4 Food Business Models

Learning Objective

• Awareness of a variety of different Foodtrepreneurial models
• Identification of the model’s pros and cons 

When we consider solutions to problems in the food industry, many models have proven successful at reaching customers. All of the possible solutions have different licensing, benefits, disadvantages, and considerations. Many businesses choose to blend two or more models, for example, a retail brick and mortar store with a wholesale business model or an educational model with a retail brick and mortar. The models are also referred to as sales streams. The following are some options to consider when developing your concept:

Food Truck

• Description: A food truck is a truck outfitted with a commercial kitchen and allows for commercial preparation of, assembly, or food production. The food truck must be associated with a required separate commissary that allows for food storage and food prep.
• Licenses: Like all businesses and food businesses, several licenses are required, and additionally, there are food truck licenses and restrictions that vary based on the county where the food truck intends to operate. Despite allowance in the county, many communities do not allow food trucks to park and do business on city property or streets. It is crucial to check the regulations and restrictions of communities one is thinking about parking in before assuming it is permissible. It is also essential to understand the parking costs.
• Another viable sales stream for a food truck is to cater to private events.  In this situation, temporary permits are almost always required. Links http://www.dupagehealth.org/211/Food-Permit-Types  
• Considerations:
  • Food trucks offer a lower point of entry into a food business than a brick-and-mortar business because the startup costs associated with a truck can be much lower than a brick-and-mortar location.
  • Unlike a leased space that a business invests in through buildout and fixtures that remain part of the building once a lease is terminated or ends, a food truck can be resold, so one does not lose all the money one has spent on the truck like you potentially might lose with a brick and mortar buildout.
  • Owning a food truck is different from renting a space and the probable kitchen or bakery buildout. In a brick and mortar business that leases and does not own the building, the landlord keeps all of the business improvements to the building. In essence, the commercial tenant appreciates their building for the building’s owner.
  • Given the nature of food trucks being mobile, the operator is not tied down to one location but can go where customers are, assuming the county and town allow food trucks to conduct business.
  • In the midwest, we do not have a long food truck-friendly season. As a result, of the weather, accommodations need to be made to account for the high demand in the Spring Summer, and Fall seasons with a potentially long down season Winter.  Commonly, a business must account for a decrease in business or a pivoting to catering during the winter months.

Ghost Kitchens, Cloud Kitchens, Virtual Kitchens 

• Description: This is a more recent business model where one can rent space from an already established food business during their off-hours. Food is prepared and then delivered through a third-party delivery company. An example of this model is as follows if the business were to rent kitchen space from a restaurant specializing in breakfast service and the business came in during the afternoon and produced food that would be advertised and delivered in the evening using a third party.
• License: Ghost kitchens benefit from working out of an already established kitchen. The kitchen has been inspected and approved by both the health department and the city. As a Ghost or Cloud kitchen operator, the business would need to acquire a business license and have certified food managers present while handling food.
• Considerations:
  • The advantage of this model is that for the business that is already established, it provides an income during the hours they are not in business in the way of rent. But it will require oversite and agreements with the ghost kitchen to maintain the standards of the kitchen. 
  • This arrangement allows the ghost operator a commercial kitchen to try out a concept before committing to a long lease and or a food truck.
  • It is often the case that the rents offered are shorter than a standard lease and can be month to month. The point of entry for a new food business is lower as a result.
  • One area that can be a significant advantage is to try out new food lines or products. A Ghost Kitchen operator can run an idea and see if people are receptive to the idea.
  • A disadvantage is that the business’s success relies wholly on third-party delivery companies to serve the customer and be the point of contact. The packaging needs to be well thought out and potentially expensive to promote the quality standards expected. As a ghost kitchen, there is not the same level of connection to the community.
  • Another disadvantage is the third-party costs. Most of the third-party platforms will charge a percentage of your sale ranging from 25 – 35%
  • Given the nature of the business as being almost invisible, the lack of presence in a community can slow down growth and exposure, which can be either desirable or a hurdle. 

