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Michael Adams Green Mountain Mustard and Gredio

Michael Adams, Owner
Green Mountain Mustard & Gredio

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How to Lower Your Food Product Cost

How to Dramatically Lower Your Food Product Cost (with Real Numbers)

You know that old saying, there are only two ways to grow your business’ bottom line? You can either grow your sales or decrease your costs. Really, you should do both at the same time for the explosive growth we all dream of.

When I analyzed my business at the beginning of 2016, I was left with a lot of homework. Top of this list was this:

How do I increase sales and decrease expenses so I might be able to scrape out of poverty-level wages after 6 years in business. Basically, every start-up food entrepreneur’s dream, right? Right.

In this post, I’ll focus on decreasing your product cost. It’s the number you have the most control over. (Yes, you have control over sales, too — it’s the biggest driver of growth. But, in terms of decreasing expenses, your COGS is ripe for the picking. Operating expenses are fixed for the most part.)

Why Decrease Your Product Cost?

Increase Your Gross Profit Margin:

You can improve your margins simply by lowering your product cost. While it may not be a double-digit increase, even a 3% increase in gross profit margin is significant. For example, if you sell $100,000 worth of product to your retailers at a 47% margin, you’ll end up with $47,000 to go towards operating expenses and your net profit. That 3% increase? It adds an extra $3,000 to your bottom line. Money in the bank. In my example below, if sales stayed the same as they were last year, I’m adding more than $8,000 to my bottom line.

Lower Your Shelf Price:

Because you’re able to improve your margins, you may have the opportunity to lower your shelf price. While I recommend getting to the nearest $0.99 ($2.99, $4.99, etc), even a $0.20 drop would be significant. Let’s say you’re selling your product for $5.29/jar. If you could drop $0.30 on the shelf to $4.99, you’d be reading right in to #3 on this list — and it would only require a $0.07 or $0.08 decrease in your product cost. More dramatic decreases in shelf price require dramatic decreases in your cost of goods. Start where you can and work down to a shelf price where you see product fly off the shelf.

Increase Your Sales:

Speaking of flying off the shelf, the biggest benefit from cost reductions is an almost-guaranteed increase in your sales. Just look at the pricing experiments I ran last year. (TL;DR: Sales increased 112%. Units moved increased 132%). If you extrapolate that increase in a few stores to all of your accounts and your distributors, you’re talking thousands of dollars. With our up-coming price drop, we’re looking to more than double retail sales this year. You can do the same!

Now that I covered why you should be spend time figuring out how to drop your product cost (MARGIN, MARGIN, MARGIN), I’ll dive into how to do it – with my real example from Green Mountain Mustard. (Oh, and did I mention, there are some fun bonuses (read: spreadsheets) at the end of this post you can download for freeee?)

Let’s get into this. Nerd alert.

How to Decrease Your Product Cost

I’m going to assume a few things going forward. One is that you sell a shelf-stable food product. If you’re a caterer, food truck, or prepared meals company, the same lessons apply, but they may be applied differently. For example, I lower my packaging cost, but a caterer may only have to reduce labor costs or ingredient costs.

Let’s break down product cost:

  • Packaging (this includes jar, cap, label, shrink band (optional))
  • Ingredients (everything thing that goes inside your packaging
  • Labor (what it costs you – or a co-packer – to produce your product)

I’ll go through each one with examples and strategies to drop them like it’s hot (is that even a joke anymore?). Let’s start with packaging.

Lowering Your Packaging Costs

Jars & Bottles:

Last year, I had a mini-party in my office because of how much I lowered my glass cost. When I was crazy and listened to large food companies about packaging in case packs of 6 jars, I sourced a 6-pack from Memphis and switched over. My glass cost went from $0.45 to $0.43. Then, after I realized switching case pack size didn’t make a difference, I went back to 12-packs. My glass cost shot up to $0.52/unit. That was an expensive Christmas season.

