Ten years ago, the kitchen incubator was a novel concept.
Since then, the food landscape has evolved pretty dramatically. We are now flooded with artisan products (or specialty, local, small batch – insert your favorite food movement here!) and have unparalleled access to unique food trucks and food services — and I think we are all better off for it. In fact, as I write this I am enjoying a “Real Dill Bloody Mary” whose spectacular mix is made right here in Denver.
In a classic chicken or egg problem, this explosion of small food businesses was either fueled by or paved the way for the evolution and growth of the kitchen incubator. Regardless of which came first, kitchen incubators have undoubtedly helped to sustain the rise of specialty products, making it significantly easier and less expensive for aspiring entrepreneurs to enter the market. According to the National Business Incubation Association, 87% of businesses that have graduated from an incubation program are still in business within five years, versus 50% of those that have not had this support.
Small, but not simple
For many of us, when we picture a kitchen incubator, we think of a certified, fully equipped commercial kitchen that food entrepreneurs can rent on an hourly basis to produce their goods. These incubators allow entrepreneurs to be in business without having to secure and pay for their own commercial kitchen space – an expense that would be prohibitive for most.
Sounds simple right? Recently, we’ve worked on several projects with a kitchen incubator component, and we can assure you it is anything but simple. As goes the popular statement heard at NGFN’s 2016 Food Hub Conference, “If you’ve seen one food hub, you’ve seen one food hub.” It’s much the same with kitchen incubators.
We have learned a lot from our research on kitchen incubators. This post describes the many different ways they can be structured and some of the common challenges they face. Perhaps you are considering whether or not a kitchen incubator might be right for your community. We hope the research we’ve conducted helps you understand the types of questions to look into as you develop the right business model. And for anyone already running a kitchen incubator, we hope this post spurs you to consider other services you might incorporate and ways to address the challenges you may be facing.
If you are operating or supporting a kitchen incubator and have thoughts and expertise to share, we’d love to hear from you … How have you structured your incubator? What is most challenging? What has been most successful? What advice do you have for people or communities interested in developing one?
Econsult Solutions, Inc (ESI) along with American Communities Trust and Urbane Development conducted a survey assessing the landscape of U.S. kitchen incubators/accelerators. While we have highlighted a sampling of incubators throughout this post, and have flagged some trends we’ve seen in our work thus far, this is certainly not an exhaustive assessment of the 200+ incubators that exist nationwide. Anyone interested in kitchen incubators should check out ESI’s 2016 report to gain a more in-depth understanding of the landscape. Also, The New Food Economy’s excellent Incubator Week series is a must read for anyone interested in learning more.
The key ingredients: kitchen incubator business models
In our work thus far, we have found the most common characteristics that make up a kitchen incubator business model to be the mission that drives it, the basic structure and services provided, the type of clients it serves, the pricing model, and valuable offerings such as storage and business services. We have also found that in some communities, the “typical” food business incubator doesn’t work, but that there are lower-cost alternatives that can serve the community’s needs. These are covered in the following sections.
Though most incubators have a number of different components to their mission, they tend to focus on one core mission above others. For some, such as Amped Kitchens (Los Angeles), the focus is predominantly on operating as profit-driven enterprises that have been developed in response to a commercial market opportunity. Others, such as the Western Massachusetts Food Processing Center, have a strong focus on providing agricultural producers with a location to process surplus produce and develop value added products. Others, such as ACENet’s Food Venture Center, aim to promote and support food entrepreneurship in their community. Organizations such as La Cocina (San Francisco) and CommonWealth Kitchen (Boston), focus on supporting businesses owned by minorities, women and low income individuals. Still others, such as Wisconsin Innovation Kitchen, owned by Hodan Community Services, prioritize workforce development and the employment of people with disabilities. An incubator’s core mission drives so much of the business model: how it’s structured, the legal entity it operates under, the services it provides, and the pricing it sets for its tenants and members.
