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BEST INDUSTRIES 2014

Best Industries: What's So Special About Specialty Foods

Thousands of small specialty food producers are looking for hot new outlets to sell their products, and that outlet could be you.
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Editor's Note: This article is part of Inc.'s 2014 Best Industries package. Read on, for more on the top industries for starting a business now.

Jump on the locavore train! Read The Omnivore's Dilemma! Dial down the GMO crops and ramp up the Omega-3s! The specialty food craze has gone mainstream. And never before has the time been so ripe for you to take advantage of a trend driven by consumers who've done a righteous about-face on what they eat and who they buy it from.

Health food, organic produce, and other specialty foods are no longer the exclusive domain of hippies and the counterculture. Interest in the market is now driven by masses of people who are concerned about what they are putting in their bodies, and this makes specialty foods a top industry for starting a company in 2014.

"How many mothers today would buy a product without reading the label," asks Andy Heyer, founder and managing partner of Mistral Equity, a private equity firm in New York. "More consumers are seeking out more and more products that are better for them, and that's creating a lot more demand and a need for [specialty] stores." Seventy-five percent of consumers reported making specialty foods purchases in 2013, up from less than half of consumers from 2009. And buyers tend to be young demographic, primarily between 18 and 24 years old, located in the West and Northeast.

The barriers to starting your own store aren't necessarily high, but competition with much larger retailers is intense. You may never get to be a multi-million dollar business, but if you love this niche you probably won't care. And while you have to fight tight margins, the upside is they're still higher than those for typical food stores.

"I love my company and my job, and our purpose, which is to protect and restore the environment," says Scott Nash, founder and chief executive of Mom's Organic Market, of Rockville, Maryland.

Specialty food stores like Nash's are invariably stocked with thousands upon thousands (14,000, to be exact) of products made by thousands of small companies, in small batches, often from locally sourced ingredients that are frequently organic and sustainably made. Products can range from bread, cheese, and chocolates, to vitamin supplements and seeds for grow-it-yourselfers.

The Specialty Foods Association has 3,200 members, the majority of which are small. Most of the companies interviewed for this story reported at least double-digit growth rates for their annual sales.

A Sense of Mission

Nash hadn't been happy at college and left without graduating, only to start a catering company that also foundered. He wound up working for an organic food wholesaler, then a produce shipper (a business he later bought) and, after selling organic goods from his garage, opened a 2,000 square foot store in 1990.

Nash now has 11 stores, each about five times the size of his original outlet, not to mention 700 employees and more than $100 million in annual sales. He's never had a month where he lost money, he says, carries no debt, and is free to do as he pleases, including donating to environmental campaigns that support his brand. Recently, Nash has spent between $50,000 to $100,000 in advertising on an anti-lawn care campaign, to help raise awareness about the toxic chemicals that leach into ground water.

Knowledge Is Power

If you've worked hard at something before, that may be all that's necessary to enter the specialty food market. Take Alex Hedrevich, co-founder and co-owner of My Natural Market, an online market place for all-natural vitamins and other unadulterated supplements. Hedrevich, whose company has been on both the Inc. 500 and Inc. 5000 lists in 2012 and 2013, has experienced classic "hockey-stick" revenue growth since opening in 2008. He was working as a stonemason for a Utah construction company, and had previously gotten a degree in computer sciences and applied math in his home country of Belarus.

To Hedrevich, it was a no-brainer to eschew a bricks-and-mortar store in favor of going e-tail. The real problem was what to sell. His boss's wife came up with the idea of selling high-quality supplements, because she'd always had a hard time finding them online. Together, the three of them bootstrapped My Natural Market with their own money. Hedrevich didn't draw a paycheck for the first 11 months, but today the company has more than $10 million in sales and 13 employees.

The challenge now, Hedrevich says, isn't reaching a critical mass of customers ("They are looking for us," he says) but finding enough different products to satisfy them. The company has expanded into organic spices, natural pet food products, and essential oils.

Know Your Niche

The need to have a product line that is fresh and relevant is also top-of-mind for Parker Garlitz, co-founder and vice president of Living Whole Foods. Garlitz says that while his core market is very tight and focused, trends change quickly. To keep up with changes he's fortunate to work with his sister, Caitlin, a life-long vegan. "She has her finger on the pulse of this market," Garlitz says.

The brother and sister team started Living Whole Foods in 2000. Parker had run an online office supply store previously, and Caitlin had just graduated from high school and was looking for work. They settled on a very specific niche--kits that enabled do-it-yourselfers to grow and harvest their own wheat grass-selling them from their home garage thanks to a $100 loan from a credit card.

Their operation has since expanded to include a wide variety of seeds, tofu and soymilk kits, juicers, and many other products. The company now has 20 employees and $6.5 million in revenue, and a growth rate around 20 percent annually.

"We had a lot of people who cautioned us in the early days, 14 year ago, that wheat grass was a fad," Garlitz says, adding that having a very focused niche proved essential for growing the business.

Tight Margins

That said, many people may find that financing is a challenge. If you're not going to bootstrap you'll have to round up angels. That might be difficult in today's environment, where consolidation has created big players with lots of scale, such as Whole Foods Markets and Sprouts.

"Retail concepts take a lot of capital, so if you’re thinking about the next iteration of Whole Foods or Sprouts, there will be more planning on what is the concept, can you get a lease, the build-out of the store, and where is the best location," says Pierre LeComte, managing director at private equity firm TSG Consumer Partners. Hint: look for secondary markets where Whole Foods has no presence.

That said, specialty foods is a huge, nascent market with lots of space for good, new ideas. Think small, think smart, and let your passion show.

IMAGE: Gallery Stock
Last updated: Mar 25, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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