Rented Shared Commercial Kitchen

• Description: A shared commercial kitchen is a kitchen that has been outfitted with several small kitchen suites. These suites can be rented by the hour or monthly to startups. They are also often referred to as incubator kitchens. These kitchens are often used when transitioning out of a home kitchen environment to expand the business and minimize financial exposure. It is possible to cater and sell to a reseller out of a shared kitchen. The health department inspects these kitchens as any other brick and mortar business would be inspected.
• License: Much like Ghost Kitchens, the business is renting a pre-licensed commercial kitchen, but this does not preclude the business from needing business licenses, permits, and a food handler’s manager license. In addition, it is most often the case that the business will need licenses and permits specific to where the products will be sold.  
• Considerations:
  • Shared kitchens provide a commercial kitchen for a fraction of the cost of going into your own dedicated space with a buildout.
  • Shared kitchens also provide storage and often an attached venue, all of which come with additional costs.
  • Typically shared kitchens rent a suite space starting at about twenty-five dollars an hour as a starting point. This needs to be added to your cost of production when considering your sales price and profit. 
  • An advantage for the business is not needing to worry about paying for gas and electricity. The utilities are part of the rent and are typically included in the hourly rate.
  • A disadvantage is that the hours add up quickly, and space is shared with others. The availability of a suite might impact your hours.
  • Another thing to consider is there is not usually a retail outlet, so it minimizes your potential for retail exposure.

Micro-bakery / Cottage Bakery/ Home Kitchen Operations

• Description: A micro-bakery is a bakery that implies small size, modest production, and production that takes place in a home. The term micro-bakery is often interchangeable with cottage bakery or Home Kitchen Operations. Some examples of Microbakeries are Lymanavebread @lymanavebread, All You Knead https://all-you-knead.com/, Bootleg Batard https://www.bootlegbatard.com/gallery2.
• License: Please refer to https://www.ilstewards.org/policy-work/illinois-cottage-food-law/ for the most up-to-date rules and regulations.
• Considerations:
  • The threshold income of a micro-bakery is often regulated by state law and the county ordinances that accept cottage food baking. This income threshold can be a limiting factor.
  • Baking or producing out of the home or farm to sell to the public has the advantage of building a business with minimal expense.
  • You may not want people coming to your house to pick up products. As a solution, you can partner with another small business in the community where customers can do product pick up. Doing this increases the potential for the other small business to get visibility.
  • You can build a partnership with another producer and create a dynamic subscription. An example would be you provide a tea cake and a florist provides an arrangement each month for a subscription price.  This will provide revenue upfront to buy the necessary ingredients etc.
  • It allows for the testing of product and concept before investing at a much larger scale.
  • It allows for the building of customers and community.
  • There is an underdog effect where customers like to be part of the development of something new and a little unknown to many.
  • The most significant advantage is the ability to bootstrap or create income to build the business instead of relying on debt in the way of loans or bringing investors into the company’s ownership.
  • Baking out of your home can be convenient and cost-effective, but it is also challenging to set boundaries between your personal and business life.

Farmer’s Market

• Description:  Farmer’s markets are often created by the community village or city where they are located. There are restrictions, rules, and procedures that are unique to each market and town. Producers that produce out of their cottage bakery often sell at farmer’s markets.
• Considerations:
  • Farmers’ markets, especially in the midwest, typically run from May through October.
  • They are most often only once a week which can restrict the potential for income.
  • It is expected for people to participate in several markets to maximize their income in the short window of the market season. In the city of Chicago, there is a grading system for markets. If you want to sell at an A market, you will also be required to sell at a C market. Be aware of qualifiers for markets you are considering. 
  • Farmers Market sales often give you an avenue to build a mailing address and then develop sales routes outside of the context of the market season.

Brick and Mortar Retail

• Description: A “Brick-and-Mortar retail store is a store that sells to customers directly in a storefront. When we think of a bakery we often envision a “Brick and Mortar” bakery. It is called “Brick and Mortar” because it is not a virtual bakery or a bakery where the products are produced in the home kitchen, but it is a physical bakery. This name originally came out of the distinction between grocery stores’ in-store bakeries, and wholesale bakeries which provide products to restaurants, cafes, and hotels. 
• Considerations: A retail bakery is what many of us dream of opening when we first engage in our baking education. It comes with a romantic notion of a manageable small business serving a community the wonderful baked goods they want and you make. It does however have its advantages and disadvantages and unique concerns.
  • One of the most important initial concerns is location. A high profile busy location with accommodations for customers’ ease of access is essential to most startup bakeries. If for example you chose a space but it was not a good commuter location but a great driving location you would also make sure you have plenty of parking to accommodate the customer’s cars. This seems obvious to many but can often be overlooked when engaging in the search for the location and can result in impacting your sales and volume immensely. 
  • Another concern is matching the product and price point with the target customer. If for example, you are in a community with large numbers of young families you can be assured they will want items such as birthday cakes, donuts, cookies, bread etc. But if for example, you are a high-end bakery producing only organic and hand-produced products at a high cost and the families in the community you are in can not afford these items and they do not see the inherent value as it relates to cost in the products, you may find that this impacts the potential to sell your baked goods.
  • Another variable is the location build-out. We will address this topic in-depth in future chapters.
  • Another variable is the restriction or potential of a lease. Leases will be addressed in future chapters.
  • One of the best features of a “brick and mortar” is the potential connection to the community.  As a business in the community, you become a business citizen and there are common expectations from the community. How you approach your business’s involvement in the community is essential to your brand and your potential success.

