MFG Podcast Ep7 with John Anderson of ATX Specialty Foods

Our very first customer was Pluckers and that was a very significant account for us. Then we were able to use that experience and the reputation that we created with them to start working with the Freebirds of the world and then it was making condiments for Hat Creek and Hop Doddy, and curry’s for Tarka and so on.

Yeah, fascinating story. My background is primarily accounting and finance. I went to work for Goldman Sachs right out of school. I worked in one of their principal investment groups for about three years and went to work for a couple private equity firms, the last of which we focused primarily on food and beverage. So that was my foray into this. Ironically enough the predecessor company to ATX was a company called Out to Lunch Foods where we made hummus; and I didn’t even particularly like hummus when we started it. But I saw a unique opportunity in the market and it was also an opportunity to move back to Austin. I’m originally born and raised here and I was living in Dallas at the time. So it was an opportunity to come back here.

I think a lot of entrepreneurs struggle with the funding side of things and that’s where we have excelled. We have done very well and have been very successful at raising money and raising money at the right time and raising money at valuations and with terms that make sense. I think that has enabled us to get through some of the harder times that we’ve experienced in our 11-year history.

I partnered with a gentleman I knew here in Austin who had some manufacturing experience, not in food but on the plastics side, but certainly understood the manufacturing arena, and a third partner who was a colleague of mine in the private equity world. Really the idea was not to be a manufacturing company. The idea was truly to build a brand, but we would support the brand with our own manufacturing. Frankly it was probably the best mistake I ever made because we should have never done it. We should have really focused on sales and marketing but as you can tell from my background, I’m not a sales and marketing guy. You know you give me an excel spreadsheet and I can run with it. So the manufacturing and the operations were the part of the business that I truly loved and was passionate about. We ultimately pivoted the business in about 2015-2016 away from the brand to focus more on the manufacturing because frankly that’s what we were good at. People don’t understand how specialized co-packing is. There’s a sense that you know copackers can make anything.

The perception is that manufacturers can do anything. I can’t tell you how often we get phone calls asking, “Hey, can you make our granola mix, or can you do our spice blends, can you do this do that?” Certainly, in the food space it’s pretty niche and through our experience with the hummus we’re able to parlay that equipment into dips spread sauces and then ultimately what we found was that consistent recurring predictable volume is what we really needed to be successful especially at a smaller level. So, we really focused on restaurants because restaurants could provide just that versus CPG companies. It’s a roller coaster - they’re going to get into new retailers; they’re going to run promotions - and the volume is inconsistent at best. Frankly it was really hard to pick the winners and losers when you’re dealing with regional brands. Our very first customer was Pluckers and that was a very significant account for us. Then we were able to use that experience and the reputation that we created with them to start working with the Freebirds of the world and then it was making condiments for Hat Creek and Hop Doddy, and curry’s for Tarka and so on. The restaurant businesses were really where we found that we like to play the most. We still have the ability to pack out in retail packaging, so we still have a decent CPG business. We just don’t like to focus there because of the inconsistencies in volume and predictability.

I’m glad you mentioned Tarka. Tarka is probably the best example. When somebody says what’s your bread and butter? What do you like to do? Well of course you know barbecue sauce, salsa wing sauce, I mean that is right down the middle of the fairway for us, but frankly a lot of people can do that. It’s the Tarkas of the world, the curries, the really complicated products that set us apart. Those are the products that people don’t really want to do because it’s multi-step, it’s complicated formulas, and their unique ingredients. Creating that consistency is frankly what I think differentiates us from some of our competitors because when you go to the Tarka in south Austin versus the one on Anderson Lane, you’re gonna get the exact same experience. That’s really what they’re looking for especially as they scale from when we started working with them with half a dozen locations to close to a dozen today and aspirations of going much bigger than that. They want your experience to be the exact same at every single location not to mention they want to protect their formulas.

I also think CPG likes consistency as well and you don’t see CPG companies bouncing around from copacker to co-packer a lot. Typically, if they really hit it big, they could outgrow their co-packer but they like consistency as well. I think the challenge is what I mentioned earlier it’s picking the winners and losers who’s going to get big and who’s not. There’s certainly credit risk associated with these small CPG companies and that’s just something we wanted to avoid early on. I’ve been in banking before and I’m not a bank. A lot of times brands want to treat their co-packers as a bank; they want really long credit terms and that’s just not who we are.

