In-house Wholesale Business Supports Culinary Incubator

Vermont Food Venture Center Food Processing Case Study

Opened: 2011
Business Model: Non-profit; fee for service
Staff: 6 FT, 6 PT
Facility at a Glance:

• 15k sq. ft total
• 3 shared use kitchens (2400 sq ft, each)
• 6k sq. ft for 2 dedicated tenant spaces
• Dry, cold and frozen storage

Annual Revenue/Budget: coming soon!
Total Clients to Date: 36

Services: business incubation, training, technical assistance, local food processing and marketing, school activities, food insecurity programming, community events and rural development

The Vermont Food Venture Center (VFVC) is a program of the Center for an Agricultural Economy, whose mission is “to build a regenerative, locally based, healthy food system by engaging the greater Hardwick community through collaboration opportunities, educational outreach and providing infrastructure.” The program currently has XX participating businesses, primarily producing value-added products for the direct-to-consumer retail market. Of the 36 businesses that have at one time been clients of the VFVC, YY have graduated to their own production facility.

The Challenge

The Just Cut product line at the Vermont Food Venture Center (VFVC) was launched when facility staff realized that one of their internal challenges, low facility utilization, could be used to address one of the factors preventing greater use of local food in area institutions: namely that many had neither adequate storage space nor sufficient staff time to work with local produce in its original form. The 2012 NOFA and VT FEED report Scaling Up Vermont’s Local Food Production Distribution, and Marketing highlighted the barriers faced by Vermont institutional purchasers seeking to increase their local sourcing, as well as the gap between total sourcing and local sourcing of fruits, vegetables, and eggs grown commercially in Vermont. The opportunity thus identified was upwards of $11 million annually in 2012 from Vermont institutions alone, with 94% of institutional respondents projecting stable or increased demand in coming years (p16; p19).  

Constructed in 2011 with funding from a consortium of economic development agencies and private foundations, the VFVC was created as a “food incubator and business hub” designed to give “one of the most economically depressed corners of Vermont connections, encouragement and new jobs” (CAE Annual Report, 2010). Since construction, however, the 3 shared-use kitchens of the incubator had never achieved full utilization (see figure xx). Less than complete utilization means that many fixed or semi-fixed enterprise costs were being spread over fewer production hours, hampering the ability of the VFVC to cover its operating costs.

Recognizing that institutional purchasers typically operate on very thin margins, and that the capital costs to create a facility to dedicated to producing a lightly-processed product line were high enough that independent entrepreneurs were unlikely to seize the opportunity gap identified by the NOFA study, VFVC staff decided to pilot a lightly-processed product line. Goals identified at the time of the program’s launch, in late 2013, were to grow institutional demand for locally-sourced and -processed products, strengthen the ability of local farms to produce for and sell to the institutional market demonstrate enterprise viability, and, eventually, to hand the Just Cut product line off to an area farmer or other local entrepreneur.

**Images of product / labels **

Evolution of the Just Cut Product Line

Beginning in July 2013, with support from a USDA Rural Business Enterprise Grant, the VFVC began recruiting farmers, analyzing demand in local school kitchens, and assessing the feasibility of different products. Titled the “Farm to Copacker” program, the initiative enlisted 15 area farms and began trying out direct sales of a variety of products to 10 local schools, producing a total of 3,100 pounds of lightly-processed vegetables. To source produce for the program, VFVC partnered with UVM Extension to develop a guide for farmers interested in beginning to grow for wholesale markets. A joint outreach effort in early spring supported farms in crop planning based on projected demand and available storage, as well as providing assistance in developing farm-specific food safety plans.

Initially, the program experimented with a large variety of potential products. Products were assessed on both institutional demand and operational viability, a judgement that included reliable supply, processing efficiency, and shelf-life. Based on test batches, a number of products were dismissed as not operationally viable. Customer feedback helped narrow the focus for 2014 to xx products:

• Beets, sliced
• Beets, whole, peeled
• Potatoes, fry cut
• Carrots, sticks
• Carrots, shredded
• Carrots, ½” dice
• Broccoli, florets

2014 saw the creation of the Just Cut brand; a choice that intentionally de-emphasized VFVC’s role in favor of prominently displaying information about the farms from which produce was sourced. Sourcing increased to 46,000 pounds from 11 area farms, and sales grew to xx pounds of product to yy local institutions. Other important changes in 2014? Shift to “minimally processed” program rather than “Farm to Copacker” b/c VFVC decided to own product line, rather than process on contract for local farms.

