CO-PACKING OF FOOD PRODUCTS 3113

1. CO-PACKING OF FOOD PRODUCTS3113 Steven C Seideman Extension Food Processing Specialist Cooperative Extension Service University of Arkansas

2. Introduction • Co-packing, contract manufacturing or private-label packing all refer to having someone else manufacture your product for you. • This allows the entrepreneur the ability to market a food item without having to own a production facility. • There are food companies in operation that either have excess capacity or are specifically in the business of manufacturing other people’s products.

3. Introduction • The complexities of moving a product from conception to market can be overwhelming even to experienced entrepreneurs. Developing networking relationships with reliable co-packers will permit the small business person to achieve maximum utilization of physical and financial resources and save time. • About 70% of businesses fail in the first year or two of operation because they do not have the operating capital to keep the business going before they start seeing the cash coming in. Don’t waste your limited capital on manufacturing the product.

4. Advantages of Using a Co-packer 1) Reduced startup costs- capital costs of equipment and facilities can be enormous. 2) Reduced lead-time in getting to market. 3) A co-packer may have experience with similar products that is transferable to your product. 4) Federal and state regulations on manufacturing, labeling and food safety are difficult and lengthy. A co-packer already knows them and can be a great help in getting your product to market.

5. Advantages of Using a Co-packer 5) Experienced co-packers have lines of credit for purchasing supplies and ingredients, insurance, food industry contacts and sources to get the job done efficiently. 6) Co-packers have the proper facilities for receiving and storing ingredients and can arrange storage of finished products. 7) Co-packers usually offer the advantage of buying supplies and ingredients in bulk, thereby reducing formulation costs.

6. Advantages of Using a Co-packer 8) Some co-packers will offer other services to entrepreneurs such as product stability testing, nutritional labeling, formulation assistance, ingredient substitution and other product development issues. 9) Co-packers can also offer suggestions on packaging and labeling which is usually based on the types of fillers, cappers and labeling equipment in their facility 10) Co-packers can direct you to professionals who can help in the design and marketing of your product.

7. Disadvantages to Using a Co-packer 1) The obvious disadvantage is the loss of control over the product. 2) An entrepreneur is at the mercy of the co-packer’s production schedule, fixed costs and methods of doing business. The product must conform to the co-packer’s equipment and facilities’ limitations. 3) Using a co-packer can be expensive. A co-packer must recover direct and indirect overhead costs. In addition, the co-packer must make some profit.

8. Disadvantages to Using a Co-packer 4) Confidentiality may be a problem as formulations, ingredients and product specifications must be shared with the co-packer. In addition, it is often necessary to share customer and sales information. Co-packers also have access to other information such as sales volume and price. This information can be protected to some degree with agreements, but confidentiality can never be assured.

9. Before Meeting with a Co-packer 1) Before you choose and meet with a co-packer, you must do your homework. 2) You should have your business and marketing plans in place which outline your product needs in terms of size and type of container, number of units per given period, buyer’s price and sales price. 3)Once you have established the product information, write preparation and process instructions. Write specifications for ingredients, packaging materials, regulatory compliance and finished product.

10. When Meeting with a Co-packer 1) First determine if a co-packer has the capacity to make the product you are wanting made. This can be done by telephone. 2) Go visit the co-packer and look over the production facility. 3) Go over all your preparation and process instructions and specifications. Does the co-packer have the right equipment to make your product. Consider what you are you willing to change to accommodate the co-packer (e.g. 12 oz jars instead of 16 oz) .

11. When Meeting with a Co-packer 4) There are many details to work out with the co-packer. Listed below are some that may apply. a) Ask the co-packer if he has a standardized “Confidentiality Agreement” for your attorney to look over. b) Go over your preparation and process instructions and specifications with the co- packer. Work out every detail. Understand the cost associated with the manufacture of your product. c) How much product can the co-packer make- weekly, monthly, etc., and how much inventory will need to be on hand ?

12. When Meeting with a Co-packer 5) Arrange for a small test batch to be run, if applicable. This will insure that your kitchen batch preparation and processing give the same quality that the co-packer will make on large scale production equipment. It is also the source of your initial selling inventory which you will need as you go out and start making sales presentations.

13. When Meeting with the Co-packer 6) Discuss who will carry the needed liability insurance. 7) Tell the co-packer if your potential buyers require that the food be manufactured under particular quality, safety or certification systems such as HACCP, ISO 9000, Kosher or Halal? Is a third party audit required?

14. Items in a Contract • It is suggested that you use a contract with a co-packer and have your attorney view it . Listed below are some items that you may wish to cover in a contract; 1)Exactly what services are you contracting for? 2)What ingredients and supplies are you responsible for and what is the co-packer responsible for? Who will provide product liability insurance?

15. Items in a Contract 3)What are the critical factors that must be met during production as stated in the specifications? 4)Will the co-packer sign a non compete clause in the contract? Usually not, because it would limit his production to only you. 5) What are the production run limitations (size, amount of lead-time required, etc.)?

16. Items in a Contract 6)What are the payment terms? The usual terms are 10% down and the remainder on delivery. 7) What finished product testing will be provided?

17. Items in a Contract • While there may be other points to be covered in a contract, the above represent some points that should be covered. • While it is recommended that an attorney advice you on contracts, the small entrepreneur may find the cost prohibitive.

18. Make the Co-packer Relationship Work • A good working relationship with a co-packer and an agreement which covers what the co-packer is expected to provide will make your venture more pleasant and hopefully profitable. • Get the co-packer on your team. Give the co-packer a chance to be properly reimbursed for his services, so you can concentrate on selling your product.

19. Where to Find Co-packers • It is not easy finding co-packers, but since the advantages for using one are so great, an entrepreneur may have to alter some details of their specifications to accommodate the need. • For entrepreneurs, the best source of information about co-packers, their abilities and how they work with entrepreneurs is often from other entrepreneurs. Meet with other entrepreneurs and small food processors at state association meetings, food shows and trade shows.

20. Where to Find Co-packers • Specialized co-packers often advertised in food industry trade periodicals and directories. • State directories of manufacturers, University Extension Service and Federal/State Food Inspection agencies are places one can look for co-packers.

21. Where to Find Co-Packers • Check out the Internet. Go to www.tfir.com and look under “manufacturers” and list your product category type (e.g. bread crumbs, canned soups, etc.). This will give you a national list of who makes similar products and if they do co-packing.

22. Co-Packer Assistance • I am always available to assist you in finding a co-packer and answer any questions you may have on the subject. • I also keep a list of Arkansas co-packers. • Steve Seideman Extension Food Processing Specialist 479/575-4221; seideman@uark.edu

23. Additional Information • Additional information on co-packing can be found in the publication entitled “Choosing and Using a CoPacker “ by Dr Luke Howard available through the Arkansas Cooperative Extension Service. www.uaex.edu. Go to publications and find publication MP423.

25. CONCLUSIONS • This summary should have provided you with some insight into choosing a co-packer instead of building your own processing facility. • It is imperative that you select a co-packer that has the ability to do what you need to have done and that you develop and maintain a good working relationship with that co-packer.