A Case Study in Scaling Up Local Food
Honest Dumplings is an Edmonton-based business in its fourth year of operation that produces Chinese-style dumplings using mostly local and organic ingredients. The business is, as a June 2016 Edmonton Journal story put it, a “classic YEG success story.” I recently sat down with Chris Lerohl, co-owner of Honest Dumplings, to get an update on the business and ask him about some of the challenges and successes of starting a food business in Edmonton. The food business is notoriously difficult, with many small businesses unable to get past the farmers’ market stage of development. I wanted to know how Honest Dumplings has navigated the challenges associated with scaling up.
Honest Dumplings started in 2014 with Lerohl’s wife Ray Ma hand-making dumplings in her home kitchen. Ma had discovered a passion for food, and the couple decided to take a risk and start a business. Ma quit her job at a law firm and started making dumplings full time. Lerohl continued working his job at TEC Edmonton, a local business incubator, providing an income to sustain the couple in their new business venture. During my interview with Lerohl, he emphasized the importance of having one reliable and sufficient source of income to sustain a start-up in its first year.
Lerohl had experience advising start-ups at TEC Edmonton, and was himself a self-proclaimed “entrepreneur at heart.” With Ma busy making and perfecting dumplings in the couple’s kitchen, Lerohl spent his free time researching “lean start-up models,” looking for ways to test and validate their business idea without spending a lot of money. As is the case with many start-ups, cash flow was a main concern for Lerohl and Ma. Along with losing Ma’s income, the couple also had student loan debt to pay down.
After researching start-up models, Lerohl and Ma decided selling at farmers’ markets was the best way to reach a large audience for minimal costs. They applied to a few local markets, and, in preparation, began testing their product. Lerohl described eating dumplings “3 meals a day, 7 days a week” to perfect the Honest Dumplings recipe. Once they were satisfied with their product, they took things a step further and did a tasting with Lerohl’s TEC Edmonton colleagues. Lerohl considers this tasting panel to be a key moment in the development of their product. He and Ma knew what they liked, but the tasting panel provided them with invaluable insight into what others liked and disliked about their product.
After adjusting their product in response to the feedback received from Lerohl’s colleagues, Honest Dumplings was ready for its first market day. Lerohl and Ma had taken a gamble in starting the business, and were nervous about how their product would be received. These fears were quickly assuaged when customers started lining up, eventually buying up every bag of dumplings. Over the subsequent weeks, Lerohl and Ma continued to sell out at the market, but it was when they recognised their first repeat customers that they knew they had something worth developing.
Lerohl and Ma knew that they wanted to eventually expand their business beyond farmers’ market, but were unsure whether to focus on a restaurant, grocery, or food service business model. It was time to experiment. The couple decided to test out Honest Dumplings as a pop-up restaurant. This, however, would require commercial kitchen space, an amenity in short supply in Edmonton. In what Lerohl described as a lucky break, he and Ma were able to rent a commercial kitchen from Kara and Nevin Fenske, the owners of Drift food truck who were about to open Dovetail Deli on 124th Street. With access to a commercial kitchen, Honest Dumplings became a pop-up restaurant, selling at “hawker markets” and other venues throughout Edmonton. The pop-up experiment was invaluable for providing validation, making connections, getting direct feedback, and developing their brand; however, Lerohl and Ma knew there were better ways to reach their goals and scale their business. In addition to testing the pop-up restaurant model, Lerohl and Ma considered both selling their product to existing restaurants, and working with food service companies, but neither of these options where ideal. Drawing on their experience, and after much research, the couple decided to pursue the retail model, making and freezing dumplings to provide to grocers.
