JOE GILL: The sobering truths for food and drink startups

In 1976, the average supermarket stocked 9,000 unique products; today, that number has ballooned to 40,000, yet the average person gets 80%-85% of their needs in only 150 different supermarket items.

These facts, from the author Daniel Levitin in his book The Organised Mind, need to be absorbed by the myriad of food and beverage entrepreneurs working in Ireland.

A narrative has developed over recent years that Ireland is brimming with food and beverage products that leverage the unique heritage of the Irish food industry.

Numerous media articles and soundbites from politicians and opinion makers elevate Irish food and drink as a rich eco-system in which to invest both money and careers forging a business that serves customers at home and abroad.

It appears as if investing behind Irish food and drink is a surefire way to create wealth and happiness.

The truth is somewhat more sobering. The food and beverage industry is a merciless and hyper-competitive marketplace.

To understand the risks involved, you must start at the consumer end of the market, where the immediate interface with products is via the retail sector.

Shops, be they physical or online, are engaged in a ruthless game with suppliers and each other. Competition intensifies around product range and price.

That dynamic has created a demand for new brands and products that retailers can use to attract customers.

This environment produces a belief that new start food and drink companies can find large retail customers who will validate their products and business models quickly. In turn, this delivers scale orders that warrant significant investment in equipment and people.

In fact, what is happening is far more shocking.

Retailers are encouraging a raft of new products on a rolling basis to drive choice and price for their consumers. This relationship starts well — warm meetings, a multi-outlet contract and investment by the supplier in a bigger factory.

But, after one, two, or three years, the same retailer encourages other producers and effectively pitches those against the incumbent supplier.

The producer who has invested heavily behind a contract now has a stark choice. Accept tougher pricing to maintain volume or withdraw.

The latter option is especially troubling for a food or drink manufacturer as their factories are capital intensive, so volume throughput is essential to maintain cashflows and efficiency.

I recently heard a story from a craft beer start-up company.

They had created a truly good, award winning product. A large retailer encouraged them and delivered a significant contract that required investment which subsequently took place.

Three years later, that retailer asked for a price cut due to competing products offered at lower prices. The craft beer company closed down.

This is the harsh reality of life at the coal face of the Irish food and drink industry.

Amid the images of hand-holding artisan producers making products derived from natural ingredients, there is a brutal reality that all who are involved in advising start-ups need to acknowledge.

In my world, we encounter tough international investors who have large amounts of capital to deploy. They have no particular love for Ireland but will invest in projects that offer true potential to create long-term equity value.

Unfortunately, the vast bulk of Irish small and medium sized food and drink businesses fail to meet the financial targets that these investors set. Hence, entrepreneurs are more reliant on savings and borrowings to support their dreams.

While many Irish food and drink projects are admirable, and the spirit of entrepreneurship must be encouraged and fostered, a dose of hard reality is needed too.

There is no easy ride in the Irish food and beverage sector.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.


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