Sunny Outlook for Outsourcing, External Manufacturing

This demand presents a major opportunity for contract manufacturers and packagers that invest in cutting-edge equipment and technology. Hector Ruiz, CEO of Stella On Fire Co., a brand specializing in seasonings, highlights that the flexibility outsourcing offers is key for many brands. 

“Co-packers provide the scalability and adaptability needed to meet fluctuating demand without requiring a substantial capital investment,” says Ruiz. “Brands that manufacture their products usually have to raise capital or undergo a few changes if a sudden increase in product demand occurs.” 

For startups and emerging brands, outsourcing to a trusted external partner provides a way to navigate financial constraints and enter the market quickly. 

“There are two main reasons we outsource manufacturing: capital expenditure and expertise,” says James Smith, who co-founded Arrowtown Drinks, a U.K.-based brand specializing in fruit-flavored vodka soda RTD cocktails in slim cans, at age 22. “Still being a young company, we simply have never had the funding to consider bringing production in-house.” 

With investment conditions tightening, outsourcing has become a necessity for many small brands. 

“The current investment climate is incredibly tough, with many founders and investors telling me this is the hardest environment to raise funds that they have ever seen,” Smith says. “For many brands, the funding required to set up in-house production is simply out of reach.” 

E-commerce, D2C, and product testing 

The rise of e-commerce and direct-to-consumer (D2C) sales is another major driver leading brands to seek out external manufacturing services. 

Eric Gantz is co-founder of Verena Street Coffee Co., a Dubuque, Iowa-headquartered roaster that also has over 800 stores in the Midwest. 

“As e-commerce and direct-to-consumer dominate, co-packers give everyday entrepreneurs a shortcut to launching a brand without the upfront costs of packaging infrastructure,” says Gantz.

Established brands also turn to CM/CPs for overflow production and new product testing. PMMI’s study found that 48% of brand owners use co-packers to test new products or packaging formats, while 43% outsource to manage extra production when their own facilities reach capacity. 

“For coffee brands, co-packing is essential for offering diverse formats like single-serve pods or quick-serve beverages,” says Jack Foster, co-owner and operations director at Crosby Coffee, a U.K. roaster that supplies coffee to cafés, restaurants, and hotels. “These formats require specialized equipment that would be cost-prohibitive for smaller brands to handle in-house.” 

With consumer trends in constant flux, external service suppliers offer brands a valuable advantage, says Smith from Arrowtown Drinks. 

“I think the speed at which trends are coming and going in industries is increasing rapidly. The agility and flexibility afforded by a good contract manufacturer allow brands to stay at the forefront of market shifts.” 

When a brand finds the right fit with an external manufacturer, the relationship can evolve into a true partnership. Sarah Nelson is senior vice president of research and development and technical operations at Sambazon, a company that makes food and drinks based on açaí, a fruit cultivated in Brazil’s Amazon rainforest. 

“In the U.S., it can be challenging to find someone who has worked with açaí before,” says Nelson. “Sometimes we invest in helping co-manufacturers acquire the right equipment because our product is so specialized.” 

Navigating challenges 

Despite its advantages, outsourcing presents risks, including price fluctuations, supply chain disruptions, and operational limitations. 

Setting up even a small factory today can cost $15 to $20 million, making it out of reach for most businesses. While contract manufacturing offers brands a cost-effective alternative, allowing them to outsource production on a tolling basis, it comes with its own challenges, says Pradeep Hadavale, chief supply chain officer at Sambazon. 

“It’s a double-edged sword,” says Hadavale. “You don’t have the same control over the business because you’re locked in a contract and pricing can fluctuate, whereas if you have your own business, you’re able to control your labor costs.” 

For many brands, cost efficiency remains the biggest factor in outsourcing decisions, so maintaining a strong, transparent partnership with CM/CP providers is crucial. Outsourcing can create significant savings when brands align strategically with external partners, says Crosby Coffee’s Foster. 

“Rising production costs have made outsourcing more attractive. Co-packers help streamline operations by sharing infrastructure costs across multiple customers, resulting in significant savings.” 

Brands moving into co-packing 

With external manufacturing as hot as ever, some brands are entering the contract manufacturing space themselves. 

“We’re not outsourcing—we’re looking to fill some of our excess capacity by offering more operations for contract manufacturing,” says Robin Simpson, vice president of manufacturing operations at Influence, a haircare brand. 

Simpson sees contract manufacturing as a way to maximize asset utilization, diversify revenue, and manage risk. 

“If we can expand into contract manufacturing, it gives us a different revenue stream,” he says. “Right now, we could handle startups or established brands, and we probably could offer turnkey operations for startups where we could develop products for them.” 

As economic uncertainty, fluctuating demand, and evolving consumer preferences shape the industry, contract manufacturing and packaging will remain a cornerstone of CPG production strategies. 

For startups, partnering with an external manufacturer is a cost-effective path to market. For established brands, it offers the flexibility needed to navigate shifting demand. Regardless of the size of the brand, outsourcing has proven its resilience and long-term value and is expected to continue to do so in the years to come.  PW