DISTRIBUTING PRODUCT

Distributing Your Product

In order to get your product to the consumer, you have to go through certain distribution channels-the paths that your goods, and title to the goods, follow.

Distribution channels serve various functions, including:

• reducing the number of marketplace contacts and resulting in a more efficient system;
• matching the requirements of individual consumers to the outputs of various producers;
• standardizing to improve the efficiency of the system;
• holding inventory to increase market response and lower transportation costs;
• physical distribution of products to ensure that they are available for customers to purchase on demand.

It's important to build good relationships with your distribution channels; remember that they are acting as "babysitters" for parts of your business that you aren't interested in focusing on. For example, a retail chain partner acts as your retailing arm to consumers.

The following terms are used in relation to distribution channels:

• Direct selling occurs when you sell products directly to consumers. Methods include catalogues, home parties, door-to-door selling, telephone sales and retail craft shows.
• Indirect selling occurs when you sell to an intermediary, as opposed to an end user. Methods of indirect sales include selling your product to a retail store as well as using a wholesaler/distributor or broker/agent. Indirect sales can include club chains, hotels and institutions as well as any kind of retail shop.
• Wholesaler and distributor are two different terms used to describe the same distribution channel. A wholesaler/distributor buys products from producers and normally sells the goods to retail stores.
  When you use a wholesaler/distributor, you must still convince each individual store to stock the product. That's why it's best to use this distribution channel when you have detailed information about retailers or previous sales experience. A wholesaler or distributor usually represents complementary products and takes title of the goods. In most cases, you will be responsible for advertising and for getting listed with retail chains. However, a distributor may share some responsibility for promotions, especially for smaller retailers.

• Broker and agent are two different terms used to describe the same distribution channel. Unlike the wholesaler/distributor, a broker/agent doesn't take title of products. Instead, he or she provides a sales force to sell your goods for you. You may want to use this distribution channel if your product falls into a mainstream category such as frozen food, dry grocery, deli or beverage.
  When you're making decisions about direct selling/indirect selling, broker/agent or wholesaler/distributor, look at competitor practices and consumer needs.

You don't always have a choice about distribution channels; industry norms often determine which channels you have to use. For example, large retailers (grocery chains, department stores and club chains) may prefer to purchase exclusively through wholesalers/distributors and agents/brokers

Types of Distribution Channels

Seven distribution channels are available for food companies.

Direct Channel

Producer to End User:

• This is preferable when technical specifications or rigorous performance requirements apply.
• The volume of the product delivered to a customer must be of an economic delivery size so that freight isn't a penalty, or of such value that transportation costs don't matter.

The One-Step Channel (Consumer Markets)

Producer to Retailer to End User:

• In consumer markets, the intermediary is usually a retailer.
• You negotiate directly with the buyer for the retail chain.

The One-Step Channel (Hotels, Restaurants and Institutions-HRI Trade)

Producer to Wholesaler to End User:

• The wholesaler takes title to the goods that are being handled.
• The wholesaler's sales force is responsible for selling to the end user.
• The wholesaler can reach hundreds of HRI accounts more economically than the producer can.

The Agent Channel (HRI Trade)

Producer to Agent/Broker to Industrial User:

• The agent becomes your sales force, making the sale but never taking title to the product.

Traditional Small Retail Channel (Consumer Markets)

Producer to Wholesaler to Retailer to End User:

• This channel is used by small processors who are producing limited lines of products and trying to sell to small retailers.

Agent/Wholesaler Channel (HRI Trade)

Producer to Agent/Broker to Wholesaler to End User:

• Use this channel if you are attempting to market a product into a new market area.
• An agent/broker familiar in the new market is used.

All-Aboard Channel

Producer to Agent/Broker to Wholesaler to Retailer to End User:

• This channel is used when products are produced by a large number of small companies that then use a broker to bring buyer and seller together.
• The broker is an independent sales force used to contact large, scattered wholesalers.
• This channel is also used if your product can deteriorate and you must find a buyer quickly.

Building a Customer Base

You can go to a number of sources to develop a list of potential customers for your product. These contacts are given in the Resources section of this guide.

Deciding On a Distribution Channel

You need to look at a number of factors when you're deciding on a distribution channel.

Market Factors

Short channels of distribution tend to be used if:

• potential customers are geographically concentrated in a specific region;
• there is a small number of buyers;
• orders are relatively few in number but large in size; or
• specialized knowledge, technical know-how and regular service are required by the customer.

Product Factors

Short channels of distribution tend to be used if:

• the product is perishable; or
• the product has a high per-unit value.

In general, the lower the per-unit value of the product, the longer the channel.

The Producer

Short channels of distribution are more likely if:

• you have adequate resources so that you can hire your own sales force rather than relying on that of the wholesaler; or
• you have a broad product line, making it feasible to cover the selling costs over a large volume.

Competitive Factors

Short channels of distribution are more likely if you feel that independent intermediaries aren't adequately promoting your product.

