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Domenick Celentano

Be Wary of the Growth Trap in the Food & Beverage Sector

By May 11, 2011

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In the New York article The Sweet Spot of Business Growth, Jay Goltz talks about the Growth Trap. This occurs when your business grows in revenue with a concurrent negative effect on the bottom line. Most people just assume that growth is good... that is not the case.   Additionally there is no "right way" to grow and there was a plethora good advice given. The  food and beverage business has unique growth issues that must be taken into consideration for all food entrepreneurs.  

All businesses should possess some form of Scalability which is a fancy term for sustainable and healthy growth. You probably consider growth as linear, slow and steady and this is not the norm. 

Food Sector Growth Issues

Growth in consumer foods growth is more like a series of steps. Why? Let us say you are selling a specialty pasta sauce to 20 stores. You are anxious to have distribution in your regional Whole Foods supermarkets. You make the presentation, they love the product and you are authorized for distribution in 10 stores. Arithmetically you grew by 50%, which is the step scenario. 

To service a 50% growth in business you have to invest money into raw materials. So let's make a list. You have to order more jars, labels for the jars, oops... let's not forget the caps and the corrugated containers the finished product is shipped. We need more spices, food ingredients, etc. See the point how you might gain sales but be short on cash because you have to scale up for the 10 additional Whole Foods stores? 

Each step increase of new business requires capital that reduces the cash position of a business for a period of time. That is normal and must be planned for in order to avoid running out of cash. 

When you grow, moving your business will be a likely outcome. In working with many food entrepreneurs I have addressed this issue frequently; too often the costs of a move are understated or worse, not considered. These are a mix of onetime costs and operating costs. 

Onetime costs will be moving your existing equipment, adding more storage to the new location, building out your specific needs in the new location, etc. Ongoing costs will be higher rent and utilities (a larger plant requires more heat, air conditioning and electricity).

Be wary of  advice related to the elimination of products that do not generated a profit margin you are expecting.  This looks great on paper. WalMart did this and now will Broaden Product Assortment  after their customers balked at less choice causing a 2 year decline in same store sales. 

Be cautious on raising prices in the hopes of providing a better bottom line. This may work in a some sectors but is not a strategy for those companies that sell into the consumer products sector. Retailers are loath to accept price increases in this environment and may choose to discontinue your products in favor of a competitor with better consumer value.

Growth needs planning and objectivity... call it practical passion.


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