The Hitchhiker's Guide to Dayton Tech & Startups

The Hitchhiker's Guide to Dayton Tech & Startups

‘Whole Foods effect’: When small food makers get the call to go big

This article, written by Amy Haimerl, first appeared in The New York Times on April 21, 2016. You can read the original post here.

Photo by Drew Kelly-- Racks of aging Red Hawk cheese at Cowgirl Creamery, a small food producer, in Point Reyes, Calif., May 21, 2013. 

Photo by Drew Kelly-- Racks of aging Red Hawk cheese at Cowgirl Creamery, a small food producer, in Point Reyes, Calif., May 21, 2013. 

Cowgirl Creamery, a small food producer in Marin County, California, was elated when Whole Foods came calling to buy Cowgirl’s organic triple-cream cheese for 45 of its stores. After five years of selling shop to shop, the entrepreneurs behind the company finally had their first big order. To meet the new production demands, they borrowed $200,000 to build new aging rooms for the cheese.

But the first batch they delivered to Whole Foods grew mold. Not the white, fluffy mold that gives cheese its essence — it was the nonedible, possibly reputation-destroying black mold.

“It was awful,” said Sue Conley, who started the company with her partner, Peggy Smith. “We hadn’t primed our new aging rooms, so other bacteria were competing with the fluffy white mold. It was a big mess.”

But Whole Foods was patient, Conley said, and the next batch sold so well that it jump-started demand. A decade later, Cowgirl employs 100 people, produces 800 pounds of cheese a day and is looking to expand by building a new creamery.

Other companies too have learned that the excitement of the “Whole Foods effect” can quickly turn to fear as they face producing and distributing their recipes at larger volumes while maintaining quality and consistency. And most critically, they have to find the money to pay for the expansions.

It’s an opportunity — and a challenge — that more entrepreneurs are confronting as retailers turn to startups and small businesses to fulfill consumer demand for locally grown food.

The percentage of customers buying these products rose to 25 percent in 2013, from 13 percent in 2007, according to a recent report from the Food Marketing Institute in Arlington, Virginia.

“We are seeing a shift of the tectonic plates of food retailing, as well as in food suppliers and processing and manufacturing,” said Mark Baum, senior vice president at the institute. “It’s all being driven by consumers.”

Local food sales could hit $20 billion by 2019, up from $5 billion in 2008, the research firm Packaged Facts predicts. The success of the local food movement has drawn backing from Tom Vilsack, the secretary of agriculture, as well as from environmental groups and food enthusiasts. Even traditionally commoditized food products like milk are burnishing local bona fides.

Whole Foods has driven much of the demand for such products at the national level. The company employs “local foragers” tasked with finding new products. It also offers a loan fund to help vendors cover the costs of growth. Since 2007, it has lent nearly $20 million to 247 recipients, with an average interest rate of 5 percent.

“We are often the launchpad for a new local product, and we are really proud of that,” said Jenna Gelgand, the senior administrator of the Whole Foods loan program. “Now investment in these types of products is really high, but that was not the case around the recession and the years following. We can really see the need.”

But as demand has grown, so has the number of major retailers seeking such products for their shelves. Kroger has created partnerships with several state “buy local” programs and Costco recently started a loan program for organic farmers who need capital to meet growth targets.

Shannon Byrne is currently trying to scale up to meet an order to supply 88 Kroger stores with her Slow Jams spreads. The turnaround time: just two months.

Byrne started the company in 2011 out of her community garden in Grosse Pointe Park, Michigan, and has been slowly expanding. In 2013, her products landed on the shelves of Whole Foods stores in metro Detroit.

Last year, she moved her production to Hopeful Harvest, a food incubator in Southfield, Michigan, to accommodate accelerating growth.

The incubator was started two years ago by the local food pantry Forgotten Harvest when it noticed increased demand for commercial kitchen space and food processing facilities. It invested more than $200,000 to build out an empty warehouse with everything needed to manufacture food in bulk, including bottling lines, giant mixers and deep freezers.

Hopeful Harvest was soon handling three shifts, seven days a week. It works with 35 companies, has a waiting list and plans to build a new facility by year’s end.

The program has been so successful that Hopeful Harvest now works with entrepreneurs on a line of co-branded food items that sell at large retailers like Kroger, with a portion of the sales supporting the food pantry.

“It’s been absolutely meteoric,” said Chris Nemeth, the president of Hopeful Harvest.

When Nemeth decided he wanted to create a co-branded line of jams, he turned to Byrne because of her unusual flavors, such as raspberry lemon verbena. She agreed immediately — never suspecting that when he pitched Kroger, it would agree to carry five of her jams and need them on shelves in a few short months.

“The biggest thing is figuring out the logistics,” Byrne said. “The best part of this process is there is a great network of entrepreneurs who have already gone down this road. You call them up, and they are happy to give their time and expertise.”

Some startups, however, have turned down offers to ramp up.

Charma Dompreh, a retired elementary schoolteacher in Flint, Michigan, makes healthy snacks out of dehydrated collard greens. Her Charma’s Green Chips are sold in four Whole Foods stores, but she could not foresee how she could expand to supply Kroger as well.

“They wanted me to do a pallet of greens,” she said. “I can’t do a pallet. Those greens have to be dehydrated for 17 hours.”

Finding good suppliers is also an issue. “I need to find farmers I can depend on,” Dompreh said. “Sometimes they have the collards, sometimes they don’t.”

Instead, Dompreh hopes to open a production space and retail shop in Detroit.

She wants to ensure that the quality of her chips does not change as she grows. That conundrum — how to stay true to what made you great while producing larger and larger batches — is the top concern small business owners face as they look to expand.

“There is a ton of interest out there, but passion for a product doesn’t make for a good business,” said Ally DeArman, the director of the Food Craft Institute in Oakland, California. “What we were seeing was businesses poised to succeed if they had the right resources or fail if they didn’t. We wanted to cut that off at the pass and give people the resources they need.”

Lindsey Ott, too, declined the opportunity to supply Whole Foods with Mama Tong soups. Ott bought the business from the company’s founder in 2013 for monthly installment payments of $200.

“My dream is to create a kitchen that can be home for a few like-minded, high-integrity food businesses,” Ott said. “I want to be more of a community kitchen space. I just want to make enough money to live in the Bay Area and chip away at the debt I’ve accrued.”