Welcome to Season 9 of the Troubleshooting Innovation podcast. Joanie Spencer, editor-in-chief for Commercial Baking, is spending this season with Darlene Nicosia, CEO of Hearthside Food Solutions. They’re talking about operations, culture and innovation … behind the curtain of co-manufacturing. Sponsored by Reading Bakery Systems.

In the fourth episode, Spencer and Nicosia take a look at what it means to be a modern contract manufacturer.

Learn more about this season here, and listen to Troubleshooting Innovation on Apple, Spotify and Google.

Joanie Spencer: Hi, Darlene. Nice to see you again. 

Darlene Nicosia: Great to see you, Joanie. How are you? 

Spencer: I am great. Thank you again for such a lively conversation last week around R&D. I’m excited for this week, and just looking at a lot of issues when it comes to what it means to be a modern co-manufacturer.  

I’m going to kick this off with one simple question: Is it just me or has the demand for contract manufacturing drastically increased over the past few years?  

Nicosia: There’s no doubt. There’s an acceleration of contract manufacturing taking place. There are a lot of reasons for it; I’ll focus on the three big reasons that I think there’s been a rise in contract manufacturing. There’s incredible demand that was created during COVID. I would tell you that what happened is that people changed their eating behaviors away from home. Everybody was locked down and at home spending more time with their families, and there was a huge demand for food at home.  

If you think about a business like ours, where we’re predominantly in the snacking side of business, we saw incredible demand for products out in the marketplace. Many of our customers called on us not only to ramp up the things that we are already manufacturing for them, but there were certain places where customers were outstripped of capacity and they asked us for help. We became a massive overflow point for them as well.  

I think you first saw this huge surge coming from COVID. But I think there are other reasons for it. You’ve never seen a marketplace like it is today. There are so many insurgent brands out there with great ideas, new ingredients, healthy, better-for-you ingredients and all types of sustainability coming into play as it relates to packaging, so many insurgent brands have come forward.  

Typically, those insurgent brands can’t afford or don’t have the expertise to have their own manufacturing infrastructures. They need to wait till they scale or perhaps they prefer to really focus on brand building. So they never really build an infrastructure from a supply chain standpoint, and they call on contract manufacturers to truly be their partners.  

Within that, you look at the cost of capital and there are choices are being made. Many of our customers would say they’d rather invest in media, advertising and consumer-facing investments versus spending it on the capital side and infrastructure. And I just think the most important piece in all of this is the expertise that really gets accelerated and brought forward by contract manufacturing. If you think about it, strong capable organizations with end-to-end capabilities from R&D through commercialization, manufacturing, safety, quality and all the things that you would want in your own internal manufacturing, but it’s external.  

That expertise is somebody else who’s invested to bring those products and skills to market. I think that capability externally has really accelerated the maturity of organizations, and the sophistication of contract manufacturing has really grown over the last several years. Our customers now have a choice, and they’re turning to contract manufacturing more and more frequently.  

Spencer: You mentioned emerging brands, and that has really been on my radar a lot lately. It just seems like there is this huge influx. Probably five to 10 years ago, most the time the story was often that my child had a food allergy that I couldn’t find a suitable substitute food for, so I developed my own and everybody liked it. Then they figured out how to scale it.  

But now, the creativity and identifying gaps in the marketplace combined with this new idea of what health and wellness looks like, consumers’ reluctance to make sacrifices for their health and wellness, and indulging in the foods that they like, and it’s all come together for the surge of these emerging brands. How is that impacting the contract manufacturing industry and is this a trend that has staying power? Is it going to have a lasting impact on contract manufacturing? 

Nicosia: You see this incredible amount of innovation coming forward from these insurgent brands. They bring to bear all kinds of great ideas; they’re tapping into ideas that may emerge at a dinner table and then they turn around and can find contract manufacturing and in weeks have product to market. 

So, they bring this entrepreneurialism and speed to the market. They call on contract manufacturers because of that speed and that capability that we can often offer to them. I mentioned that the maturity of contract manufacturing has accelerated and evolved.  

There are fewer and fewer barriers for a new brand to get to market. First, they can do direct-to-consumer very easily through digital. Just about anybody can sell what they want through a digital channel that’s easy to create. Accessibility to the consumer has been incredibly changed by technology. 

I think that the ability to manufacture in a high-quality way through contract manufacturing brings a tremendous amount of excitement into the space that we operate in. Many of these emerging brands start to grow and get the attention of the big guys, and  then they are acquired by a company that can scale them, the ability to get them distribution, shelf space and things like that. 

