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Co packing... I'm going wrong somewhere!!

Sprocket

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Hi all, Hope you're all good?

My inexperience with co packers has me stumped, can anyone tell me where I'm going wrong??

I've been working on developing our business model to escape the trap of TIME. We pack food products in our own brand and sell to wholesalers. The business is running us and it's only a matter of TIME before its unsustainable...

So, I wanted to look at getting a co packer to pack the products for us in our brand. Then we can sell the products (at a similar cost). Our margin would be lower but initially this could supplement existing trade until it grows big enough to stand alone. At that point we could reduce factory space etc which would lower overheads.

I thought it was a great plan until I started contacting co packers. I've spoken with quite a few now and the quotes are coming back consistently high. So high, the packing cost is 2x that of the raw materials. Not commercially viable. In any way shape or form.

I'm stumped.

I look around at other products that are copacked and are still sold competitively and I just can't understand it. Our product is a commodity. Our packaging is standard. Our volumes are fair (not massive, not tiny). I've seen people on Dragons Den (UK) with much more elaborate packaging & expensive product and their price is cheaper than what our commodity product would be in standard packaging.

Please can anyone tell me if I'm missing something through lack of experience?

Thank you so much in advance for ANY advise you may have to share :)
 

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Scot

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Yay, another foodie!

First, check out my starter guide when you get a chance Food entrepreneurship startup guide

So, copackers, I was going to throw this awesome directory of copackers at you until I saw UK on your profile, so unfortunately can’t be of help in finding you one.

But, I’ve got a fair bit of experience finding copackers.

So, copackers Love to gee you to death. My copacker has yet to give me a breakdown of the costs. Even when I reduced the cost of my main ingredient by 20% it only reduced my product cost by 5.5%.

I have a great document from a copacker I interviewed with that shows the math on the broken system. Long story short it’s something like, (cost of ingredients + 35% markup) + packaging + $0.25/unit packing fee + labor/unit packing fee = crazy high number.


Here are a couple of ways to get lower packing costs.

- provide your own ingredients, all of them. If your copacker is getting everything from a distributor, there’s no telling how much they actually cost. It’s easy for them to add a 10-20% markup for “sourcing and delivery” Same goes for packaging. Getting your bag/bottle/box made offsite and delivered will save this markup too. Now, all they can charge you for is the actual food prep and packing.

- Higher volumes. My product currently is $35/case. But, I did my first run at 1/3 size of a normal production. That cost me $50/case. Because the time it takes to set up the line and then sanitize and break down the line is the same for 100 unit’s or 100,000 units, and it’s a long process. So, you’re paying for those hours regardless. Ask your copacker for quotes at multiple unit ranges to see if they give you reasonable breaks at scale. If they don’t, tell them to pound sand.

- Look for a copacker that charges a flat rate by hour of labor vs a markup. The copacker I interviewed after I found my current copacker does flat rate hourly. But, here’s the kicker, you need to make sure they have the crew to do the job quickly. It would have lost me money because they only had 2 people to work the line, vs the 5 at my current facility.

Relationships go a big way in this industry too. If they can’t give you the best prices, you can negotiate better terms.

Hope this helps a little bit!
 

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G-Man

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- provide your own ingredients, all of them.
This ^^^. I would shoot for unit cost instead of hourly, though, so they can't "tax" you later on. Work them out to a per unit cost at a small run size, then get them to give you tiered pricing on larger runs.

Part of the reason the markup is so high is that you tend to compensate them for opportunity cost. This is why it's important to ask specific questions like
"Do you have different machines that can pack different case pack configurations of my product?
If so : "Which of the machines is faster? Which machine has more capacity (i.e. run time)."
"What run size would be exactly a shift from setup to tear down and clean?"

It's important to learn about their business model if you're going to trust them with yours.

Our product is a commodity.
This can actually mean you don't get as much cost savings from scale. The problem with commodity based products is that co-packers buy the agricultural commodity at scale to start with, which means that increasing the scale of production on your individual product doesn't necessarily create a corresponding cost savings at the materials level. You'll still get some from labor/logistics, but if your product has, say, almonds in it, The cost of the almonds isn't gonna go way down just because you go from 1 million units to 2. If you're Blue Diamond, you can create at the scale to be a market maker, but otherwise you're a price taker.
 
OP
OP
Sprocket

Sprocket

Bronze Contributor
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Speedway Pass
Mar 7, 2018
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UK
Yay, another foodie!

First, check out my starter guide when you get a chance Food entrepreneurship startup guide

So, copackers, I was going to throw this awesome directory of copackers at you until I saw UK on your profile, so unfortunately can’t be of help in finding you one.

But, I’ve got a fair bit of experience finding copackers.

So, copackers Love to gee you to death. My copacker has yet to give me a breakdown of the costs. Even when I reduced the cost of my main ingredient by 20% it only reduced my product cost by 5.5%.

I have a great document from a copacker I interviewed with that shows the math on the broken system. Long story short it’s something like, (cost of ingredients + 35% markup) + packaging + $0.25/unit packing fee + labor/unit packing fee = crazy high number.


Here are a couple of ways to get lower packing costs.

- provide your own ingredients, all of them. If your copacker is getting everything from a distributor, there’s no telling how much they actually cost. It’s easy for them to add a 10-20% markup for “sourcing and delivery” Same goes for packaging. Getting your bag/bottle/box made offsite and delivered will save this markup too. Now, all they can charge you for is the actual food prep and packing.