Zilks was the predecessor company. It was originally Out to Lunch and then we rebranded in 2012 and given my background you know Zilks and the brand was not something we really wanted to focus on. We wanted to move away from that to focus on ATX Specialty Foods and so I tried to kill it the best I could. We had it down to a couple hundred thousand in revenue and before I knew it came roaring back. It’s back in the seven figures and we have great products. We’re really good at making products and product sales. We have long-standing relationships with Whole Foods and other retailers and that ultimately is what has allowed us to be successful with Zilks despite not running it or managing it like a traditional CPG company.

Austin has been a breeding ground for food creativity for some time now. When you think about fashion or other industries, you’ve got LA and New York. For us in the food industry it’s always been Austin or Boulder, Colorado especially on the all-natural or what I consider “better for you” products. Those areas have just been breeding grounds for really innovative food companies and you know it’s fascinating. I’ve tried to separate myself from the CPG world but as I think about when we started and where we are today, just the proliferation of the number of SKUs in the grocery store has tripled in the last 40 or 50 years. It’s really coming from some of the ethnic categories in new cultures that have blossomed here in the United States. The Krafts, General Mills and Frito-Lays, those aren’t the companies that traditionally were on the innovative side of things. They focused on what they were really good at, what worked, and what was tried and true. There was just so much white space for regional CPG companies to pop up and fill that void. That’s where a lot of companies in Austin and Boulder have stepped up and created some unique products. Unique goes two ways: one it certainly gets attention from the buyers but it’s also unique and sometimes it requires education and it can be slow for adoption.

It starts with some of the companies you mentioned, the Scott Jensen’s and Clayton Christopher’s. Some of them were the very early successful CPG entrepreneurs here in Austin and they’ve taken that success and parlayed it into other ventures, but they’ve also been good about investing in small CPG companies and supporting other entrepreneurs. I think that’s also been a big help here in Austin.

Absolutely, I think it’s certainly getting better and better. I think the challenge today is probably no different than any of the other manufacturing companies that we talk to in ARMA; it’s is the shortage of labor. I think the rising cost of living has really made it difficult for people in Austin which is one of the reasons why we’re looking to move outside of Austin to access better labor. So between the supply shortages and the rising food costs we’re dealing with in kind of a post-COVID environment, or at least was post-COVID and now kind of it’s back right, but you know the labor side has been something that’s plaguing us for some time now and it just continues to get worse and worse.

It’s very exciting we just broke ground on a brand new 73,000 square foot building down in Kyle. This is a greenfield project; we bought five acres through a joint venture with some common investors of ATX and we’ve been able to design this building to our needs. It’s very Exciting. We’ve had to make do with the space we’re currently in and we’ve been pretty successful with that, but we’re just running out of capacity and right now those with capacity are the ones that kind of control things. So this is a big investment for us and we’re very excited about the opportunities it’s going to give us.

It’s tough for a small manufacturer like us. We have hopes to be able to offer health benefits at some point in the future. We’re not there today. I know some people are starting to offer that but for us it’s just we’re constantly increasing our starting wage. I mean we’ve seen increases in the last 24 months north of 35% to get to a competitive wage and it’s a really tough environment because just when you hire somebody all of a sudden they get another opportunity somewhere else for a dollar more.

We’re having supply chain issues just like everybody else whether it’s you know brown mustard seeds or something random like that where we just can’t get it versus you know soybean prices have gone you know have more than doubled in the last eight to twelve months and so we’re seeing rising food costs we’re seeing supply shortages and navigating that is is a daily task and fortunately we have a fantastic team but you know some things are just outside of our control and part of our job as a contract manufacturer is to create consistency and you know there’s so much noise in the background that hopefully our customers never see but there are there are times that you know it’s just unavoidable

That’s a great question. I don’t know the answer to that but I know that there has been a shortage of brown mustard seeds and so far I think we’ve avoided any out of stock issues with our customers but it’s been a challenge to say the least.

I would love to. Yeah, I’m very fortunate, my sister works in the golf industry. She works for some pretty high-profile golfers, and she’s been able to get me some pretty nice swag. This was the 2009 major championships and the champions. Unfortunately, it was like the one year Tiger didn’t win but still a very cool background thing.