Information for the Distributor

The distributor will want certain pieces of information from you, including the following:

• a description of the product;
• the product's size;
• whether the product is fresh, frozen, etc.;
• what the product's shelf life is;
• whether the product is seasonal;
• packaging (Is the package prone to breakage? Who takes credit for breakage?);
• what market the product is in currently, or what market you would like it to be in;
• the distributor's costs (what he or she can sell it for);
• the store's costs (suggested retail selling price);
• current and future sales promotion activities (sampling, merchandising, coupons or allowances); and
• the distributor's territory and responsibilities to you.

If you're dealing with multiple distributors, providing this information (and more) in a standard electronic format is an appealing approach. You may wish to investigate the option of an electronic catalogue based on your products' barcodes or other identifying marking.

An electronic catalogue could include "public information"-such as size and description- that is accessible to all of your customers. It could also have several private sections, where partner promotion activities and other more confidential information can be stored.

How to Get Your Product Listed

When a retailer puts your product on the store's shelves, this is often referred to as being "listed." The term comes from larger grocery wholesalers that sell to a network of stores. The store buyers make their purchases from a central product list of available items.

In most cases, store operators within a chain purchase at least 60 percent of the products they carry from their wholesaler's pre-approved lists. Smaller, independent stores operating outside of a chain may have more discretion to buy from a variety of suppliers.

Food products proliferate on the market, so getting a listing in a large retail chain isn't a simple process. Generally, to make room for new products, another product will need to be bumped off the shelf (be "delisted") or assigned less shelf space.

You need to convince the buyer that your product is unique. You will also have to provide specific product/market information that shows how the product will succeed in the marketplace and bring more returns to the retailer than a competing product.

Although traditional grocery store shelves are dominated by national brands and private label products, there are opportunities for smaller businesses to enter the retail market with unique, quality food products that meet consumer demands.

Choosing the Right Stores

By this stage, you will probably have decided the type of stores you are interested in selling to; this is part of developing your marketing package. To ensure that your product sells well, it must be where consumers who are likely to buy your product shop, available at the quality/price/value they want, and meet their needs.

Look at your business goals and resources. If all you want is for your business to provide a part-time income while you sell locally to two or three stores, you will likely want to consider small, independent stores run by local businesses.

If you have a unique gourmet or specialty product, you may want to approach gourmet stores and cooking schools in your town, the province, the country or export markets.

If you have something that you think would appeal to a value-conscious consumer, you may want to consider the mainstream grocery retail stores that are targeted at the budget shopper, such as No Frills™ or Food Basics™.

Larger chain stores generally have their own in-house distribution system for stores across the chain. However, specialty or health food stores tend to be supplied by a combination of local suppliers and wholesalers/distributors that aren't affiliated with their stores. Much of the information that follows is aimed at giving you help in selling to wholesalers/distributors.

Who Decides What to Buy?

You should investigate very carefully the buying policies of the food retail companies you want to approach. The rule of thumb for new products is that buying decisions are made at the retail company's headquarters, not at the store level. Some managers may have input in identifying potential new products for their particular store. However, the majority don't have the authority to secure listings. You may risk non-payment if you close a deal at the store level, even if it's an independent store of a corporate chain.

Within each organization, identify the buyer responsible for purchasing your product. Buyers are classified by product category or by specific products. Get information about the organization's purchasing policies from the buyer before you present your product.

Some food retail companies make decisions about buying new items by committee. This process allows buyers, category managers, merchandisers and executives to pool their expertise so that they can achieve the right balance of merchandise categories within overall company strategies. Committees usually meet biweekly or monthly to review new product applications.

In some organizations within certain product categories, buyers are authorized to approve or reject items on the spot if they feel strongly about the product. If the buyer is uncertain about the item, he or she will bring it before the committee.

You need to provide sufficient relevant information about your product so that informed buying decisions can be made. In addition to basic product/vendor information, buyers and committees expect details about consumer preferences, shelf space, distribution allowances, test market results, advertising and consumer promotional support.

Purchase Planning Cycles

Retailers/distributors may have specific cycles for certain product categories that fit in with seasonal promotions. If you want to sell products for the Christmas season-such as bakery, confectionery and poultry products-you should approach retailers/distributors at least six months in advance.

If you have perishable items such as produce or fresh meats, buyers may order three to six weeks in advance of promotions. What's more, some retailers/distributors may forward-contract production of horticultural products up to one year in advance of actual product sales.

Purchase planning cycles can differ greatly between product categories and retailers. You need to familiarize yourself with buyers' seasonal order deadlines and contracting policies and target your sales efforts accordingly.

Presenting Your Product

Your critical first step to securing a listing with a retailer/wholesale distributor is presenting your product. Your presentation skills, level of detail of the information you present and adherence to correct protocol according to the company's policy will influence the buyer's decision to list.

Once you have identified the buyer, telephone him or her to make an appointment to present your product. Allow at least two weeks to get a meeting scheduled.