Basic structure and core services
A shared use kitchen is the most common way to structure a kitchen incubator. New models, however, such as LA Prep and The Hatchery (Chicago), are emerging that provide dedicated, “move-in ready” production space to entrepreneurs. Additionally, some kitchen incubators, such as CommonWealth Kitchen, Organic Food Incubator (Long Island City, NY), and Kitchen Coop (Broomfield, CO), have begun offering contract manufacturing and packaging services; this supports tenants who are outgrowing the shared use kitchen model and establishes a new and diversified revenue stream.
Type of clients served
Clients can range from caterers to food trucks, agricultural producers, food product companies and food service companies (such as meal delivery services). The decision on what types of clients to serve, and whether or not to be restrictive on some types of clients, is driven by the incubator’s mission, its infrastructure (equipment, size, parking, etc.) and certifications held. For example, some incubators may be able to work with food trucks as clients, but may limit the number of tenants based on their parking and plug-in capacity. Some incubators may not have the appropriate certifications to accommodate food businesses that handle raw meat. Other incubators may have invested in specialized equipment, such as a coffee roaster or equipment for juice pasteurization, and therefore seek out specific types of food businesses to utilize their existing equipment. As an example, Bake, Boil and Brew (San Antonio, TX) invested in a state of the art brew kitchen, making it one of the few incubators that is set up to support microbrewers. Targeting the right mix of clients is an important business decision — collectively an incubator’s clients should maximize kitchen utilization throughout the year, make good use of facility and equipment investments, support the incubator’s core mission, and reflect businesses at different stages of growth and financial stability to perpetuate a stream of inbound and successful outbound clients.
Historically, kitchen incubators have operated on an hourly fee structure, ranging from $8 to $50 per hour (averaging about $20-25 per hour). This wide range in pricing reflects the diversity of both real estate markets nationwide and what is often an incubator’s desire and ability to support entrepreneurs who are unable to pay full market rates. Some organizations, such as Kitchen Chicago, will provide different rates for different times of day (with lower rates at night) while others will provide discounts for businesses that have high usage rates. Additionally, some kitchens may increase the hourly rate if the company brings in more than a certain number of staff members, or if they take up more than a specified amount of room for their production. Recently, more and more kitchen incubators – such as Union Kitchen (Washington DC) – are operating on a membership basis, with a monthly rate that offers a set (or unlimited) number of hours of access. Kitchens such as Amped and The Hatchery, which provide entrepreneurs with private space, will charge a monthly fee akin to a lease. Those offering co-packing services usually price this service as a fee per unit or as a percentage of revenue that the food business receives for their products.
It is virtually required for a kitchen incubator to provide dry, cold and frozen storage to accommodate entrepreneurs’ raw inputs and finished goods. In fact, some entrepreneurs we have interviewed have suggested that storage for finished goods is the most valuable component that an incubator kitchen offers them. Not only do kitchens need to have storage available, but the storage areas should ideally be accessible to the loading dock (or similar loading area) and the incubator’s production area. Most production processes involve many steps; having convenient access to storage simplifies the process of receiving raw goods and other inputs, moving it out of storage and into the production area, storing “work in progress” goods, then finally storing and organizing finished goods. If storage is located inconveniently, this can add substantial time and hassle to the production process. Most kitchen incubators will charge separately for storage on a “per cage” basis or include a certain amount of storage as part of a set monthly fee.
The phrase “additional services” is probably misleading, as for many incubators, these services may actually be the most valuable part of what they offer to food entrepreneurs, and may become their most lucrative revenue streams. While the following list is not exhaustive, it highlights some of the most valuable and common services provided by incubators.
- Business expertise and support: Almost every kitchen incubator we have researched offers these types of services, sometimes as a core component of their kitchen or as a separate service for which entrepreneurs are charged an additional fee. Amped Kitchen, CommonWealth Kitchen, La Cocina, and Union Kitchen are all examples of incubator kitchens that incorporate business services, and do so in very different ways. These programs range from business and production related classes to mentorship opportunities to more formal business incubation or training programs from which entrepreneurs will “graduate” after a series of classes or steps. The common thread is that incubators are recognizing that beyond access to production space, entrepreneurs need support with all aspects of building their business — including business plan development, sales and marketing support, and financial planning. By helping their clients succeed, incubators are securing their own future revenues by keeping entrepreneurs in business and utilizing their incubator kitchen, and demonstrating their value to new inbound clients. And, in many cases, these business services are a critical component of how incubators accomplish their mission to support local entrepreneurs.
