Right-Sizing vs. Scaling: The Growth Strategy That Actually Makes Food Founders Money
(Listen on Apple or Spotify. Full transcript below.)
What if the secret to a profitable food business isn't scaling bigger, but growing smarter?
Sarah challenges the "grow fast or fail" mentality that's crushing food entrepreneurs, revealing why 75% of VC funded businesses fail and sharing a proven approach to sustainable growth.
You’ll meet two food founders who made the counterintuitive decision to right-size their businesses - one contracting from national to regional distribution, another strategically eliminating sales channels. The result? Better cash flow, higher profit margins, and businesses they actually love running again.
Discover the three warning signs that your business needs right-sizing, why gross profit margins below 50% slowly drain your cash flow, and the specific financial tools Sarah uses to help founders evaluate whether contracting could transform their bottom line. You'll hear practical strategies for building a financially sustainable food business that works for you, not against you. Plus: inspiring updates on where these founders are today- including one successful business exit and a beautiful rebrand that's thriving.
Financial Strategy Software is coming soon!
Get on the waitlist now at thegoodfoodcfo.com/waitlist
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Episode Timeline
00:00 Introduction to Right Sizing Business
03:10 Understanding Financial Strategy
09:36 Reasons for Right Sizing
15:25 Case Studies: Vermont Tortilla and Semolina Pasta
22:05 Impact of Right Sizing on Profitability
25:57 Tools for Financial Assessment
29:00 Updates on Featured Businesses
Full Episode Transcript
You're listening to the Good Food CFO podcast. I'm your host, Sarah Delevan, and with us as always is our producer, Chelsea Stier. Hey, Chelsea.
Hey Sarah, today we're doing something a little different.
we are. We're going to do a replay of a previous episode, one that aired back in season eight. And in that season, it was called Pulling Out of Retail.
Yeah, Sarah, we typically don't replay episodes like this, right? We don't typically don't re-air episodes. So I want to talk about what it was about this conversation that made you want to revisit it.
Yeah. Well, I'm hoping that people are not turning off the podcast right now because this was a very under-listened to episode and we take full responsibility for that because we got the title wrong. I think we've talked about it, Chelsea, how we're bummed out that more people didn't hear this episode because what it's really about is right sizing your business. Yeah. And it just so happened that the two founders that we spoke to in the original episode were indeed
pulling out of retail. And so that's what felt like the right kind of title. But I wanted to re-air this episode to get more ears on it. I think people need to listen and hear this episode and need to think about right sizing. know, we've been doing a lot of talking on social media lately about, you know, VC funding and angel funding. And there's so much focus on this quote unquote achievement of getting
funding. And the reality is that funded businesses, however you go about it, are no more successful than unfunded businesses. 75 % is the most recent stat that I've heard of funded businesses, whether it's VC, Angel, or otherwise fail. And what that made me think as soon as I heard that stat was funding is not a financial strategy. And what you really need to be successful is
a good financial strategy, the one that is right for your business. And that idea coupled with this message that we get all of the time in traditional media that you got to go big, you got to grow fast, right? It's like, whoa, whoa, whoa. What you need and what we've proven, right, that helps make businesses successful is understanding your margins, understanding what channels
and how you grow are going to help you be the most successful, the most profitable, have the most positive cash flow. It's not to say that you never need outside funding. It's not to say that you never go for venture or you never work with angels. But at the core, you've got to have a financial strategy that works for you. And right sizing is something that I have done with countless number of founders and businesses up to this point.
And I know that it's going to be the case for a lot of other founders as well listening. So long answer to your very simple question of why are we re-airing this? It's because people need to hear about it.
Yeah. And I remember in the episode two that we're re-airing today, at the end, you know, when you talk about financial strategy, I think I even asked you, like, if someone is thinking about right-sizing their business, like, what can they do or how can they go about that? And you mentioned a couple of our tools. I believe it was the perfect pricing calculator, the profit assessment, and the annual planning and forecasting.
What I think is so interesting is that those are the three tools that you named and those are the three tools that basically the software, the GoodFoodCFO software is replacing.
