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How Central Texas became a hotbed for packaged food businesses

The Austin packaged food economy is as hot as the restaurant scene, and its reach extends far beyond the boundaries of Central Texas and into the shopping carts, refrigerators and pantries of grocery shoppers from coast to coast.

Hundreds of companies call Austin home, from established homegrown brands like Stubb’s, Primizie, Beanitos and Vital Farms to booming transplants such as Skinny Pop, one of the biggest ready-to-eat popcorn companies in the country, which recently moved its headquarters from Chicago to Austin for warmer weather and livability for its top executives.

On a national scale, small to midsize consumer packaged goods companies have taken $18 billion from the pockets of the largest food companies in the past five years, and a healthy portion of that money is flowing through Central Texas.

Other parts of the country, especially the Upper Midwest, where mega food companies such as Kraft, General Mills and Kellogg have long been based, have far more institutional knowledge to launch and manufacture products. Austin’s history is shorter.

In 1888, Adams Extract became one of the city’s first consumer packaged good companies, but for most of the next 100 years, local food businesses were mostly frozen foods, salsas, salad dressings and, with the opening of White Mountain in 1980, increasingly niche, natural foods, like Bulgarian yogurt.

On the food manufacturing side, Night Hawk and Michael Angelo’s were churning out frozen meals, and Jardine’s had bottled salsas and other sauces. During the 1990s, money from the tech boom made its way into the food economy through companies like Sweet Leaf Tea and Guiltless Gourmet, and out in Fredericksburg, jam-makers Fischer & Wieser were busy developing their blockbuster raspberry chipotle sauce.

However, in the past decade, the number of local food companies has easily doubled thanks to an influx of investment capital, food-savvy entrepreneurs willing to take a risk on creating foods and drinks that consumers have never seen, grocery stores willing to carry those products and a fast-growing population of customers willing to try them.

“There wasn’t a collective place where we all got together and shared ideas,” says Scott Jensen, CEO of Rhythm Superfoods, who moved here in the early 1990s to take the helm at Stubb’s. “Now there is a good ecosystem here, and I think it’s really just starting.”

In your backyard

Many of the city’s food businesses are small enough that they can work out of one of more than a dozen commercial kitchen spaces.

One of those is Capital Kitchens, a 3,600-square-foot facility in South Austin that is home base for more than 20 food companies, including Sway Water, Chocolate Pharmacy, Juice Society and SoCo Gingerbeer. Owner Trish Wesevich would take on more if she could. “I’ve got a line out the door.”

In these kinds of kitchens — including another owned by Bola Pizza, which is home to Red Rabbit Cooperative Bakery, Naked Fox, Love Bean, and Skull and Cakebones — the business owners do much of the processing and packaging by hand and with small machines.

Under the cottage law, some food products can be made at home and sold to the public, but many business owners prefer to share a kitchen space that doubles as a community hub.

If one of those companies receives an order for more than what they can make by hand, they have to outsource the production or decline the order. That’s where contract packing, or co-packing, facilities come in. Those are larger manufacturers that take a company’s recipe, produce the food and then package it for them.

Fort Worth, Houston and San Antonio all have larger co-packing capacity than Austin, but some products have to be made in manufacturing hubs like California, Chicago or Boulder, Colo., because there are specialized machines there that can make products like bars or dehydrated crisps.

Jensen says that there are plenty of places to get certain foods manufactured in Texas, especially hot sauces, salsas, jams and anything else stored in a bottle or jar, as well as spice mixes and chips.

That’s one of the reasons there are so many sauce companies in Texas. “Salsa and barbecue sauces are among the fiercest battles in grocery,” he says. With limited shelf space, “everything you get you have to steal from someone else.”

“Your odds of success are so much better in a category that’s growing fast, which is one reason why we’re seeing totally new-to-market, niche-within-a-niche products,” he says, like sprouted crackers, quinoa puffs or kombucha that tastes like Dr Pepper. “But just because you come up with an idea doesn’t mean that there’s a factory to produce it.”

Warm water, friendly sharks

With fewer co-packing facilities than elsewhere in Texas, Austin might not be the most efficient place to run a food business, but that’s not stopping people from doing so. Local food manufacturing generates $738 million a year, more than agriculture and grocery sales, according to a recent city of Austin report.

One of the busy bees in the local consumer packaged goods hive is TexaFrance, which started in the mid-1980s as its own sauce and pesto company and now makes dozens of products for more than 30 other Austin food companies at a 10,000-square-foot manufacturing space in Round Rock. They make, among other things, salad dressings, marinades, bloody mary mixes, jellies, condiments and quesos — just about anything in a jar, plastic container or bottle.

“I get a call a day, at least, from people who want to start a new product,” says co-founder Jean-Pierre Parant, who started TexaFrance with David Griswold. “I will take on people who have a product, a label and are ready for the shelf, but I can’t hold their hand” from the beginning.

He has a 50-case minimum for an order, half of what the larger co-packers in Houston or Dallas might require, and he insists that there’s no competition between the co-packers. After 17 years in the space, Parant says they are thinking about adding a second shift to pack more products. His facility makes and packages Hoover’s barbecue sauces, BeeSweet Lemonade, Chameleon Cold-Brew, Yellowbird Sauce and Ana’s Salsa, which Jim Ullrich started with his wife, Anna, more than 30 years ago.

“The creative culture of Austin, along with access to money and educated workforce, means more people can do this,” Ullrich says. That so many are taking on the challenge means that the area could handle more small co-packers like TexaFrance, Ullrich says, but he warns prospective business owners that the survival rate can be low.

But on the other hand, Ullrich says: “Anna likes to tell (new food entrepreneurs) that the water’s warm and the sharks are friendly.”