Lerohl and Ma applied for funding in their first year through the Alberta Government’s Growing Forward 2 (GF2) grant. This grant is designed to help agriculture and agrifood processors grow, and it was a perfect fit for Honest Dumplings. Lerohl and Ma used the funding they received to attend a large food trade show in San Francisco. During their visit, they were delighted to discover that no one was doing quite what they were doing. Knowing they had a unique product added to their confidence in moving forward with the business. In describing this to me, Lerohl made a point of recommending that anyone interested in pursuing a food start-up first do their homework and see what other similar products may be out there. In addition to helping to fund their trip to San Francisco, the GF2 grant connected Lerohl and Ma with Lindsay Sutton and Darcy Peters from Alberta Agriculture and Forestry, who provided them with valuable direction and support.
At the conclusion of Honest Dumplings’ first year they gained access to SPUD, a grocery delivery business serving Edmonton. They were only able to secure this contract because they had access to a commercial kitchen. Working with SPUD was not only a great opportunity, but also part of a larger educational experience, with Lerohl and Ma learning the ins and outs of the food business and adapting their production processes along the way.
Year two saw the arrival of Lerohl and Ma’s first child. This caused the couple to slow things down with the business a little, cutting back to selling at only one farmers’ market. Lerohl and Ma also lost consistent access to the commercial kitchen around this time. While not unexpected, the loss of the kitchen posed a challenge as maintaining their contract with SPUD required them to use a commercial kitchen. Lerohl and Ma arranged to rent the same kitchen they had been using a few times a week. This situation was less than ideal, but it provided a temporary solution. During our interview, Lerohl repeatedly emphasized the difficulties of making things work without reliable access to a commercial kitchen. In their case, limited and sporadic access to a commercial kitchen impeded production, and even resulted in Honest Dumplings having to drop the SPUD contract for a short time. As Lerohl put it, “having that home base is very important, and it’s something we’ve struggled with this entire time.”
In year three, Lerohl quit his job at TEC Edmonton to focus his energies on the business. Honest Dumplings still wasn’t financially secure, but Lerohl and Ma had more confidence in their product, and a better idea of what they could expect of the future. In year three, cash was more of an issue than it had been in year one or two. With both Lerohl and Ma having quit their jobs, the couple needed to find creative ways to grow their business. Finding external sources of funding and support became a necessity. Towards the start of year three, Ma and Lerohl applied for a second government GF 2 grant to help procure automation equipment for scaling. The funding allowed them to travel to Japan to see a key piece of production equipment they were interested in buying. The grant also provided them with access to consultants to aid them in making the best choice of equipment for their specific scaling strategy.
Despite the brief slowdown, business continued to thrive for Honest Dumplings throughout years two and three. They received glowing media reviews, and demand for their product increased. Times where good, but Lerohl and Ma struggled to balance home production with their very limited commercial kitchen access. The situation clearly wasn’t working. To achieve growth and scale-up, Honest Dumplings needed to find a more permanent home to produce their product.
Reliable and adequate commercial kitchen space was hard to find in Edmonton, and Lerohl and Ma struggled to find something that would work for them. This changed when Lerohl met Jessie Radies at a MADE event in the city. Radies informed Lerohl about the kitchen space at Northlands, and Honest Dumplings moved in as soon as they were able. According to Lerohl, securing the Northlands kitchen opened new doors for Honest Dumplings. The new space, equipment, and resources helped them 1) improve the consistency and quality of their product and 2) immediately scale up production. One of the biggest benefits of the move was the new access to freezer space, which allowed Lerohl and Ma to do larger production runs. The new facility also enabled Honest Dumplings to hire staff, resulting in an immediate increase in production. Most importantly, gaining access to a commercial kitchen allowed Lerohl and Ma to focus more on pursuing the grocery market.
With more reliable access to commercial kitchen space, industrial-scale equipment, and new staff, Honest Dumplings was able to get their product into a few grocery stores. This was a key “scale moment” for the business, allowing Honest Dumplings to begin moving beyond the local artisanal food scene, and towards grocery. Beyond the market validation they received by getting into grocery stores, the new commercial kitchen space also expanded their capability to continue to do spontaneous pop-up restaurants.
