Making a Successful Co-Manufacturing Match

Gary Plassmeyer quit being a manager for Texas Roadhouse restaurants, opened his own eatery in Wisconsin, and began selling homemade butter cakes for dessert. Next thing he knew, the sweet hybrid of white cake and cheesecake began selling like, well, hotcakes. Plassmeyer closed his restaurant and turned it into a bakery to satisfy fast-rising demand for Mama Bev’s St. Louis Butter Cakes.

That worked for a while. But after Plassmeyer got to pumping out 100,000 butter cakes a month from his 4,000-square-foot converted restaurant, he decided to seek a contract manufacturer. He found Sprout Creek Bakery, a contract baker in New York state, which now produces enough butter cakes to give Mama Bev’s annual revenues in the mid seven figures. In fact, the relationship went so well, so quickly that Mama Bev’s just formed a joint venture with Sprout Creek Bakery to facilitate expanded production.

“Partnering with Sprout Creek, our cost of production has come down by 40%,” Plassmeyer says. “It was the best decision we’ve made. If I knew how to do an Irish jig, I’d be doing one.”

Every small company in a growth mode would like to be as positive as Plassmeyer about its manufacturing, and many seek a contract manufacturer to obtain that kind of satisfaction. But some find a “no available capacity” sign at seemingly every potential partner, while other companies discover their output needs or product specs don’t fit co-packers’ actual capabilities.

Indeed, it’s become a seller’s market for contract food and beverage manufacturing services, in a significant tightening that began during the COVID-19 pandemic and has continued well afterward. At-home meal preparation took market share from restaurant meals during the pandemic and has held on to much of it, tightening the ability of both contract manufacturers and logistics providers such as warehousers to satisfy demand.

Vagaries including ingredient supply shortages and cost inflation also played a role. Only now, two years after the pandemic and with a slowing economy helping create slackening demand, is the capacity pendulum beginning to return to pre-pandemic days, industry insiders say.

Back to Normal

“But that doesn’t mean the situation is coming back to,‘We will [make] everything that comes across the table,’” says Ron Puvak, executive director of the Contract Packaging Association, which represents co-manufacturers and contract packagers across industries. “The thing has just settled down a bit and has slowed down to more normal terms now.”

As it is, the persisting shortage of contract manufacturing capacity is prompting more small companies to retain their own production even as they grow. Also, some emergent brands hold onto their own manufacturing because their production process is unique, because they believe it’s a competitive advantage to control it, or for both reasons.

“But most young companies or brands are still better off with a ‘co-man’ than doing it themselves,” says Jeff Grogg, founder and managing director of JPG Resources, a growth consultancy that conducts many client searches for co-manufacturers. “It takes a lot of money to set up your own manufacturing, and it’s a whole different skill set than running a brand. Plus, lots of brands don’t have the right talent or sufficient financial resources to do it on their own.”

Contract food and beverage manufacturing was already a $141 billion global industry in 2022, according to market researcher ReportLinker, which expects the industry to grow at a strong compound annual rate of about 10% through 2026 to a total of $208 billion.

The industry was booming even before the COVID era with the growth of private label merchandise lines by retailers, and as small and startup challenger brands ate into the existing oligopoly of traditional CPG giants that largely do their own production. Now the co-man business is embracing its greater opportunity.

Key to making contract manufacturing work for small brands is to understand that the relationship is truly a partnership. That means there are two sides to the equation. “A good contract packer should provide technical services, R&D, quality control, and understanding of federal regulations, so they can become a de facto manufacturing arm,” says Bill Germano, a former food entrepreneur and now chief operating officer of Enrich Foods, the new CPG unit of Columbia Grain International.

“But it’s not as simple as having someone make it for you,” Germano continues. “There’s always a trade-off to it. It’s a big balancing act. Everyone’s needs are different, but there really has to be a match.”

Here’s a guide for emerging brands to get to a happy place with co-mans.

Recognize the big picture. Consider that emerging brands need something from co-manufacturers, and typically the manufacturers don’t need anything in particular from them, especially in the industry’s current state of high demand.

"Many companies are a little less willing to take on what they consider ankle biters who are a lot of work for them, for not a lot of volume."

“It’s a little bit of a seller’s market, and many companies are a little less willing to take on what they consider ankle biters who are a lot of work for them, for not a lot of volume,” Grogg says. “They are also concerned whether younger companies are stable and whether they can play for the long term.”

