Andrew Andriano, founder of Flourish Pancakes, says he feels like a 'pawn on a chess board'.Cole Burston/The Globe and Mail
Flourish Pancakes and Mid-Day Squares are rare examples of successful Canadian startups manufacturing and delivering food products consumers can readily prepare and eat. But with U.S. sales either the largest or fastest-growing part of their businesses, neither believes they can withstand the 25-per-cent tariffs President Donald Trump has said are coming Feb. 1 without making changes to their operations.
Canada’s second-largest pancake mix brand and a pioneer of high-protein refrigerated snacks are looking to expand production across the border to serve the U.S. market from within that country, mirroring a KPMG survey that found almost half of Canadian businesses plan to move more investment and operations to the U.S.
The homegrown companies are not happy but feel they have no choice.
“I feel used,” said Flourish Pancakes founder Andrew Andriano. “I feel like we are a pawn on a chessboard.”
But tariffs and the flight of manufacturing beg larger questions about Canada’s shortcomings in the consumer packaged goods category.
Canada will always fight an uphill battle with the U.S., with the latter’s denser landscape and more numerous highly populated cities. Retail consolidation and a shortage of capital here also pose barriers to growth.
However, Canadian companies have an ace in the hole that should not be underestimated: access to raw commodities.
Mid-Day Squares and Flourish Pancakes are consumer packaged goods startups that punch above their weight. Both launched about six years ago and have grown at impressive rates.
Flourish Pancakes has about $15-million to $20-million in annual revenue; Mid-Day Squares, about $30-million.
Flourish Pancakes can be found in stores within a 10-minute drive of 90 per cent of Canadians, said Mr. Andriano, and Mid-Day Squares has sold more than 50 million of its high-protein, high-fibre, low-sugar chocolate bars.
Flourish Pancakes manufactures in Toronto, while Mid-Day Squares are produced in Montreal.
Tariffs on Canada and Mexico coming Saturday, Trump says he’s deciding whether levy will hit oil
A major factor driving both companies to set up shop in Canada was the abundance of raw commodities. Maple syrup is a key ingredient of the chocolate bars, while wheat, dairy and sugar are key to the pancake mix.
However, both companies are now looking to the U.S. for the next stage of manufacturing – something they were not really considering before Mr. Trump’s tariff threats. Their U.S. customers, which represent big growth opportunities, are just too valuable to lose, both founders said.
Mid-Day Squares plans to reach $100-million in revenue within three years. To do this, it needs to expand its manufacturing facility. The plan was to build out its plant in Montreal, but with 70 per cent of its sales in the U.S., it is now considering Ohio, Wisconsin and Missouri.
The U.S. market’s size is a primary driver of those sales numbers, but so too is the more experimental retail environment.
Mid-Day Squares fall into a subset of consumer packaged goods called refrigerated snacking. This is an established and popular category in the U.S., but not in Canada, said co-founder Jake Karls. Marketing in Canada is therefore more difficult and expensive.
“We need the U.S. as a business,” Mr. Karls said. “It’s critical.”
Flourish Pancakes also benefited from the U.S. retail environment finding a foothold in innovative retailers such as H-E-B Grocery Company LP, based in San Antonio, Tex.
This is typical of U.S. retail, said Matt MacDonald, the food and beverage lead at MNP, a professional service firm. The U.S. retail sector is more competitive (the top three retailers control just 33 per cent of the market, compared with 65 per cent in Canada). Smaller grocers are able to try new products and develop different lines that can, after testing, be expanded nationally.
It is this competitive market that drives innovation in U.S. food processing, while Canada’s consolidated retail sector suppresses producers, said a report commissioned by MNP and published Monday.
The other reason why both companies need the U.S. market is capital. Mid-Day Squares received significant funding from public sources. But now it needs an extra $14.5-million to expand and $10- to $13-million for manufacturing. So far, securing funding from Canadian private equity has been challenging, Mr. Karls said, so he plans to get it in the U.S.
Flourish Pancakes is also hoping to secure an extra $10-million, which it expects to find in the U.S., not Canada.
Tony Ayala, president of Queen St. Bakery, at his Scarborough factory on Jan. 30.Cole Burston/The Globe and Mail
That a Canadian company would turn to the U.S. for funding comes as no surprise to Dana McCauley, the chief executive of the Canadian Food Innovation Network.
Canadian entrepreneurs can find public funding at the start, and funding is available to large, multinational companies, but private capital is not readily available to those in the middle, especially compared to the U.S.
This is particularly challenging for food manufacturing, the growth of which Ms. McCauley describes as more of a staircase than a steady curve. Companies need a hefty injection of cash at the mid-point to build infrastructure and push production to scale.
District Ventures Capital is one of the few funds focused on Canadian consumer packaged goods, says general partner and Dragons’ Den star Arlene Dickinson, and one of the primary investors in Flourish Pancakes.
Canada’s capital shortage is in stark contrast to the situation in the U.S., where she knows of a number of multibillion-dollar funds with consumer goods verticals. This reflects a problem for our food sector, she said, especially now, as Mr. Trump threatens to impose tariffs.
In the absence of significant funding, she promotes co-manufacturing, where a third party takes care of the manufacturing process of goods.
Queen Street Bakery, a gluten-free bakery startup and another of District Venture Capital’s investments, has a co-manufacturing plant in Toronto. In addition to its own products, Queen Street Bakery also manufactures for three other companies, including one U.S.-based company.
However, two of the bakery’s brands are considering leaving for the U.S., said president Tony Ayala. This is a double hit to the business: The U.S. accounts for around 50 per cent of its sales, and Mr. Ayala is also worried about the increased costs of ingredients – some of which he sources from the U.S. – should countertariffs come into play.
“The whole ecosystem is getting stressed,” he said, adding that this moment highlights the importance of free trade to both the U.S. and Canada, especially for food.
“Everyone buys food every single day. It’s going to be felt.”
Editor’s note: This article has been updated to clarify that the companies are not ceasing production in Canada, but expanding production to serve the U.S. market from within that country.