Local Can Mean Manufacturing, Too

Dec. 2, 2014
An uptick of start-up food companies is occurring to serve consumers' growing belief that small is beautiful.

Volume of less than 10 million lbs. a year puts Lacas Coffee Co. in the small-roaster category, but local sourcing trends have drawn much smaller operations into the business in recent years.

Large organizations tend to be risk averse, and consolidation and specialization have created some very large food and beverages companies, a situation that sometimes works against innovation.

But consumers have the final say in the kinds of products produced and sold, and they continue to seek out and buy the niche products that start-ups and small processors are happy to provide. Whether it’s the locavore movement, aversion to gluten or farm-to-fork visibility, people are gravitating to distinctive products produced by smaller firms.

Occasionally a large organization can crash the party. Rescreenings of “Blue Velvet” have made Pabst Blue Ribbon (PBR) the ironic beer of choice for hipsters everywhere. For the most part, though, nimble entrepreneurs are satisfying the demand for something different.

Distilled spirits are a case in point. Firms like Brown Forman and Diageo dominate the category, but excitement and sales growth is being generated by the so-called craft distilleries. Only about 60 small-volume, independently owned distillers operated nationwide a decade ago. Today’s count is closing in on 600, with hundreds more in the licensing pipeline.

Annual growth is in the 13-25 percent range, according to Pennfield Jensen, executive director of the American Craft Distillers Assn. (ACDA). It’s only a matter of time before some of these new businesses are popular enough to attract buyout offers from major corporations.

“Craft spirits appeal to a premium crowd, and that’s what makes it interesting,” says Jensen. “All the millennials want is authenticity, integrity and story,” and those characteristics don’t mix well with a large corporation’s image.

Many of the new spirits companies are funded by “legacy investment,” his term for family-owned firms preparing for generational succession. Often those firms are wineries interested in attracting more tourists. Distilling wine for cognac and other brandies is an effective way to draw more winery visitors, and repeal of Prohibition-era laws is facilitating distillery start-ups.

The state of Wisconsin repealed a law forbidding the distillation of wine in 2009. The following year, Philippe Coquard set up a still at his 27-acre Wollersheim Winery in Prairie du Sac. In August, construction began on a $4 million distillery as the firm expands into vodka, gin, whiskey and other styles.

“Wisconsites like their brandy and beer, and they are particularly attracted to beer and spirits made here in Wisconsin,” says Leah Anderson, Wollersheim’s public relations director. “It’s the next localvore movement. We focus on authenticity, made in our backyard with a lot of care.”

Only one licensed distillery operated in the state 20 years ago. Coquard predicts two dozen new craft distillers will be working within 10 years, creating a Great Lakes version of the Kentucky bourbon trail.

Craft spirits like Wollersheim's appeal to distributors and retailers who like the quality perception they bring to a price-driven product category. Trend setters are driving retail sales, drawn by “the bragging rights of being able to share quality with your friends,” suggests Jensen. “If you see a thought leader drinking a PBR, you’re going to buy PBR.”

Coffee 3.0

For the first six centuries of coffee cultivation, it was a Maxwell House world. That began to change in the U.S. in the 1960s, when the late Alfred Peet introduced Americans to the pleasures of specialty coffees.

Starbucks turned the specialty market into big business and oriented people to paying $5 for cup of joe. Today, Starbucks is “very second wave,” sniffs Jon Phillips of New York’s Dallis Bros. coffee, “but they’re making entrees into the third.” Specifically, the ubiquitous coffee purveyor has launched Reserve Roastery & Tasting Room, an under-the-radar Seattle experiment in single-origin, manually roasted coffee beans. A red "R" replaces the familiar green mermaid as the stores' logo.

The café’s connection to Starbucks isn’t obvious. “Within the third wave community, there’s suspicion that anyone from the second wave can also be third wave,” says Phillips, director of specialty coffee at the former Ozone Park coffee roaster, which recently relocated to Long Island City, N.Y.

“The real out-there stuff is not for everyone’s palate,” he adds, noting combinations of fruity notes and unusual combinations of bean types and roasting styles. It extends the concept of terroir — the French term for the impact of climate, soil and other factors on the outcome of an agricultural product — to include post-harvest processes.

Rob Johnson, master roaster at Lacas Coffee Co., watches as roasted beans are discharged for cooling. Small start-ups are challenging Lacas in the specialty coffee segment.

“'Local' is everything in today’s market,” adds Jonathan Del Re, owner of Lacas Coffee Co., a Philadelphia area coffee roaster that acquired Dallis Bros. last year. New York is little more than an hour away by train from Lacas’ Pennsauken, N.J., roasting facility, but it might as well be in another country as far as some of the Dallis Bros. customers are concerned. More than a few Dallis customers were lost when ownership and roasting activities shifted to Pennsauken.

“People are getting more finicky about their coffee,” says Rob Johnson, Lacas’ master roaster, with variations of the local brew-pub trend cropping up.  With annual volume of under 10 million lbs., Lacas is a midsized food company that is under pressure from micro roasters. Somewhere in Brooklyn, a hipster is roasting less than 100 lbs. of beans a year and finding a receptive audience.

“We have hundreds of artisan coffee roasting companies, literally with people roasting in their garages,” Phillips confirms. “It sounds kind of hipsterish, but it’s making the roaster more of a craftsman or artisan who works with the bean.”

The parallels among distilled spirits, coffee’s third wave and craft beer are striking. The number of brewpubs, microbreweries and regional craft breweries recently topped 3,200, reports Bart Watson, staff economist at Boulder, Colo.-based Brewers Assn. Twenty years ago, there were 600. The number of start-ups this year has reached an unprecedented rate of 1.5 per day, with another 1,000 firms waiting in the wings with licenses issued by the federal Alcohol and Tobacco Tax and Trade Bureau.

While mainstream beers continue their sales slide, craft brewers have seen sales grow to $14.3 billion, or 7.8 percent market share, up from 2.7 percent in 2003.

“The people getting into it now are slightly more sophisticated than the early craft brewers, including more research in developing their business model,” Watson says. They are brewing a broader spectrum of beer styles in an effort to stand out from the crowd, with new yeast strains, barrel aging and different hop varietals being incorporated in their recipes.

Market saturation is becoming a concern, and both Watson and ACSA’s Jensen cite regulatory barriers and capital costs as barriers to entry. “A $500,000 capitalization in a start-up is kind of a minimum to be a viable business,” Watson suggests. Considering a McDonald’s franchisee is required to have cash liquidity of $750,000, that seems modest for a food processor.

It’s small change for $1 billion-plus food companies. However, just as Anheuser-Busch has been wounded by a thousand arrows from craft breweries, other major companies are nervously watching shifts in consumer preferences and the emergence of new competitors who cater to shifting consumer preferences.
“We’re going to see more and more localized food, and the prices are going to go up,” predicts Jensen.

Market fragmentation and product polarization is worrisome for mainstream companies that must increase share to grow. For the thousands of entrepreneurs jumping into the food industry, small is a beautiful opportunity.

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