Wholesale

• Description: A wholesale business is a business that produces a product to sell to another business. The business that bought the product then sells to the retail consumer. An example, Company A makes pies and sells them to a grocery store who then turns around and sells them to retail customers. Another example is your bakery makes croissants and bread and you sell to the hotel. The hotel then serves the hotel guests the baked goods produced by the wholesale bakery. What wholesale does is allow the hotel to offer products without needing to employ a baker or pastry chef or to support the baker of pastry chef of a hotel depending on the product. This is important because often the hotel/restaurant/grocery store can not justify the labor but still needs to provide products.
• Considerations:
  • As a wholesale bakery, you can be located in an area that is not retail and less expensive to rent or own. You can be located in what is known as TIF zones which can provide financial incentives in the way of tax refunds or discounts. 
  • As a wholesale bakery, you do not need to employ retail storefront personal.
  • As a wholesale bakery, you do not need a well-curated storefront which can be an expensive endeavor. But then without the storefront, you may be missing a marketing opportunity and capturing future customers.
  • A consideration for wholesale is the method of distribution. The product that you make as the wholesale bakery will need to get to the hotel restaurant, cafe, or grocery store. There are a couple of options, you can deliver it which means you are not only a wholesale business but now you are a distribution business. And as a result, will need to buy vans and hire drivers. You can have the business customers pick up the product but this can be a barrier to a predictable long-term customer or you can outsource your distribution by engaging a third party to distribute. Each of the three solutions to connect products to the business customers has its advantages and disadvantages and should be considered very thoughtfully because they will impact your profitability.
  • Wholesale items are commonly sold at a variable reduced retail rate because of the perceived constant commitment of sales. What is meant by this is, if you are the wholesale bakery and you are selling muffins, scones, and cookies to a cafe, the cafe has ideally established a standing order. This standing order offers some predictability to the wholesale bakery because there is assumed known volumes, ingredients, labor equipment, etc.  The assumption is that predictability is a benefit to the wholesale bakery and the product should be discounted.
  • A common wholesale price difference is 20 – 30% of that of retail.
  • Wholesale items are also often sold at a variable reduced rate based on the volume of orders. For example, If I am a restaurant and I buy 300 baguettes I may ask for a discount because the perceived cost of making these 300 baguettes is less than if you had to sell those same 300 baguettes to the retail customers. This perception of reduced costs to the wholesale bakery is even higher if you are mechanized meaning you use machines to produce the baguettes. If you produce by hand and use regenerative flour that perception is lessened.
  • As a wholesale bakery, your reputation in the food industry is paramount to your success. Word travels exceedingly fast if mistakes are made and as a result, your room to make errors is much smaller than in a retail bakery. In addition, if you do lose a customer that can be profound given the size of the customer and the dependence on the income.

Kiosk

• Description: Kiosks are stand-alone booths or carts commonly found in airports, malls, train stations, and music venues. They are meant for a person or two and are typically used for minimal finishing of food. Kiosks are also associated with a commissary or commercial kitchen that will provide storage and food prep areas.
• Considerations
  • Offers another sale center with a smaller investment
  • Offers additional exposure of your products to more potential customers
  • WIll require an additional retail salesperson
  • Will require off-site management
  • Will require delivery of product from bakehouse to Kiosk