Scaling up

The water gets a little choppy at a place like Expo West, the country’s largest natural foods show. Every March, it draws 70,000 players in a $100 billion game of chess whose players include buyers, brokers, distributors, marketers and business owners.

This spring in California, thousands of companies pitched their latest food products: meat-mimicking vegan patties and nut cheeses; beverages made from the “water” of prickly pear, coconuts and maple trees; bars made from whey, nuts or minced meat; flaxseed crackers and pasta dough chips. With more people on specialty diets, companies pop up to meet those demands for paleo tortillas or vegan burger patties.

Among the fastest growing Austin food brands is High Brew Coffee, a company David Smith founded after Nestle bought his first company, Sweet Leaf Tea, which he co-founded with Clayton Christopher.

Despite the crowded category — other Austin companies also selling cold brew coffee include Chameleon, Kohana, Coffer and Cuvee — High Brew is already in more than 11,000 stores nationwide.

Smith and his staff are based here, the drink is made out of state (he won’t say where — camaraderie in capitalism has its limits) and Smith hopes that one day you’ll be able to get it anywhere you’d get a Starbucks Frappuccino.

The local craft beer and spirit industries thrive for much of the same reason Austin’s food industry does: a creative culture driven by a young population and capital-rich investors.

Many of these executives have become mentors and investors who, formally or informally, share their knowledge with up-and-comers who might not have more than a seed of an idea.

Austin boasts two food incubators or accelerators that pair entrepreneurs with possible investors and mentors. The first, called SKU (formerly Incubation Station), draws some of the biggest local names in the industry, including Christopher, who is now the co-founder of Deep Eddy Vodka. The second is the Challenge Prize from UT’s Food Lab, which launched with a similar mission last year.

But in order to get to that point, companies often have to start out in food trailers or farmers markets, which Jensen calls the pre-incubators. They are places to test a product and see if there is enough consumer demand to pursue the capital to grow into the most coveted space of all: the shelves of a large grocery store chain.

Making the leap from a small market to a regional supermarket is easier to do when the chain is based in your backyard, as is the case with Whole Foods and the San Antonio-based H-E-B. Both companies have programs to help business owners make the transition from selling a few hundred products a month to thousands, but that leap never comes with a sure landing.

Oh Kimchi was the blockbuster local food company of 2014, expanding so quickly that they were planning a brick-and-mortar retail outlet and restaurant.

Earlier this year, however, owners Abbi and Duane Lunde shut down the business they’d worked 16-hour days for a year to build after they ran into problems trying to make and package their fermented vegetables on a larger scale. The physical, emotional and financial toll was too high a price to pay for their young family, the Lundes decided. They hope to keep the brand and vision alive but have ceased production and are exploring options, they have told customers.

Jake’s Granola, Mary Louise Butters Brownies and Food for Lovers, which made a popular vegan queso, have all shuttered or ceased production in recent years.

Building a village

Avoiding burnout is just as important as finding investors, which is one of the reasons Happy Hemp founder Tara Miko Grayless started ATX Makers, a support group of entrepreneurs that meets once a month to help one another solve problems.

“I started it selfishly,” Grayless says. “I needed help. I had questions that I didn’t have answers to, and I had answers to other people’s questions.”

It’s easy to get overwhelmed with the logistics of getting insurance, a nutritional label and a bar code, keeping your costs down and running an efficient marketing campaign. “You’re paying 5 cents for that, $2 for that. By the time you get paid, it’s a little amount, and those mom-and-pop days look real good to you,” she says.

In ATX Makers, owners can swap stories of mistakes and successes and pass along the name of a really great label maker or distributor or place to find workers who are good at sampling at grocery stores.

About 40 businesses, among them the Good Promise (formerly Animeals), Bearded Brothers Energy Bars, Bona Dea and World Peas, are involved in the group, and they meet once a month and organize themselves through a Facebook page. Many have collaborated on products by using one another’s ingredients, which explains how Grayless’ hemp seeds found their way into a new breakfast line from Martha Pincoffs’ Hot Dang.

It’s the kind of culture where one person’s success is celebrated as everyone’s success, the opposite of what Grayless found while working in the fashion industry in Los Angeles. “People stop and ask how I am and genuinely care about the answer,” she says.

The leap to the big leagues

The sheer number of people moving to the area means steady growth for many Austin food companies, but High Brew’s Smith says that the true test will be how far the business owners can take their products beyond the local market.

To help in that goal, both Whole Foods and H-E-B offer loans for small businesses, and they also employ buyers who seek out startup companies that might not have thought they were ready for the leap to the big time.

Lynda Berrios is one of 16 “local foragers” employed by Whole Foods across its international markets to bring in budding businesses, many of whom are selling at farmers markets or small retail outlets, such as corner markets or online delivery companies.

Berrios is there to help the companies figure out things like where to buy non-irradiated spices or hormone-free dairy to meet their standards.

The chain works with about 250 Austin food companies, and product lineup can vary as much as 15 to 20 percent from store to store.

For H-E-B, and its specialty store Central Market, and Whole Foods, brokering deals with brands that have a distinctly Austin flavor keeps customers on their toes as they’re walking through the aisles.

Berrios anticipates a continued boom in new products in the coming year, but only if companies can find the manufacturers to produce to their specifications.

“The co-packing world hasn’t quite caught up with the speed that the CPG people are working at,” she says. “It’s an exciting time to be a grocery shopper.”

CORRECTION: An earlier version of this story used the incorrect title for Clayton Christoper, co-founder of Deep Eddy Vodka who stepped down as CEO from that position in 2013.

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