Then, I called up one of my favorite packaging suppliers in Montreal. I said, “How much for glass?” His response? $0.28/unit – with the cap, landed to our kitchen. Whaaaat? I went from $0.52 to $0.28? That’s an annual savings of $6,000 for me.

Turns out my old glass supplier BUYS the jars from my supplier in Montreal. That means they mark it up and make almost a $0.25 on every jar. I had just eliminated the middleman on glass going from Montreal to Boston then back up to Vermont. Mind. Blown.

On my most recent purchase, my glass went up to $0.31/unit landed, but that’s to be expected as there are cost increases every year. So, how does this apply to you?

There are 5 main packaging suppliers for glass and plastic. They all buy from each other if they don’t have the sku you’re looking for. I’m in constant contact with 3 of these suppliers because they all offer vastly different catalogs.

Lesson? Always keep for searching for lower packaging costs. Look for a warehouse that’s closer to your kitchen to decrease freight, and never turn down the opportunity for another company to quote you on your jar or bottle. You never know what you’ll find.

Labels

I’ve purchased labels from three different vendors since starting my company. And I don’t necessarily have the lowest price right now, but I do have the highest quality. My labels are beautiful (printed at Creative Labels of Vermont).

With labels, you want to order enough to get a significant price break. If you know your label isn’t changing for a couple years, order enough (mine has change about 6 times and I have a lot of label waste in my basement). The other advantage is keeping your label size the same across all of your products. This creates the volume you need. If you change the size, it’s a whole new quote. In volume, here’s what I’ve been paying for our labels:

  • 10,000 labels = $0.08/label
  • 20,000 labels = $0.06/label
  • 40,000 labels = $0.04/label

You’re probably thinking, does $$0.04 make a difference? You bet it does. Let’s say you sell 50,000 units this year. If you printed your labels in bulk, you’d be saving a whopping $2,000 a year in product cost. That’s $2,000 that goes right into your pocket.

Shrink Bands

While I don’t have direct experience with purchasing shrink bands, there are a handful of suppliers to purchase from online. The game here is buying in bulk again. Or, think of a shrink band as another branding opportunity. Get custom-printed shrink bands (as a marketing expenses) to further your brand’s presence on the shelf.

Using a broker to decrease your freight

I’ve had to do this a couple of times in the past few months – and it’s sort of exciting. I’ve learned so much about freight, that I might as well write another post about it. Anyway, use a freight broker. Freight brokers are people who have connections to thousands of trucking companies around the world. Simply hook up with one, give them the to and from zip codes and the weight. Then, they get you a quote. But, you should go one step further – pit them against another freight broker. They want to win your business so they drop the price until they can’t anymore. This saves you a couple hundred bucks – and you’ll get an on-time shipment.

Keep in mind that the freight you’re getting from your suppliers may be better than the freight broker’s. That’s because your suppliers ship hundred of pallets every month and they likely have their own freight broker. That has been my case with every shipment in the last three months.

Online order packaging costs:

While slightly un-related, I’d like to mention the costs you incur to ship an order direct to a retailer. I talked about the true costs of shipping in a post two years ago because it does add to your overall cost – packing tape, bubble wrap, peanuts, the cardboard boxes, etc.

I always thought ULINE was the go-to supplier of shipping materials. Now, everything I use to ship mustard across the US is purchased on Amazon. With a Prime account, I was able to nab everything above (except the boxes) for a fraction of what is was on ULINE because of free two-day shipping. As for the boxes, ULINE is pretty competitive – just order a pretty good amount to spread the shipping cost out over hundreds of boxes instead of 25.

Lowering Your Ingredient Costs

Buy your ingredients in bulk

This is a lot easier said than done. Buying ingredients in bulk is a large capital expense for any size food business — whether you’re just starting out or you have been in business for years. Why? Because it’s cash in the form of flour or seeds, or salts. It’s not cash in your bank account. But, if over the course of the year, you’re able to save money and sell more product, it’s worth looking into.

You might be wondering, how the heck do I buy in bulk? Where do I look? What’s a great price?

