Innovation Diary: The product startup is rising – but the sector has its own challenges

 
Tom Welsh
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THE UK services industry has sprung into life, with Markit’s respected purchasing managers’ index for the sector reaching its highest reading in June since March 2011. Yet an increasing number of entrepreneurs are shirking this traditionally attractive sector to start product-based businesses – selling physical things like clothing or food. Between 2010 and 2012, Mintel registered a 47 per cent growth in the number of new food and drink products launched in the UK. The number of new beauty and personal care products released over the same period grew by 16.5 per cent, while new pet product and household goods launches leapt by 50 per cent and 65 per cent respectively.

The broader retail climate is also sunnier, with like-for-like retail sales values in June up 1.4 per cent compared to the year before. But product-based startups clearly have a distinct range of challenges. Despite the market’s vibrancy, many new items don’t stick around for long. Who now remembers Maxwell House’s brief foray into the ready-to-drink coffee market, or Thirsty Cat!, the pioneers of bottled water for pets?

Put simply, product businesses have a tangible object to market, so the chance of a spectacular flop is arguably higher than for, say, a hairdresser. But this can also be a positive. If you run a cleaning agency, the quality of the job may vary widely based on a number of factors. If you’re selling microwave ready-meals, with proper product management, the end result is likely to be fairly predictable.

One difficulty, highlighted in our interview with Bulldog’s Simon Duffy, is how to bring your product to market. There are, of course, a range of ecommerce options that could let you sell direct to customers. But consumer decisions vary widely by sector. According to the Office for National Statistics, 66 per cent of all adults purchased goods or services online in 2011, up from 62 per cent in 2010. Yet the idea that physical stores will become mere showrooms was exposed as myth by PwC’s 2012 Global Multichannel Consumer Survey. In nine out of the 11 categories it looked at, the majority of consumers still used shops to both do their research and make their purchases. Only in books & music and electronics was the trend on the e-tailer’s side.

So how do you get your product into stores? Retailers are always looking for exciting new items, and are increasingly open about how they can be approached. Waitrose, for instance, has regular Meet the Buyer days, and is particularly keen on encouraging smaller suppliers. But most won’t touch you unless you have an product ready to sell. And in an interview with Startup Donut, Lucinda Bruce-Gardyne, founder of gluten-free breadmakers Genius, highlighted the importance of being able to scale up production to meet potential demand. “You need to be sure you can cope with growth – success brings additional challenges,” she said. Genius has invested £2m in baking facilities since its bread entered major retailers in 2009.

Ultimately, however, it may be worthwhile thinking through the full range of uses for your product. Dana Elemara, formerly of Goldman Sachs and founder of organic oil company Arganic, started her business with the intention of supplying restaurants and shops with her fancy olive oil equivalent. “It’s fine to supply restaurants,” she said when I interviewed her last year. “But they only ever order one litre at a time.” Now she’s selling the oil as a raw material to the cosmetics industry, though she maintains that food is her passion.

Tom Welsh is business features editor at City A.M.