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Home-Based & Micro Businesses in Mississippi - FAQ 12

How do I go about producing and selling a specialty food product made from a family recipe?

PROCESSING

For small businesses, product development (usually experimentation) of most food products takes place in the home kitchen. Production is limited. Perhaps the most difficult decision to make is the one that forces you to take the plunge into commercial production of a product. For food items, this means a whole new set of problems must be considered. Two major obstacles to overcome include complying with regulations and providing for consumption a safe and desirable product that can be "mass produced." It seems logical that if all regulations are met, the latter takes care of itself. This isn't always the case. You must consider other factors that affect the acceptability of the product from a consumer's viewpoint.

For many, the initial bottleneck that forces the decision to "go commercial" occurs when you reach the limits of the home kitchen. In most cases, approval by regulatory agencies to manufacture a food product in a home kitchen will not be granted, which means whatever you were doing, you probably should not have been doing anyway. Notice the "in most cases," because there have been exceptions in situations where compliance with regulations can be achieved in a home environment.

One way to deal with the problem of expansion without investing a lot of money is to enter into a contractual agreement with an existing processor, i.e., someone who will process your product to your specifications, package and label it with your company logo, and, in some cases, also distribute the product to regional and/or national markets. This alternative eliminates many of the headaches of complying with regulations and allows some flexibility to test the water before diving in head first. This might be a less expensive way of expanding, since no investments in facilities and equipment are necessary on your part. On the other hand, some of the control for maintaining the desired product quality and day-to-day management will be taken out of your hands.

If the decision is made to "do it yourself," you need to develop a step-by-step description (process-flow diagram) of the production process so you can adequately describe and explain each step in processing your product. In developing this flow diagram, it will be necessary to answer certain questions, including the following:

• How will raw materials (ingredients) be delivered? In what form? Size?

• How will ingredients be stored? Frozen? Refrigerated? Dried?

• What must be done to ingredients before use? Measure? Clean? Thaw? Weigh?

• How much time is necessary for preparation? Cooking? Cooling? Packaging?

• How will finished product be handled and store? Frozen? Refrigerated?

This exercise will force you to think through the amount of work and storage space needed. It will also help you determine the type and size of machinery and equipment needed for your operation and what your labor requirements will be. This information will prove essential as you estimate the size of facility needed and the dollars required to start up your production.

Processing Regulations

Two regulatory agencies that oversee processing food products on the federal level are the Food and Drug Administration (FDA) and the United States Department of Agriculture (USDA). As a general rule, if your product contains more than 3 percent raw meat or poultry, the processing of that product falls under USDA regulations; otherwise, it falls under FDA regulations.

The regulations governing "good manufacturing practices" are published by the Office of the Federal Register, along with hundreds of pages of information specific to problems you may never encounter. You will need to read "Current Good Manufacturing Practice in Manufacturing, Packing, or Holding Human Food," Part 110 of the Code of Federal Regulations.

The local agencies to advise you on the things necessary to comply with the various regulations include the Meat Inspection Division of the Mississippi Department of Agriculture and Commerce (MDAC) for USDA regulations and the Mississippi State Board of Health for FDA regulations. You should contact the director, Meat Inspection Division at MDAC (601/359-1191) or the supervising environmentalist for your district. The food technologist at the Food and Fiber Center (662/325-2160) at Mississippi State University can also advise you on preliminary requirements to comply with USDA and/or FDA regulations.

Product Recall Plan

From time to time a food processor may need to remove one of its products from the market. The vast majority of recalls are voluntary. Whether or not the problem is minor or life threatening, good advance planning is the key to resolving it thoroughly and quickly.

The Food and Drug Administration's guidelines, policies, and procedures for recalls can be found in Title 21, Part 7 of the Code of Federal Regulations. A food technologist with the Food and Fiber Center can provide you with a copy of the regulations and more specific details on a recall plan.