With increased scale comes new and often unforeseen challenges. Lerohl and Ma quickly discovered that selling to grocery stores was a lot different than selling at farmers’ markets. As Lerohl told me, “you can’t let their shelves go empty, you need to have inventory.” The transition from the steady cash flow of farmers’ markets to the delayed payments and inventory reliance of the grocery model was a major learning experience for Lerohl and Ma. Once Lerohl started tracking their accounts payable, the couple realized that, despite the good business, they had no money. This was a major eye-opener for Lerohl and Ma. Lerohl noted, “I’m glad I got burnt and learnt this lesson early, because something like that can wipe you out later on.” In describing their accounting mishap, Lerohl spoke to a theme that would shape the last part of our discussion – the importance of a business development strategy.
Since the move to Northlands, Honest Dumplings has continued to grow. They have received an NSERC engage grant that enables them to partner with NAIT and Leduc Processing Centre to help improve the dough recipes and production processes to increase shelf life. Lerohl and Ma also received a NRC youth employment grant, which helped them offset the costs of hiring a fulltime pastry chef trained in a top European school. According to Lerohl, both of these opportunities were game-changing for the company. The business is expanding and shifting gears as they move towards their goal of becoming an international brand and business development hub.
Honest Dumplings has been successful at obtaining the space, expertise, and equipment to ramp up production and get a start in the grocery business. If you include Ma and Lerohl, the company now has five full-time and three part-time employees. But with growth comes added pressures, and the company must now make enough money to pay their employees while maintaining a large enough inventory to ensure they can supply their grocery requirements. The company has also embarked on a rebranding, to help make their product more enticing to the grocery industry.
Scaling up is not just about production. As Lerohl told me, “what Honest Dumplings really needs is business development, marketing, and strategy support.” While it’s often easier to justify spending on the production side where the immediate need is, scaling up also requires an effective business development strategy. Lerohl noted, “we now have the equipment to produce 10 times what we did a year ago, but we need is the business development support to move forward.” While there are grants available for market research and equipment, very little support is available to help with market development. One of the few opportunities that does exist is a grant offered through Alberta Innovates (AI). Lerohl’s application for this grant has been discouraged by AI as they do not consider Honest Dumplings to be a tech company. Lerohl disagrees with AI’s assessment and plans to apply for the funding anyway, as it is currently the only option he can find for business development funding.
Lerohl and Ma have big plans for their business. Last year Jessie Radies of Northlands suggested the couple start thinking about working with a co-packer. Radies used her industry connections to facilitate an introduction, and Lerohl and Ma are now in negotiations with a CFIA certified co-packer that will provide distribution across western Canada within 6 to 9 months if all goes as expected. “We found the right size of co-packer,” says Lerohl, “and this will help us take the business to that next level.” Involving a co-packer only puts more pressure on Honest Dumplings to develop a comprehensive business development strategy. Looking further into the future, Lerohl envisions expanding the company far beyond dumplings into a tech company where the focus is on innovation and product/brand development. He envisions a kind of development hub to help fledgling and struggling companies rise to success. As Lerohl put it at the end of our interview, “we want to be a brand throughout Canada and internationally, but our long-term vision is to be that product innovation and brand company. Dumplings are just a first product.”
In the meantime, Lerohl and Ma continue to learn, grow, and experiment with Honest Dumplings right here in Edmonton. This summer, Northlands provided the company with an opportunity to set up a pop-up at K-Days. “We hadn’t really done the concession thing before,” said Lerohl, “we’d done restaurant pop-ups, but this was different. It was a great opportunity to get some new exposure and experiment with another form of sales.” It is clear that Lerohl and Ma are passionate about their product and their business. Beyond this, their early success in moving Honest Dumplings beyond farmers’ markets and pop-ups has been a combination research, financial and institutional supports, finding reliable commercial kitchen space, and a lot of hard work. It is the hope that other small businesses will benefit from the Honest Dumplings story and be better prepared for the many challenges of scaling-up.
Click here to see Honest Dumpling's Business Development Timeline