 So, for the winners out there, it is an exciting time. I think contract manufacturing has definitely enabled both the ability to execute and innovate in that space, but also the accessibility to grow quickly. 

Spencer: When you talk about the ones that are ultimately getting acquired, I’ve always had this theory that when you think about some authors, certain authors out there write books intentionally to be adapted to a screenplay. And I have a theory that there are entrepreneurs who develop brands to be acquirable. 

Nicosia: There’s absolutely no doubt. You can see it in the marketplace. Many of them are famous now. They have their own “recipe book”; they know how to do this and they’re great people to partner with. Certainly, they’re very innovative and they’ve got a network, which is so critically important to get brand visibility, awareness and trial. 

Spencer: So, your scope of customers is broad. You work with smaller nimble ones, and you work with the big brands. So, this rise in need for co-manufacturers and this influx of these insurgent brands, when it all comes together, what does that mean in terms of the competitive landscape for a co-manufacturer, especially when you have no brand to market? 

Nicosia: I think that we market ourselves as a trusted, reliable partner. Our reputation is determined by the quality, service and reliability that we bring. I also think value-added capabilities are what differentiates a company like Hearthside. I know in an earlier episode, we talked about our R&D capability and certainly unmatched in our size relative to some of our big customers. But if you can get the right audience and you can have the right conversation, we can bring some of that capability to complement what our big customers are doing.  

We do transactional work, but I think we do even better work when we’re working in partnership with our customers. When we get the opportunity to build those lasting relationships, we can bring more of our capabilities to bear, whether it’s related to how we do our work, the commercialization support that we bring or how we service our customers. But there’s no greater joy than seeing one of our customers truly scale a product, be hugely successful and feel like certainly we were part of that success. 

Spencer: As a mother, I feel like it is like watching your child do something great and just being in the back behind the scenes and knowing, “That is my kid, and I helped him get there.” 

Nicosia: There’s no doubt. Our employees feel like they’re an extension of the brands they manufacture every day. Whether or not their shirt says Hearthside or not, there is a tremendous amount of pride they take in what they do. 

Spencer: I love that you have a workforce that has pride in the brands that they produce; that’s really cool. 

We talked about this and we got into it a couple of weeks ago … your experience from the brand side of things … does it impact your view as a co-manufacturer and how you go to market? I know you have a philosophy that speed wins. How does that work in the context of today’s conversation? 

Nicosia: It’s funny because in my leadership team meetings, we always talk about the importance of supporting the brands that we work for and understanding what a brand stands for. Consumer expectations today are so high. They want to know that they can trust and that they are eating a quality product; those are paramount. 

We have the responsibility to ensure that all those things take place as we manufacture for our customers. They entrust us with billion-dollar brands, and we have to be the network that supports those brands in a way that maintains that trust at the point of consumption with the consumer. It’s really important for us; we talk about it a lot. When I’m with other CEOs, and talk with them about their businesses, there’s no doubt I understand the trust they’re placing in us when they ask us to manufacture their brands. 

Spencer: That’s a good segue into the next thing that I wanted to talk about. Contract manufacturing is on the radar more than it has been. One specific example is that Hearthside was identified in a New York Times article earlier this year, which led to a bit of a crisis.  

It brought contract manufacturing to the forefront in a way that was maybe unexpected, but that’s putting it lightly. I’m interested to hear your perspective on how a PR situation like that comes to light and how you learn from it and move forward from it.  

Nicosia: At the end of the day, we are in a manufacturing industry. Customers come to us for our asset infrastructure. I want to say the word “asset” infrastructure because people are assets. When I think about it, this asset infrastructure, which includes our people and, as many people know, the labor market has been tight for the last couple of years, and American manufacturing jobs are harder to fill today than they were even three years ago.  

We have a lot to do to attract more people into wanting these types of roles and give them training and help them develop so they can continue to grow in their careers. When I think about that, we’ve relied more recently on temporary workers to staff our plants, while in parallel, we’ve been aggressively hiring full-time employees.  

So, when this came to us, my first reaction was shock and disbelief. But we quickly pivoted to engaging with our temporary agencies, really to confirm they were abiding by our policy of requiring any of their temporary workers that entered our facilities to be 18 and over. We asked them to go out and validate their employment practices and confirm back to us that they were taking the proper steps, and they had the steps in place to confirm all their temporary workers were 18 and over.  