Franchise

• Description: Franchises are a way to get into a business without personally proving the product and or brand. The product has already been proven in the marketplace as successful. The model has proven to return a certain percentage of profit. Examples of franchises are Nothing bundt Cakes, Crumbl, and Wetzel Pretzels.
• There are many advantages to acquiring the rights to a franchise, but there are also many disadvantages, including little to no product or creative marketing input. As a franchisee, you are not innovatively solving a problem. You may still solve a problem by providing access to what the community wants by opening up a franchise location. Typically the environment in which you operate is heavily controlled by the franchise, and this can impact how you manage your employees and all areas of the organization. There are guard rails, and as such, it may provide an education and a safer entry to business ownership.
• Considerations:
  • Proven product
  • Support and specific direction
  • Strick limitations minimize your creative input
  • Defined financial target goals
  • Packaged marketing
  • Management focus can be narrowed to labor and customer service

Popup

• Description: A pop-up is a term used for single stand-alone events where you sell your products. An example of this would be a Holiday fair or a craft event. It can take the form of temporarily occupying a retail space until a long-term tenant is secured or setting up in an already established store. 
• Considerations: 
  • A pop-up can be an opportunity to promote your work and reach customers you might not otherwise have exposure to.
  • It minimizes the commitment and cost
  • It is a chance to test new products and see how customers respond.

Cake Studio

• Description: A cake studio is a cake and sweets table bakery that does not have a retail storefront but a viewing and tasting room, much like a gallery. The advantage is that you do not need to employ retail clerks and have hours dedicated to walk-in customers. The disadvantage is that you rely heavily on word of mouth and marketing to get visibility.
• Considerations:
  • You can look at real estate in areas that are less expensive lowering your costs
  • You need to have a strong social media presence, or word of mouth, and proven track record

Specialty Bakery

• Description: A specialty bakery focuses on products outside of the mainstream but has robust demand. An example is a gluten-free bakery, or an allergen-free bakery, or a vegan bakery.
• Considerations:
  • You must have a clear understanding of your target customer and the volume of the target customers
  • Your commitment to the product’s adherence to the specialty concern is essential

Education model

• Description: Instead of the end product being a tactile thing like a cake or bread, you may want your product to be classes where customers learn or acquire skills. If you intend to host classes and teach a skill, you would be employing an educational model. Your space would be outfitted to accommodate learning and possibly producing.
• Considerations:
  • This model is often added to a retail bakery to add another sales stream
  • When teaching a skill you also have an opportunity to sell tools and merchandise increasing your sales
  • You will need to accommodate the space and equipment necessary for a class
  • If you are a stand-alone educational model you will not be relying on walk-in sales or orders but classes, private parties, and merchandise.
  •  In most cases, you will need to have a strong connection to the community and a strong social media presence.

Not-for-profit social justice motivated model

• Description: Many entrepreneurs are embracing a social justice partner. Partnering might work by donating a portion of sales to a specific organization that aligns with the company’s values and consumers.
• A company that comes to mind is Tom’s shoes. When you buy a pair of shoes, another pair is given to someone who needs a pair. A model that evolved organically was the Rosas Pizza Post-it Notes model. https://www.post-it.com/3M/en_US/post-it/ideas/articles/giving-back-with-post-it-notes-how-rosas-fresh-pizza-helps-the-philadelphia-community/.
• There is a more dedicated model where the bakery or restaurant is fully staffed with people who are working at a disadvantage, have learning differences, physical limitations, or are returning citizens, to name a few iterations. There is a more significant commitment, motive, and purpose to the social justice component in these businesses. The business is part of a solution for a community and or to a population’s skill development and or labor issue.
• Considerations:
  • This model requires deep commitment and follow-through on the business founders’ and or operators’ end.
  • A business that is rooted in social responsibility is likely to attract secondary marketing or press releases. Articles are often written as a way to highlight the work of the business and other businesses want to promote businesses that are giving back in authentic ways.
  • The motive for these types of businesses is not profit and or what the owners can reap but rather how the community will benefit.

Co-packing Product:

• Description: Co-Packing is when a person or business creates a product and wants to outsource or contract the production of the product. If a business develops an amazing nutrition bar but does not want to focus on manufacturing the product, the company could contract a co-packer. The co-packer would manufacture and package the product to the specifications provided by the company for a cost. This model works well when there is a dependable and significant demand for the product. It also works well when there are specific products that are well developed and tested. This model typically requires a significant investment to account for the marketing, packaging, costs associated with the manufacturing and distribution. However, it provides a way for a company to focus its energy on marketing, promotions, and sales.

The list above is in no way exhaustive, and one should not be limited by what is written. It is intended to encourage the reader to consider all the ways a Foodtrepreneur could solve food-based pain points or problems.