Operating a food
incubator
Interview with Pete
Herman and Mike
Schwartz by Jeff
Yoskowitz, Kathryn
Gordon and Jessie
Riley
Name of business: BAO
(Bad Ass Organics) and Organic Food Incubator
Kathryn: So
you just gave us a great tour of this 12,000 square foot organic, Kosher
facility; can you tell us how you got started?
Pete: My
background is in investment banking and finance. A lot of my past work was in management and
development of businesses around the world on behalf of banks. I was looking to do something more
interesting, and had been in touch with Mike Brady (the third partner), who I
went to high school with. We wanted to
have a business that provided good jobs to people, and offer healthy products
to consumers. A lot of my current work
is business management, contract negotiation and some of the sales and
marketing for the permanent clients and the daily use clients of the incubator.
Mike: Mike
Brady and I went to college together, and he has an IT/ marketing
background. About 3 years ago, Mike and
I decided to start BAO. We wanted to
make a healthy soda that was tasty and good for you, and after a number of
experiments we realized we could get a consistent culture with kombucha. At the time, the market for kombucha was
growing so fast we never went back to the sodas! We started in Hell’s Kitchen in an expensive,
shared commissary-catering kitchen for the first year. We shared a small space (a third of a
kitchen) with 2 other companies and our rent was $3000 a month plus utilities…we
had to make a move.
Jeff: Mike,
besides teaching with Kathryn and I at ICE, what is your background?
Mike Schwartz:
I have a culinary degree and attended the CIA. I worked in restaurants for a long time and
started teaching at ICE about 12 years ago as a career culinary
instructor. A lot of my interests had to
do with teaching nutrition at ICE. Talking to so many students, you realize how
awful a lot of the food in the American food chain is. I figured I should put
my money where my mouth is, and I should be making something healthy while also
promoting other healthy eating oriented businesses through the incubator
structure.
Jeff: How
did you formalize how your partnership is set up?
Pete:
We wrote an operating agreement that defines roles and responsibilities,
and we structured as an LLC.
Jessie: Why
did you choose this space?
Mike: Our
prior landlord wanted to raise our rent and we had quickly outgrown our space,
so we looked at over 30 spaces in Brooklyn, Bronx, Jersey City and Queens
areas. This was the only space that was
ready to go for our production and we were up and running in one and a half
weeks. Once we installed some sinks and
our kettle we looked around and the space was too big! We found some like-minded acquaintances that
needed space and contacted them.
Kathryn: Do you help your incubator kitchen customers
obtain their own organic certification?
Mike: There
is a tremendous amount of paperwork required for organic certification. For example, a National Organic Plan (NOP)
has to be developed and filed for each ingredient that you use – and you have
to verify that your process is chemical-free. For our products, we use hydrogen
peroxide here as our sanitizer because it oxidizes quickly and it’s naturally
occurring. We had to learn all these
rules because there was nobody to help us through the 230+ page organic statute.
As a result, we can now help other
businesses write their plans, and get through the inspection process here at
the Organic Food Incubator.
Jeff: What
were the major surprises you’ve encountered?
Mike: After
working in restaurants for over 20 years, I had figured that food was food but
working in a restaurant or hotel is not food manufacturing. The labeling alone is a learning curve – the
nutritional labeling, the kosher certification, the types and costs of containers
and everything else. Our bottles are fired in NJ because we wanted to have a
green footprint but even locally, the material shipping costs are insane. The distribution process learning curve was
also a surprise. Simple things like how to get your product onto a truck so a
distributor would sell it to store, for example. To complicate matters, all of our products
are refrigerated (because they are fermented and need to be temperature-controlled
or they could explode).
Jessie: What
kind of a margin does a distributor take?
Mike: It
can be between 20-30 percent and the retailer marks it up an additional 30-40
percent before it reaches the consumer.
Pete: We
put together a schematic to explain the process and mark-ups for an intern from
the not-for-profit organization Opportunities for Tomorrow. If the farmer charges $1 for their ingredient
cost, the final consumer cost at retail can be $4.50, with the product
manufacturer and two distributors in between.
 |
| Pete shows us the whole process from farmer to end retailer |
Jeff: Pete,
what did you find surprising?
Pete: There
are minimum orders for everything (bottles, labels). Most people also don’t appreciate the costs
that add up in building out a kitchen with the required bathrooms, break rooms,
security, sanitation, etc. to satisfy labor law.
Jeff: Are there
trends that you’re seeing for the type of people interested in incubator
kitchens?
Mike: Age-wise,
I guess they tend to be young. Some were
making products at home and selling (illegally) while others have come here
with a great idea but are completely new to kitchens. We help them learn the ropes at whatever
stage they’re in for their business.
Kathryn: How
did your incubator kitchen customers find you?
Pete: We’re listed on a number of incubator
websites such as the Cornell website and we were featured in the Daily News and
the Wall Street Journal.
Jessie: How
have you focused your marketing efforts for BAO?
Mike: We
just used the internet. In retrospect,
we could have done samplings and demos and we just have not, but need to build
going forward. We don’t have a demo
team, but a Long Island grocery store wants to pick us up, so we need a team to
do product demonstrations in local stores.
That investment is key for a small business to help get your product to
customers. There are already a million
products on grocery store shelves and you need yours to stand out.