Yeah. Something else I recently shared, I think in a conversation was that, or maybe on social, was that this software has been in my mind for over seven years. Yeah. And there have been drafts and iterations of it. And what is so fascinating to me is getting glimpses as I go back into the records and as I was working on creating it and seeing that it's the same foundation. Like these tools are
core to creating a financial strategy. And so when I was listening back to this episode, just as a refresher, because we're going to do a company update, a business update on the two founders and businesses that are a part of this conversation at the end of the episode, I wanted to refresh my memory of like, what did we talk about? What did we say? What was in this episode? And at the end, I heard those three tools and I said, how much do I love it? That those are the three core tools that are in.
our software, it's for a reason. It's so founders have tools at their disposal that are easy to use, that are easy to understand, to understand their margins and pricing, to understand how their business is performing today and how they can improve their financial outcomes, and then to create a financial strategy that will indeed help them to implement those changes and to actually improve their financial outcomes.
Yeah.
Yeah, I actually got quite excited and was like, I'm proud in this moment that we've put these core tools together for people and that I'm realizing it as we're re-airing this really important episode.
Yeah. Well, I think we should get into the episode itself. And then like you said, at the end, we're going to be back and you're going to be giving us a little update on the two businesses that you talked to in the episode and where they are today. So make sure if you're listening that you stick around for that and we'll see you at the end of the episode.
Let's get to it.
-BREAK-
This past August, we had a really wonderful panel discussion surrounding the true cost of food. You can...
listen to that full episode, it's episode 75. And it was such a great, lively, extensive conversation that we actually couldn't publish the entire thing as an episode. And we created two bonus clips available inside of our Plus membership with additional content. And one of the clips is called Retail and the True Cost of Food. And in that clip,
Vincent Finazzo, the founder of RiverWords Produce says, you either play the game or you make your own. And he's talking about playing the game of big retail. And as the conversation went on, you know, I asked the question, can a business reel it in and make the math work? And what I was talking about there is if you, you know, if you choose to not play,
the game of big retail, you choose to pull out. Can you make the numbers work? Can you have a financially viable and successful food business? And since that conversation, I have worked with a few brands that have right-sized their businesses by either pulling out of retail,
contracting from national to regional or regional to local brands or removing a business line completely. And these are all changes that resulted in them being more profitable and having more cash flow in their business. And I want to talk about that today because for all of the founders who are making these changes, there are many other founders who aren't. And through conversation with
founders, I have come to understand that the reason they aren't making these changes is because of the fear of failure. That making your business quote smaller is a failure as a business owner. And one founder actually said, it feels like going backwards.
Yeah, I understand that way of thinking. And it's something that we hope to change right here. know, traditional business media celebrates big revenue, celebrates new accounts, celebrates growth and scale. Cutting revenue in the short term, letting go of accounts and scaling back are the exact opposite of what is celebrated. So of course it feels bad and like you're moving in the wrong direction.
Yeah. And we need to look at the benefits of doing things differently, really the benefits of doing what is right for your business rather than what's generally celebrated in the public eye without context.
Absolutely, think you're right. And so Sarah, I want to start off by talking about why a company or a business would want to right size.
a great question and typically it comes down to three main things or three primary things. Number one on top of the list is cash flow or perhaps I should say lack of cash in the business. Number two is often that a founder has hit their risk threshold, right? They don't feel comfortable taking on more risk whether that's in the business itself or in terms of
you know, debt and financial risk. And the third factor is things like exhaustion, internal difficulties in the business, right? And that could be as a result of cashflow issues and dealing with the stress of the amount of financial and business risk you have taken. It could be that the company just internally isn't
functioning well and we'll dig into the whys of that in a couple of minutes, but you know if you have a business that just isn't operating smoothly and when that happens, it can be a good time to say, like, let's take a pause and right size our business either temporarily or permanently to make things work a little bit better.
want to take a step back from there. Could you explain to me what would cause a business to get into that position in the first place?
That's a great question. you know, what I hear you asking is like, how does a business end up with cashflow issues or how does a business end up with internal difficulties or hitting their risk threshold? And it's a great question. And I think on a sort of a high level view, that often happens because a founder is building the business they think they should be building or they're growing at a pace that they think they should be growing.