Before this meeting, you may have to complete a "New Product Presentation" form from the organization. This form is often used for grocery items. It may be mandatory if you are presenting new grocery items to retailers. However, if you're selling perishable items such as produce, meat and bakery goods, you may be able to complete a shorter version of the form or even just negotiate a contract on the spot. The protocol differs among retailer/wholesale distributors and product categories. Check it out before your appointment.

If you do need to complete the form, you will be asked to provide basic information such as address, telephone, fax and sales representative/broker. You'll also be asked for general product information including item description, pack/case dimensions and weights, Universal Product Codes (UPC), pallet patterns, pricing information, trade terms, deals, allowances, promotional support, order sizes (that is, minimum quantities) and delivery information.

At the Presentation

It's important that you provide as much information as possible when you are presenting your product. This may be the only opportunity you'll have to try to convince the buyer (and the buying committee, which you won't meet) to list your product.

You should also provide several product samples, company and product brochures and details about the following:

• the unique benefits your product provides;
• its planned positioning in the marketplace;
• suggested positioning in-store;
• cross-merchandising options;
• planograms (schematics for shelf-space positioning);
• a one-year marketing plan that includes proposed purchases of ad support;
• the distribution system;
• delivery arrangements;
• options/costs;
• special terms and allowances;
• additional marketing support such as advertising, in-store product demonstrations, point-of-sale material, consumer product information and special events;
• a list of competitors who are currently carrying your product; and
• relevant market research on the product, category, size and growth of the market, and test-market results.

Buyer Preferences

Ontario retailers generally state that they would prefer to purchase Ontario products over imported products when everything else-such as quality, price, supply and allowances-is comparable. When approaching a retailer, you should emphasize that you are a local supplier, because you may be more likely to be listed, even on a test basis. (However, once an Ontario supplier's product is on the shelf, it is expected to perform as well as any other successful product-slow sales will result in delisting.)

Planograms

A planogram is an electronically generated representation of a section of shelving in a retail environment. Retailers use the information to develop planograms, which help them to plan for optimal use of shelf space. The planogram is given to the stores to show the merchandisers how to set up the shelves.

A planogram can be an impressive part of your sales presentation, providing a mockup of what a shelf would look like if your product were on it. For more information, contact:

GS1 Canada 1500 Don Mills Road, Suite 800 Toronto, Ontario M3B 3L1 Tel: 416-510-8039 Toll Free: 1-800-567-7084 Fax: 416-510-1916 E-mail: info@gs1ca.org

After the Presentation

Once you have presented your product to the buyer, you may be given approval or rejection at that meeting. However, it's more likely that you'll have to wait two to four weeks, depending on the product category and whether a committee is involved in the buying decision (perishables tend to have a faster response time).

In some cases, the buyer will agree to test-market the product in a few stores for a set time (for example, two to six months) before committing to listing the product. However, this is more the exception than the rule.

If your product was rejected after the initial presentation, that isn't necessarily the end. You can approach the retailer again if you have made appropriate product modifications or enhanced trade terms to meet the needs of the retailer. Be aware, though, that many retail organizations only allow previously rejected products to be reviewed for listing again after three to six months have passed.

How to Be a Successful Supplier

Retailers have used adjectives such as “professional”, “efficient”, “well-informed”, “ambitious”and “creative”when asked to describe a successful supplier. However, effective actions leading to results speak louder than words

Communication

A successful supplier must consider the buyer's needs and communicate all relevant information concisely and on time.

Important information includes:

• price changes;
• promotional deals and allowance;
• product shortages and date of availability;
• new products;
• discontinued items;
• changes in packaging, labelling or size; and
• promotional activities.

You should always have product samples, price lists and deal information readily available for the buyer.

Frequency of Contact

When retailers were surveyed, they indicated that successful suppliers contact buyers on a regular basis-for example, every two weeks-to ensure that supplier and product are meeting retailers' needs and expectations.

Getting a product listed doesn't mean that it will stay listed. You will have to follow up with adequate merchandising and promotional efforts to ensure that the turnover rate of your product meets or exceeds expectations.

Turnover Rate

You and the retailer should agree on the expected turnover rate of your product at the store level. Then you need to constantly monitor this rate and adjust deals, allowances and promotional efforts to ensure that retailer expectations are satisfied. Keep in mind that the number of times a case of your product sells (the "case turns") and the size of cartons are extremely important. When buyers check velocity reports, they usually look at the number of turns, not the case size. It may be to your advantage to package 12 units per case instead of 20, because increased turns are perceived to equate to increased sales volumes.

Merchandising

Merchandising focuses directly on using the trade and the purchase environment as vehicles for enhancing consumer sales. It affects the trade's acceptance of and support for the product in-store. Merchandising is an ongoing activity.

Aspects of merchandising include:

• In-store location;
• Shelf space;
• Shelf position and layout;
• Shelf communication materials;
• Distribution;
• Brand;
• Size; and
• Inventory.

