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        Notes From The Field by Mark Uhrmacher

                              "The enemies of the truth are always awfully nice."
                                                                                Christopher Morley
   

Mark Uhrmacher In the words of Austin Powers, "please allow myself to introduce.. myself."

I'm Mark Uhrmacher, VP of Sales & Marketing for Expert Foods, Inc. For those of you who don't know about Expert Foods you may have heard of one of our brands: ThickenThin thickeners, Wise CHOice dessert mixes, and ExpertExtras. Regardless of whether or not you know of our products let me tell you a little about us.

Expert Foods was started in 1997 by Barbara Pollack and J. Carl Uhrmacher (yes, we are related.) The idea then was to create a line of products to serve people on a variety of underserved diets. These included low-carb, gluten-free, kosher, dairy-free, and diabetic. We went about this by using very versatile, natural ingredients, eschewing fillers and allergens, and by rethinking commonly-accepted chemistry of food.

What resulted was (and still is) a line of high-quality dry powders that can be used to make all kinds of finished foods. Of course, developing processes and ingredients that had never been used in the food industry led to expensive products. Several experts from the food industry told us we wouldn't succeed because no one is willing to pay a premium for what we offer. Thankfully, they were (and continue to be) wrong.

Sometimes I have to remind people that seven years ago low-carb was one of several unknown niche diets that had a few thousand followers across the US. The market was so diffuse we started by retailing to consumers over the Internet as there were very few stores focusing on low-carb, diabetic, gluten-/wheat-free, kosher, etc. After a few months a couple of web-based retailers approached us. Thereafter, we entered distribution about two years ago.

Now that you've learned about Expert Foods I'll give you some insight into my background. First and foremost, I am relatively new to the food industry (like the rest of Expert Foods.) Back in 1997, when Expert Foods was founded, I had been working for a startup called NetGravity in California's Silicon Valley for two years. My degree was in Computer Science and, starting in the software development organization, I held a variety of roles there. NetGravity was purchased by DoubleClick in 1999 and I moved to DoubleClick's HQ in New York (where I now live). I can honestly say I lived through the Internet boom from the inside starting at a time when I had to explain to people what the Internet was. This experience gives me an interesting perspective on the current popularity of low-carb and what might happen.

So, now you know a little about Expert Foods and about me. I'm writing this column to give you a little perspective of what it is like to be an entrepreneur in the middle of the fastest growing subsection of the food industry. In addition, I hope to let you in on a few of the observations from an industry insider that can help you make intelligent choices when you go to the food store.

Economics of the Food Industry:

One of the most common complaints manufacturers here is about costs. "How can your products be so expensive?", "I went to the store and they wanted $$$$ for your product." I'd like to take the opportunity to describe how distribution of food products works and where the money goes when you go to the store.

To understand the rest of this column you'll have to grasp the concept of margin. Simply put margin is the percentage of the selling price of a product which is profit. Margin = (Selling Price - Cost) / Selling Price. So, if a retailer buys a product for $5.00 (Cost) and sells it for $10.00 (Selling Price) that would be ($10.00 - $5.00) / $10.00 = $5.00/$10.00 = 0.5 = 50%.

Now, let me introduce the players. Between the manufacturer and the consumer there are typically two or three distinct businesses: retailers, distributors, and brokers.

As a consumer the one you know best is the retailer. This can be your local health-food store, a web-based retailer, or even your local supermarket. The margins required by a retailer for specialty products like ours range from 30% - 40%. For the chart I chose 33.3% which is a common margin target for many retailers.

Though you probably can name twenty retailers without thinking too hard I would be shocked if most of the readers of Low Carb Luxury would be able to name a single distributor. Distributors (sometimes called wholesalers) operate large warehouses that consolidate products from several manufacturers and sell them to retailers. Retailers like them because they are one-stop shopping for several hundred (or more!) brands. In addition, distributors frequently offer discounts to retailers who buy a great deal. Therefore, retailers can deal with one vendor (rather than hundreds) and sometimes pay less than the manufacturer would charge. Distributors operate with 25% - 30% margins. For this example I've assumed 29% as that is the most common value we've found in the natural foods industry.

Last, but certainly not least, we have brokers. Otherwise known as manufacturer's reps these folks represent multiple manufacturers with distributors and retailers. Typically, a good broker takes calls on retailers in a geographical region and on their local distributor. These are the people who setup displays, organize literature, run sampling programs, and a myriad of other tasks known in the industry as "retail detail." Typically brokers take 5% of anything sold in their territory.



Ok, now you know what you need to understand the chart in figure one. Let's say you have a product you buy in the store for $10.00. Here we have breakdown of where the money goes. You can see that the manufacturer receives ~45% of the retail price. Note, however, that this is gross revenue. Of course, it takes money to actually produce product. Here I've assumed the manufacturer is running a 33% gross margin which is quite large for someone in the food industry. Basically, all of the costs of materials and direct labor associated with production are deducted from the revenue and what is left over is gross profit. This is the money that pays rent, salaries, utilities, website, marketing and sales.

Now you have an idea of how food distribution works. In reality, things are rarely this simple. For instance, many retailers and distributors require discounts and/or promotional/advertising programs before they will add a new line. These are always paid for by the manufacturer. This simple model doesn't take into account fluctuations in ingredients costs, labor, gasoline (and, therefore, transportation fees), and the other details of real life. You can also see why so many of the products in the grocery store use incredibly cheap ingredients. Think about how little it must cost to produce a product with a $2.99 retail price to be able to afford to retail it.

Please, write me your thoughts or questions to MarkLCLux@ExpertFoods.com.

                                                          

Copyright © May 2004  Mark Uhrmacher and Low Carb Luxury
Title photo Copyright © 2004  Neil Beaty and Low Carb Luxury



       

 
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