- Sourcing and collective purchasing: Small food businesses are often a one man or one woman show. A single person will often run sales, production, procurement, social media, label making, distribution, etc. Incubators such as CommonWealth Kitchen are beginning to offer sourcing and collective purchasing support, helping their entrepreneurs gain access to great inputs without spending extensive time finding the right suppliers, and gaining more competitive pricing from common vendors leading to significantly improved profit margins. This service is especially valuable to food businesses that are interested in sourcing locally but find it difficult to establish a relationship with a local producer given their capacity or volume constraints. Incubators often charge a small fee for this service, enabling them to gain additional revenue while still passing on savings to their entrepreneurs. Win-win.
- Receiving: Many food entrepreneurs have full or part-time jobs and cannot be in the kitchen at any hour of the day. At the same time, many suppliers will only deliver at specific times, such as early mornings, when entrepreneurs are often unable to be at the kitchen. Some incubators therefore provide receiving services for their clients, with a staff person signing for incoming shipments of inventory and managing the process of stocking this inventory in appropriate storage areas.
- Marketing and brokering: Generating sales is the most important task for a food business, and is often the most difficult, particularly for entrepreneurs with limited experience in the food space. For kitchen incubators that serve many consumer packaged goods (CPG) companies, like Union Kitchen, helping connect these entrepreneurs with large-scale buyers (such as Whole Foods) can be a huge value add. Some incubators will even support entrepreneurs in their efforts to pitch and sell to these large-scale buyers.
- Distribution: So many entrepreneurs operating out of kitchen incubators have very basic delivery capabilities, and are often delivering their goods with their personal vehicles. Incubators like Union Kitchen have begun providing distribution support for their entrepreneurs. As another alternative to direct delivery, incubators might facilitate relationships between entrepreneurs and third party logistics providers.
- Formula development: A food entrepreneur might have a great salsa recipe, but there is work to be done to turn that recipe into a shelf-stable, jarred, FDA-compliant product. Incubators such as Wisconsin Innovation Kitchen have a cadre of experts who can support entrepreneurs in developing their formulas, analyzing the nutritional value of products, and developing industry-compliant labels that include this information.
- Office space: Entrepreneurs, especially as their food business becomes their primary or only venture, may need office space – with phones, printers, shipping supplies, etc. These can be common, shared work spaces, but many incubators also provide private offices and conference rooms.
Lower cost alternatives
Finally, it is always helpful to consider when a different model — outside of a “standard” kitchen incubator — may be the right fit for a community. In some instances, when only a kitchen space is needed for a short time during the year (such as a production space only being needed by growers in 2-3 months of the season), it may make the most sense to upgrade a local school’s kitchen into a commercial grade facility or find underutilized kitchen space in local restaurants or even churches. The Food Corridor is a platform that will support these types of connections by helping food entrepreneurs find cooking spaces — described in a New Food Economy article as an “AirBNB for commercial kitchens.”
If a community of entrepreneurs is in most need of business support, it may make the most sense to skip the kitchen altogether. Providing startup business support and encouraging entrepreneurs to take advantage of their local “Cottage Laws” and produce at home until they have proven out their concept further may present the best community solution.
A tricky recipe: kitchen incubator challenges
We’ve had the opportunity to work on quite a few kitchen incubator projects, and have received input from dozens of entrepreneurs nationwide who are either incubator clients or operators. The challenges they face are not unlike those of the entrepreneurs they exist to serve: profitability, operations flow, pricing, cost management, serving a changing customer and regulatory requirements. This list is by no means exhaustive. If you operate a kitchen incubator, we’d love to hear what kinds of challenges you’ve been facing, and learn more about the strategies you’re using to address them.
The age-old dilemma for all businesses! The most recent study by Econsult Solutions on kitchen incubators found that 25% of those surveyed report losing money each year. Profitability concerns can be driven by a combination of pricing levels that are too low to cover occupancy costs, low overall demand or utilization, high overhead, expenses related to delivering valuable services to entrepreneurs, and much more. Successfully addressing profitability issues can range from simple fixes (like increasing prices or diversifying client types) to more complex solutions (like adding new services such as marketing and brokering assistance). Pinpointing the exact issues and the right changes for an incubator to make requires a deep dive into the business financials and operations combined with a thoughtful strategic planning effort.