- Higher volumes. My product currently is $35/case. But, I did my first run at 1/3 size of a normal production. That cost me $50/case. Because the time it takes to set up the line and then sanitize and break down the line is the same for 100 unit’s or 100,000 units, and it’s a long process. So, you’re paying for those hours regardless. Ask your copacker for quotes at multiple unit ranges to see if they give you reasonable breaks at scale. If they don’t, tell them to pound sand.

- Look for a copacker that charges a flat rate by hour of labor vs a markup. The copacker I interviewed after I found my current copacker does flat rate hourly. But, here’s the kicker, you need to make sure they have the crew to do the job quickly. It would have lost me money because they only had 2 people to work the line, vs the 5 at my current facility.

Relationships go a big way in this industry too. If they can’t give you the best prices, you can negotiate better terms.

Hope this helps a little bit!
Wow thank you! A lot of really helpful information to go on!
Yay, another foodie!

First, check out my starter guide when you get a chance Food entrepreneurship startup guide

So, copackers, I was going to throw this awesome directory of copackers at you until I saw UK on your profile, so unfortunately can’t be of help in finding you one.

But, I’ve got a fair bit of experience finding copackers.

So, copackers Love to gee you to death. My copacker has yet to give me a breakdown of the costs. Even when I reduced the cost of my main ingredient by 20% it only reduced my product cost by 5.5%.

I have a great document from a copacker I interviewed with that shows the math on the broken system. Long story short it’s something like, (cost of ingredients + 35% markup) + packaging + $0.25/unit packing fee + labor/unit packing fee = crazy high number.


Here are a couple of ways to get lower packing costs.

- provide your own ingredients, all of them. If your copacker is getting everything from a distributor, there’s no telling how much they actually cost. It’s easy for them to add a 10-20% markup for “sourcing and delivery” Same goes for packaging. Getting your bag/bottle/box made offsite and delivered will save this markup too. Now, all they can charge you for is the actual food prep and packing.

- Higher volumes. My product currently is $35/case. But, I did my first run at 1/3 size of a normal production. That cost me $50/case. Because the time it takes to set up the line and then sanitize and break down the line is the same for 100 unit’s or 100,000 units, and it’s a long process. So, you’re paying for those hours regardless. Ask your copacker for quotes at multiple unit ranges to see if they give you reasonable breaks at scale. If they don’t, tell them to pound sand.

- Look for a copacker that charges a flat rate by hour of labor vs a markup. The copacker I interviewed after I found my current copacker does flat rate hourly. But, here’s the kicker, you need to make sure they have the crew to do the job quickly. It would have lost me money because they only had 2 people to work the line, vs the 5 at my current facility.

Relationships go a big way in this industry too. If they can’t give you the best prices, you can negotiate better terms.

Hope this helps a little bit!
Hi! Wow thanks so much for taking the time to help me, I really appreciate it! Sorry I was slow to reply, kids and work seem to consume all my time!

So I have been asking for quotes based on us supplying ingredients and packaging, so the cost we're being quoted is 100% packing charge.

Our current cost per case in our own factory (raw materials, packaging, transport and factoring) is £5 per case. Our average price is £9 per case so £4 per case profit. And margins are getting squeezed massively at the moment so there's not much room for price increase. When I look at the average quotes we've had back from co-packers we're looking at £11 per case packing charge!! We'd get laughed out of business.

We've looked at massive packing businesses and smaller hand packing lines. All coming out at around the same price. It's incredibly frustrating.

From reading these posts I'm wondering if its just a case of searching talking to more companies until we find somewhere with a better fit with our product... or perhaps it's just that we don't have the scale needed. We were looking at starting at 10 tonne a month and increasing this to 60 tonne over a period of time...

It's nice to talk to someone in the industry, thank you
 
OP
OP
Sprocket

Sprocket

Bronze Contributor
FASTLANE INSIDER
Speedway Pass
Mar 7, 2018
96
173
144
37
UK
This ^^^. I would shoot for unit cost instead of hourly, though, so they can't "tax" you later on. Work them out to a per unit cost at a small run size, then get them to give you tiered pricing on larger runs.

Part of the reason the markup is so high is that you tend to compensate them for opportunity cost. This is why it's important to ask specific questions like
"Do you have different machines that can pack different case pack configurations of my product?
If so : "Which of the machines is faster? Which machine has more capacity (i.e. run time)."
"What run size would be exactly a shift from setup to tear down and clean?"

It's important to learn about their business model if you're going to trust them with yours.


This can actually mean you don't get as much cost savings from scale. The problem with commodity based products is that co-packers buy the agricultural commodity at scale to start with, which means that increasing the scale of production on your individual product doesn't necessarily create a corresponding cost savings at the materials level. You'll still get some from labor/logistics, but if your product has, say, almonds in it, The cost of the almonds isn't gonna go way down just because you go from 1 million units to 2. If you're Blue Diamond, you can create at the scale to be a market maker, but otherwise you're a price taker.
I think your're point about getting to know their business models is spot on. I've been looking at it too simplistically, I've basically been looking for co-packers in Europe (close to manufacturers) that can pack in similar packaging to us. I think I need to be a bit more focused in what I'm asking for upfront.

The commodity issue is hard because the market knows the value of the product so the key is in getting git packed cheaply. There isn't much room to move on price, it's very market driven. I'd like to move on from this product but at the moment it's bringing in the lion share of profits so it needs to be looked after at least until I get a chance to develop the business model.

Thanks for your help and time!
 

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