Recalls are usually initiated as a result of consumer or customer complaints. It is essential that every legitimate consumer and/or customer complaint is documented and investigated thoroughly. Sometimes a product problem is identified before the product leaves the process; it should be documented and investigated the same way.

In order to recall a product, the processor must be able to identify the product involved and determine the distribution of that product. A code-dating system needs to be part of the company's policy. Print production date code on all finished product packages and/or cases. This code can identify the production date, shift, or hour of production/and/or lot or batch number, and production facility. Each processor may devise its own variation of coding. It is important that a meaningful product coding be established and a record-keeping system be adopted so individual lots of the product can be traced from the processing facility to the end user. Use the code date on all quality control records, production reports, and shipping forms.

Examples of code dating:

• Julian Date Code - 2316A
  
  • 231 represents the day of the year
    
  • 6 represents the year 1996
    
  • A represents hour period or production batch

• Gregorian Date Code
  
  • June 5, 1996A or 6/6/96A
    
  • Date is self-explanatory
    
  • A represents hour or production batch

All products produced should be recorded on a daily production log, identifying the product produced, total number of cases produced, and case size. This information is linked to invoices of shipped product, bill of lading, and inventories.

If a legitimate customer complaint is received or if the company has found a problem, a recall can be initiated more easily with the use of the described coding systems. If a recall is necessary, the product can be identified, accounted for in inventory, put on hold, and tracked to the customer until all products are accounted for and located. Arrangements should then be made to get products returned to the processing facility.

Safety, Shelf Life, and Sensibility

Food safety has received much attention in recent years. As new products and technologies are developed and consumers become more and more knowledgeable about food additives and treatments such as irradiation, food safety will become even more important. Most food safety issues can be handled easily if the manufacturer uses the proper manufacturing procedures and exercises common sense. Tamper-resistant closures might or might not be necessary, for example. Even food-borne diseases are minimized by proper handling and care during the manufacturing process.

It is important that the product maintain its appearance, texture, and taste beyond the date on the package (if applicable). This is usually referred to as "shelf life" and is viewed by the consumer as the "fresh through" date. Once that date passes, the product is viewed as "old, stale, or deteriorated in quality." To ensure that the useful life of the product is as long as possible, you should have the product tested by a food scientist (technologist) to determine the pH of the product for durability and to detect any changes in texture, appearance, taste, or smell over time. If anything goes wrong with the product, you probably will not hear it from the consumer, but they might tell everyone else!

Additives

Additives might be an unpleasant thought to you, but they do serve an important role in many products. Most additives can be used at little or no expense to the "natural" effect you may be trying to maintain. Additives can function as softeners, hardeners, thickeners, thinners, flavor enhancers, stabilizers, nutritive supplements, color enhancers, sweeteners, and/or preservatives. One or many may be used in any one product. In relation to shelf life of your particular product, a determination must be made concerning additives. It is acceptable to go "all natural," but doing so, however, may impose some restrictions on marketing because of the length of time the product maintains acceptable characteristics.

PACKAGING

Image

Once you are reasonably sure the product can be efficiently manufactured, resulting in a safe, quality product that meets a consumer need, the next step is to build an image for the product. Packaging is your eye-to-eye salesman in the store. If the package cannot sell that first unit, you're in trouble. It is important for your product to be the one product on the store aisle that screams out to the consumer, try me! With several, perhaps dozens, of competitive products with yours on the shelf, the package must dominate the consumer's attention in some way.

As a test, walk down the store aisle where your product's competitors are or where your product will likely end up if you're able to get it into the store. What do you see? Look at the shapes of the packages, the colors used, the logos on the labels, the size of the packages, and the location (low or high on the shelf). Which one would you buy? Why? Hundreds of consumers are going to be making these same observations about your product, and they are going to do it in a fraction of a second! The image you create for your product is extremely important to the success of your company.

Labeling

In packaging, too, there are regulations, and one of these is in labeling. The wording on labels must conform to regulations defining type size, listing ingredients, and positioning of prominent information (e.g., Net Weight).