For starters, figure out what you’re paying right now. Then put it all in a spreadsheet and go searching for better prices. It may take the better part of  week depending on how many ingredients you have in your products.

The best searches I’ve found were “bulk (ingredient)”, “pallet of (ingredient)”, and “industrial bulk (ingredient)”. While you may be able to find better keywords, these are a great place to start.

In terms or pricing, determine how much you use annually. Start with that quantity. That way you won’t be sitting on it for years. Once you get a price on that, you’ll have a good idea if you’ll be saving money. Also, make sure you’re factoring in the cost to store these ingredients. Depending on where you live pallet storage in a warehouse can range anywhere from $15 – $50/pallet per month.

The ingredients I use the most of are: mustard powder, mustard seeds, vinegar, and maple syrup. While I can source cheaper maple syrup, I’ve been focusing on the first three as they are the main drivers to getting my COGS down.

Partner up with another business owner

If you know someone else is buying the same exact ingredients you’re using, why not partner up to see if you can get a discount? In our kitchen, we’ve shared sugar, vinegar, eggs, butter and more (it also helps if you forget to order ingredients!). While this may be hard to do, the next option is one of my (surprising) favorites.

Buy ingredients from other food companies

You know those giant competitors you said you’d never be like? Well, guess what? They use the same ingredients you do – at a MUCH cheaper price than you can get it for. Why? Because they have volume buying power. The best example of this was when I went searching for a cheaper vinegar (read: I was tired of being asked if I made pickles when I bought a orange cart full of vinegar every week).

First, I started at our regional ingredient supplier – whose price wasn’t the best. But, I knew they had to be buying from somewhere locally. I then went straight to my competitors – and emailed them to see if they’d sell me vinegar. One replied, with a price that didn’t make it worth it, but then pointed me in the direction of a supplier one state over. This multi-million dollar company just dished out the best lead. I called the company, ordered some vinegar – and it was at a fraction of the price.

Here’s the secret: We use 5% white distilled vinegar. By buying four drums of 10% vinegar, we can get double our money’s worth – eight drums of vinegar. That’s enough to last me the better part of 8 months.

What ingredients can you buy from large companies who already locked in their buying contracts?

Buy already prepped (or IQF) ingredients

IQF stands for Individual Quick Frozen. You can find IQF herbs, fruits, and vegetables. Companies harvest and process large amount of fresh produce, freeze it, and then sell it to people like you and me. It may not be less expensive, but it saves on labor – discussed later in the blog post. If you’re looking for IQF items, some of the best sources are Supherb Farms, Van Drunen Farms, and Superior Foods. Good luck!

How to determine your price decrease (hopefully not increase)

Once you’ve figured out how much you’re paying for ingredients (hopefully you have this done already), you’ll want to compare that to the prices you’re finding online or from different suppliers. One way to do that is to keep overwriting your spreadsheet with new data, but then you can’t compare. That’s why you’ll find a comparison spreadsheet in the free downloads below that you can edit to see if you’re getting a better price or not.

With the methods above, these were my results:

  • Mustard powder went from $2.80/lb to $1.02/lb
  • Mustard seeds went from $2.40/lb to $0.66/lb
  • Vinegar went from $2.87/gallon to $1.03/gallon

Everything else I buy in smaller 5-25 lb boxes and that’s “bulk” enough for me. But, these were definitely three HUGE wins for Green Mountain Mustard.

You can achieve the same results. You won’t know until you try — there’s always a better price out there!

Lowering Your Labor Costs

Start by calculating your labor – don’t skip this!

It blows my mind when I meet a small producer who is pricing their product without including labor in their product cost. What’s even worse are the companies who haven’t the slightest idea what any of their costs are — they simply take some cash home at the end of the market and call it a day.

You have to know where your labor costs stand to know where and how you can improve it. If you’re still making your product at home, the labor cost is pretty simple — How long does it take you to produce “X” amount of product? For example:

Jenny makes the best chocolate chip cookies. It takes her 3 hours to bake and package 72 cookies. She “pays” herself $12/hour because that’s what she would someone else to make the cookies if her cookie biz was expanding.