Kathryn:
What is the cost for the business to use your space?
Mike: To
use the kitchen for a 7 hour shift, that price is currently $220 plus a per
pallet cost in a walk-in refrigerator.
To some extent, our clients are also making inter-client arrangements to
rent each other’s equipment and help defray costs (such as sharing use of a
blast freezer).
Jeff: The
structure you have here for monthly incubator rental customers is very
different than other incubator kitchens. You rent them raw space with plumbing
hookups for their 3-part and hand sinks, and provide electric hookups and most
bring their own equipment. How did this
evolve?
Mike:
It kind of worked out on its own.
We have such a varied mix of companies and there are few who require
ovens. We leave the space raw and it’s
up to each company to bring in the equipment they require. Everyone shares the loading dock, and
bathroom/break rooms as well as the walk-in refrigeration, if needed for that
product.
Pete: Originally
we thought we might have more shift kitchen usage, but we determined there was
more of a demand for private kitchen usage on a monthly rental basis.
Kathryn: How
big are the various spaces we saw on our tour?
Mike:
They range from about 220 square feet to about 800.
Jeff: What
are your long term plans for BAO, your own product line?
Mike: We’ve
been focusing on getting the incubator kitchens built! But the brand has been building and sales
have been growing, so I need to get back to that. We’ve been launching new products every 3-4
months.
Jeff: What
are the long-term goals for the incubator?
Mike: We’ve
talked to investors who like our incubator business model to either expand here
or move to another city. There’s a strong culture around the US for locally
produced foods which would imply that artisan, hand crafted food manufacturers
need space – space that right now does not exist. We think our incubator model could be
duplicated in other metropolitan areas.
The per-shift kitchen model works up to 5 days a month, after that you
want to be in your own space. It’s
difficult to afford the right space that will pass inspection (FDA) as well as
provide loading docks for bringing in materials or shipping out product, etc.
Jeff: What services do you provide for your
customers at the incubator kitchen?
Pete: When
a potential customer needs help with labeling, packaging, recipe development,
licensing, etc. we will do some consulting to help them after they have a
business plan and are ready for the next step.
We’re working on a classroom to provide training on business management,
sanitation, equipment use, and are developing a curriculum now. We can help set
them up with an insurance company, obtain equipment, etc. because there are
multiple new businesses here working together. Additionally, we can help
companies bottle their product using our bottling line, operational procedures,
etc. That kind of hand-holding is hard
to find…
Furthermore, micro lender terms are very expensive for small
businesses, and eligibility is based on personal credit scores. However, those loans can be used here to help
get started on an initial packaging run, and we can help guide people to get
started.
Mike: We’ve
also been approached by companies who need us to be their co-packers and we
don’t have the typical 5,000 production run requirement (we can do a test run
of 100, for example). To be a co-packer
customer, they have to have their own insurance, a license, (Cornell scheduled
process for hot foods), and all their “ducks in a row.” There’s a lot of demand for that, so we think
that business will expand.
Jeff: How
did you fund your current set-up?
Mike: We
started with friends and family, and we’re now “coming around,” three years in.
Jeff: What
about the incubator kitchen customers, how are they financed?
Pete: A
lot of the incubator customers are self-funded. Most have between 6-months and a few years
of financing. Some of the smaller
businesses have a goal to bring a test product to market and have a budget just
enough for that. We don’t want people to
over-commit for their own good, so I always talk to everyone in depth.
Jessie: What
does a company need to be able to start-up here?
Mike: They
just need a) license, b) insurance and c) to be able to make their stuff, or
we’ll help them do that through sub-contracting out BAO employees. When we began, nobody would help us find 100
cases of bottles vs. truckloads full. We
try to help people by providing what was not provided to us when we started up.
Jeff: Do
you have any “words of wisdom” for our readers?
Pete: Start
small, conserve capital and test your product.
Get out there through the daily shared space to prove your concept. When demand grows and you know if your
product is priced correctly, (through trial and error) you can obtain financing
and grow.
Mike:
You have to charge the end (retail) price when you start-up, even at
farmer’s markets. Initially sell the product for the grocery store price, and
when you do grow and have distributors to take your product to the retail customer
base; your pricing model will work.
__________________________________________
Kathryn: Hi Lisa! We’ve spoken before about your grandmother
who was a chocolatier in Salt Lake City, and your mother who was a pioneer in
NYC cake decorating. Your parents use to
run the business. Now it’s more being
run by you and your siblings, right? How
did that all evolve?
Kathryn: So do people watching TV! I imagine the cake craze has helped your
business boom?
Lisa: Our emphasis is on introducing new cake
ideas to refresh the company and to provide better customer service. You can say that the “girls in the family”
definitely have personality! I’m really
excited to get in there as an adviser to people, to help them make whatever
cake they want to make. 
Lisa: In January, I expect to introduce a gluten-free cake mix with natural flavorings. There is such demand now for great tasting, gluten free products. I hear it all day in the store as customers
come in looking for product. I am right
in the middle of the store so I get to hear all day what my customers want.
Lisa: I want to be a trend setter, and never a
“copier”. I don’t even look at what
other people are doing with their cakes or cake classes. I focus on myself, not other decorators. Some people consider me a threat – which I
think is sad. I need to do my own thing,
and I have my hands full with my own projects. 
