Food start-ups rush to the market….but 90% won’t make it… Clued Up investigates

The number of new food manufacturing start-ups is at an all time high. We, the public, are showing an ever increasing appetite for new and different foods for all sorts of reasons from health to convenience,  boredom and to “save the planet” There is also more advice, support and funding available to people who want to have a go.

The facts and figures

Independent food and drinks production has never enjoyed a higher profile. From artisan cheese to high-spec, healthy pet food, the passion and hard work of countless small producers is regularly featured and celebrated in magazines, on TV and across social media. And as public interest in unique, high-quality food products has risen, so has the number of food start-ups.

According to research published by Alert BI, the business data and insights firm, a total of 1,725 new food manufacturing businesses began trading in the period running from September 1, 2018 to 1 March this year. All are hoping their products can find a viable and lucrative niche in a market that is currently worth between £190 and £200bn.

According to food-technology networking
company Y FOOD, around 90% of new companies starting in the sector are forced to close their doors within a few years.

According to new research published by Alert BI, a total of 1,725 new food manufacturing businesses began trading in the period running from 1 September 2018 to 1 March this year.

Volume of new food manufacturing businesses incorporated in the UK over the period
1   September 2018 – 1   March 2019

Some start-ups aren’t afraid of taking on the big producers

The diversity of the food and drinks market is reflected in the broad range of startups that have come on stream over the last six months. Perhaps not surprisingly, the greatest number of new business registrations  have been in those segments where entrepreneurs can see most scope to provide products that address the desire of consumers to experience something different and unique, either in terms of flavour, quality or perhaps also the provenance of the ingredients.

Thus, the largest number of new start-ups (269) was in the bread and bakery products manufacturing segment. The drinks market was also well served with 198 wine, cider and beer producers opening their doors, plus 160 businesses offering a new take on spirits. Meanwhile, 133 soft drink producers started new businesses. Affordable luxury was also a theme, with new entrants into the ice cream and coffee markets totalling 111, and 80 respectively. Most independent producers are not setting out to compete directly with the big names of the industry but are instead seeking to identify specific gaps in the market where new products can address untapped demand.

That said, a significant number of new companies were prepared to seek their niche in areas often seen as the natural territory of major producers. For instance, 83 companies entered the prepared meals segment and 53 offered tobacco-based products. There were also 53 new pet food providers.

The 269 new baking companies established over the past six months equates to a start-up rate of over 500 per year – that’s a 17% increase in numbers in an industry that already has 3,000 established firms.

Funding and cash flow issues

One of biggest mistakes made by food and entrepreneurs is a failure to fully appreciate the funding and cash flow issues they are likely to face as they begin to scale up production to meet growing demand.

At the artisan level – say a tiny home or farm-based production facility supplying local shops – funding may not appear to be too much of a problem, given ingredients can be bought as required in small quantities. But once a business begins to scale up, the costs mount and budget must be found for equipment, staff, marketing and the all-important creation of a recognisable brand. The expense of creating a scalable business is often underestimated.

Then there is the question of cash flow. If businesses in the supply chain demand money up front while customers – such as supermarkets – pay their bills many months after receiving the products, a huge gap can open up between money coming in and cash going out. It is a chasm that sinks many young businesses.

Britain has become a “foodie” nation – hence the number of food related start-ups formed every month. But to minimise the chance of failure and, therefore, maximise the likelihood of great products finding an audience, producers need to understand the realities of the market. It’s tough out there.

Passion for the product does not guarantee success

On the face of it, the data points to a boom in independent food production, driven – at least in part – by the commitment of new entrepreneurs to providing high-quality products. For many entrepreneurs, food represents not just a business opportunity but a mission.

But passion for the product does not guarantee success. Failure rates in the industry are depressingly high. According to food-technology networking company Y FOOD, around 90% of new companies starting in the sector are forced to close their doors within a few years.

The 269 new baking companies established over the past 6 months equates to a start-up rate of over 500 per year – a 17% increase in numbers in an industry that has approximately 3,000 established firms.  That’s  a lot of new competition!

Failure to understand the realities of the market

One key problem is that a commitment to the product itself – regardless of how high the quality happens to be – does not necessarily go hand in hand with an understanding of the challenges presented by the industry.

On the supply side, the UK food and drink industry is dominated by a fairly concentrated group of major producers such Associated Foods and Unilever. These are organisations that have multi-million pound budgets to spend on the development and marketing of each of their brands. Meanwhile, on the supply side, supermarket groups guard the gateway to the mass consumer market. They have limited shelf space and are picky about suppliers. In addition to product quality (and whether or not it will be attractive to consumers), they are looking for suppliers who can ship the required volumes while also putting the work in to build their own brands. From a supplier point of view, this can create problems that are difficult, and sometimes impossible, to overcome.

That should cover not only the possible lines of communication with buyers, but also what stores already have on their shelves and current industry trends.  Meanwhile, the supplier should have a clear unique selling point – one that will justify shelf space.

All of which feeds back to the need to have sufficient funding to properly address the market.

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