What Are Food Incubators and Do They Create Viable Businesses?
By Tove Danovich for eater.com
It’s a good time to be in the specialty foods business. Retail sales in the United States were worth over $85 billion in 2014 and, overall, $42 billion in sales came from mainstream stores like Target or Costco. Some of these specialty foods can be found in stores from Alaska to West Virginia. Others never make it farther than their local farmers market. But there’s one thing they all have in common — they were started by real people who had an idea for a business and made it happen.
This is not your average Lunchables or Cheetos: conceived, sold, and marketed on a large scale by massive companies. Specialty foods are typically high-value and, at least in the beginning, low production. Though it may seem easy to start a brownie assembly line in your home kitchen, many states require a commercial kitchen to sell at a larger venue than the local market. Starting a commercial kitchen from scratch can cost up to $100,000 — far more than the average food entrepreneur has to spend before even making their first batch of salsa.
This need for low-cost kitchen space has led to the development of shared commercial kitchens that can be rented for hourly or monthly rates. But finding a place to make specialty food products is only the first step. Entrepreneurs who want to make a profit have to successfully package, market, and sell their products, too. That's where food incubators come in.
What do incubators do, anyway? Incubators are an idea born sometime in the 1960s but became popular during the ‘80s as the government "looked for new instruments to stimulate economic development and job creation," writes Emma Hall in a 2007 study. These incubators took in entrepreneurs and gave them an education in running a business, often for a low fee or stake in future earnings. By the late ‘80s, Hall adds, incubators realized it was more useful to have a tenant base focused on one specific industry rather than putting a wannabe furniture maker, baker, and fashion designer in the same program.
Junea Rocha, founder of the brand Brazi Bites, got her start at the KitchenCru incubator in Portland, Oregon in 2011. Though Rocha had taken a community college class focused on starting a food business, she had no experience in a professional kitchen. KitchenCru, too, was just starting out — there was no structured program for members. "What we got was support and training on how to use commercial-level equipment in a kitchen," Rocha says. That seems simple, but an industrial kitchen is a big shift for someone used to her oven at home. The per-hour kitchen rental cost seemed high for a company that wasn't making money yet, Rocha says, but was a fraction of what it would have cost to do everything by herself. "Not only that, it was an environment where we all supported each other and each other's companies," Rocha remembers. "You can't put a price on that."
During the day, she worked as a civil engineer; nights and weekends, she cooked in KitchenCru's commercial kitchen. After a year, she expanded into her own space. Then came national distribution, retail, and a stint on ABC's Shark Tank. Today, Brazi Bites is a multimillion-dollar company. "The incubator was the perfect first step," Rocha says. She notes that when she started her company, she didn't know it would ever grow to the size it is today. "People think you're going to be in an incubator and sell to artisanal farmers markets, but it can be a stepping stone to something big."
If you live in a city in the United States, it's more likely than not that there's a kitchen incubator near you. According to a 2016 study, nearly 60 percent of U.S. incubators are located in urban areas. Some, like New York City's Hot Bread Kitchen, allow new businesses on a rolling basis, while many others like to start new businesses in a group, allowing applications only two or three times a year. After that, each incubator works a little differently.
The New York City-based Food-X, technically an accelerator, is like an incubator on speed. Rather than charging its members, who often work on larger businesses in ag tech or online food marketplaces, Food-X provides each new business with $50,000 in start-up capital in exchange for future equity in the company. Twice a year, a group of 10 — chosen out of 300 to 500 applicants — goes through a 14-week training program that culminates in a final showcase in front of food-industry experts.
Hot Bread Kitchen, which is located in East Harlem, charges a fee, but aims to bring in 30 percent of its members from a low-income demographic and subsidize their use of the incubator's resources. It offers the usual kitchen space and storage but also hosts monthly workshops and one-on-one business advising. San Francisco's La Cocina has a similar model, but exclusively works with low-income entrepreneurs, 95 percent of which are immigrant women or women of color. Its program is structured in three phases — pre-incubation, incubation, and graduation. At La Cocina's facility, it takes an average of four to six years for businesses to graduate to their own commercial space.
And it's not just new food businesses that benefit from incubators — big stores do, too. "Incubators have been a huge resource for a lot of our small brands," says Elly Truesdell, who oversees Whole Foods' sourcing and local-supplier partnerships in the entire Northeast region. She explains that there's much more to running a business than having a good product to sell — state and federal food safety laws, label requirements, marketing language, and more. The largest benefit incubators provide to specialty food creators, Truesdell says, is "the business acumen they need on an accounting, sales, and marketing level."
How well are incubators working? While there are clear benefits to entrepreneurs who want to work with a food incubator, running one takes more effort than slapping together a kitchen and opening the doors. If, like most, the incubator doesn't take a percentage of future revenue, then its main sources of income are often kitchen rentals and storage. But a case study of incubator kitchens found that "the kitchen is not likely to cover more than 30 to 40 percent of the facility's cash flow even when fully booked."
