the product is filling a niche. Sell what your customer wants to buy, not what you want to sell.

Wadhawan: I look at the product’s uniqueness and consider market research or information about similar products.

What are the most important ingredients in a business plan?

Gjersvik: They’re all important. Just like you would never go on vacation to a place you’ve never been without a map, so you should never go into business without a “map” on how you plan to get from point A (starting a business) to point B (a successful business). The business plan ensures that all aspects of the business have been critically evaluated for feasibility, from production and marketing to management and cash flow.

Wadhawan: The business plan is a principal sales tool for the entrepreneur to raise capital. The most important ingredients are: money — how much is needed and where it will be spent — and marketing strategies.

What advice do you have for capitalizing a new product venture?

Wadhawan: It is very important to figure out all costs. Insufficient financing is a major cause of small business failure.

Gjersvik: Adequate cash flow is the most important consideration when financing. You need to have enough in the bank to cover expenses and service your debt (if any). You also need to be aware of the timing of cash going out and cash received from revenues. Unless it’s a cash business where payment is received immediately upon sale, which is rare, there will be a time lag. A business can’t run long if cash going out exceeds cash coming in.

What agencies or organizations would you advise them to contact?

Gjersvik: Small Business Development Centers, their local economic development professionals, Regional Development Commissions and regional Initiative Funds — and, of course, AURI. All of these agencies have programs, whether financial, business assistance or both, that help entrepreneurs get started. Some provide microenterprise or revolving loan funds as well.

Wadhawan: Also, the Minnesota Department of Trade and Economic Development for their publication: A Guide to Starting a Business in Minnesota … and the Minnesota Department of Agriculture marketing division for state licensing and marketing assistance.

Are there regulatory issues entrepreneurs often aren’t aware of in the start-up phase?

Wadhawan: Yes, there are a variety of issues entrepreneurs aren’t aware of. One of the most common is that the product must meet FDA standards of identity and quality. Standards of identity define what a given food product is, its name, and the ingredients that must or may be used in its manufacturing. Standards of quality assume that the food is properly prepared from clean, sound materials, without such factors as impurities, filth or decomposition.

Some standards set nutritional requirements, such as those for enriched bread or nonfat dry milk with vitamins A and D, etc. Foods with a nutrient content claim or modified from a standardized food (e.g. “reduced fat” or “reduced calorie”) must comply with certain standards. All the FDA food standards are published in annual editions of the Code of Federal Regulations, Title 21, Parts 130-169.

Gjersvik: Entrepreneurs need to get connected with someone who can help them navigate the regulatory labyrinth. FDA regulates labeling and marketing claims on packaging and the Federal Trade Commission regulates marketing claims in advertising and promotional materials. And then there are regulatory food inspections, depending on the product type and where it is processed.

Catching the trends

How do you determine where consumer interest is heading in the next five years, rather than just respond to current trends?

Gjersvik: That’s the $64,000 question. Every year trade magazines have special issues focusing on trends, such as Prepared Foods or Food Product Design. These are must-reads.

Wadhawan: Analyze demographic trends, attend new product seminars and industry shows, conduct independent market research, review advertising and brand publications and do a Web search.

What are the newest food trends and niches entrepreneurs could tap into?

Gjersvik: Consumers want it all — their food to taste good, be easy to prepare and healthy. There will continue to be a merging of medicine, wellness and food. Here’s where it’s at: nutraceuticals, wellness foods, designer foods and near ready-to-eat foods that taste great and require minimal preparation.

Wadhawan: I agree. Food trends are for functional, organic and healthy foods. Organic food sales reached approximately $5.6 million in the USA last year, up from $4.7 million in 1999.

Consumers are choosing foods based in part on how they protect against disease or enhance performance. Rising health costs and aging baby boomers are motivating food companies. For example, new federal guidelines calling for people to lower LDL cholesterol spike interest in foods with cholesterol-lowering ingredients.

Is it wise to purchase marketing services?

Gjersvik: Yes. Unless the entrepreneur is experienced in marketing, it is wise to seek professional assistance. The challenge is finding a reliable consultant — be a wise consumer, ask for references and check them out. Try to find someone experienced in the market you’re seeking to get into. Not all consultants are created equal.

Wadhawan: It all depends upon the entrepreneur’s background and the availability of experienced employees to take up marketing functions. If those elements are not present, then it is wise to purchase marketing services.

Is it best to develop and market one product at a time or to offer a variety?

Gjersvik: In my experience, it is best to develop one new product at a time, establish the business during this learning period, then expand the product line. Do what you know best first. Ultimately, however, if you’re looking to distribute products through a broker or distributor, some have a preference for product lines rather than sole products.

Wadhawan: In my opinion it is best to focus on developing and marketing one product in the two to three most acceptable flavors (through sensory evaluation) and in two different sizes, such as single-serve and multi-serve packages. This causes less confusion in collecting market data.

How important is a Web site?

Gjersvik: It depends. Having a Web site can be a convenient way to provide consumers with company and product information. But having one won’t necessarily make you any more successful.

What are the advantages and pitfalls of marketing over the Internet?

Gjersvik: One advantage is that it can provide a more level playing field for the little guy to compete with the big guys. However, that depends on how well the small business generates traffic to its site through search engines or printed materials. Most Web traffic still comes from written ads or promotional materials.

A Web site is good for providing information on the company, its product line and contact information. Some may want to sell on-line via e-commerce. But companies can often be just as successful providing information for off-line ordering.

Wadhawan: The Web provides a low-cost product display and easy consumer access. But you need extra staff to track Internet orders and the means to ship products. Order size can vary from day to day and you must be able to fulfill orders instantly, which requires extra inventory. So you also need to look at the product’s shelf life under a variety of environmental conditions.

Attributes for success

Are there assets or personality traits you’ve observed in successful entrepreneurs?

Gjersvik: Personality traits I see are optimism, ambition, self-d iscipline, self-confidence, innovation, goal-orientation, good sales ability and ability to problem-solve and take risks.

Assets needed include intelligence, strong interpersonal skills, leadership abilities, good management skills in employee and customer relations, operations and finances … with a broad-based understanding of how to run a business. And above all, have a product or service that fills unmet wants or needs.

What is the main reason new food ventures fail?

Wadhawan: Inadequate research: several studies confirm that is a major reason for new product failure. Other reasons for small business failures are a lack of necessary resources, such as people and funding, poor market understanding, a lack of commitment, no formal development process, poor decision making and a lack of focus and discipline.

Gjersvik: Businesses fail for one or more of three reasons: money, management or marketing. Either they weren’t capitalized well enough, the management wasn’t experienced enough at their type of business, there wasn’t a market for the product or, if there was a market, the business did not succeed at reaching it.

What is the most important advice you can give an aspiring entrepreneur?

Wadhawan: Commitment. Focus on strategic objectives, with a long-term commitment to achieving those objectives. Know when to cut your losses and seek new directions.

Gjersvik: There is a very high rate of failure for new businesses. Go into this with your eyes wide open. You must be willing to work very long hours and risk losing everything you put into the venture. Do your homework, make sure there’s a market and seek the counsel of competent advisors.

Any other suggestions?

Gjersvik: Although I don’t usually promote any particular business toolkit Web site, there is one I have found to be comprehensive and useful for the small, startup company. Business Owner’s Toolkit: www.toolkit.cch.com, particularly the site’s guidebook: www.toolkit.cch.com/scripts/sohotoc.asp.

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