The COGS Advantage
The Business of Food
by Jennifer Barney
The COGS Advantage
3-min read
In the last three years food startup acquisition deals got bigger and there were fewer of them. Covid accelerated that trend last year, and 2021 will not be different.
Consequently, access to capital has become more prevalent as startups must stay in the game longer. Savvy investors (food veterans and ex-founder PEs and VCs) are holding startups accountable to capital efficiencies through ever more rounds of funding, in hopes of securing a successful exit.
Last week’s post was about gross margin being the most important metric on the P&L. Startups that get this right have a better chance at fundraising, and are healthier overall for the long term.
If you’re in ag and want to invest in a startup, what does this have to do with you? It goes back to fundamentals.
The biggest contributor to gross margins is COGS. Ag, as an investor along the supply chain, will have an unfair advantage on COGS day one. Where the average startup pays a premium for raw goods at low quantities, ag supported startups can access full truck load pricing, shaving off a few points or more. This seems obvious. But what’s not obvious, is how to use that advantage.
Don’t act like this will last forever
Understand that this early advantage won’t linger once competitors get to scale – and if you don’t believe me, have the conversation now about below-market inputs as a form of investment – that never ends – unless and until the equity converts.
This is usually where the conversation turns to switching to a lower cost (i.e. quality) input at that point in time. If you’re thinking you can change your spec later on, and the consumer won’t notice, think again. Today’s consumer is more discerning and educated about food and if they have reason to doubt the authenticity and transparency of your brand, you’re done.
Don’t undercut retail price
The last thing you want to do is go out at a lower price in order to “buy” revenues. The thinking goes like this: make it cheap so people will buy it, then once the consumer is hooked, raise price.
This rarely, if ever, works.
First of all, retail buyers don’t accept price increases just because. Once you go out with a price you can only raise it if there is an industry-wide commodity shift.
And I’m not talking about pandemic buying.
Look at eggs. Egg prices soared during the 2015 outbreak of avian flu. This coincided with the protein-for-breakfast trend. Brands like Jimmy Dean frozen breakfast, for example, had to raise price as both consumer egg prices and processing egg prices escalated.
Second, few consumer food products are inelastic to price. There is usually an acceptable substitute. So once you train the consumer that your product is worth X, a price increase will kill sales.
Where brands get tripped up is in believing that their products are so unique, that no competitor can match their offering, and that the consumer cares enough to pay whatever.
Do employ good fundamentals
How to apply the COGS advantage goes back to good fundamentals: keep other above-the-line expenses down (see last post) and invest in the people and brand activities that generate quality sales for the long run.
Good sales and marketing will help you get ahead. They will instill good habits internally, and will do the right things in the marketplace that generate measurable ROI for strong, sustained growth. Don’t wait too long to bring these people in, especially if you have the advantage to do so early.
All my best,
Jennifer
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I'd love to hear from you - get in touch at jennifer@3rdandbroadway.com