Merchandising tools include:

• Display bins;
• Signage;
• Racks; and
• Point-of-sale materials such as signs.

Suppliers often hire merchandising companies to monitor in-store product displays, product stocks and so on, to ensure that their products are being presented as expected.

Warehousing and Distribution

You should identify any shipping problems, stock shortages, over-shipments and damages. Then you need to take immediate action to correct them. It's also important to monitor the service of freight companies to be sure that they are meeting your needs and those of your buyers.

Category Management

The industry often uses terms to refer to its buying practices and the process of effectively moving product from the raw stage to the consumer.

Category management is a distributor/supplier process of managing categories as strategic business units. This is a process of maximizing profits on the basis of product movement by category, not by brand item. It's done through efficient use of item assortment, pricing, promotion, shelf presentation and other techniques to move goods out of warehouses to consumers.

You should identify which buyer has responsibility for the category that your product falls into. Talk to retailers about your profitability and provide factual support. For example, you can indicate the incremental sales gains from merchandising programs and discuss distribution of support.

Be prepared to follow up promotional programs with reviews of the results, and share the information with retailers so that they can modify efforts to increase mutual benefits

E-Business and Electronic Data Exchange

These days, it's becoming increasingly important for producers to understand electronic commerce and the ability to use the Internet to receive orders. You should be prepared to invest in the equipment that will make this possible.

Becoming an affiliate member of a grocer trade organization should give you a pipeline to public information about electronic commerce initiatives.

Find out what type of computer system the retailer operates and how you can interface with it. Retailers who are wholesalers may have integrated warehouse and store computing; they may be prepared to allow dial-in access for suppliers. This would enable you to exchange information about purchase requirements, purchase orders, etc.

Choosing a Broker

Make sure that you need a broker's assistance before you hire one. For example, if you're selling to President's Choice, you may need a broker, but if you're dealing with Sam's you may not.

When you use a broker, it's like hiring a sales force, and can be immensely important to the success of your company. Here are some of the benefits of a broker compared to a salesperson:

• Food brokers represent the products of many companies and can achieve better market coverage for lower cost.
• You will get a sales force at minimal cost.
• Brokers offer you the link to electronic commerce functions.
• Most brokers offer a menu of services that covers every area of the business cycle except the actual manufacturing. Services can include head office contact, retail and end user coverage, invoicing, warehousing, developing marketing plans, tracking of promotional spending, retail audit and much more.
• A broker can give you wide geographic coverage for less cost.

.The food broker's main strength is local market and account knowledge.

Your best approach to finding a broker is to contact the Canadian Food Brokers Association (CFBA). CFBA works, without charge, to educate processors and help them in selecting a broker. The association also offers a service to aid manufacturers in contacting suitable firms, and you can get a list of members from the association. Contact:

Canadian Food Brokers Association c/o Food and Consumer Products of Canada Tel: 416-510-8024 E-mail: info@fcpc.ca You can get lists for the United States from the Grocery Manufacturers of America. This organization offers several documents on choosing a broker, including:

• How to Select Your Broker;
• Handling Competing Items;
• A Guide for Developing Food Brokers-Principal Agreements;
• Professional Working Relations Between Manufacturers and Food Brokers; and
• Guidelines for Manufacturers and Food Brokers Serving the Food Service Industry.

For more information, contact:

Grocery Manufacturers of America 2401 Pennsylvania Avenue N.W., 2nd Floor Washington, DC 20037 Tel: 202-337-9400 Fax: 202-337-4508

Food manufacturers' associations often hold exhibitions, inviting brokers from target markets to attend. Federal and provincial government trade development groups also plan and manage trade shows in target market areas. These are often cost-efficient because a variety of discounts due to group participation are available.

There are also national associations of brokerage firms that hold annual exhibitions. At these shows, companies searching for representation exhibit their products in a trade show format.

Creative Ways to Distribute Your Product

November 15, 2012, 12:08 pm David Koch KBB

As a small business owner, how can you find easy, cost-effective ways of distributing your product?