Only 39 percent of for-profit incubators report making a profit, while 57 percent break even, according to a 2013 industry report. Nonprofit incubators have an even more difficult time being self-sustaining, with just 15 percent making money and a full 31 percent operating at a loss.
The accelerator Food-X is an interesting counterpoint to the average incubator. Not only does its program move faster and invest $50,000 of capital in the companies it accepts, it also isn't interested in working with "lifestyle businesses." Managing director Andrew Ives says that "small ideas" might grow large enough to pay the owners' bills, but if it's "not something the world needs," it's not what Food-X wants. (Though he makes a point of saying that there's a need for "what all the accelerators are doing.")
Obviously, not many for-profits (much less nonprofits) have the money to invest hundreds of thousands of dollars in food start-ups that might not succeed. Ives says that there's likely to be a five- to 10-year window between a company working with Food-X and any return on the accelerator's investment. "The only time equity is worth anything is if the company has been successful in some way — either IPO'd or has been acquired," Ives says, noting that "80 to 90 percent of companies fail within the first three years."
Without investors to grant the capital Food-X enjoys, many nonprofit incubators rely on grants from banks and local governments. "There's a lot of people who want to fund economic development," Mataka says. Though La Cocina is a nonprofit with a strong social mission, it's been able to generate about 60 percent of its income. In addition to the kitchen rentals, it also has a catering program, rents kitchen space at higher prices to commercial users outside the program, and has a kiosk space at the San Francisco Ferry Building, where it sells packaged goods produced by its entrepreneurs. "We're their first wholesale buyer," Mataka says. The goal is to eventually become 70- or 75-percent self-funded — a feat for any nonprofit.
Yet some have found that the high operating costs of food incubators outweigh their economic impact. A 2007 case study of Nuestra Culinary Ventures incubator in Boston found "a majority of the businesses created unstable, part-time jobs and hardly generated enough sales to sustain a part-time employee, let alone a full-time worker," writes Emma Hall of the program's graduates. The incubator was started by Nuestra Comunidad Development Corporation, who expected to cover initial operating costs until the incubator started to break even, estimated to occur around year five of operation. "They underestimated NCV's actual losses," Hall writes. In 2005, for example, the Development Corporation estimated a loss of $595 when, in actuality, losses were $62,628. Since the study, Nuestra has been taken over by CropCircle Kitchen and now goes by the name Commonwealth Kitchen.
But one could argue that there doesn't need to be dollar-for-dollar payoffs in order for these programs to be doing important work. As the University of Florida's Kelly Moore and Marilyn Swisher wrote in the Journal of Agriculture, Food Systems, and Community Development, "the food movement most often reflects white, middle-class interests, and ignores or even rejects the interests and cultural histories of diverse populations when establishing what constitutes 'good food.'" And many food accelerators are at least attempting to reach out to low-income, minority, or other underrepresented entrepreneurs.
Though Nuestra had trouble funding itself, the businesses in its 2006 program were mostly run by people from a minority group. Hall writes that there were actually two-thirds more minorities represented in the incubator than living in the surrounding area at that same time. "While NCV has struggled financially, its base of culinary entrepreneurs reflects its mission and captures the diversity of the city," Hall concedes.
Are they really necessary? While counseling and feedback are always helpful for new business owners, incubators aren't necessary to start a successful business. In some ways, this is obvious — small businesses have succeeded long before the incubator model was ever developed. However, in some communities, other businesses are taking up the mantle of "business mentor" without ever developing an official program to go along with it.
Claire Sullivan, previously a purchasing coordinator for Whole Foods Hawaii and current team leader of Kahala store in Honolulu, has a very different set of challenges to stock her stores than Truesdell, who's on the manufacturing-heavy East Coast. "On the cultural side, we have these incredible layers of traditional Hawaiian food followed by many layers of immigration to the island," she says. "It's a leg up in the culinary sense, but with some significant logistical challenges [for producers]."
The most apparent challenge is that Hawaii is not just one island but many. Since commuting to a commercial kitchen on Oahu isn't feasible if you live on Maui, each island needs duplicate resources for small businesses. Sullivan explains that having rental kitchens is "tremendously helpful in providing a starting point for our producers" yet adds that they still can't provide the range of services that an incubator would. In lieu of that, Sullivan reveals, "some businesses have allowed others to incubate in their production space." This is more than sharing a kitchen, she explains. "All sorts of learning is transmitted from senior businesses to junior. It's like a chain."
Incubators, whether the non-formal type seen in Hawaii or the application-required types found in urban areas, are in many ways a modern-day apprenticeship — no years of unpaid toiling required. The benefits to business owners are clear. But there is still uncertainty in the practicability of running a business that often relies on low hourly rentals of kitchen space. For incubators to have a real shot at thriving — not just surviving on donations and grants — a new business model will need to develop that takes into account both the fundraising and social mission aspects of these services.
Now if only there were an incubator for that.
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