Yet, adds Ken Harris, managing partner of Cadent Consulting Group, the broad capabilities of the industry are improving for emerging brands that present complex manufacturing challenges and still want to keep costs in line. “Artificial intelligence is starting to make these manufacturers a lot more efficient,” he says. “So as they get more efficient, they’ll reduce costs, and that will make them even more appealing.”

Come ready. Many small companies “don’t speak the language of the industry” in their requests for quotations, Puvak says. So, contract manufacturers “may not understand what [potential customers are] trying to communicate. A lot of times these [brands] don’t know what they don’t know.”

Or young brands may not have advanced their product far enough. “What they really need is a product developer first, not a manufacturer,” Puvak says. “For instance, have they done shelf-life testing? They may have to step back a bit.”

Commercial kitchens typically make sense as a first step for scaling manufacturing. “It’s a food-safe environment, and you can produce product that can be sold and test marketed and taken to local convenience stores or farmers markets, or you can walk into a local or regional supermarket,” Puvak says.

This phase can last two or three years even for a fast-growing brand, says Jamie Valenti-Jordan, CEO of Catapult Commercialization Services. Then comes the reckoning point: “Do you have enough volume that you can utilize a piece of equipment fully, such that putting a line together for you makes sense” for a co-man? “And what does your sales trajectory look like?”

Dig deep. Services including PartnerSlate and the Contract Packaging Association are available to help emerging brands locate contract manufacturers. Yet many small companies complain it’s very difficult to locate directories.

“It’s hard to know where co-manufacturers with available capacity are,” says Renee Leber, technical services manager for the Institute of Food Technologists. “There’s no directory for everyone who’s open to making cookies, for example. There’s a lot of calling around and phone tag and having to do further investigation of [manufacturers]. No company wants to give their project to just anyone.”

This process can be especially vexing, Leber says, because available information often doesn’t accurately represent up-to-date realities. “Companies can be found, but the list hasn’t been edited to show that while they might have a high-speed line, right now it’s actually full” because of production commitments, she says. “It seems like there’s no one straight source of truth they can go to, especially for companies that want smaller runs and are not the priority.”

At the same time, Grogg says, while “co-mans are generally terrible marketers of themselves, why should a little brand believe that someone owes them some updated registry of who’s out there and what’s available?”

Be ready for hiccups. One of the biggest complaints of food and beverage entrepreneurs is that having secured a contract to do the output, the manufacturer begins to try to change the rules.

“Brands find that things change as they get closer to the run, as the co-manufacturer wants to use things that are available to them instead of what’s specified,” Leber says. “These may be ingredient substitutions, or the contractor says they won’t be able to buy ingredients at the minimum quantity agreed to. So the customer is asked, ‘Do you want to increase the run, or look for an ingredient substitution?’ For a small company, that can be a tough call.”

"Brands find that things change as they get closer to the run, as the co-manufacturer wants to use things that are available to them instead of what’s specified."

Quality issues are another common bugaboo. “Some [co-manufacturers] won’t change the settings on their homogenizer for anything, regardless of what’s needed for your product,” Valenti-Jordan says. Another sticking point can be who pays for maintenance obligations for a piece of equipment that the co-man has upgraded to meet terms with a customer, he says.

The volatile macroeconomy also can throw some big curves. No Evil Foods made its own plant-based meats in a food incubator kitchen, then scaled up to a contract manufacturer, but it has had to change co-mans twice in the past few years, once because the company it worked with (which made its own plant-based products as well as those of No Evil Foods) went out of business.

“We’ve been able to reduce our overhead by more than half and finally move into profitability,” says Mike Woliansky, cofounder of No Evil Foods. “But outsourcing has had its own speed bumps.”

Walk a mile in their shoes. “Entrepreneurs get a little starry-eyed and get their belief structure set up so the thought is, ‘[Manufacturers] will be thrilled to work with me,’” Harris says. “But this is not a romantic relationship; it’s more of a shotgun wedding.

“So the very first thing you must do is look at it from the co-manufacturer’s point of view, backward,” Harris continues. “You have a product you want to make and sell, and to grow a brand, but the co-manufacturer, frankly, doesn’t care about any of that. They make money in unit economics by pumping stuff out of their factory.

“So, they’re going to make decisions on assisting you to produce stuff versus assisting something else, and if the something else is more profitable at a lower volume, you lose. So you need to go in with a very tight set of expectations and commitments, that you’ll be needing ‘X’ amount for them to make it worthwhile for retooling or putting you on the production line. Their little slice of perfect is that you are consistent, you are easy to maintain, and you are profitable.”