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Basic business textbooks will always cover the four 'P's - product, promotion, price and place. These are the key factors in the marketing mix that will determine whether a good or service finds demand among customers. Yet, as is nearly always the case, there's a big difference between theory and practice, and the traditionally touted processes aren't always viable for SMEs.
This is arguably most true when it come to 'place', or distribution - what I consider to be the least sexy of the four 'P's. It's quite often the most expensive of the four 'P's and, if done badly, can bring a business to its knees.
A bloke I was talking to about this very issue is Tim Pethick, founder of boutique juice maker Nudie. Tim learned his lesson the hard way and now refers to the transportation infrastructure his company purchased as "dumb assets".
Dumb because in hindsight it would have been more cost-effective for Nudie to outsource its distribution to logistics experts and stick to what it did best: making juice and marketing it.
Of course, at the micro and small end of the SME market, where we’re usually talking about relatively small amounts of product, the distribution challenge is different again. It often sits somewhere in the middle of not having enough time to take care of the supply side yourself, and not making and selling enough product to make outsourcing it feasible.
Related: How To Know When To Outsource
I’ve met countless operators who are in this position and working themselves into the ground trying to do it all. Deep down, they know there must be a better way, but they’re terrified they’ll drop the ball if they spend too much time looking for it. This is where thinking outside the square can mean the difference between controlled business growth and complete personal burnout.
But back to Tim. We asked him to help a fresh pet food business find ways to distribute its frozen product, after reaching the point where the owner could no longer manage deliveries alone. The obvious solution was to contract a transport company with refrigerated trucks to pick up the product and carry door-to-door on the owner’s behalf.
Yet to do this would have meant hiking up the price of the product significantly to cover the increased freight costs – and almost certainly losing customers as a result. Tim suggested finding other businesses already using chilled transport and slotting into their distribution networks.
So the owner spoke with butchers and found a handful that were thrilled at the opportunity to offer the product in their store. They were just as thrilled at the opportunity to lower their own freight costs – even if only slightly – by filling gaps in their trucks with small amounts of pet food product.
The owner is now able to promote the product to new customers and also give current customers the option of picking up from their local butcher and saving on shipping fees.
Taking the same creative approach to distribution can work for just about any product. The key is to do your homework and find other businesses to build relationships with, which will result in cost and time savings for both parties.

For more business building tips from Kochie, tune into KBB 11am Sundays on Channel 7!

5 How should your product be distributed?

Main points in Chapter 5
How should your product be distributed?

Agroprocessors have a number of options for distributing their products. Market research can identify the most appropriate.
Distribution can be ...

• direct to consumers, which may be a suitable option for smaller processors covering small areas;
• to all suitable retailers in an area;
• to supermarkets, if they find the product acceptable and sufficient quantities can be delivered;
• to wholesalers, suitable for larger processors;
• to institutions and the catering trade.

Factors to be considered in deciding on the marketing channel(s) to use include ...

• quantities processed and quantities required by distributors;
• transport arrangements;
• margins and mark-ups;
• payment arrangements.

When deciding on which retailers to supply, you must be sure that you can keep their shelves stocked at all times

POSSIBLE DISTRIBUTION CHANNELS
By now you should have covered the issues related to the product and to the potential consumers. You have surveyed the market size and consumer tastes and identified those categories of consumer likely to buy your products. You have decided on the packaging and unit sizes. You have chosen a brand name and identified what needs to be printed on the packets or labels. You have found out what prices competitors’ products are being sold at to consumers and what the shops are paying for them. With this information you have concluded that you may be able to sell your products profitably. However, you still need to consider how the items you produce are to get from your processing facility to the consumer. This requires further research. Possible distribution channels are selling:

• directly to consumers;
• to retailers;
• to supermarkets;
• to wholesalers;
• to institutions and the catering trade.

Selling directly to consumers
This can be done from a small shop, usually attached to the processing facility, or at the local retail market. It is usually only an option for very small-scale processors although, in some countries, medium and large-scale producers do sell directly to consumers by using mail order or teams of door-to-door salespeople. The advantages of selling directly are:

·         you can keep the full retail selling price and do not have to pay the margins of wholesalers and retailers;

·         in other retail shops your products will just sit on the shelves waiting for someone to buy them, but in your own shop you can actively “promote” your products;

·         you may not have to provide packaging for some types of product;

·         you have few transport problems;

·         you can talk to your customers and find out what they think about your products. They may even suggest ways in which you can improve them.

On the other hand, if you are going to sell directly to consumers you will:

·         have to do it yourself, in which case the time you have to spend selling is not available to you for processing. This limits how much you can produce and your ability to expand your business; or

·         have to employ someone to sell for you. Unless you are confident of selling a large number of products in a shop or market, for example if your shop is on a busy main road, this may cost you much more than paying the margins of the shopkeepers;

·         have trouble expanding your business, as selling in just one or two locations limits the total quantities you can sell.

Selling to retailers
The advantages of using shops to sell your products include:

·         you can sell greater quantities because your products are on sale in many more locations than if you were doing your own marketing;

·         you can devote most of your time to processing, which is what you are best at.

Offsetting these benefits are the facts that you do not receive all of the retail selling price and that you have to organize transport of your products to the retailers and ensure that they do not run out of stock.
Selling to supermarkets
Supermarkets are a particular type of retailer. Some are independent companies with just one or two shops. These can be considered as large retailers and you can usually distribute to them as you would to other retailers. However, supermarkets are often part of a large chain. Selling products through such chains can cause considerable problems for small and medium-sized processors.
Reasons include:

·         supermarket chains are often reluctant to sell other than popular, well-advertised brands and, occasionally, their “own brands”. They give priority to brands with a high turnover;

·         chains often require their suppliers to supply all their shops and may specify minimum quantities, which can be difficult for smaller processors;

·         chains may require deliveries to a central warehouse, which may be a long way from the processing factory;

·         chains can sometimes be very slow to pay!

