Flour Maker Wants to See Profits Rise

Steven J. Rice has beaten the odds by keeping his flour and baking-mix company open past the five-year mark--the point by which nearly half of new businesses have folded. But the tiny Gardena operation is having trouble stirring up profit.

The product isn’t the problem. Authentic Foods’ specialty chocolate and lemon cake mixes, cinnamon bread mix and stone-ground bean flours, along with the rest of its product line, are sold nationwide at Wild Oats and other health-food stores. Whole Foods Market even uses Authentic’s chocolate cake mix in some of its in-store bakeries.

Rice has folders full of thank-you letters from customers and cookbook authors thrilled with his flours and mixes, all blended without wheat or other grains that contain gluten, a protein that some people, celiac disease sufferers in particular, cannot digest. Industry giant Arrowhead Mills even approached him about mass-producing his cake mixes before talks broke down over terms.

Rice’s secret? He came up with a light and fluffy bean flour--a mix of garbanzo and fava beans--that eliminated the dry, powdery tastelessness associated with traditional gluten-free baked goods. Among other things, the flour holds liquids well and has a special affinity for chocolate.

Revenue, including wholesale and mail-order retail sales, grew 23% to $112,000 last year. Rice thinks he can double that this year. Still, the company lacks the critical mass needed to generate more substantial profit, he said. At the current rate, for example, Rice estimated it will be at least two years before he can afford to hire a much-needed marketing executive.

“I’m a jack-of-all-hands and that’s because of cash flow,” said Rice, who has a bachelor’s degree in biochemistry from USC. Rice enjoys the technical side of creating new flours and mixes, but he’s the first to acknowledge his shortcomings in the sales arena. He’s also worried that his small production capacity of 65 to 80 cases a day hampers sales.

If it makes him feel any better, companies 100 times his size face the same frustrations over cash flow and manufacturing capacity, said sales and marketing consultant Raymond L. Coen.

“Every company runs into these different barriers as they grow,” said Coen, who, before he started Pacific Palisades-based Coen Co. in 1981, was executive vice president of BBDO/West, a major Los Angeles advertising agency. “You need imaginative ways to leapfrog them.”

To help Rice work up new ideas in areas such as sales, finance and production, Coen recommended that he pull together an advisory board of outside experts and learn to create other business alliances. The company, a sole proprietorship, also needs to get a better handle on who buys its baking ingredients and how often. He also recommended the company focus on the wholesale business and redesign its “amateur” label and packaging.

Entrepreneurs in particular often are advised to create a board of expert advisors. Rice is willing. He has considered hooking up with a marketing expert in the past, but said he’s never been able to find someone who is really interested in going into the business with him. He’s also unsure of what kind of interest or payment that a potential partner or advisor would expect.

“I guess I was waiting for more of an offer to see if it made sense to me,” Rice said.

A business owner interested in setting up an advisory board should start by talking to suppliers, customers and accountants about finding qualified people to fill in missing skills, Coen said. Sometimes those sources are also willing to become formal advisors. Unless a candidate has small-business experience, though, Coen advised Rice to steer clear.

“He needs entrepreneurial kick-butt advice,” the consultant said.

Rice should draw up a list of skills, then network until he finds at least one or two experts in each area. He could consider recruiting retired or semi-retired small-business owners or executives, or those who are successful and still working but who have the time and desire to help a micro-business like his. An advisory board should meet monthly.

Authentic Foods has several things going for it that could help attract advisors, Coen said, including quality products, clear product differentiation and a “reasonably broad appeal” to customers who want to avoid gluten or simply desire the higher protein level of bean flour.

Although Rice sells his products nationwide, distribution is limited, Coen said. Authentic Foods needs to be in many more stores and increase its sales per store, he said. To do that, Rice must focus his limited resources and sales efforts, which are currently split between wholesale sales to health-oriented grocery store chains and direct retail mail order. Coen encouraged him to make wholesale sales a priority.

