Operating a food incubator
Interview with Pete Herman and Mike Schwartz by Jeff Yoskowitz, Kathryn Gordon and Jessie Riley
Name of business: BAO (Bad Ass Organics) and Organic Food Incubator
http://baofoodanddrink.com or http://organicfoodincubator.com
Kathryn: So you just gave us a great tour of this 12,000 square foot organic, Kosher facility; can you tell us how you got started?
Pete: My background is in investment banking and finance. A lot of my past work was in management and development of businesses around the world on behalf of banks. I was looking to do something more interesting, and had been in touch with Mike Brady (the third partner), who I went to high school with. We wanted to have a business that provided good jobs to people, and offer healthy products to consumers. A lot of my current work is business management, contract negotiation and some of the sales and marketing for the permanent clients and the daily use clients of the incubator.
Mike: Mike Brady and I went to college together, and he has an IT/ marketing background. About 3 years ago, Mike and I decided to start BAO. We wanted to make a healthy soda that was tasty and good for you, and after a number of experiments we realized we could get a consistent culture with kombucha. At the time, the market for kombucha was growing so fast we never went back to the sodas! We started in Hell’s Kitchen in an expensive, shared commissary-catering kitchen for the first year. We shared a small space (a third of a kitchen) with 2 other companies and our rent was $3000 a month plus utilities…we had to make a move.
Jeff: Mike, besides teaching with Kathryn and I at ICE, what is your background?
Mike Schwartz: I have a culinary degree and attended the CIA. I worked in restaurants for a long time and started teaching at ICE about 12 years ago as a career culinary instructor. A lot of my interests had to do with teaching nutrition at ICE. Talking to so many students, you realize how awful a lot of the food in the American food chain is. I figured I should put my money where my mouth is, and I should be making something healthy while also promoting other healthy eating oriented businesses through the incubator structure.
Jeff: How did you formalize how your partnership is set up?
Pete: We wrote an operating agreement that defines roles and responsibilities, and we structured as an LLC.
Jessie: Why did you choose this space?
Mike: Our prior landlord wanted to raise our rent and we had quickly outgrown our space, so we looked at over 30 spaces in Brooklyn, Bronx, Jersey City and Queens areas. This was the only space that was ready to go for our production and we were up and running in one and a half weeks. Once we installed some sinks and our kettle we looked around and the space was too big! We found some like-minded acquaintances that needed space and contacted them.
Kathryn: Do you help your incubator kitchen customers obtain their own organic certification?
Mike: There is a tremendous amount of paperwork required for organic certification. For example, a National Organic Plan (NOP) has to be developed and filed for each ingredient that you use – and you have to verify that your process is chemical-free. For our products, we use hydrogen peroxide here as our sanitizer because it oxidizes quickly and it’s naturally occurring. We had to learn all these rules because there was nobody to help us through the 230+ page organic statute. As a result, we can now help other businesses write their plans, and get through the inspection process here at the Organic Food Incubator.
Jeff: What were the major surprises you’ve encountered?
Mike: After working in restaurants for over 20 years, I had figured that food was food but working in a restaurant or hotel is not food manufacturing. The labeling alone is a learning curve – the nutritional labeling, the kosher certification, the types and costs of containers and everything else. Our bottles are fired in NJ because we wanted to have a green footprint but even locally, the material shipping costs are insane. The distribution process learning curve was also a surprise. Simple things like how to get your product onto a truck so a distributor would sell it to store, for example. To complicate matters, all of our products are refrigerated (because they are fermented and need to be temperature-controlled or they could explode).
Jessie: What kind of a margin does a distributor take?
Mike: It can be between 20-30 percent and the retailer marks it up an additional 30-40 percent before it reaches the consumer.
Pete: We put together a schematic to explain the process and mark-ups for an intern from the not-for-profit organization Opportunities for Tomorrow. If the farmer charges $1 for their ingredient cost, the final consumer cost at retail can be $4.50, with the product manufacturer and two distributors in between.
Jeff: Pete, what did you find surprising?
Pete: There are minimum orders for everything (bottles, labels). Most people also don’t appreciate the costs that add up in building out a kitchen with the required bathrooms, break rooms, security, sanitation, etc. to satisfy labor law.
Jeff: Are there trends that you’re seeing for the type of people interested in incubator kitchens?
Mike: Age-wise, I guess they tend to be young. Some were making products at home and selling (illegally) while others have come here with a great idea but are completely new to kitchens. We help them learn the ropes at whatever stage they’re in for their business.
Kathryn: How did your incubator kitchen customers find you?