Selling to wholesalers
In your discussions with retailers you need to find out whether there are wholesalers operating in your area and, if so, who they are. You can then contact the wholesalers to find out which areas they supply and to obtain other important information, as discussed below. The advantage of working with a wholesaler is that you usually only have to make one delivery to one location. For example, you may be able to make a delivery to a wholesaler once a week, for which you could hire a vehicle and driver for a few hours. Supplying lots of individual retailers who are spread out over a large area may mean that you have to operate your own vehicle every day, which can be costly. Another advantage is that wholesalers visit, or are visited by, a large number of retailers and are thus able to give your products much greater exposure and sell them over a wider area than you could do on your own.
The disadvantages of using wholesalers are that they may require large minimum quantities that may be difficult for you to supply. Also, of course, they need to make a profit from their activities and need to take a margin. This further reduces the share of the retail selling price available to you.

Your sales need not only be through shops.
Restaurants and fast food restaurants may also be possible outlets for your products.

Selling to institutions and the catering trade
For ventures that are neither very small nor large enough to finance an expensive promotion campaign, selling to institutions can be an attractive option. Institutions, such as schools, hospitals, prisons and military bases, can be supplied under fixed agreements which permit you to know in advance how much you will sell. Also, if you can supply institutions you do not have to worry about promotion. One drawback is that governments are often very slow to pay their bills. However, you should certainly visit all the institutions in your area to see if they are interested in your products.
Similarly, you should survey restaurants and fast food outlets to identify their requirements for processed foods. The questions you need to ask are very similar to those you would ask retailers.
DECIDING ON THE CHANNEL OR CHANNELS
This should be discussed carefully with retailers and wholesalers. Combining some limited direct sales with sales to retailers should cause few problems. For example, for a small dairy it should be possible to sell milk and dairy products directly to consumers in your village as well as supplying retail shops in neighbouring villages. Combining sales to both retailers and wholesalers may be possible, but it may also cause problems. In some cases, for example, very large supermarkets may not want to deal with wholesalers and will expect you to deliver direct to their shop(s) or warehouses. Even small shops may prefer to get all their supplies from one wholesale source, in preference to dealing with individual small suppliers. Where there is more than one wholesaler in an area, each may demand sole distribution rights for that area. This means that for one of them to agree to stock your products you have to agree not to supply retailers and other wholesalers. No wholesaler will want to do business with you if you also want to supply retailers directly, unless you have a clear agreement from the beginning about which retailers you can supply.
During your discussions with wholesalers and larger retailers you need to find out what conditions they will attach to selling your products, as discussed below. On the basis of this information and an understanding of the mark-ups that particular retailers and wholesalers require, you can begin to work out which channel, or combination of channels, is likely to suit you best in terms of maximizing the sales you can make at prices that will be profitable.
DELIVERING YOUR PRODUCTS
Wholesalers and retailers may not have much storage space available. Very small retailers, for example, may only have the space they use for selling to consumers, with no additional storage room. In such circumstances they will not be happy to sell your product if you only want to deliver once a month, as they have nowhere to keep it. Also, they probably have problems in paying for a month’s supply in one go. They may ask for weekly deliveries or, if you insist on delivering once a month, require you to offer them credit for that period, so increasing your costs.

MARKET RESEARCH HINT Identify the quantities that you can deliver to retailers at any one time As well as estimating the total market size for the items you plan to produce (see Chapter 2) you also need to work out how many of your products you can sell to individual retailers at any one time. Find out from the retailers how frequently they receive deliveries from your potential competitors (daily, weekly, fortnightly, monthly, etc.) and the total quantities they buy each time. Assume, also, that when retailers agree to sell your products they will, at least in the short run, continue to sell the brands they are already selling. To get some idea of the likely size of your sales to a retailer divide the total quantities purchased by the retailer by the number of existing suppliers plus one (i.e. you). Unless your company is large enough to do advertising, or your products are significantly cheaper or you give additional margins to the retailer, this is likely to be the maximum that you could sell at the beginning. The result of your calculation should enable you to work out which size of retailer would be able to take quantities that are viable for you to deliver or whether it would be better to supply retailers through wholesalers.

When you are delivering non-perishable items to small retailers in urban areas you can agree to sell them quantities that reflect what they sold in the previous week. For example, if a small retailer normally takes two cartons of your potato chips but didn’t sell many in the previous week, you, or your salesperson, can deliver one carton instead. This clearly doesn’t apply to rural areas as you may drive 20 km to a shop, only to find out that it wants nothing! When your products are perishable, particularly when you have to make deliveries on a daily basis (e.g. milk), you want to be sure that you can sell everything you produce. You need to discuss with retailers their willingness to take delivery of an agreed quantity every day. Without such an arrangement you could face big problems in disposing of the surplus.

Many shops can only take small quantities at a time ...
... be careful not to oversupply them.