And that is often sort of like the root cause of a lot of reasons and a lot of causes. But if we're going to get really specific, some of the most common things that I see are number one, the gross profit margin of products. We talk about this a lot around here because it's so important and we do a deep dive into it in the rethinking cashflow episode. But if you are selling a product that has a profit margin below 50 %
It means that additional funds from somewhere else, either your business savings or a line of credit or debt of some kind outside of the business is needed to fund the continuation, not the growth, but just the continuation and maintenance of those sales channels or those customers. So we most often see this in distribution and in wholesale direct relationships, but it can happen in all sorts of businesses.
The other thing that plays a part particularly in retail and distribution is trade spend. Trade spend is such a high cost of doing business. And a lot of founders either don't know what they're getting into when they're signing agreements because they don't know what questions to ask or they think they understand what they're agreeing to, but they don't have a full understanding. You might also...
know, be taking advantage of an amazing opportunity like opening a national retailer. And that's going to cost you $250,000 in some cases just in, you know, slotting fees alone. That's not accounting for any new distribution centers you might have to open. It's not accounting for any promotions that you may need to run. And you might enter into trade spend fully informed, but
the results of that financial impact on your business may be unexpected and may cause cashflow issues and stress just generally or related to debt, right? We also know that a lot of people use brokers and merchandisers and these are valuable participants in the landscape of retail and distribution, but sometimes we onboard these supportive people
and they detract from the profit margin of a particular retail partner. And we may not realize that, right? What the expense is and how it's affecting our overall gross profit margin. So a lot of these come back to margin as you can tell. The last thing I'll mention, and we've seen this a couple of times, we've talked about it, I think, a couple of times here on the show, is that brands get introduced into a new retailer.
very exciting. pay the sliding fees or they provide the free fills and the sell through rate at those stores is not high enough for the store to keep them on the shelf and they'll be discontinued within six months. I mean, we're starting to hear rumbles with inside the industry that that's simply just the model of certain retailers that they'll onboard.
new brands earn a bit of money in terms of those fees and get them off the shelf relatively quickly. mean, again, that's rumblings in the industry. It's not for sure information, but we also have seen for sure that when you're launching into a new retailer, there's a lot that's out of your control. You can't force your distributor to deliver to every store that you've just onboarded with. You can't always insure.
that your product is on shelf and available when and where it's supposed to be. And so there are things that are out of your control that will have an impact on your cashflow and on your stress level and on how you're feeling about running your business. And all of those things lead up to roll up to cashflow issues, risk tolerance issues, and potentially those stress and sort of internal difficulties.
So these are some of the reasons a brand might right size by contracting from a nationally distributed brand to a regional brand or from a regional brand to a local brand. And I had a chance to speak with the founder of Vermont Tortilla about this very topic and some of the reasons that they right sized from a national brand to a regional brand. April, Vermont Tortilla is a regional
Portier brand. Have you always had being a regional business as your vision and your goal or did you have different aspirations at one point? So we started as a regional brand. We started to attend various trades shows, Fancy Food Show and everyone that we met with.
at the shows.
the brokers and all the salespeople would say things like, you need to this store. You need to get into this store. Before I knew it, we were trying to get into stores all over So just in our region, started to go for some of these larger accounts, really realizing what we were getting ourselves into financially. Right.
Get into the. And.
with the place. So not region but outside. So.
without you.
Was it observations over time? it something in particular that happened that after you started to grow into these various locations that made you more of a national brand that you decided to, I'll call it contract back to a regional brand? One thing.
that we realized after we got a national
account that we were really excited about is that we didn't have the money to support that account. So when you're working with a larger retailer, you're going to have expectations in terms of promotions, terms of terms of using spend, demos, there's all kinds of programs that they want you to participate in that are expensive.
to
they are
Of every day low price.
And as a and not backed by venture capital, we have that they thought we would get if we were as they call it.
But Brown.
We did not the funds to sustain the type of growth.
if to invest in our brand. Outside of the retail and distribution conversation, any type of food business could be struggling with cash flow. They might be bumping up against that risk, you know, tolerance level or struggling with internal difficulties due to simply lack of clarity within their business. And that might look like a couple of different things that might look like the founder
having all of the recipes in their head and their team not having access to that information without asking, right? That causes all sorts of difficulties and issues. It might be that the operations team or the kitchen and production team don't have the tools and the resources as well as the information that they need to operate as efficiently as possible to keep.