Guidelines for minimum labeling requirements are established. The laws that govern package labeling, however, are complex, confusing, and subject to change; it is always best to have labels reviewed by a professional before incurring expenses for labels.

1. The label must have the common and usual name of the food (e.g., blueberry jelly, French onion dip). If there is no common or usual name, the food must be appropriately described (e.g., sunflower seed soup).

2. Ingredients must be listed by common and usual name in descending order of predominance by weight. Standardized ingredients must be listed. For example, if catsup was used in the formulation, it would be listed in the appropriate order in the ingredient statement, followed by its ingredients in parenthesis.

3. The label must state the name and place of business of the manufacturer, packer, or distributor. If the firm's name and address are listed in a current city or telephone directory, the place of business does not have to include a street address or box number but must include the ZIP code (e.g., Oktibbeha County Processors, Starkville, MS 39759).

4. The quantity of the contents must be conspicuously stated in the lower third of the primary display panel of the label. Type size must be easy to read and established in relation to the size of the principal display panel. The line of type must be generally parallel to the package base and should be no less than 1/16 of an inch high.

5. If the product is filled into the container by weight, net weight is stated and must also be declared in metric measure, e.g., 12 oz (340.2 g).

6. If the product is filled into the container by fluid ounces, fluid ounces must be stated and must also be declared in metric measure, e.g., 12 fl oz (335 ml).

Nutritional labeling requirements changed in 1993. "Nutrition Facts" must now be printed on most food products. Some food manufacturers are exempt under the small business exemption amendment. For food products introduced into interstate commerce, an exemption may be claimed if the manufacturer employed fewer than an average of 100 full-time employees and sold fewer than 100,000 units of the product in the United States during the 12-month period before the time for which an exemption is claimed (or if not previously sold, anticipates meeting these criteria during the period). If these criteria are ever exceeded, the small business exemption expires 18 months later.

Small domestic manufacturers with fewer than 10 full-time employee equivalents and fewer than 10,000 units of any food product sold annually are exempt from the nutritional labeling regulations and the notification requirement.

A food manufacturer claiming exemption generally must notify the office of Food Labeling (HFS-150), Center for Food Safety and Applied Nutrition, Food and Drug Administration, 200 C Street, SW, Washington, D.C. 20204. You may contact the Food and Fiber Center at Mississippi State for a copy of the exemption notice form.

For products regulated by the USDA, different regulations apply to labeling and inspection. The food technologist at the Food and Fiber Center will be glad to provide this information for you.

If your food product is not exempt and requires a "Nutrition Facts" panel, there are a number of laboratories that perform nutritional analyses.

The food technologist at the Food and Fiber Center can critique your label design to determine compliance with FDA regulations. Hundreds of companies specialize in designing and printing labels. You may need several discussions before you finalize your label, so it is important you select professionals for your label design and printing.

Patents and Trademarks

The question of trademarks and patents always comes up when there are discussions about packaging. As a general rule, there is no valid reason to try to protect a food recipe, since any food scientist or chemist can duplicate one with accuracy in a limited time and only slight changes are necessary to create a different product. (If you have the Coke Classic TM recipe, that's a different story!) Trademarks are a good idea because you have no idea at the beginning how much of an impact your product will have on the marketplace, and you do not want to get tied up fighting someone over a product name or design while sales are increasing rapidly. Be aware, though, that trademarks protect the name or symbols (logos) only. This prevents someone from using an identical or similar name or symbol that causes confusion between the products in question. General information on patents and trademarks is available from the U.S. Patent and Trademark Office in Washington DC. A hotline number to call to request this information is 800/786-9199.

Bar Coding (UPC)

The Universal Product Code (UPC) has become a must on the label because most check-out counters now use the scanning machinery. This is especially true if you are considering grocery chains as a target market. Call the Uniform Code Council in Dayton, Ohio, at 937/435-3870 to request a brochure and application for the UPC symbol, or you may contact the Food and Fiber Center for this information.