If your research makes you believe that it would be uneconomic to supply small shops directly, or if you find that small shopkeepers buy all their supplies from wholesalers, then you have to look at the delivery requirements of larger stores and/or wholesalers. It is important to note that supermarkets do not like to have empty shelves and wholesalers do not like to tell their retail customers that they are unable to supply a particular item. You need to be sure that you can supply the minimum quantities that they require. If you start delivering to a supermarket or to a wholesaler and are unable to continue to supply the agreed quantities, then those buyers are unlikely to want to buy from you again. If you later increase your production capacity so that you can meet their minimum quantity requirements you will have a lot trouble persuading them that you are reliable.
Supermarkets and wholesalers do not like having “old” stock even if it is not past its “sell-by” date. Thus, for some more perishable products they may insist that every time processors make a delivery they take away any unsold stock, even if it has not reached its “sell-by” date. This can mean a considerable cost for agroprocessors. Under these circumstances you will need to be careful that you only supply such companies with quantities they are likely to be able to sell.
Shipment or distribution containers
By “shipment or distribution containers” we refer here not to the packs or containers that go on the retailers’ shelves (see Chapter 4) but to the packaging in which those containers are delivered. You need to find out what sizes of carton, sack, bag, barrel, etc. your competitors are using and whether the wholesalers and retailers are happy with these. Remember that the containers you use should not be too large, particularly if you plan to supply small shops, or wholesalers who sell to small shops. In northern Iraq, for example, one factory ran into problems because it was supplying retailers with cartons containing 15 cans of tomato paste. Competing factories were all supplying six cans per carton.
In deciding on the size of the containers to use, you need to refer to your estimates of the quantities different types of retailers are likely to order (see above). Wholesalers usually prefer to deliver to retailers in the packaging that the producers provide. Therefore, the number of units you provide per carton, etc. must be consistent with the quantities retailers are going to want to buy at any one time. For example, very small retailers who sell eight or nine cans of pineapple every week will probably want to buy either one or two cartons containing six cans every week. They will not want to buy a carton containing 36 cans.
Transporting your products
Having decided to where you want to deliver your products and having learned of the requirements of those you hope will buy from you, you now need to identify your transport requirements. As noted above, if you think you will have to supply a large number of small retailers with daily or weekly deliveries, you may need to buy and operate your own vehicle. On the other hand, if you intend to supply just a few large shops or one or two wholesalers you may be able to make arrangements with a local transporter to deliver your products once a week.
It is important to make a detailed study of your transport costs. Although supplying small retailers may be your preferred method of distribution you may find that the costs of supplying small quantities to some or, indeed, all small retailers are so high that the prices you have to charge will mean consumers will not want to buy your product.
In your discussions with wholesalers and/or large shops you should find out at what times they accept delivery. Some, for example, may only receive goods between certain hours or on certain days. You also need to identify the delivery procedures. Does the wholesaler assist with the unloading or does the company expect you or your transporter to unload everything?
Once you have all this information then you can approach transporters in your area to find out whether they can provide the service you require at the times you require it. You can also get some idea of the likely costs. Transport for food products must be sanitary, covered and preferably only used for food products.
PRICING, MARGINS AND MARK-UPS
This subject requires detailed discussion with potential customers. The ways in which you can work out your selling price are discussed in Chapter 8. However, at this stage of your research you need to find out from wholesalers and retailers what their approaches to pricing and margins are. You need to get as much information as possible about the prices that wholesalers and retailers presently pay for those brands that would compete with your planned products, and the mark-ups they apply. You need to discuss whether they would pay the same prices and apply the same mark-ups for your products or whether they would expect to pay less and charge higher mark-ups because they would be taking a risk by stocking new products. Figure 4 illustrates the concept of margins and mark-ups.
The price that wholesalers and retailers are prepared to pay and the mark-ups they require are likely to depend on several factors.
Some of these are:

• speed with which the product is sold;
• quantities that can be sold;
• range of products to be stocked;
• the strength of the manufacturer;
• the strength of the retailer.

Speed with which the product is sold
If businesses expect to stock products for a long time before selling all of them, then they require higher markups. Low mark-ups are required for products shopkeepers are sure they can sell quickly (e.g. carbonated drinks).The more often shopkeepers can buy and sell, the more profit they can make.
Quantities that can be sold
Wholesalers and retailers often accept a lower mark-up for products that can be sold in large quantities. This may be a condition imposed on them by the manufacturer, but they may also find that lowering the price can increase overall sales and, hence, their revenue.
Range of products to be stocked
The range of products is a factor contributing to the speed with which they are sold. Shoe or clothing retailers, for example, have to stock a large number of items so they have available the style and size that everyone wants. They therefore expect higher mark-ups.
Figure 4
Margins and mark-ups

	price	% of retail price	margin (%)	mark-up (%)
Ex-factory price	75	62.5
Wholesale selling price	90	75.0	12.5	20.0
Retail selling price	120	100.0	25.0	33.3