They all came back, and they did certify that to us. We also then required all of our temporary agencies that we worked with to utilize e-Verify. Some did and some didn’t; we made it mandatory moving forward. 

But also, on the customer side of this, we go to great lengths to protect the confidentiality of what we do and who we do it for. We also immediately placed calls to our customers to tell them our stance, our policies, our practices and the changes that we were making. While unfortunate, the best of relationships, I believe, are forged in the toughest of times.  

For us, I would say that was even true. The situation allowed us to get even closer to our customers and to talk with them about our practices. Many of them have known us for many years. They knew the type of customer relationship that we had had with them and they believed in us. I think that we learned a lot. We’ve made the proper adjustments to our system, and we continue to be a trusted partner.  

Spencer: From a leadership standpoint, what would you say to sum up what you learned in your first year on the job and how to move forward from such a devastating situation? How do you move forward from that and maintain those high standards that you do have in taking care of your workforce? 

Nicosia: I think the very first thing is communication. Whether it is talking to customers, employees or the values that we stand for, there is nothing that takes the place of communication. We turned to our teams and partners and talked with them about our business and what we believed in, what we were doing and had done.  

I think being able to maintain an open line of communication and knowing that you have values and processes in place are probably the biggest things that a business has to have as its foundation. But I think for me, my greatest learning was just continuing to talk to people, continuing to engage in dialogue and make sure there’s open conversation. 

Spencer: I really like what you said about your relationships becoming stronger in times of adversity. That is when you really discover the strength of the relationship when the times are bad. So one, I appreciate your candor and two, I appreciate what you’ve taken away from it and how you’re moving forward and just carrying those strong relationships through, because it’s not easy. 

Nicosia: Thank you. I appreciate that. 

Spencer: Having this conversation about contract manufacturing having a much thinner veil than it ever did, how do you see this evolution impacting things like culture within the organization or really contract manufacturing in general? 

Nicosia: I think this idea of thinning of the veil is becoming really important to my team as we talk through our ambition to be our customer’s best partner. I’m sincere in that I feel like as I came in, the business and too many of our relationships felt more tactical than they were strategic. As I’ve gotten to know so many of our customers, I’m constantly talking to them about the opportunity for us to work much more closely together, but I’m constantly also sharing my point of view on how our relationship could be different, and they would benefit from it.  

So, talking about the value equation and trying to share with them this idea of a relationship that goes far beyond CPG and contract manufacturer. It’s one of great transparency, especially in the commitments to each other for support and planning. But it’s this opportunity to also become extremely efficient, faster to market and bringing the opportunity to essentially affect their growth agenda at a faster rate. The only way that we can do that is by working more closely together and trying to really eliminate some of that tactical behavior that I think is prevalent in this industry. 

Spencer:  This thought just occurred to me: We’ve talked a lot this season about your experience leading a well-known brand. But the truth is, it doesn’t matter what brand came from or where you came from, you came into contract manufacturing not having been in contract manufacturing, and you came in at a time of upheaval.  

You have an incredibly unique perspective that is completely fresh from anything that anybody has seen on the co-manufacturing side. Usually, a contract manufacturer gets a problem and then you have to solve it and clean up the mess. But it sounds like you’re coming into this and looking forward to the industry with how we can proactively avoid those problems and streamline things so that we can be a better partner, a help us help you type of thing. Is that fair to say? 

Nicosia: It absolutely is. I do think at the heart of it, it is about helping our customers be successful. But it also is partially selfish because I see the frustration from my internal teams, and they wish they had known about something earlier because they could have helped. They saw a problem coming, and they didn’t have an outlet to communicate with our customer base, and the person that they would share it with wasn’t able to escalate it to get it to the right person in the right department. This idea of being able to be better partners creates a tremendous amount of value in everything that we do, so it really does resonate with me. 

Spencer: Talk about being a disrupter. I think that you can change the game for modern co-manufacturing. 

Nicosia: You are so kind, Joanie. We’re doing our best one step at a time here at Hearthside. 

Spencer: I think that’s a good note to end this week on. 

Nicosia: Thank you. I look forward to our time again next week.  

Spencer: Next week will be our last episode. I’m so excited because we are going to unpack your unique leadership perspective as a CEO with a very interesting background, so I can’t wait for next week to wrap up the season. 

Nicosia: Awesome. Thanks, Joanie.