Setting up a CPG Business
March 29, 2021 | Education
Have all of your family told you you’d be rich if you could bottle your famous madras curry sauce? Or have you transformed your entire friend group’s skin with a lovingly researched natural face lotion that is better than anything on the shelf?
If you’re wondering how to take your product from your kitchen table to the grocery store, here are a few things to consider as you start out.
What is a CPG product?
Consumer packaged goods (CPG) are any items in consumer’s homes that need routine replacement or replenishment, like cleaning supplies, food, beverage, and beauty products.
It can be a tough market to break into because we have more choice than ever, and it’s quick and easy to try something new and change our loyalty. But that also means there’s so much room to delight people with innovation; products that are organic, sustainable, gluten-free, mission-driven, nostalgic, or locally sourced.
Purchase and consume all of your competitor’s products. Make sure you have a niche and that your product is either tastier, healthier, more effective, tactically nicer, more sustainable, or more affordable.
Then, nail the recipe. This can be a creatively fulfilling part of the process as you stop eyeballing your measurements and start to experiment with how your product could work in a commercial kitchen or lab. When you scale, there are a lot of other factors to consider than making something beautiful, tasty, or effective:
- Consider your suppliers. If they’re small-batch too, have an informal conversation about whether they have capacity to scale with you
- Ask yourself if your product could be replicated on bigger equipment. If there’s something you do by hand every time, is there a way that it could be automated?
- Think about whether any of your ingredients are needlessly expensive or hard to get hold of, and if you could substitute it with something less pricey or rare.
- Research and get advice about which preservatives, if any, you might need to add to make it shelf-stable.
After, register your business and obtain business insurance. If you can, use a lawyer. If your budget won’t allow it, try a platform like LegalZoom.
Does my product have to be tested in some kind of lab?
If your product is used to treat or affect how the body works, it’s classed as a drug and needs to be tested and approved by the Food and Drug Administration (FDA).
The FD&C Act defines drugs, in part, by their intended use, as “articles intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease” and “articles (other than food) intended to affect the structure or any function of the body of man or other animals” [FD&C Act, sec. 201(g)(1)].
Sometimes the line between what is and isn’t a drug is difficult to decipher.
A facial cleanser is cosmetic, but a soap is a drug because of it’s antibacterial properties.
A shampoo is cosmetic, but an antidandruff shampoo is also a drug because its intended use is to treat the scalp.
The FDA says, “Among other cosmetic/drug combinations are toothpastes that contain fluoride, deodorants that are also antiperspirants, and moisturizers and makeup marketed with sun-protection claims. Such products must comply with the requirements for both cosmetics and drugs.”
Tell me more about compliance
The FDA does not have pre-market approval of food or cosmetic products. It does, however, have the authority to approve certain ingredients before they are used. Those mostly include food additives and color additives.
If you’re working on a cannabis product, the FDA regulations are less clear. Since the Farm Bill was passed in 2018, the agency has been trying to untangle it’s role in approving claims for a product that is still federally prohibited. The key thing to know is that you can’t make any medical claims in your marketing and you will certainly need to lab test your products and send them to your state for approval.
If you’re working on an alcohol brand, you will instead need to apply for a permit from the Alcohol and Tobacco Tax and Trade Bureau. From there, you’ll have to apply for separate licenses and permits that allow you to manufacture, ship, or own equipment.
Cleaning products are subject to different federal labeling and registration requirements depending upon their intended purpose. For example, general-purpose disinfectants must be registered with the Environmental Protection Agency (EPA) as a pesticide. The Consumer Product Safety Commission (CPSC) regulates all chemical cleaning products that are properly defined as hazardous substances. And general purpose cleaners would be subject to Occupational Saftey & Health Administration (OSHA) regulations.
There are myriad other ways your business will have to be compliant, depending on your state regulations, what your products are, and how you plan to manufacture them, and your local health agency will want to visit you for regular inspections. They tend to view home kitchens as lower risk, but you will still need to familiarize yourself with your state’s regulations around your industry.
Then, invest some time and resources in getting your product in front of as many people as you can to get candid feedback. A new plastic-free, aluminum-free deodorant? Contact your local sustainability group to see if you can join the next meeting with some free samples. A new protein-packed cookie? Chat to your local gym to see if you can offer their members a post-workout snack.
Ask your testers four or five questions to gather whether your product could fit into their lives. You might like to present the product as if you aren’t the founder, so they feel encouraged to provide honest feedback.
The data you collect will not only help you refine your offering, but will also be useful when you come to fundraise as proof of concept.
How do I choose the right packaging?
The packaging you choose now likely will be very different from your packaging in a year’s time. Choosing your brand packaging is an immensely detail intensive decision that has to take into account your budget, transportation needs, materials and sustainability, safety and freshness needs, product size, branding, and packaging trends.
In the prototyping phase though, the only thing it needs to be is practical; affordable, transportable, and safe. In fact, packaging that looks a little more homespun could add some charm.
What needs to go on the label?
Your statement of identity, the product’s net weight, the manufacturer’s address, and an ingredients list.
The FDA has strict guidelines about how to label your food or cosmetic products, so you can make it clear what’s inside, when it expires, and avoid making any false claims about what it does.
All household cleaners containing known hazardous chemicals must carry a warning label that spells out the potential risks, along with precautionary steps and first-aid instructions.
How can I get distribution?
Most CPG brands can sell direct-to-consumer (DTC) without any additional licenses (barring cannabis and alcohol brands). The great thing about DTC, is that you get to know your customers, you can receive feedback, and you can keep all of your data.
If you can grow your customer base and get some enthusiasm behind your brand, it’ll make it easier to sell your product into shops and distributors.
Walmart or Target may be your dream stockists, but if you try to get distribution too early, they would only order a small amount, and if it isn’t a runaway success, it could damage your future relationship with the company. Sophie Bakalar told Collaborative Fund “Once these [CPG] companies make the jump to mass/conventional, they often struggle to meet supply demands or even to drum up much demand at all. When you’re just one of dozens of products on a shelf, it’s difficult to stand out – particularly if you haven’t achieved the scale to compete on price yet…Entrepreneurs frequently don’t account for the additional marketing dollars needed in order to push customers to the store. If you spend all your capital on a huge PO, you won’t have any marketing dollars to put behind the product and it might just sit on the shelf. And there’s no benefit to having your product at a heavily trafficked supermarket if it’s just sitting on the shelf.”
Build your brand in more targeted channels, like independent grocery stores, local food delivery services, local companies that do gift boxes or DTC channels. When your product has a solid customer base, some brand recognition, economies of scale, and confidence in its performance, you can evaluate whether moving your product to mass or conventional will make sense.
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