After two years of experience and increasing sales, in 2015 VFVC wanted to assess the future direction of the Farm to Copacker program and the associated Just Cut product line. Kitchen Table Consultants, of Bala Cynwyd, PA, was contracted to conduct an opportunity assessment and develop potential business strategies. While recognizing the significant market opportunity, they pointed to a number of challenges, including high costs of production and the lack of mid and long-term growth goals. Neither of these came as a surprise to program staff, given the provenance of the Just Cut as an attempt to demonstrate the viability of a lightly-processed product line for institutional markets.

A variety of options were considered for the future of the product line, from handing it off to one of the participating farmers to run as an on-farm enterprise to persuading one of the distributors working with participating farms to take over the processing operation (as is currently done by other distributors). In the end, the operational complexity, low margins, and relatively low sales volume made taking on the production of Just Cut an unattractive proposition for other supply chain partners. Instead, the decision was made to keep production in-house in the otherwise under-utilized VFVC incubator kitchen space and focus on improving production efficiencies.

Among the challenges the Just Cut product line faced in 2015 was the ongoing tension between supporting area farms and managing costs. Sourcing arrangements had evolved from simple handshake transactions to written good faith agreements laying out projected purchase volumes and expected prices. Still, when the broccoli crop in the area suffered extensive damage from swede midge (one farm lost their entire crop) VFVC was forced to purchase inferior broccoli at a higher-than-expected price point. Between the lower yields and the higher cost, VFVC ended taking a loss on the broccoli floret product line in 2015 simply to avoid losing existing customers. A more rigorous supply contract, common between larger-scale processors and their suppliers, would’ve required the farm to cover the cost difference, protecting the product line’s margins.

In part to address the challenge of high materials costs, VFVC staff in 2015 focused on reducing waste in two ways:

1. Doubling the shelf life of the Just Cut product line, from 5-7 days to 10-14 days. This was accomplished by testing a wide range of packaging and organic preservatives to find the best fit for existing products and distribution.
2. Developing “secondary” products to repurpose some of what would otherwise be waste from the core vegetable products. The addition of a chopped frozen broccoli product, for example, increased the overall processing yield on broccoli from an average of 53% to an average of 76%.

At the same time, feedback from college and hospital customers led to a shift in product assortment. Production of carrot coins was stopped when it was determined available equipment wasn’t able to produce at the desired level of quality. A sliced beet product was discontinued due to lagging sales. Finally, the frozen diced carrot offering was shifted from sorted to unsorted, allowing a $0.15/lb reduction in price that made it accessible to more institutional customers.

Between these changes and the ongoing efforts of VFVC staff to develop customer relationships and build demand for the product line, 2015 saw total raw produce procurement reach approximately 60,000lbs, up from 46,000lbs in 2014, an increase of 30%.  At the same time sales grew from $38,000 in 2014 to $52,000, an increase of 38%.

Building on this momentum, in 2016 VFVC staff has continued to shift to a blended market paradigm for Just Cut products, expanding focus beyond the original K-12 school audience to target other institutional kitchens, including health care and senior living facilities. At the same time, the program’s sourcing geography has been widened, with additional volume from larger regional farms able to offer a lower price point (e.g., Pioneer Valley broccoli at $0.70/lb vs. $1.80/lb from local farmers) improving unit economics. With continued focus on the development of secondary products and an effort to grow existing partnerships (e.g., Healthcare Without Harm) to further expand demand, VFCC staff is optimistic about the future of the Just Cut product line.

Just Cut’s Role at the VFVC Today

As sales of the Just Cut product line have expanded, the Farm to Copacker program has expanded from being an occasional user of the shared kitchen space to its single largest occupant, accounting for between ¼-½ of kitchen utilization on an average week (see chart xx).

