I often get asked by brands why I decided to self-manufacture. The answer is simple: my partners, who controlled the input, were farmer/producers and had manufacturing in their wheelhouse. By building butter and jarring capabilities we were able to capture and sustain an unfair advantage through vertical integration.
If I didn’t have the advantage of vertical integration, I wouldn’t have self-manufactured. In fact, most investors don’t want you to own manufacturing and it’s extremely hard to do when you are an emerging brand.
Some strategic acquirers do want to own more of their supply chains and will purchase brands and their facilities. You may have seen that Hershey, who acquired Skinny Pop in 2018, recently bought two popcorn manufacturing plants. This on the heels of purchasing a pretzel plant in the Dot’s acquisition two years ago.
Hershey is interested in building out these capabilities to more effectively take share in the salty snacks market. But you are not Hershey.
Here’s why self-manufacturing can really suck and why investors (VCs in particular) like asset-light brands:
1. Capital intensity – tying up cash in hard assets that depreciate quickly isn’t good for nimbleness, flexibility or resale
2. Spread too thin – most of you have core competencies in brand building and marketing, not in food safety, process engineering, and labor laws
3. Scalability – starting small and manual with the intent to automate later is smart, but adjusting production levels to anticipated demand is tricky. Plus, it’s risky and expensive to scale up
4. COGS – it’s difficult to be cost efficient without scale, but you have to be competitively priced, therefore your margins will suffer for a while
This advice is for most of you. Some of you may be a co-founder team with really good ops and manufacturing expertise. In that case, if you’re still thinking about self-manufacturing – a couple more things:
· The innovation lead you have right now probably can and will be duplicated if you have any measure of success in market (unless you have a process patent), so don’t decide to do it solely as a way to hold an advantage
· Unfair advantages include owning/ controlling some part of the supply chain, not that you have a great “in” with a supplier
· The longevity of your brand will likely depend on your ability to stretch beyond your core product and into different forms and offerings (that most likely require different manufacturing equipment/capabilities).
But no one can make what I make so I have to make it myself
Most of the time when I hear this, it means that no single manufacturer currently does all the steps in your process. Consolidating steps might be the only way to make the unit economics pencil. Understood. Don’t discount having a coman customize a line for you. Many contract manufacturers will partner with you on integrating new equipment and it’s not too early to talk about that possibility – even just to get the future-state P&L in your plan.
If you still wish to endeavor in manufacturing after this very persuasive list of reasons why you shouldn’t, work with your financial advisors on the long -term plan and get comfortable with how you will fund growth. Figure out if you are capital efficient enough, and patient enough, to fund it yourself, or who is most likely to back you. It might be the right decision for you – I have seen it done!
All my best,