12 December 2018

Food Startups Enter the Market

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As tastes shift toward specialty, local and organic foods, more so-called “food startups” are entering the market. According to PitchBook, a private financial database, close to $570 million in venture capital has been invested over the past five years in companies that produce food for consumption, or prepared foods, with the number of deals involving startup food makers growing to 36 in 2014 from 13 in 2011.

And for good reason: The specialty food business is booming. The National Association for the Specialty Food Trade says the sector hit a record $88.3 billion in sales in 2013, and continued to grow in 2014. The association attributed the sector’s popularity to “growing concern” among consumers about sustainability and health, as well as increased interest in “small-batch production”—knowing where food is made and who made it.

As demand for their products grows, food startups sell mainly in nearby shops and are restricted to producing limited quantities in their home kitchens—are finding they need to scale up quickly for wholesale distribution. And that can be difficult.

Regulatory requirements have complicated the transition from selling goods at local retail shops to distributing them wholesale to large grocery chains. Wholesale buyers have stricter health standards than local retailers, requiring significant upfront investment by producers.

Los Angeles County’s public health inspectors are now re-evaluating the rules. Some state health codes have already changed in recent years to ease the startup process in the cottage food industry, or businesses that operate out of their home kitchens. New legislation is what helped Semolina Artisanal Pasta first get off the ground, but the law restricts cottage food businesses to less than $50,000 a year in sales.

In Los Angeles County alone, according to the U.S. Census, the number of food manufacturing businesses with fewer than 10 employees grew to almost 2,000 in 2012, from less than 1,500 10 years earlier. Angelo Bellomo, Los Angeles County’s director of environmental health, said health inspectors are now trying to foster those small businesses’ need to grow. The current regulatory system was tailored to accommodate larger-scale food producers, which have a major presence here.

Most of what’s produced here gets shipped elsewhere. In most major cities, only 1% to 2% of what’s consumed is produced locally. Developing that shorter supply chain—from local farms to packing and production facilities to retailers—is “the big missing piece in the local food puzzle.”

Enter Los Angeles’s latest experiment: Early in 2015, several small food producers will move to an industrial kitchen at L.A. Prep, a new food production center that will house as many as 50 businesses ready to scale up from home or shared kitchens. Mott Smith, one of L.A. Prep’s founders, said he sees the facility as a way of expanding the “middle-class in the food processing arena.”

Developed through collaboration with the county over the past two years, the facility will manage health and safety requirements for producers, help them get expedited wholesale licenses and provide services such as food storage, security, trash collection and access to required equipment like range hoods and grease traps.

L.A. Prep will also provide “accelerator” services to help its tenants grow their operations, joining more than 100 food incubators and culinary accelerators that have emerged around the country in the past few years, such as Mess Hall Food Community in Washington, D.C., and Chobani Food Incubator in New York City.

Mr. Smith said he expects companies setting up shop at L.A. Prep to follow varied paths, such as establishing brands and selling their businesses to larger food producers; outgrowing the shared space and moving into their own facilities; or simply staying put.

Click here to access the full article on The Wall Street Journal.

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