Gourmet gamble: The challenges setting up a food business

The number of Irish food entrepreneurs tasting success has been on the rise since the recession began but starting a food business can be a daunting experience.

Aside from the basics, such as deciding on the product and market, numerous regulations, health and safety concerns, and industry practices must also be considered.

Many food businesses fail within the first 12 months due to failure to carry out market research, underestimating the strength of the competition and failure to secure adequate finance.

One common mistake many first-time food entrepreneurs make is underestimating the amount of money it takes to start a business.

Pricey packaging
Joanna Lovegrove, co-founder of Chilly Moo frozen yoghurts, says the biggest surprise she got in setting up her enterprise was a minimum run requirement by packaging companies.

“We phoned around various packaging companies for prices and they told us we had to order a minimum of 55 pots for our frozen yoghurt. We thought that sounded fair and that we could do that. They actually meant 55,000 though. Bigger print runs are required for branded packaging so our initial order was 55,000 pots, which was a huge outlay for a start-up company. And then we had to find somewhere to store all the pots.”

She said it was also very difficult trying to work out pricing margins, as everyone needed a cut. And the product was put into the same food category as ice cream and chocolate, which meant it had a higher VAT. “We wanted to make the product as affordable as possible but that was very hard as the distributor needed a cut, as did the shop, the price of ingredients was expensive and we needed to make money too. We were also bumped in with higher sugar foods, which meant our product had VAT of 23 per cent. Normally yoghurt has no VAT.”

Lovegrove says she and co-founder Clare Holman also had an additional challenge in that their product is frozen.

"In some ways, it's great as it has a really long shelf-life. Prior to getting a distributor, if someone phoned us from Galway wanting samples we would have to come up with a way to deliver it without it melting. We couldn't just get in the car though and drive it there."

Additional costs
Cork entrepreneur Aimie Musgrave, who founded Crunch Foods earlier this year, says there were many additional costs she hadn't factored in when setting up her protein-based "food on the go" business. These included obtaining the nutritional value information for the labelling.

“I had to pay to get the nutritional values for each product. I had to send the products off to a lab and get them tested. It costs €150 per product so is not cheap.”

Taking a cue from the explosive growth of food vans – more small businesses are forgoing costly bricks-and-mortar premises by becoming mobile vendors – she decided to do the same.

“I originally thought about having a restaurant or café and I looked at renting premises but they all had four-year contracts, which I was terrified of, especially when some of the premises up for lease had businesses next door to them which were closing down.

“I didn’t want that huge commitment and pressure so I thought it would be better to be a mobile business.”

While the downside of having a physical space is high overhead costs – be it rent, a lease or mortgage – having a mobile business also has its pitfalls.

“I thought getting my van insured would be as simple as making a phone call to an insurance firm. It was really difficult though as my van is vintage, left-hand drive and I’m towing around gas canisters. I never thought of this when I was purchasing the van and setting up the business.

“I was living in a bubble when I started. I assumed I could trade wherever I wanted within reason and thought all events would welcome me with open arms because I specialise in healthy food. There is a lot of politics involved though.”

While she didn’t encounter the vast packaging orders Chilly Moo faced, she was surprised by the cost of her packaging.

“The packaging costs are an absolute killer. It costs me 30 cents to make a flapjack but the packaging for that flapjack could be another 30 to 40 cents.”

Musgrave says she also has to be able to trace all her products, which results in a lot work – it’s not as simple as making the product, packaging it and selling it.

"You have to batch code everything in case someone gets sick. You need to be able to trace everything back. You also have to be able to trace all the ingredients you purchase for the product back to the source."

Banking issues
Former project manager Simon Stenson, who oversaw the construction of multimillion euro boomtime developments, including Dublin's Convention Centre before losing it all, came out of unemployment to set up his own bakery.

But despite having run numerous businesses over the years, including a small hotel in the UK, he says he didn’t realise the extent of the difficulties entrepreneurs have getting money from the banks.

“I knew the banks were bad but I didn’t realise how bad they were. They would only give us an overdraft. Once we asked them to extend it by a week as there was a problem with receiving payment from one of the supermarkets. They refused to do so and we were nearly unable to pay the wages. Luckily the supermarket came through with the money.”

Stenson says he set up the Cherry Blossom bakery for €37,000, which included buying stock and equipment.

However, one factor he hadn’t taken into account was the business being an overnight success, which caused cash-flow problems. “We didn’t have a lot of capital to start off so it was a struggle keeping up with demand,” he says. “The supermarkets wouldn’t pay us for 60 days but we had no credit terms with our suppliers as we were new, so we had to give them all cash on delivery.

“There have been times where everybody got paid except me. There were weeks where I lived on beans on toast and had no oil in my tank for heating despite it being winter.”

While all the food entrepreneurs have no regrets about setting up their own businesses, and would do it again, they may not have done so had they realised all the work and challenges that lay ahead.