“That doesn’t mean walk away from mail order, but spend 90% of your time on the side with the most potential,” Coen said. If Rice can build per-store sales, he’ll attract the interest of competing grocery stores. He would then gain the leverage to bargain for more shelf space. That’s how the grocery business works, Coen said.

But first, Rice needs to learn more about the customers who buy his flours and mixes at the stores. He already knows that his falafel mix, a concoction of ground garbanzo beans and spices with which he launched the company, doesn’t do well in stores but does sell nicely through mail order. (Rice used to sell handmade falafel in pita bread at his former business, Steve’s Oasis, a small health-food restaurant in the Farmer’s Market in the Fairfax District.)

Coen encouraged Rice to do informal research in stores that carry his mixes to gather more information. For instance, Rice acknowledged that he doesn’t know if the grocery store sales are being made to repeat buyers or many one-time purchasers.

“That’s one of my biggest fears,” Rice said. “If I’m just filling the pipeline [no repeat orders], I know it will be a failure.”

Giant packaged-goods companies can afford to have two sales and marketing teams, one to focus on marketing to grocery store buyers and one to focus on end-users, Coen said. Authentic Foods can’t afford that luxury, but there are a couple of things Rice can do to communicate directly with his end-users.

Shelf signs, which Rice says he uses, tags affixed to the products, in-store questionnaires, informal surveys of customers at the checkout counter, and even in-store product demonstrations, all will give him a chance to communicate with customers. Each of those options requires store permission and involves a cost, Coen said. But the end result will give Rice the solid information he needs to build a sales and marketing strategy.

“You have to find your customer base,” Coen said. “It might be a big one. Right now it’s a very narrow one, but it could be terrific.”

And Rice doesn’t have to pay for a major research effort.

“Because he knows so little, he doesn’t need a big study to start building hypotheses,” said Coen. As few as 15 or 20 customers will do.

Once Rice has a clearer idea of who buys his products, how much they buy and why, he’ll have a better idea about what kind of label designs and packaging would attract them, Coen said. Rice has been working on finding a graphic designer, but he said he was discouraged by the $5,000 to $10,000 quotes he has received.

Coen would also like to see him upgrade the look and strengthen the sales message in his small catalog.

With those tools in hand, Rice would be ready to enlist some allies, according to Coen.

For example, he might consider a joint venture with another quality food manufacturer, small or large, to share resources, the consultant said.

Or he might approach a store he has a good relationship with, such as Erewhon, his first big customer, about financial support in return for exclusive access to Authentic Foods products for a certain time. Or he could offer to make a private label line for a store in exchange for financial support of some sort, Coen said.

Big manufacturers such as Arrowhead Mills are often looking for products to add to their lines. Without giving up proprietary control of his recipes or his brand, Rice might consider selling his products wholesale to another manufacturer, the consultant suggested.

“It isn’t like everything will work,” Coen said. “But you’ve got to be trying things and not be afraid to go up dead ends.”

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This Week’s Company Make-Over

* Name: Authentic Foods

* Headquarters: Gardena

* Type of business: Specialty flours and baking-mix manufacturer

* Owner: Steven J. Rice

* Founded: 1993

* Start-up financing: $40,000 from sale of previous business

* 1998 sales: $112,000

* Employees: 3 part-time independent contractors

* Customers/clients: Wild Oats, Whole Foods Market and other health-food stores nationwide; Breadsmith, a retail bakery; mail-order customers

Main Business Problem

Lacks advertising and marketing expertise and financing.

Goals

Increase manufacturing capacity to support higher sales; heighten awareness of celiac disease, a hereditary nutritional disorder.

Recommendations

* Set up a board of advisors to provide needed expertise.

* Conduct informal research on retail customers.

* Focus on selling to health-oriented grocery stores.

* Create business alliances.

* Upgrade packaging and catalog designs.

Meet the Consultant

Raymond L. Coen is a sales and marketing consultant. Before starting Pacific Palisades-based Coen Co. in 1981, he was executive vice president of BBDO/West, a major Los Angeles advertising agency.

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