Tuesday, July 3, 2007

So You Want to be a Sauce Mogul

This is the first in what will be a series of articles about bottling and selling your own sauce. I went through this exercise when I created Greg's Happy Sauce, so you can have the benefit of some of the things I've learned.

So you've got a great family recipe for a barbeque sauce and you're convinced that it's much better than the bottled sauces you buy at the grocery store. You've figured out that a bottle of sauce costs you about $2.00 to make, and you think it will sell for $3.00 -- a tidy 33% profit!

That business model only works if you're going to sell your sauce directly. Which is pretty tough. You'd have to sell 6 bottles an hour, 8 hours a day, just to make minimum wage. That's 12,000 bottles per year. And we haven't even gotten into the overhead costs such as insurance, gas, warehousing, etc.

You're not going to be able to make more than a small income from selling sauce directly. You're going to need distribution channels, such as grocery stores or over the internet. But you don't have any room in your 33% profit to share with the grocery store, so your price has to go up, perhaps another 25%. So now that $3.00 bottle is $4.00. So, armed with your slightly higher retail price, you start to approach the big grocery chains.

You can spend months doing this and get nowhere if you don't already have business contacts at the stores. Showing up at a local grocery store and giving the store manager a bottle to try may sound like a good idea, but it's not going to get you anywhere unless the store is a standalone store. The big chains do their buying through central purchasing, and they've set up business processes designed to make it very difficult for new products from unknown vendors to make it into the store. They're not in the business of helping you launch your business, they'll only be interested once there is a demand.

Now you try to find a broker for your sauce -- someone who has all the contacts and can open doors for you. Oops, you'll need to add another 25% to the retail price because brokers don't work for free. So now you're looking at about $6.00/bottle retail. Now you're triple what a bottle of Kraft barbeque sauce costs on the shelf, and no one has heard of you. The chances are the broker won't be able to get anything done for you until you've got some outside traction, so you've got a high price and still not enough sales. And six bucks is a lot of money to shell out for a sauce you've never tried.

We're in the era of Web 2.0, so just create a web page and start selling, right? That's a great idea, except 1) You'll have to market your site which is something professionals expend a lot of effort on, and 2) It's pretty hard to sample a sauce over the internet. The internet works great if there's already a demand -- people will purchase a sauce if they've tried it before. Yes, there are lots of stories of people that hit it big on the Internet, but there are thousands times more stories of products that didn't even cover the web site fees.

So what about the big websites that sell specialty products, such as The Carolina Sauce Company? They can certainly give you exposure, and they have more traffic than you could hope to generate for yourself after a few years of work. And they do it full time. But you'll still need to generate demand, because people don't buy sight unseen from the Internet. The big specialty foods websites are an ideal solution for fulfillment of orders, but you'll still have to convince the general population that your sauce is something they want to buy.

One of the mistakes many people make is that they compete with the big specialty foods websites while at the same time trying to sell through them.  The big sites need a 50% margin just to make a go if it.  Any less than that and they probably won't carry it.  If you give them 50% off your $6.00 retail price, and then turn around and sell the same sauce on your own website for $4.50, they're going to drop you like a hot potato.  Why should they bother to publicize your sauce and establish an internet presence for it if you're going to turn around and undercut them?  Most websites are flat out not interested in dealing with a vendor that's going to compete with them.  It's fine if you want to pursue direct sales, but your price to consumers needs to be the most expensive in the entire distribution chain. 

How about specialty stores? Just hit the Mom and Pop stores and get them to carry it? That's your best bet. The Mom and Pop's will need about a 50% margin, so you're still in the $6.00/bottle range. Why so much margin? Mom and Pop don't move much inventory, and their shelf space is small so they have to maximize their revenue from every inch. And your costs will go up in dealing with them -- you'll have to arrange for deliveries to all these little stores. Shipping or gasoline will cut heavily into your margins. And you'll have to actively demonstrate the product in order to generate sales. People still won't buy it without trying it.

The bottom line is that this is a very tough business to succeed in. You can see from the simple math that a $2.00 cost per bottle probably can't succeed. You've got to be closer to $0.50-$0.75 in cost to make a go of it. And then you've got the problem of getting people to buy it. The best way seems to be to generate a buzz by demonstrating the product every chance you get. You'll be giving out dozens of samples just to get a single sale, and you'll need dozens of sales to get a repeat customer. And you'll need thousands of repeat customers just to make minimum wage.

At some point you'll transition out of the specialty stores and websites and into the traditional grocery chains.  You can't do both.  Neither of the other two distribution channels will be interested in carrying a product they have to sell at $6.00 to remain whole and compete with the local megamart selling it at $3.50.  Making this jump is a critical juncture.  Do it too soon, and you end up on the other side without any demand.  Do it too late, and you may never make it.

But it can be done. There are success stories out there. It seems to take about 7 years to go from a recipe to when it's a real going business. Generate the buzz, get into the small stores, land a few brokers, get it on the internet, and eventually you can break into a giant nationwide grocery chain where they're selling 1,000 cases/month and you've got a real business.


Entrepreneur234 said...

Apologize ahead for what I am about to say, but this is the most pointless article ever.

So you have posed the issues and what you have learned. Now what are the solutions? What did you do to make it successful? Were you even successful in your venture?

Get it together

kim said...

What a Debbie downer !! However, realistic. I just didnt learn anything from this .

WeMerge said...

Thank you Greg. I'm not sure what these other people missed, but I got it. Appreciate the advice, first article I found that gave some insight.

Godo.Villena said...
This comment has been removed by the author.
Michael Podolinsky said...

Hi Greg

Thank you so very much! This was very helpful. I'm an American living in Asia and we are thinking of starting a pasta sauce company here in Mongolia. This really got us thinking about costs, distribution and other factors we'd not considered. Your 3 articles combined really made a significant difference for us. Instead of making our own from scratch, we are thinking of private labelling a sauce. From your article, we may now work on the marketing BEFORE starting our sauces. THANK YOU! I'm not sure people understand your generous spirit in sharing here. As a 32 year entrepreneur in adult education, I always appreciate a professional sharing his information pro bono. God bless you! Mike

bubble crunch said...

Hi Mike,
I own a bubble tea/vietnamese sandwich (banh mi) shop and discovered the best vietnamese sauce ever. I would love to learn more about how to bottle my sauce and sell it. Your post said the author have 3 articles, can you please give me the links?


Would you be able to give me the links if Mike
Didn't get the message? Thank you both in advance!

ken medei said...

For the readers who did not feel this article was helpful, I feel that they will never succeed if advice was delivered to them in a gold plated box. The author gave excellent advice. I started my own line of pasta sauces in 1990, Medei Cuisine "Not Justa Pasta Sauce". I learned the hard way but was able to sell the business/brand to an established sauce company. Costs are everything. Making sure you have things covered in your wholesale pricing... distribution, marketing, retailer/dist promo's, and broker fee's. 21 years later I am getting the itch again. So many more opportunities nowadays via internet marketing, E-commerce, etc. Just have to create my "hook" that'll get them talking from coast to coast.