Getting right financial advice critical for startups trying to clear distribution hump

By Hank Schultz

- Last updated on GMT

Getting right financial advice critical for startups
Going from $2 million in sales to $10 million is a huge jump that requires a radical change in company culture. Getting expert advice in how to negotiate that change can help nascent firms get over that hump which derails so many startups, an expert said.

Greg Wank is an accountant in the firm Anchin, Block & Anchin who leads the firm’s food and beverage industry practice group. Wank spoke with NutraIngredients-USA on how a specialist accounting firm can supply a company with more support than just crunching numbers.

Food/supplement line blurring

Wank said the way the food markets are developing is bringing some of the functional benefits typically associated with dietary supplements in the past into the food space. When consumers are looking at labels they are looking for additional benefits, many of which are linked to supplement-type ingredients, such as astaxanthin added to sports performance beverages to use one example.

“We do a lot of work with emerging brands; almost all of them are in healthier for you foods and beverages,” ​Wank said. “Most of what we’ve seen in terms of innovation is a healthier functionality. The lines between foods and supplements are blurring every day.”

New ingredients = new challenges

Adding those functional benefits to existing products in a portfolio presents new complications of its own, Wank said. Formulators might typically have the end game in mind—what the product is going to look like on the shelf and how consumers will connect to its benefits, in other words—and might be less concerned at the outset about how difficult or expensive it might be to incorporate that new ingredient stream into an existing production network. What is that end benefit really worth in terms of the brand’s overall market position? How much should the company be willing to pay for an exciting new ingredient?

“One of the things our clients count on us for is the industry knowledge,” ​Wank said. “We can help them figure out what their true gross margins are, what their true costs of goods are.”

Naiveté on difficulty of scaling up

In other cases, brands are built from the ground up based on the benefits of a specific type of ingredient, such as a new superfood.  The amount of effort required to discover these new ingredients, research their benefits and bring a viable product to market is huge, Wank said, and assumes (and requires) a correspondingly huge amount of passion on the part of the entrepreneur.  But passion in business is like a big play in football—it can help you build a big lead, but by itself it won’t help you hold it.  Harsh market economics start to come into play, and, to extend the analogy a bit further, it’s the basic blocking and tackling of business such as pricing things competitively and properly managing inventory that will carry a company through the rest of the game.

Greg Wank
Greg Wank

“Typically is what we find in these companies find that are passionate about something they’ve found that is so much better for people, for their bodies, or that is better for the environment, they tend to be at a price point that is too high to reach mass distribution. They might have started in specialty food stores or in the natural channel and when they try to go into mainstream distribution they’re in for a shock,”​ he said.

Even for brands that successfully negotiate that hurdle, there are more down the road. The jumps from $500,000 in revenue, to $2 million, to $10 million require a company to fundamentally change and not merely grow in size. The enthusiasm about making small batches of kombucha in a small facility is a different ballgame than managing different production and distribution contracts with overlapping deadlines, Wank said.

“What we do advise them on is how many levels of process you have to go through to make those jumps, how incredibly different those tiers are. We see that as a point of naiveté for new companies.  You might start out maybe only in the natural channel in one region of the country. To grow you need to add operations people who know how to set up a distribution network, who know how to deal with multiple copackers, who know how to manage warehouse operations,”​ he said.

Managing success

Some companies fail not because their product does not gain traction, but because it gains too much too quickly, Wank said. Knowing how to manage a production ramp up, and how to allocate the funds for that, is a key part of that growth curve, he said.  Being out of stock on a popular item is a hard situation to recover from, especially for companies that don’t have a long history in working with certain distributors.

“That’s usually the start of it. They’ll miss some deadlines for shipments either because of quality or supply issues.  Maybe they didn’t raise enough capital.  Then they start short shipping, and these are the kinds of things that after a while distributors and retailers are keeping score on and they’re going to say that you’re more trouble than you’re worth. You might have a great product, but they’ll say, I’m going to give your shelf space to someone else,” ​he said.

Beverages are a special case

Wank said making this jump is particularly hard in the beverage business, and that’s why he sees expert advice as being critical to success for these startups.  Now matter how cool, how fun, how functional your new beverage is, once you get into mainstream distribution you are now essentially in the business of moving around large quantities of the densest thing that people consume—water. And you’ll be going up against companies that have many decades of experience in profitably shipping this heavy material. 

“The beverage business is the hardest in my opinion because the cost of distribution is high because the stuff is so heavy. It can be difficult for these young upstarts to try to compete with those huge beverage companies that control the distribution,”​ Wank said.

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