Path to Profitability

This knowledge article breaks down how Consumer Packaged Good (CPG) businesses make money, what the path to profitability looks like, and highlights the challenges to becoming profitable.

A bottle of coca-cola sells for around $1.99. A sprite or aquafina, all brands under the Coca-Cola umbrella, ring in at similar prices. Coca-cola reported net revenues of $10.1 billion in the second quarter of 2021 alone. How do businesses, selling low cost packaged food products, build these massively profitable enterprises? What is the path from a farmer’s market table to national and international brand presence with billions of dollars in revenue a year? 

This knowledge article breaks down how Consumer Packaged Good (CPG) businesses make money, what the path to profitability looks like, highlights the challenges to becoming profitable, and ends with an example of a one company’s path to profitability.

CPG Business Model

Packaged products, or CPGs, are affordable, everyday goods that are purchased frequently and consumed quickly. Think of that bag of chips you added on with your sandwich at the deli or that bottle of gatorade you grabbed at the gym. These are all packaged products that are distributed widely and sell quickly. 

The CPG business model relies on manufacturing low-cost food products at high volumes to leverage economies of scale. This means that you’ll need to produce at high volumes to drive down costs enough to be priced competitively. 

Let’s say you go to the grocery store and buy ingredients to make a cupcake. This might cost you $10 all in with the flour, butter, eggs, etc. to make a dozen or so cupcakes. Now imagine your cupcake business took off and you need to make 10,000 cupcakes at once. You’re not going to buy a dozen eggs at a time. You’re going to buy thousands of dollars worth of eggs. All of a sudden, the price per egg drops since the farmer is interested in negotiating the price with you. Large volume is a win-win all around. You’re able to make your cupcakes for less money, as the input costs go down, and you’re able to sell those cupcakes at a cheaper price, making it an affordable, impulse buy for your customers. People are buying your cupcakes again and again.    

CPG businesses reach large quantities of consumers by producing in large volumes, leading to accessible price points, and distributing into stores across multiple regions. The more consumers they reach, the quicker they turn over their inventory, or sell through those cupcakes, and the faster they make money. 

So how did Coca-Cola bring in $10.1 billion in Q2? They manufactured a product people want at scale, driving down their own costs, and distributing it widely. 

Path to Profitability 

As a startup food founder, you’re not producing millions and millions of units in a single production run and you’re likely not selling globally - not yet anyway! So what does the path to profitability look like? Can you make money at smaller volumes?

The answer is yes and no. Yes, you can operate at a breakeven place, if not close to cash flow positive, and no, you’re not going to be making billions of dollars when you first start. At Union Kitchen, we break down the path to profitability into four phases: Launch, Product Market Fit, Growth, and Scale.

Phase One: Launch

Phase One: Launch focuses on getting a product into the market. On average, it takes most food startup brands about $50,000 to launch a packaged product to market and several million for large corporations. Through our Accelerator, it takes about $15,000 to launch. During Phase One: Launch, food founders work on the technical elements to get a product ready for launch. This time is an investment in the business so it is built to last. 

Phase Two: Product Market Fit

Phase Two: Product Market Fit spans from launching a product to market through reaching $150,000 in annual sales. Phase Two is focused on learning what consumers want and innovating towards that to achieve product-market fit. During this time, food founders typically need to raise between $150,000 and $200,000 to support their growth. Investment funds are used for scaling manufacturing and buying ingredients and packaging up front for larger purchase orders. 

Food founders are typically able to start paying themselves a salary once they have hit between $10,000 to $15,000 per month. Some of this will depend on how much you make on each product sold. By the end of Phase Two, brands are typically in 150 to 200 retail stores and are not yet profitable.

Phase Three: Growth

Phase Three: Growth spans from exceeding $150,000 in annual sales through $1 million in annual sales. 

Once in Phase Three, brands have established that their product is something  people want, saturated the local market, and started to expand regionally and beyond. Brands break even when they make between $15,000 and $20,000 in monthly revenue. 

Further, brands in Phase Three typically operate cash flow positive, meaning that internal cash flow is keeping the business running and outside investment is needed to help the business grow.  This will vary by product and product pricing structure. Food founders typically have to raise $500,000 to $1 million of outside investment to fund increasingly large purchase orders, scale manufacturing, and pay for up front packaging and ingredient costs. By the end of Phase Three brands are typically in 500 to 1,000 stores. 

Phase Four: Scale

Phase Four: Scale begins once a brand achieves over $1 million in annual sales. Brands in this phase have a national presence and have proven they are a viable business. Investment at this phase is focused on propagating growth, rather than saving the business from closing. Brands in Phase Four are in more than 1,000 stores and achieve profitability by producing in large volumes, pricing their product at a competitively low price point, and distributing widely. 

Conclusion

The path to profitability relies on producing at high enough volumes to drive down costs and price products competitively. Accessible price points paired with widespread distribution allows CPG brands to reach more consumers, turn over their inventory quickly, and eventually turn a profit.

How the Cookie Crumbles: Cookie Co.’s Path to Profitability

Cookie Co. makes delicious baked goods. At the end of Phase One, they launched three flavors of cookies: Chocolate Chip, Sugar, and Snickerdoodle. When they first launched, they ordered the minimum amount of packaging and ingredients required by their suppliers. Because they were tight on cash and still had small orders, it only made sense to order in as small of quantities as possible. 

The high packaging and ingredient costs, paired with a largely manual production process resulted in a high cost of goods. Cookie Co. launched with a 28% margin--big enough to keep them in business while they grew. 

Once in Phase Two and in market, it didn’t take long for Cookie Co. to take off. People loved their cookies. They received lots of helpful feedback on their packaging and ultimately switched over to a cheaper and more effective alternative. 

Concurrently, Cookie Co. worked hard to sell into more stores and sell more per store. They went to stores several times to pitch their product until they were accepted, they checked in on stores they were already in, and they held lots of demos. All of this together led to a large increase in sales. After two years, they reached $150,000 in annual sales.

To keep up with the growing demand, Cookie Co. decided to purchase a dough depositor. They realized this would resolve their leading process constraint and drastically increase throughput. It also would reduce labor costs. 

Additionally, Cookie Co. started ordering packaging and ingredients in higher quantities because they now had the demand to support it. This drove down their per unit packaging and ingredient costs. To cover these up front costs, Cookie Co. raised $200,000 of outside investment.

The combination of the decreased labor costs from mechanization, and ordering larger amounts of packaging and ingredients resulted in higher margins. Cookie Co. was now operating cash flow positive. This allowed them to continue their growth and comfortably raise more outside investment to help them secure a major contract. 

Cookie Co. successfully raised another round of investment, this time for $750,000 to cover the upfront costs of their new major contract and to help further scale their manufacturing. With the help of the new contract, Cookie Co. was now available in stores all along the east coast and parts of the midwest. Their store count continued to increase until they were in over a 1,000 stores!

Because Cookie Co. was able to increase their sales volume, price their cookies at a competitively low price, and distribute widely, they became profitable in 2021, five years after launching.