I saw an interesting thread on LinkedIn in the CPG SuperGroup. It was on the subject of copacking or contract manufacturing for food products. Walter Venarchik is principle of Wallyn Enterprises, LLC , a Food Broker servicing major chains such as Acme Markets, Ahold, King Kullen, Bozzuto's, Weis Markets, A&P, Wakefern amoung others.
His question "I am looking to have a frozen breakfast item co-packed. What is a typical mark up that I can expect? "
There were many responses and I am publishing 2 that I feel are most educational for foodpreneurs looking to start a business or for those who products are in supermarkets and want to grow their business without the overhead of a production facility.
Jack Marcus who has experience in the copacking industry pointed out that "there is no simple answer" and posed a series of great questions you should ask.
10 Questions to Ask a Co-Packer
- Will you or the co-packer be purchasing and managing the ingredient and packaging inventories. If they are handling it all you need to decide on safety stocks, storage and out-of-date costs. Are you able to use ingredient specs that are common to other producers (e.g. salt granulation).
- How predictable is the demand for your product and how far in advance will you be willing to "lock in" on the production schedule?
- Do you have or do you know the optimum production length?
- Does the co-packer already own the equipment and can it be used as is?
- Does your packaging material run on their machinery?
- What raw material, in-process and finished product analysis do you require?
- How will you train the co-packers employees on the sensory standards for pass-fail of the product?
- How will you handle "emergency" product demands and does the co-packer have machine/personnel resources to handle the production and at what cost?
- If you require short runs on an unpredictable schedule your costs will be very high. Will this be sustainable for your business?
- Have you considered asking the co-packer to develop 2 cost scenarios?
Create Multiple Scenarios for Food Production
Jack suggested 2 that you might build into your query:
- They develop the FOB manufacturing cost only...you handle everything else, e.g. purchasing all materials and delivering them on a truck to their plant based on their evaluation of your product...ask them to break out all the detail and losses.
- They quote on a finished case price based on their providing all services e.g. purchasing, etc. again get all the detail.
Jacked added that "FULL cost mark-ups where the co-packer is doing all...can range from 20-50% depending on all the factors above."
Other Advice for Food Entrepreneurs
Michael Gagne chimed in with some helpful advice "We use a 100% transparent formula… running the raw materials through our manufacturing data base, and charge a conversion costs on finished product with 3% shrink on materials, and packaging built in. Jacks right on, but as a copacker, with my own brand, I try to approach the relationship in such a way that my costs are covered, my margin fair, and the cost to the customer is such that there is possible success based on their operating margin, for them to promote and sell… We do charge an upfront SKU charge to set up, and to do the risk analysis, as we are SQF level 3 certified, and it takes a fair amount of work to set it all up, approve suppliers etc."
What Co Packers are NOT
I responded that the points that Jack articulated should be your basis for requesting a quote or at least to determine what co-packers can be your initial target for inquiry. Be prepared!
If you look like you are very prepared, you will have a better chance of engaging the correct co-packers. Far too many food entrepreneurs expect the co-packer to educate them and co-packers are not in the business of educating. They are in the business of making money!
Food Entrepreneurs Successfully Using Co-Packers