Case Counts

Another consideration in packaging is case packs. People forget that grocery chains and distributors do not buy products the same way as do individual consumers. Stores/distributors purchase by the case, which consists of individual packages in a larger container. The case (shipper) should be designed to protect the product (and unit packages) from damage from the point of manufacture to the point of display at retail or to the point of use by the consumer. The number of packages in a case is referred to as units per case or 12 ct. (count) 24 ct., etc. Some larger companies use the case container as another advertising medium and print the company logo on it, which is a good idea if it is economical. For many smaller companies this isn't feasible nor is it necessary. It is necessary to recognize the shipper as an additional cost item.

PRICING

Gross Margins and Markups

A frequently asked question by those investigating the possibilities of a new business startup includes "how do I price my product to make sure I'm making a good profit?" Of course, even a question of this type raises additional questions such as, "What is meant by a 'good' profit?" Can the product even be sold at a price that results in profit? Once some consideration has been given to costs and prices of competing products, the question of price necessarily must be addressed.

You should analyze your product costs in detail to determine pricing that is acceptable to the consumer while providing a reasonable profit to you. Some additional study on your own may be necessary if terms such as profit, gross margin, and markup seem unusually strange to you. With the following examples you should gain some understanding of how these concepts work together in a business environment. The old adage "buy low, sell high" still holds. The question to address is "how high?"

There is more than a little confusion about the issue of profit and the impact that product pricing has on profit. If you have more than one product, each product in the company's product mix should be treated as a "profit center," (i.e., calculate its contribution toward covering operating costs and determine its value in the mix of products. )

Selling Price Determination

The essence of this discussion is not to define gross margin and markup, but to help determine what the selling price of the product should be to return a certain percent gross margin. Gross margin is sometimes called "gross profit" and is defined in dollar terms as:
Sales in $-Cost of goods sold in $, where cost of goods sold includes those costs that vary with the number of units of product sold. This includes ingredients, direct labor, packaging, and other variable costs. Fixed costs, those that you have to pay whether or not you manufacture a product, are categorized as overhead costs. These costs include, among others, depreciation, insurance, rent, taxes, and interest. Remember --- The gross margin is the amount available to pay fixed costs and return a profit.

The formula for calculating selling price requires that costs be known and a desired gross margin percentage can be identified.

As an example, for a desired gross margin of 40 percent and cost of goods sold of $1.50, the formula would be:

Profits and Breakeven Analysis

One of the most pressing issues in considering whether or not to add a product to an existing line (or to begin manufacture of a new product) is how to determine if that product will be profitable. A satisfactory solution is at best a complex process, but there is a simplified method used to eliminate some product alternatives or to select others for further consideration. This method is called a "break-even analysis."

Defined in its simplest form, the break-even point at which sales (revenues) are exactly equal to costs (expenses). At this point, zero profit is made and zero losses are incurred. Even this approach is extremely helpful in that the number of units of a product or the dollar amount of sales necessary to cover all costs is determined. This makes it possible to determine how much of a product you'll have to sell in order to cover your costs.

The basic equation used for determining the break-even point is:

Since profit is defined as zero at the break-even point, sales must, by definition, be equal to total expenses. For example, let X represent the number of units to be sold to break even (zero profit). Suppose further, that the cost per unit of X is $.35, the selling price per unit is $.75, and there is a fixed cost of $100 to manufacture product X. How many units of X must be sold to break even? Going back to the equation and listing the known values results in:

In this case, 250 units of X must be sold to cover all costs. In dollar terms, the break-even point is $187.50 in sales of product X (250 units @$.75 per unit).

Using the same example, suppose a profit of 20 percent of sales is wanted. What effect would this have on the break-even volume? Since profit is defined as a percentage of sales, the initial equation changes to include the profit calculation:

Where .20(75X) is the profit term, since profit is defined as 20 percent of sales (.75 per unit times the number of units). The equation then becomes:

To cover all costs associated with Product X and to make a 20 percent profit on sales, 400 units must be sold. Total sales volume in dollars in this case will now be 300.