know, ingredients and food costs on target, you know, every time they produce the product, then that can lead to all sorts of different problems, right? We also see businesses that are running without an understanding of their cost of goods sold. You know, what does it cost to actually make their product? And with that, you know, without that core piece of information of growing your business is actually
potentially detrimental, right? Because if you're not selling a profitable product, if you're selling a product that's profitable, but the margins are below that 50 % mark, we know that that's actually gonna eat up more and more and more cashflow the more you grow. So in these instances, right sizing by removing a business line, either permanently or temporarily, or contracting the business that you are running,
are really good ideas because that's going to give you the space that you need to dig in and do the foundational work that you need to do to be able to grow confidently in the future. I recently had a conversation with Leah Farazani, who is the founder of Semolina Pasta, about why she decided to eliminate some business lines or sales channels from her business. Let's take a listen to that.
So Semolina is a retail shop where you sell your pasta, you sell other products. You have an amazing little like sandwich business that runs out of there. The greatest sandwiches, Italian ices, and in the back of the retail store and to the side of it, you have your pasta production, which for a couple of years or several years, you've been selling not only wholesale direct, but also through distribution to larger.
retailers and you shared in the true cost of food episode that you had pulled out of UNFI in the past. recently, so within 2023, you also made the decision to stop working with, at least for now, the distributors that you had been working with. Can you talk a little bit about like what was happening and why you made that decision?
of all, with the distributors that I left recently at UNFI is like night and day. So I don't want to totally discount the level of partnership, especially with Foundation Foods that I had, the advocacy, the work that they did to get our brand on shelf and keep it on shelf and really understand the moving parts of a
a small food business or small to medium food business as opposed to a behemoth. They were fantastic partners. That said, with all of the cost increases over the last two years, even with a price increase on my own end, the margins to sell at that tier really just
don't make sense. The place that like running projections, it felt like, and this may be a slight exaggeration, but it felt like to really see the profitability that I used to have at that same tier, I needed to 10X the business. And that's a business that makes a million and a half pounds of pasta a year. That's a
Yeah.
different, fundamentally different operation. It is a truly streamlined factory that has automation in packing. mean, that's a huge part of where we were struggling is the time that it took to pack. It either is drying the pasta much faster and at higher temperatures than we do to make that process shorter to be able to match.
the space or finding other shortcuts. And those were never principle shortcuts has never been a principle that I've operated on. And automation isn't a cutting of corners. It's an investment. And the revenue isn't there to financially pay for the investment. And the space isn't there.
Yeah.
to fit the equipment. isn't right size equipment, which also means then there's not right priced equipment to hit that middle tier. So like, if you start adding it up, it's like, well, I can't go from 150,000 pounds to like 350,000 pounds or something like that, right? Like get like a small packing machine. It's like, no, no. Like I have to get the.
packing machine for this much, much larger business, which means that I have to make that much pasta to even justify having the $50,000 packing machine to make the same amount of money that I used to make making less pasta. when I think about the parts of the business that I love, the parts of the product that I love, that's
Yeah.
the product that I would make, how do I reconcile those? And do I have the same connection with the business at a million and a half pounds? Do I get the opportunity to talk to my customers? Like that is so important to me to feel like I am bridging a gap between somebody and the thing that they're feeding people. And so I just couldn't see
myself in that bigger picture.
Yeah.
So we've heard from two founders now who made decisions to right size their business and really why they made those decisions. But I'm curious to know still how those changes affected profitability, cashflow, getting realigned with their risk tolerance, all the things that we've talked about today.
Yeah. Well, right off the bat, in terms of cash flow, when you identify that something's not working in your business, you identified the strain on cash flow. And a lot of the examples we gave today, it was distribution or retail. When you identify the source of low profit margins, that drain on your cash flow, as I said, and you eliminate it from your business,
What you're left with typically is higher margin sales channels. So right off the bat, your gross profit margin is increasing and that's going to allow you to hang on to more of the money that you're earning in your business. So that has a pretty direct correlation to cash flow and a pretty quick impact on it as well. The other thing that we see in terms of profitability is that
when you're spending less, you are more profitable. And so for some businesses, when we looked at April's numbers, for example, per profit on the P &L, it seemed to change overnight. It was a very, very quick change. With Semolina, it's taking a bit longer to see the kind of change that we saw with Vermont Tortilla. But we're
taking closer and closer and closer month over month over month. And it's because you've taken the time during the contraction, during the right sizing to say, what do I need? What do I not need? Where am I spending money? Where am I not spending money anymore? it just, it essentially right sizing is making your business profitable at the core, right? And not just profitable, but also manageable.
