Minnesota small food companies growing in an otherwise stagnant grocery industry

Back in 2013, Alyza Bohbot, a Duluth native working in marketing for Boston Beer Co. and earning a master's degree at the University of Massachusetts, received a call from her dad in Duluth.

Nessim Bohbot, an immigrant from Morocco, had started a coffee roaster, Alakef, in the 1980s, to produce a stronger North African-style product in small batches. The downtown Duluth business had grown modestly, to several employees over 25 years.

Alyza Bohbot remembers as a schoolgirl putting labels on bags of Alakef and helping her dad at Midwest coffee shows. She always told the folks that it was "their business." However, by 2013, her dad and mom, an audiologist in the Duluth schools, had decided to sell the coffee business and retire.

"I wanted to see the business stay in the family," Alyza Bohbot recalled. "So I moved back in 2014 and bought the company from them."

She also launched City Girl Coffee from Minneapolis, a premium retail brand that she sources from female growers in Colombia, Mexico, Peru, Brazil, Guatemala and elsewhere that has helped her spur growth in what is now an 11-employee company.

"It's a business and a mission for me to source from women," said Bohbot, also a board member of the International Women's Coffee Alliance. "Launching City Girl breathed new life into our company. We are developing [retail] partnerships. We have positive cash flow, and I continue to put back a lot of the profit to keep growing it."

Bohbot is also part of the fastest-growing segment of the otherwise-stagnant grocery business. Specialty, high-quality, locally owned products that command premium prices in small-but-growing sections of supermarkets.

Dozens of these companies have sprung up in homes and kitchen incubators around the Twin Cities in recent years. Not all make it. And some of the older, proven players are getting picked off by food marketers such as General Mills.

For example, earlier this month the venture capital arm of General Mills invested in Purely Elizabeth, a Boulder, Colo.-based maker of granola, oatmeal, muesli and cereal that uses nutrient-rich ingredients. Three years ago, Mills spent more than $810 million to acquire California-based Annie's organic foods that was growing faster than Mills' cornerstone cereal and yogurt businesses.

Most of these small local producers, such as T-Rex Cookie, Lucille's Kitchen Garden jam, the Amazing Chickpea, Rise Bagel Co. and St. Paul Bagelry, are far from being big enough to be a target for larger companies. They are born of farmers markets or the owner's kitchen and struggle for revenue, distribution or enough capital to open their own shop.

"We're trying to educate the producers about what the stores are looking for, and there is a lot of ingenuity coming from these entrepreneurial producers," said Mike Reineck, president of Market Distributing of Burnsville, which works with small producers as well as big ones. "We are smaller and we try to help some of them come to market. It's not easy.

"Just because you have a good product doesn't mean you will make it. You have to price it right and be ready for promotions and things that can cut into your margin. And they learn that maybe you're only going to make $10,000 a year for 50 hours a week of work. But these people believe and have energy and that's how some of them will take it to the next level."

Central Minnesota farm couple Tom and Jenni Smude, owners of Smude Enterprises of Pierz, appear to have ascended to the next level.

They nearly lost their farm in 2008 amid drought years and hailstorms that devastated their corn and soybean crops and forced them to buy expensive feed for their cattle.

They switched to sunflowers, which require much less fertilizer and water, and which replenish the soil as a good rotating crop for beans and corn.

They started producing small batches of sunflower oil in 2009-10 on 60-or-so acres. The idea was to press it, make some oil and feed what was left to the animals.

Tom Smude, who has become an unassuming operations-and-marketing expert, this year will contract with farmers who expect to plant up to 1,500 acres. That compares to 800 acres last year to meet the demand for Smude oil in supermarkets, high-end pet foods and movie theaters in amounts that range from 16-ounce bottles to 35 gallon drums.

"We just had a meeting with the bank, and they're still on board for expansion," Smude said last week of a several-million dollar business that also employs up to 10 at Smude's expanding processing plant in Pierz. "I'm nervous, but it's a good nervous.''

Chad Gillard, founded Midwest Pantry several years ago with business partner Zoie Glass to help small food companies grow through trade shows and connect with wholesale buyers.

"The number of companies we work with continues to grow," said Gillard, who works with about 200 members. "Another indicator is the number of shared-kitchen spaces around the Twin Cities. It's growing.

"Some of the bigger food companies have started business accelerators to help smaller companies grow. And we work with organizations such as Greater MSP, the state departments of agriculture and economic development. They want to see Minnesota small-food companies grow."

Neal St. Anthony has been a Star Tribune business columnist and reporter since 1984. He can be contacted at nstanthony@startribune.com.