Wednesday, October 29, 2008

Supply Side Memo: Current Credit Crunch and Financial Crisis Beginning to Have Negative Impact on Smaller Specialty and Natural Foods Companies

The current credit crunch and financial crisis in the U.S. is starting to have a negative impact on smaller specialty foods manufacturing companies, particularly those who had embarked on growing their product lines and distribution prior to the crisis emerging so strongly in September to the present.

Yesterday's San Francisco Chronicle profiles one such specialty foods company in a credit jam, Napa, California-based The Perfect Pear, which produces and markets homemade specialty pear sauces, oils, marinades and jams.

The Napa specialty foods company was founded in 2003 by former corporate marketing executive Susan Knapp, who left her corporate job to live her dream, to become a specialty foods industry entrepreneur.

Today The Perfect Pair produces 19 different pear-based specialty foods products and has annual sales of $700,000.

Not bad for a self-funded,start-up niche specialty foods company that's not yet five years old.

But that's the good news.

The not so good news is that Susan Knapp needs $200,000 right now to fill current orders from customers like Whole Foods Market, Inc. and others, as well as to meet the increased demand from retail customers for her products, she tells the San Francisco Chronicle staff writer Julian Guthrie in the story.

Normally that wouldn't be a big problem for the specialty foods industry entrepreneur, since her company has good credit, she has fairly strong sales, and has an existing retail customer base, along with new customers wanting to buy her pear-based specialty products.

But because of the frozen credit markets Susan Knapp has been unable to obtain a working capital loan. In order to hold on, she is using her credit cards, asking friends and associates for loans or to invest in the company and searching out private investors who if the deal is right she is willing to sell a stake of her self-funded specialty foods company to in return for working capital so she can fulfill her orders. Investors in small companies like hers are very hard to find in good times let alone now though.

Read the story, "Successful pear products firm in a credit jam," from yesterday's San Francisco Chronicle here.

Susan Knapp's specialty foods company is far from alone in experiencing the freeze in the credit markets, even for short-term, working capital loans. In recent weeks we've spoken to a number of smaller, entrepreneurial specialty, natural and artisan foods manufacturing companies facing the same issue.

Most of these companies are doing well. They just need short-term loans to produce inventory. In most of the cases we've come into contact with there are orders from distributors and retail customers for this to be produced inventory. It's cash flow that's lacking. And crdit is tight.

Unlike larger manufacturing companies, these entrepreneurial specialty companies don't have the sales or cash flow to always fund production. This is expecially true if they get a new customer like a Whole Foods Market, Inc., who's initial order of such a product for all of its U.S. stores can easilty be 400 -to- 1,000 cases. or more Most of these smaller firms don't keep that much extra inventory on hand since doing so isn't financially prudent.

Another difficulty is in the current poor economic climate distributors and retailers often hold back their payables a bit longer than normal. Going say just an extra 30 days without being paid by a couple major customers can play havock on the cash flow of these smaller specialty producers.

Another problem many smaller specialty, natural and artisan foods manufacturers have is they may not have noticed the coming economic downturn like bigger companies did. Therefore they didn't cut expenses or make other preparations soon enough. Of course in the case of the current credit crisis, not even the largest U.S. banks and corporations, let alone the Bush Administration and Congress, appeared to have had any idea it was on the way. And despite the $700 billion taxpayer bailout of financial institutions we have yet to see any thawing in the credit markets.

Unfortunately for these smaller, entrepreneurial companies the current credit crisis is just the tip of the iceberg. Most U.S. economists believe the country has now fallen into recession, and that things are going to get far worse before they turn around.

As a result, for smaller specialty foods companies this not only means a continued period of frozen credit markets. It also means the possibillity of decreased sales to retail customers because the demand for more expensive specialty and natural products is decreasing. There is across the board evidence of this, as consumers are trading down to lessor-quality, cheaper food and grocery products -- and shopping more at discount rather than natural and specialty stores -- in significant numbers all across America.

This means less sales, cash flow and resources for these smaller specialty foods companies. It also means those who are going to survive need to look at their operations from stem to stern and cut costs whereever they can -- from procurement and production to administrative and operations.

This week's Newsweek magazine has an informative article suggesting small businesses of all kinds need to do just that now -- to shift into cost-cutting mode.

Read the Newsweek article, "Shifting into Cost-Cutting Mode," here.

Now is the time for smaller specialty, natural and artisinal food companies to cut costs. The longer and deeper into a recession it gets the harder it becomes to realize proper savings. And to survive.

Below are a few suggestions we have for smaller specialty companies looking to and needing to cut costs now:

>If you use a co-packer sit down with him or her and talk costs. Also talk to one or two competing co-packers and find out what they would charge you compared to what you currently are paying. There is usually money to be saved by doing this exercise.

>Cut any extra administrative costs to the bone. Do you really need those two company vehicles? Can you pay yourself a smaller salary for a while? What are you paying for office supplies? Probably too much. Lastly, can you afford the current number of employees you have working for you?

>Cut back on travel. Do you really need to attend the number of food shows you have been? Coudn't you cut back to two or three key shows and still be fine? Do you really need to travel to the number of customer calls out of the region you have been? Can you cut back on this expense -- air fair, hotels, meals when on the road -- a bit in order to save big dollars without hurting sales.

>Look at packaging. Packaging is one of the biggest money wasters smaller specialty companies neglect. Talk with your suppliers. Get estimates from competitors. Could you save by say going from glass to plastic, for example. Maybe you should reduce the size of your package from say 16oz to 14oz so you can make a bit better margin per unit of sale. Notice how the traditional gallon of bleach is now a few ounces less than an actual gallon? That's because Clorox and the other big guys have reduced package sizes in order to gain a few extra pennies per unit in gross margin. It's the same with various food products from numerous major manufacturers. They've been reducing package sizes by small increments since last year.

These are just a few examples of places smaller specialty, natural and artisan food companies can look to cut costs.

Generally speaking, cost-cutting isn't going to solve the need for cash that Susan Knapp and her The Perfect Pear has, although cutting costs to the bone without harming sales is the first thing she needs to do if she hasn't already done so.

However, we've never seen one smaller-size (under $10 million in annual sales say) specialty or natural foods company that couldn't cut costs, be it cutting back on excess travel, trimming administrative costs, doing better with marketing and sales, shopping around for better deals on co-packers and packaging, and other key operational, production and related expenses.

It's also important that along with cutting costs right now these companies make sure they are collecting receivables on time. There is a time-honored practice by some customers to hold their accounts payable for as long as possible in recessionary times. Even an extra week can be negative to the cash flow of a smaller specialty foods company.

Therefore, keep on top of receivables. Also, if things get real bad check into factoring companies. These companies will advance you cash on your unpaid customer receivables, taking a percentage cut of course, which in the case of seriously outstanding accounts can mean the difference between surviving and folding up the tent in terms of needed cash flow.

Now is the time for smaller specialty and natural foods manufacturing and marketing companies to take a comprehensive, rational look at every aspect of production and operations. Doing so will allow you to whether the current recessionary storm.

Also such companies should be all over their Congressional representatives about the $700 billion bailout's not yet having even a minimal affect on thawing the credit markets. After all, its is small business, such as specialty and natural foods companies, that provide the majority of new jobs in America, as is said by both Presidential candidates multiple times a day on the campaign trail. These very same small businesses need access to the credit markets in order to create these jobs.

[Photo credit: Credit Crunch Cereal graphic courtesy: That's Federal Reserve Bank Chairman Ben Bernanke pictured on the front of the cereal box.]

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