And so when you make your business more manageable, more profitable, you're going to see the changes on the P &L. You're going to see the changes in cashflow. Many founders also feel the change in terms of the lightness, in terms of the space they have to be creative and to truly build the business of their dreams. And so...
It doesn't look exactly the same for every single founder and for every single business, but without a doubt, when we've made very thoughtful changes in terms of right sizing a business, the impacts on cashflow and profitability happen quickly and they're pretty significant.
So Sarah, for any founders that might be out there thinking, you know, listening to this episode and thinking, maybe it's time I take a look at my business and do I need to right size? Do I need to pull out of retail or, or don't I, where can they go to get some support in that kind of thought process?
Well, I'm going to point them in three different places depending on where they're at in their business. So if you're a founder who's listening and you don't know the cost to produce your product or you don't know the profit margins of each of your product in each of the sales channels that you sell through, I highly recommend that you take a little bit of time and work through our perfect pricing calculator because that's really going to show you very clearly what your margins are. And if they're not,
you know, above that 50%, you know, we provide some recommended targets for each type of sales channel. If you're not hitting those, then you can start to make some decisions from there, right? So that would be step one. If you've done that work, you know you've got profitable products. The next thing I would recommend that founders do is to complete a profit assessment. This is a tool that we use with all of our clients every single month.
But when you do it for the first time and you do a full 12 month assessment, you really get a big picture view of how your business is performing financially. And the coolest thing about the profit assessment is that it comes with a decision tree. So you can walk through the numbers with me inside the course and then use the decision tree to identify where do I need to focus time and attention in my business to change the financial outcomes.
Here is where you may get some inclination on whether or not you need to right size your business. And if signs are pointing to yes, the third step that I would direct people to would be to complete a financial forecast. It doesn't have to be complicated. It can be a simple model. But this is where you're going to do the work of looking at what your business looks like financially. If you were to, you know, pull back from national
distribution to a retail or sorry to a regional distribution or from regional to local. It might, you know, it's going to help you identify if I pull out of wholesale altogether and I become a DTC brand, what does that mean for my business? And that's so important, Chelsea, because we don't want you making sudden and drastic changes to your business without a firm understanding of the financial implications.
to that, right? If you were to downsize to D to C, you know, in one week's time, you might have shrunk your revenue to the point where you can't cover your bills, right? You might need to make team changes that also need to be downsized. So the point here is that I want you to go into any right sizing and any decision-making around right sizing fully informed
And also with the ability to create a plan of how are we going to roll this out? No one that, you know, we talked to today within this episode made these decisions overnight, nor did they implement the changes overnight. They were planned, they were thought out, and they got, you know, kind of rolled out over a few weeks time. And I think that that's really important to note.
I love those tools, Sarah. think that just like you said, they do give you a big picture view of your business. And for anyone who might be working through those tools and need some additional support, I think I would also say our office hours, the weekly CFO office hours are a great place for founders to come and not just to get support in using maybe those tools, but to...
bounce their thoughts off of other founders in a small group setting and be able to develop the plan like you said with the support of people in the industry.
Well, Sarah, after listening back to the episode, I can definitely see the value in resharing it and the value that it can bring to founders in understanding where they're at in their business and where they want to be, right?
Yeah, I think it was just another reminder in the importance of, as you say, having a financial strategy, right, as a founder of a food business in this industry especially. Now, I remember you teasing at the top that you're gonna have some current updates on Vermont tortilla and semolina artisanal pasta.
Yeah, that's amazing. Thank you so much for sharing those updates with us on Vermont Tortilla and Leah over at Farrazzani's now. I love that, the name change. It was really good to kind of listen to this episode again and to hear what a true financial strategy and the work that you can do in right sizing your business, the impact that that can have, right?
I think if you're listening and you would like to dig into that kind of work, I just want to remind you again that all of those foundational tools that we talk about in the episode are a part of the Good Food CFO software that is going to be available very soon. So if you're interested, make sure you get on the wait list, which you can do at the goodfoodcfo.com slash wait list. also will have the link for that in the show notes.
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