Chocolate Business Models

How do we transform our experience with chocolate from a hobby to a business without losing the fun, collaborative, part-time nature of it all?

Honestly, this is a very difficult question and we don’t assume that there is an answer. This question goes much deeper than the surface question of how to start a business – it asks how we want to spend our free time, how we want to spend our working hours, how much financial risk we are willing to take on, how confident we are that our chocolate is actually any good, if chocolate bars are our ultimate product, what the future of our family looks like, and how permanent we are in our current living location.

All that said, we are trying to follow the practices of The Lean Startup: How Today’s Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses, in order to keep the potential business light and flexible. Some of the recommendations in the book are difficult to apply to a brick and mortal chocolate shop, since it’s mostly geared toward tech startups. However, we’re doing our best!

Let’s take a look at the different business model options for starting a bean-to-bar chocolate business (at least to our knowledge in California):

Cottage Food Operator (CFO)

In another post, we went into some detail about this business model. The basic idea is that this business model allows the food maker to prepare food in a private home and sell by delivery or pick-up. We don’t know of a chocolate-maker who has successfully done this.

Pros

  • We could set this up in our kitchen with limited financial input
  • We could work on chocolate at any hour of the day, in our pajamas if we want

Cons

  • We would have to deliver the product to our customers, since shipping is not permitted
  • Most famers’ markets do not allow CFOs, which would limit our distribution
  • Sales are restricted to our county, which is quite small and limits our growth potential significantly
  • Licensing is by county, so if we moved to another county, we would be required to start the process over
  • It would be very difficult (nearly impossible) for us to be profitable due to these limitations
  • We could not import (or store) large quantities of beans in our apartment

Private Wholesale Commercial Kitchen

This business model constitutes a private space in a commercial zone rented and outfitted as a legal commercial kitchen. With the wholesale model, the assumption is that there will not be customers purchasing products directly from the physical site. Instead, the product will be sold either online or through a third party distributor. This is what our friends at Arete have at the moment.

Pros

  • We would have full access to the space
  • Once we pay for the outfitting of the space, our cost of operation would decrease significantly
  • This provides the highest potential for growth
  • We could import beans and store them here

Cons

  • It is difficult to find a space small enough to be practical for small-batch chocolate-maker use
  • These types of spaces are few and far between, can be very expensive to rent, and are almost always very expensive to outfit
  • This is very location-dependent and would require the decision to permanently be located somewhere

Private Retail Commercial Space

This business model constitutes a private space in a commercial zone rented and outfitted as a legal commercial kitchen, like the wholesale space described above. Products could still be sold online and through other distributors. In addition, this model makes it possible for customers to come purchase products on site, like Dandelion’s Valencia Cafe.

Pros

  • We would have full access to the space
  • This can be incredibly lucrative, depending on the location, marketing, local foot traffic, and many other factors
  • We could import beans and store them here

Cons

  • It is a huge investment to build out a retail space
  • There are a lot more requirements, such as ADA bathrooms, to consider
  • This is very location-dependent and would require the decision to permanently be located somewhere
  • We would need to either quit our jobs or hire staff to physically run the store

Shared Commercial Kitchen

This model involves renting shared commercial kitchen space, typically by the hour or with a monthly membership fee. An example of this is KitchenTown, located in neighboring town, San Mateo.

Pros

  • This provides the lowest up-front cost of making chocolate commercially
  • The commercial kitchen has legal documentation and gear for producing and selling food
  • There’s a particularly amazing shared commercial kitchen about 10 minutes away from our apartment
  • The hours are usually flexible, so we could continue to do this on nights and weekends
  • This provides a community of food makers who we could get to know
  • We could import beans and store them here

Cons

  • Since cocoa butter is so susceptible to other scents, it’s possible that the chocolate could take on the flavor of whatever else is being cooked in the space while it’s in the melanger
  • It’s possible that we do so well that we would outgrow the shared space
  • Not all of the gear is provided, so we’d need to bring our own in
  • We would need to share the space with other chocolate-makers, which means coordinating times and machine usage

So, what’s the verdict? Good question. We’re not sure yet. We’ll keep you updated with our decision!

Where do you make your chocolate? What do you think the best option is for a chocolate start-up? Share your thoughts in the comments below.

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