Crowding and bottlenecks
Beautifully summarized by the New Food Economy, “by offering professional mentorship and low-cost kitchen access, incubators have made it easier than ever for entrepreneurs to enter the food space. But though such facilities help businesses grow, they aren’t fully equipped to handle success. Incubating businesses run into production bottlenecks quickly, maxing out the possibilities of shared, communal space. Limited capacity makes it harder to reach crucial next stages, like generating the volume that would justify building out a private facility, or moving to a full-scale co-packer. Some businesses outgrow the incubator, in other words, long before they’re ready to leave the nest.”
The crowding issue is often driven by a number of factors. Seasonality leads to crowding in the summer, and then huge drop-offs in winter use. A mix of tenants that use a disproportionately large amount of kitchen space because of their unique production needs, such as food trucks or juicing companies, can lead the kitchen getting maxed out too early. Tenants who require massive amounts of storage space can crowd out storage capacity, making the entire facility untenable for other entrepreneurs. Solutions can range from a more strategic selection process for accepting new clients, to restructuring the entire facility to offer private spaces or separate packing lines instead of having all of the production done in shared spaces.
Pricing it right
The right price needs to balance the financial limitations of entrepreneurs, the need to cover occupancy costs (especially after factoring in electricity, gas and very high cleaning bills), and the importance of being competitive against other options for entrepreneurs (such as renting space at a local restaurant). This is no easy feat. Many kitchen incubators offer à la carte pricing for different services, and make higher margins on value-added services. In particular, services such as co-packing, brokering and business services can often be priced to generate higher margins than renting out communal kitchen space alone.
Higher than expected costs
Many kitchen incubators we have spoken with have highlighted the fact that their operating costs have been significantly higher than they first expected. Electricity, water, cleaning and equipment maintenance are all line items that can be easy to underestimate. Getting these operating costs right is critical to ensuring pricing levels cover costs and leave enough margin to cover other expenses as well.
The new missing middle
As kitchen incubators eliminate obstacles for aspiring entrepreneurs, businesses that find initial success inevitably (and often very quickly) find themselves outgrowing the operational limitations of a kitchen incubator well before they have the sales volume and cash flow to warrant an investment in their own production facility. Incubators like Union Kitchen are working to address this challenge by offering private “pods” to entrepreneurs who have outgrown their shared production area. Others – such as Amped Kitchens, Kitchen Coop and The Hatchery – are focusing on these “middle” food businesses by providing move-in ready, permanent or semi-permanent private production spaces.
Meeting health codes and food safety requirements
This is a major challenge for so many reasons. Food safety requirements differ for each municipality, meaning that a kitchen incubator in one city might be subject to very different regulations than one in a neighboring town. Kitchen incubators must first make sense of the food safety requirements they will be held to, and then work towards designing and outfitting their kitchen accordingly, establishing their own operations and staffing as needed, and ensuring their entrepreneurs are adhering to local requirements.
In many cities, the kitchen incubator must first secure proper licensing and then all entrepreneurs operating out of the kitchen must obtain their own licenses. In some instances, all tenants of a facility might be penalized (by having their inventory or products thrown away for example) if a single tenant is found to be in violation.
Because shared production kitchens are a new trend, the food safety requirements they are held to are ever evolving — and incubators and their tenants must stay on top of these changes. Incubator operators we have spoken to agree that navigating the complex web of food safety requirements requires a strong relationship with health inspectors, treating them as partners in the design of the facility and the development of operations. Additionally, working with entrepreneurs to establish written food safety protocols (even if they are not required by local regulation) is important in order to maintain high standards of operation and minimize the risk of an outbreak.
And try out our Kitchen Facility HubSizer® if you already have a site in mind for your kitchen. This tool estimates the number of entrepreneurs the facility could serve and the utilization rate required to break even.
(Photo courtesy of Pilotworks)