In many cases, the customer doesn’t understand the role of the co-man: It’s a crucial part of the brand’s value chain. The co-manufacturer “gets treated as a transactional element where you insert money and get out product,” Grogg says. “You need to align expectations and communications at the beginning.”

Work out the details. For the most part, Valenti-Jordan says, working with a co-manufacturer to make a new product “is about altering process conditions, quality set points, textural optimizations.”

But there can be major stumbling blocks. The biggest in establishing these relationships is minimum order quantity. “Minimums could comprise weeks or months of inventory for a small brand, and if you want to manage your cash, complying with that can be a little self-defeating,” Germano says. Or a co-manufacturer “could lower their minimum requirements [for the brand to purchase] in exchange for not providing certain services.”

Also, many emergent brands run into problems finding contract manufacturers that offer major certifications such as those offered by GFSI (the Global Food Safety Initiative) and SQF (Safe Quality Food) and are willing to make small production runs. “Some of these have higher minimum quantities to accept new customers,” Leber says.

Prepare to go small. If they can’t wrangle a big or experienced co-manufacturer, Leber says, “One answer for some of our members is to go to processors that are newer in the space.” Indeed, Puvak notes, the largest handful of co-manufacturers combined still own only about 20% of the market.

“There are a lot of [co-manufacturers] below $10 million in annual revenues,” Puvak says. “So there are a lot of [co-manufacturers] to equate with small companies. It’s just a matter of finding them. They’re not necessarily good at marketing, and they only have a few clients. They don’t have business development people. They rely on e-mail contact forms and a lot of referral business.”

Be committed. “Thinking about your relationship is part of the commitment,” Harris says. “A co-packer’s worst nightmare is that you start to create a product and it starts to create momentum and you’re doing really well, and then you pull the rug out from underneath them and start making that yourself.

“So what are you going to do for them that makes it worthwhile for them to invest sunk costs? Though they do this for a living, there are always ways you can include them in the upside,” Harris continues. “Give them a piece in whatever the upside is. All sorts of deals are made to enable contract manufacturers to be part of the upside of whatever they’re making.”

One partway step that demonstrates commitment by a customer is for emerging companies to invest with a manufacturing partner in getting specific output instead of doing the all-in of building a dedicated plant.

“There’s a lot more middle ground than people realize,” Grogg says. “You could buy the tooling for your production, or put in a specific piece of equipment. So you could spend $1 million on your own facility or $50,000 to $100,000 for a co-manufacturer to be a partner with you. You just need to have the right conversation.”

Be diligent at the factory. It’s one thing to hire a co-man to make products, but growing brands bear the ultimate responsibility, in a variety of respects, to make sure they come out right.

“Many co-packers would like you to pay them and go away, but as steward of the business, you need to make sure you’re getting the best from the co-packer,” Harris says. “Negotiating that is going to be very important.”

For example, there’s the crucial matter of oversight. “It can be a very delicate subject,” especially with the many emerging brands whose very proposition is based on being “free from” various allergens that easily can be introduced by a co-manufacturer, especially one that handles a variety of clients, says Harris, who was chairman of Enjoy Life Foods, a pioneering allergen-free brand that was acquired by Mondelēz International in 2015.

Consider going on your own. Some startups begin their own manufacturing around their tabletop, graduate to a commercial or ghost kitchen, and then exit into a plant they’ve built for themselves. Other emerging brands face the decision of doing their own manufacturing later in their growth.

"Ninety-nine point nine percent of all products that have been developed can be run in a facility that exists today with at most one extra piece of equipment and with some tweaks."

“Ninety-nine point nine percent of all products that have been developed can be run in a facility that exists today with at most one extra piece of equipment and with some tweaks,” says Valenti-Jordan. “Even the high-moisture meat analogues that people are going after these days just require running an extruder in a suboptimal format.”

In any event, this decision presents a major turning point. “The speed at which you exit contract manufacturing is directly related to the complexity of the development of your product,” Harris says. “If you’re producing a simple product, there probably isn’t a whole lot of upside in trying to make it yourself. But if you’ve gotten initially high quality from a co-manufacturer but at some point, you’re not getting satisfaction anymore, then you need to think seriously about taking [manufacturing] under your own recognizance.”

Still, notes Grogg, “It can be fundamentally difficult to figure out how to build something efficient enough to be able to charge reasonable prices while not overbuilding so you have empty capacity, and not get eaten up by utilizing only 20% of the plant. It’s a tough needle to thread.”