  • $12/hour x 3 hours = $36 in labor (under the table so no taxes here)
  • 72 cookies are produced during that time
  • $36 / 72 cookies = $0.50 in labor per cookie.

If you haven’t done this for your business, do it right now. You need to know how your labor influences your product cost for every product. You may notice that for chocolate cookies it’s $0.50, but for your Kitchen sink cookies it’s $0.75 because they take longer to prepare. That raises your costs. Seriously – go do it.

List the steps that take you the longest time

Once you figure out your labor cost, identify how you can improve it – if you can. For many people, labor is pretty standard. But for others, there are dramatic ways to lower your time spent in the kitchen. For example, could you weigh out a bunch of dry ingredients all at once, for the next 3 months? Could you create a small assembly line? What about running two pots at once?

Write down what takes so long. And then go searching for ways to improve it.

Find equipment that may speed up those steps

A few weeks ago, I wrote a post on buying equipment for your food business. It detailed how to figure out if large equipment purchases make sense for your company. Having been an equipment nut, there is a YouTube out there to show how fast you make something – and it blows my mind what’s available. If you need help finding some equipment, let me know. Chances are I’ve come across a company that sells it.

I’d also like to point out that some equipment may be completely out of reach for your company – so prohibitively expensive that it would put you out of business. That’s why I’m leaning towards my next point.

Research co-packing your products

A few months ago, I started talking with a reader and friend who needed help producing orders for a large customer. It was going to take her more than a month to produce the product. We talked on the phone and discovered that not only could we produce her order in less than a day, but we could do it for $0.85 less than her doing it herself. That’s because co-packers all over the nation have invested in equipment you probably dream about. They have the ability to produce a lot more product faster than you can imagine. Give co-packing a shot. I wrote 58-pages about it in the Ultimate Guide to Co-packing.

My Results with Green Mountain Mustard:

I started trying to figure out how to lower my product cost about a year ago. The glass was the easiest. Then, I went on a mad search for the ingredients. After finding suppliers for my main ingredients, I was able to drop my product cost from an average of $1.85 to an average of $1.35, with one flavor definitely being a loss-leader.

Over the course of the year, this price drop should add about $8,000 to our bottom line. If we increase our sales, this number will grow, but the challenge is solidly in phase two of making my mustard company work. It’s still a lifestyle business and nothing huge, but we’re getting there!

You can do it, too!

Don’t be afraid to take this road to profitability. It may take a little bit of investment up front, but it’s ultimately the direction you need to go to run a profitable food business. You can only run so long from your house or your shared kitchen. These are the moves you need to make – from packaging to ingredients and beyond – to be successful in this industry.

Free Resources – just click the download links

As promised, I made two quick Google Sheets:

–> Get Your Spreadsheets here <–

 

Both spreadsheets (on separate tabs) are completely free. Make sure to “make a copy” so you’re not editing the original file. Enjoy!

Have you found any quick and easy ways to lower your product cost? Let me know about your story in the comments below.

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16 Comments on this post

  1. AUTHORHope Lawrence

    on April 8, 2016 at 12:47 am - Reply

    Just a note on boxes – I find Staples is cheaper than Uline if you have free shipping with Staples (which is easy to get).

    • AUTHORmichael

      on April 8, 2016 at 11:43 am - Reply

      Staples is cheaper for certain sizes, but they don’t have any size I need — I mainly use them for case shipments – 2-6 cases. I’m always looking for a cheaper box, though!

  2. AUTHOREmily

    on April 8, 2016 at 3:32 am - Reply

    Great stuff and very timely THANK YOU!!

    I will purchase your $49 package soon. I am working on my 1st distribution deal and trying to figure out packaging, lowering ingredient costs and labor.

    • AUTHORmichael

      on April 8, 2016 at 11:44 am - Reply

      Hi Emily,

      Thanks so much for reading the blog — it’s appreciated! Congrats on your first distribution deal. Between the package and the blog posts, you should be well on your way to a successful biz — good luck!

