Considerations Before Starting
A Small Food-Processing Business

Individuals who are interested in introducing a processed food product into the market place should be aware of several considerations. This publication addresses some of the problems typically encountered by home-based businesses that process food items to be sold to the general public.

Objectivity

Many people fall into the trap of being too close to the product to evaluate objectively its need or value. "Grandma's secret recipe for pickled peaches" may be the best thing since sliced bread, but family and friends will not always tell the truth in these matters.

If possible, it is best to get opinions from people who are not closely associated with you or the product you are developing. Restauranteurs, caterers, and grocery or specialty food store managers are better able to evaluate a proposed food product.

Market Niche

Is the product new and different, or is it just one more salsa, salad dressing, or jelly to fight for market share among the hundreds of similar products already cluttering the food store shelf? A good question to ask yourself is, "Do I want a hobby, or do I want to make money?" It is very difficult to introduce a new product into the market place. In many instances, it would be better to take the money required to start such a business and invest it in a certificate of deposit.

Another question is, "What market should I attempt to enter?" Grocery stores, institutional food services, or specialty shops are three separate and different markets.

Grocery Stores. Grocery store markets are probably the hardest to enter. They are highly competitive and require high volume sales items with low margins. Shelf space in grocery stores commands a premium, and most grocery stores require a "slotting fee" to place a product on their shelf space. The slotting fee can be quite expensive, depending on location of the product on the shelf and location within the store. More importantly, the slotting fee is not refundable! Furthermore, slotting fees do not guarantee that the product will remain in the store. If the product does not sell quickly, it will be replaced by some other product that does sell.

Another obstacle in the grocery market is competition with nationally branded products. Large, national food companies have economic advantages that make it almost impossible for small companies to compete with them.

Institutional Food Service. The institutional food service market is somewhat easier to penetrate than grocery stores. This market mainly consists of restaurants, schools, factories, and hospitals and is serviced by large food distribution companies. Normally, food products used by this market are packaged in larger containers than would be purchased for household use. However, there are several advantages to this market channel:

• Restaurant managers and food brokers can actually help introduce a new food product to food distribution companies.
• Packaging is generally less costly on a per unit basis than in other markets.
• Brand identification is not a major concern with most products.

Specialty Shops. Specialty or gourmet food stores may have less market entry barriers for the small food processor than any other food market outlet. Uniqueness or novelty of the product and/or packaging becomes more important in this market. Although packaging is important in the specialty market, it is the quality of the food product that creates repeat purchases.

The majority of food products sold through specialty shops in Mississippi are purchased through one-on-one negotiations with the shop's owner or manager. The food processor or broker will make direct contact with the shops management regarding the food product.

The specialty market generally is not high volume but relies more on the perception of a high quality product at higher prices. Consumers of specialty foods look for food items not only for personal consumption but also as gift items and will pay premium prices to get them.

Liability

The home kitchen is not an approved food-processing facility. Food products processed for sale to the public must be processed in a facility that is inspected and approved by the proper health agency.

Food products sold to the public must adhere to specific regulations to ensure safety to the consumer. All processed foods must follow the "Good Manufacturing Practices" set forth by The Food and Drug Administration (FDA).

Product liability insurance is a must for anyone engaged in the business of processing food products for sale to the public. Consumer complaints or lawsuits resulting from problems with the end product will ultimately be traced back to the manufacturer for reparation.

Product Form

Will the product be liquid, solid, semi-solid, or powdered? The form of the end product will affect both the packaging required and the equipment needed for processing. Also, will the product be shelf stable, or will it require refrigeration after processing? These are critical questions that must be answered before a market strategy can be developed.

Additional Information

This publication has briefly covered several topics for consideration by potential food product processors. If you are interested in starting a food processing business, you need to consider many other factors before you make a decision.

The Food and Fiber Center, a department within the Cooperative Extension Service at Mississippi State University, has prepared a document to address the needs for starting a food-processing business. The document is easy to follow and understand. It is designed to help a person make the right decisions when considering food processing as a business. For a copy of this document, contact your county Extension office, or call Dr. Ken Hood, Economist, Food and Fiber Center, Cooperative Extension Service, at (601) 325-2160. Ask for "Exploring the Potential for New Food Products."

By Dr. Kenneth W. Hood, Extension Economist

Information Sheet 1554
Extension Service of Mississippi State University, cooperating with U.S. Department of Agriculture. Published in furtherance of Acts of Congress, May 8 and June 30, 1914. Ronald A. Brown, Director

Copyright by Mississippi State University. All rights reserved.

This document may be copied and distributed for nonprofit educational purposes provided that credit is given to the Mississippi State University Extension Service.

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