Since deciding to keep production of the Just Cut product line in house, VFVC staff have continued efforts to recruit customers and develop a market for the products. One component of this has been attempting to shift the ordering and distribution model to streamline customer experience. In the current model staff communicate weekly with customers, aggregate orders, and produce to demand for the following the week, at which point orders are distributed by existing distributors (Upper Valley Produce, Black River Produce) and freight charged via Bill of Lading. VFVC has attempted to switch to simply selling to the distributors and having customers order through their distributor systems, but in both cases this led to lost sales and wasted product. The reasons for this breakdown in the distribution chain remain unclear and a source for further work by program staff.

While sales of the Just Cut product line are still below the level VFVC staff would like to see, continued refinement to the product line and proactive engagement with partner organizations is generating positive momentum. Following the success of a ‘coleslaw’ cabbage shred piloted last winter, VFVC staff is planning to add other shredded vegetables to offer a seasonal slaw product year-round. A connection from Green Mountain Farm Direct, for example, led to a close relationship with, the Food Service Manager for the Lamoille South Supervisory Union, with sales to his 3 schools increasing from a single case every few months to larger orders on a regular basis throughout the school year. Sales for 2016 are on track to reach the target of $90,000, nearly double the 2015 total.

Impacts

Given the relatively small scale of operations, the many manual processes, and the extra labor cost associated with production in a shared use space, the Just Cut product line isn’t yet a large source of revenue for VFVC. Nonetheless, the Farm to Copacker program delivers numerous other positive impacts in line with the Center for an Agricultural Economy’s mission and the VFVC operations as a whole:

1. Production of Just Cut products creates food processing jobs in the Hardwick community. The availability of trained staff familiar with the VFVC facility is a benefit to incubator clients, who occasionally recruit from the Just Cut labor pool to fill additional staffing needs.
2. The need for significant volumes of produce and the work of VFVC staff to recruit farms as contract growers creates markets and reduces risk for local farms. The Farm to Copacker program provides an easy first step for small farms looking to enter wholesale markets; for at least two farms, Just Cut orders were their first wholesale accounts.
3. Co-branding with the farms who grow the Just Cut products positively reinforces their brand with institutional purchasers and creates or strengthens existing wholesale relationships.
4. Institutional purchasers appreciate the convenience of the Just Cut product line. As goals for local sourcing increase across many institutions, Just Cut offers an easy way to meet procurement targets without dramatically increasing prep costs.
5. Incubator clients can take advantage of bulk purchasing for Just Cut production to obtain better pricing for some of their ingredients. One client, Vermont Veggie Burger, actually buys the Just Cut beet bits product to use as an input in their burgers.
6. Where appropriate, VFVC staff cross-promote the products of incubator clients to Just Cut purchasers, a valuable marketing boost for any new food business.

Table: 2016 Performance of Top 5 Products

Coming soon!
 

Key Takeaways

1. Underutilized capacity is a valuable resource for new product development. Because the shared use kitchen space wasn’t fully utilized, the opportunity cost to use it for testing new product ideas was very low. This created the flexibility to allow VFVC staff to try many different products and to continue to iterate and adjust their product line.
2. Institutional purchasers, especially K-12 schools, are extremely price sensitive. Working with potential customers to identify product modifications, aggregating orders to create scale efficiencies, and being creative with secondary products to increase yield are critical to managing margins.
3. Creating institutional market demand for a premium local product line is challenging: it takes time and the strategic use of partnerships. In addition to the challenges of starting any food business, local sourcing imposes seasonal delays in working with suppliers and institutional buyers are often constrained by annual menu planning and budgeting cycles. Supporting organizations can assist by brokering introductions and advocating for preferred procurement, but the creation and maintenance of strong customer relationships is critical to success.
4. An in-house product line, even one with low margins, can be a valuable anchor for an incubator facility. Financial impacts are positive as long as the gross margin contribution is greater than the opportunity cost of an alternate use (e.g., the product line generates at least as much margin as the expected use by incubator clients) and the reliability of a steady, high-volume product such as lightly processed vegetables creates opportunities for incubator clients to benefit from cross-staffing, bulk purchasing, and cross-promotion.