      Michael

  3. AUTHORRichard Freyermuth

    on April 8, 2016 at 11:01 am - Reply

    Great article

    Thanks so much for sharing your expertise.

    • AUTHORmichael

      on April 8, 2016 at 11:45 am - Reply

      Hi Richard – thanks, man! Glad you found it helpful! — Michael

  4. AUTHORRosetta cudazzo

    on April 8, 2016 at 11:34 am - Reply

    Good stuff! Can you tell me where and who the glass suppliers are? I am currently paying
    .53 per 24 oz jar and .11 for the liday in Tampa Fl. I go pick up myself so free pickup with about an hours drive from Orlando.
    Thx

    • AUTHORmichael

      on April 8, 2016 at 11:49 am - Reply

      Hi Rosetta,

      There’s a supplier up here that also has an office in Fort Lauderdale — Andler Packaging. It may not be worth the free delivery or pickup as that takes up a lot of your time. It also depends on whether or not your supplier is buying from another supplier and marketing the jar up. And your volume. If you’re only getting a couple cases, you’re not paying a bad price. The discounts come in when you order at least 1-3 pallets pretty regularly. Hope that helps – and good luck!

      — Michael

  5. AUTHORBob Burns

    on April 8, 2016 at 6:32 pm - Reply

    Hey Michael,

    Thanks so much for your hard work in writing about your experiences; I’ve found the information very helpful. You mentioned 5 main packaging suppliers for glass. Could you share the names of the companies? I’ve spent countless hours, finally found a source, but it’s on the other side of the country and shipping is costly. Thanks in advance for any additional info you can provide on the 5 suppliers.

    • AUTHORmichael

      on April 8, 2016 at 7:19 pm - Reply

      Hi Bob,

      You’re welcome. Glad you’re finding the posts useful! As for glass suppliers, there’s Richard’s Packaging, Berlin, Andler, Ardargh (if you’re HUGE), Birch Bottle, Container & Packaging Supply, etc. Looks like you’re in Nevada — I’d look at suppliers in LA – there’s got to be tons since it’s a large food production area. Unfortunately, I’m unaware of any in your neck of the woods — I’m mainly east coast suppliers. Good luck! — Michael

  6. AUTHORPeyton Clark

    on April 21, 2016 at 6:02 pm - Reply

    I’m a husband & wife home kitchen operation, selling at 2 local farmers markets, so 8 drums of vinegar would last us about 15 years. Small operations like ours still want bulk savings. I’ve found several ingredients through Amazon, on their Subscribe & Save option. Not everything is available this way, of course, but I can save 15% and set deliveries of each item for every month, or 2-6 months if I don’t use a lot of it. Some items are available from several sources on Amazon, so it may take some comparison research; but it has helped us!

    • AUTHORmichael

      on April 22, 2016 at 3:14 pm - Reply

      Hi Peyton,

      Definitely true. When you’re small it is tough, but that’s why you could buy from larger, like manufacturers — their surplus in a way. Good point about Amazon’s subscribe and save!

  7. AUTHORLee Burns

    on April 26, 2016 at 5:08 pm - Reply

    Hi Michael,

    Great post. Who was the glass supplier you found in Montreal? Would love to find something that inexpensive. Did your jar price include lids? How much did you have to order to get that lower price?

    • AUTHORmichael

      on May 9, 2016 at 6:53 pm - Reply

      Hey Lee — sorry for the late reply. We use Richard’s Packaging in Montreal — great team and they have a pretty big catalog. Jar price included the lids and that was on 3 pallets shipped to Vermont. Good luck!

      • AUTHORAja Horsley

        on July 19, 2016 at 6:00 pm - Reply

        Dominion and Grimm near Montreal are also great!

        • AUTHORmichael

          on July 25, 2016 at 9:57 pm - Reply

          Yes! We get our food service packaging from them — great to work with! Thanks for the tip, Aja!

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