Pete: We’re listed on a number of incubator websites such as the Cornell website and we were featured in the Daily News and the Wall Street Journal.
Jessie: How have you focused your marketing efforts for BAO?
Mike: We just used the internet. In retrospect, we could have done samplings and demos and we just have not, but need to build going forward. We don’t have a demo team, but a Long Island grocery store wants to pick us up, so we need a team to do product demonstrations in local stores. That investment is key for a small business to help get your product to customers. There are already a million products on grocery store shelves and you need yours to stand out.
Kathryn: What is the cost for the business to use your space?
Mike: To use the kitchen for a 7 hour shift, that price is currently $220 plus a per pallet cost in a walk-in refrigerator. To some extent, our clients are also making inter-client arrangements to rent each other’s equipment and help defray costs (such as sharing use of a blast freezer).
Jeff: The structure you have here for monthly incubator rental customers is very different than other incubator kitchens. You rent them raw space with plumbing hookups for their 3-part and hand sinks, and provide electric hookups and most bring their own equipment. How did this evolve?
Mike: It kind of worked out on its own. We have such a varied mix of companies and there are few who require ovens. We leave the space raw and it’s up to each company to bring in the equipment they require. Everyone shares the loading dock, and bathroom/break rooms as well as the walk-in refrigeration, if needed for that product.
Pete: Originally we thought we might have more shift kitchen usage, but we determined there was more of a demand for private kitchen usage on a monthly rental basis.
Kathryn: How big are the various spaces we saw on our tour?
Mike: They range from about 220 square feet to about 800.
Jeff: What are your long term plans for BAO, your own product line?
Mike: We’ve been focusing on getting the incubator kitchens built! But the brand has been building and sales have been growing, so I need to get back to that. We’ve been launching new products every 3-4 months.
Jeff: What are the long-term goals for the incubator?
Mike: We’ve talked to investors who like our incubator business model to either expand here or move to another city. There’s a strong culture around the US for locally produced foods which would imply that artisan, hand crafted food manufacturers need space – space that right now does not exist. We think our incubator model could be duplicated in other metropolitan areas. The per-shift kitchen model works up to 5 days a month, after that you want to be in your own space. It’s difficult to afford the right space that will pass inspection (FDA) as well as provide loading docks for bringing in materials or shipping out product, etc.
Jeff: What services do you provide for your customers at the incubator kitchen?
Pete: When a potential customer needs help with labeling, packaging, recipe development, licensing, etc. we will do some consulting to help them after they have a business plan and are ready for the next step. We’re working on a classroom to provide training on business management, sanitation, equipment use, and are developing a curriculum now. We can help set them up with an insurance company, obtain equipment, etc. because there are multiple new businesses here working together. Additionally, we can help companies bottle their product using our bottling line, operational procedures, etc. That kind of hand-holding is hard to find…
Furthermore, micro lender terms are very expensive for small businesses, and eligibility is based on personal credit scores. However, those loans can be used here to help get started on an initial packaging run, and we can help guide people to get started.
Mike: We’ve also been approached by companies who need us to be their co-packers and we don’t have the typical 5,000 production run requirement (we can do a test run of 100, for example). To be a co-packer customer, they have to have their own insurance, a license, (Cornell scheduled process for hot foods), and all their “ducks in a row.” There’s a lot of demand for that, so we think that business will expand.
Jeff: How did you fund your current set-up?
Mike: We started with friends and family, and we’re now “coming around,” three years in.
Jeff: What about the incubator kitchen customers, how are they financed?
Pete: A lot of the incubator customers are self-funded. Most have between 6-months and a few years of financing. Some of the smaller businesses have a goal to bring a test product to market and have a budget just enough for that. We don’t want people to over-commit for their own good, so I always talk to everyone in depth.
Jessie: What does a company need to be able to start-up here?
Mike: They just need a) license, b) insurance and c) to be able to make their stuff, or we’ll help them do that through sub-contracting out BAO employees. When we began, nobody would help us find 100 cases of bottles vs. truckloads full. We try to help people by providing what was not provided to us when we started up.
Jeff: Do you have any “words of wisdom” for our readers?
Pete: Start small, conserve capital and test your product. Get out there through the daily shared space to prove your concept. When demand grows and you know if your product is priced correctly, (through trial and error) you can obtain financing and grow.
Mike: You have to charge the end (retail) price when you start-up, even at farmer’s markets. Initially sell the product for the grocery store price, and when you do grow and have distributors to take your product to the retail customer base; your pricing model will work.