STATE REGULATIONS

The state of Mississippi has regulations governing food service sanitation for the purpose of protecting the public health. What does this mean? It means that anyone offering food to the public for sale or otherwise must be in compliance with these regulations.

Surprising to many this includes baked items such as cakes, pies, cookies, fried pies; short order items such as sausage and biscuits, hamburgers; food prepared by caterers; prepared food sold at garden produce stands; and other regularly prepared food items, just to name a few. Contact your local environmentalist listed below for complete information.

In most cases, approval in Mississippi to manufacture a food product in a home kitchen will not be granted. Notice the "in most cases," because there have been exceptions in situations where compliance with regulations can be achieved in a home environment.

The first step is to call the local environmentalist and discuss your plans. The environmentalist will help you by providing information and guidelines of everything that must be done before you can apply for a food service permit. There is a fee for a food service permit based on a food risk sliding fee scale (range is between $35 - $125).

The following is a list of the state of Mississippi public health districts and supervising environmentalists:

• District I --- Coahoma, Desoto, Grenada, Panola, Quitman, Tallahatchie, Tate, Tunica, Yalobusha

  Contact ---
  Roger Whittington
  240 Tower Drive
  Batesville, MS 38606
  Phone: 662-563-5603

• District II --- Alcorn, Benton, Itawamba, Lafayette, Lee, Marshall, Pontotoc, Prentiss, Tippah, Tishomingo, Union

  Contact ---
  Jesse Shields
  532 S. Church
  P.O. Box 199
  Tupelo, MS 38802
  Phone: 662-841-9015

• District III --- Attala, Bolivar, Carroll, Holmes, Humphreys, Leflore, Montgomery, Sunflower, Washington

  Contact ---
  Edward Course
  701 Yalobusha Street
  Greenwood, MS 38930
  Phone: 662-453-4563

• District IV --- Calhoun, Chickasaw, Choctaw, Clay, Lowndes, Monroe, Noxubee, Oktibbeha, Webster, Winston

  Contact ---
  Susan Howell
  732 Whitfield Street
  Starkville, MS 39759
  Phone: 662-323-7313

• District V --- Claiborne, Copiah, Hinds, Issaquena, Madison, Rankin, Sharkey, Simpson, Warren, Yazoo

  Contact ---
  Homer Smith
  5963 1-55N
  P.O. Box 1700
  Jackson, MS 39215
  Phone: 601-987-7864

• District VI --- Clarke, Jasper, Kemper, Lauderdale, Leake, Neshoba, Newton, Scott, Smith

  Contact ---
  Charlie Busler
  3128 Eighth Street
  Meridian, MS 39301
  Phone: 601-482-3171

• District VII --- Adams, Amite, Franklin, Jefferson, Lawrence, Lincoln, Pike, Walthall, Wilkinson

  Contact ---
  Bruce Rawls
  205 N. Front Street
  McComb, MS 39648
  Phone: 601-684-9411

• District VIII --- Covington, Forrest, Greene, Jefferson Davis, Jones, Lamar, Marion, Perry, Wayne

  Contact ---
  Joe Hasty
  602 Adeline Street
  Hattiesburg, MS 39401
  Phone: 601-544-6766

• District IX --- George, Hancock, Harrison, Jackson, Pearl River, Stone

  Contact ---
  Pansy Maddox
  15151 Community Road
  Gulfport, MS 39505
  Phone: 228-831-5151

CONCLUSION

Now that you know a little more about what you're in for, what are you going to do? If you've decided to abandon the whole project, that is understandable. Maybe your next idea will be a better one for you. If you decide to continue, contact the Extension Food and Fiber Center, who will provide assistance to help you toward a successful food related business project.

Source of Information:
Mississippi State University Extension Service - Food and Fiber Center