From the above it can be seen that the “margin” is calculated with reference to the final selling price. It is the percentage of the retail selling price retained at each stage of the marketing chain. The “mark-up,” on the other hand, is calculated with reference to the buying and selling prices at each stage of the marketing chain. It is the percentage difference between the price a company pays for a product and the price it sells it at. Thus, in the example above, the retail margin is [(120-90) ÷ 120] × 100 or 25 percent, while the retail mark-up is [(120-90) ÷ 90] × 100, or 33 percent. The concept of “margin” is useful when you are looking at the profitability of your business. However, in dealing with shopkeepers you will nearly always be discussing their “mark-ups,” i.e. by how much they want to increase the price when selling your product.
The strength of the manufacturer
Larger companies, particularly those with well-advertised and well-known brands, can often negotiate very favourable arrangements with distributors. Some brands are so famous that shopkeepers have no alternative but to sell them if they want to attract customers. In this situation the manufacturers can often dictate the maximum retail selling price, and hence the mark-up, although in some countries this practice is illegal. Small agroprocessors, on the other hand, are in a position of some weakness when negotiating with distributors, particularly when there are several other suppliers of the same product.
The strength of the retailer
Large supermarket chains are extremely powerful in many countries. They sell a high proportion of foodstuffs and are able to buy from manufacturers at very favourable prices. As a result they can retail the products at prices much lower than can smaller retail shops and charge profitable mark-ups. Even in rural towns, a large supermarket is in an extremely powerful buying position in dealing with a local agroprocessor, because of the quantities it can purchase.
TERMS AND CONDITIONS OF PAYMENT
This is an extremely important subject. Payment terms and conditions can make the difference between profitability and bankruptcy, particularly in countries with high inflation or high interest rates. If you have to wait for payment from the businesses that you supply you may:

·         have to delay payment to your suppliers, for example the farmers or wholesalers who sell you the raw materials;

·         have to borrow money from the bank to pay your suppliers and staff; or

·         have to use your own money to pay your suppliers and staff when it could be in the bank earning interest.

All over the world companies that are basically profitable occasionally run into “cash flow” or “liquidity” problems. This means that what they must pay out to their suppliers is not being matched in the short run by what they are receiving from their customers (if it is not matched in the long run they will, of course, go bankrupt). This is discussed in more detail in Chapter 8.
Small retailers may pay in cash when you deliver to them. Larger shops, supermarkets and wholesalers, on the other hand, almost certainly will not. They normally expect you to post them an invoice and undertake to pay within a certain period. In some cases this period can be up to 90 days. You need to clarify with these businesses the exact length of credit they require. It is also a good idea to check with existing suppliers to wholesalers or shops in order to find out whether those businesses do in fact pay within the agreed period. When a company is very slow in paying there is little you can do about it. You can stop supplying the company but taking legal action will often cost more than the sum you are owed.
REACHING CONCLUSIONS
You should now have a good idea of the channels that are likely to be the most profitable for you. Such information should include:

• the advantages of selling direct to consumers compared with through distributors;
• the benefits of supplying retailers direct compared with wholesalers;
• the advantages of selling to caterers, small retail shops or to large supermarkets;
• how to deliver products, when and in what quantities;
• pricing and payment arrangements.

You can then make some informed conclusions, such as:

·         the quantities of orange juice I shall produce will be too small for wholesalers and the local supermarket chain to handle. I shall have to concentrate on supplying small local retailers and one or two restaurants and fast food shops;

·         I can deliver my weekly production of tomato sauce to the wholesaler in one morning, using a hired truck. Delivering to retailers will take five days a week. I need to calculate whether the cost of delivering to retailers is greater than the margin I will have to give the wholesaler.

·         I can produce sufficient jam to supply my local supermarket chain. Although this company will pay less than smaller retailers, I can deliver to all its shops on one day in a week and my costs will be much less. The local wholesaler requires larger quantities than I can supply.

6 How should you promote your product?

Main points in Chapter 6
How should you promote your product?

However good the product, it is unlikely to sell itself.
Advertising and promotion are required.
The chapter discusses researching ...

• types of promotion, including advertising, point-of-sale displays, free samples and price reductions;
• promotion carried out by competitors;
• how competitors advertise their products;
• what arrangements are usually made with distributors for in-store and other promotions.

A promotional presentation, such as a point-of-sale display, will help identify your products to consumers.

PLANNING PROMOTION
You should be thinking about how to promote your product a long time before you start producing it. Your visits to shops and interviews with shopkeepers and wholesalers will give you an opportunity to find out what sort of promotion your potential competitors are doing and what sort of promotion you could organize with shopkeepers.
Types of promotion
The word “promotion” covers a range of activities to make people aware of, and want to buy, your products. Examples of techniques that are used around the world include the following:

• advertising;
• point-of-sale displays;
• free samples;
• word-of-mouth;
• coupons;
• tokens;
• special prices;
• free publicity.

Advertising. This can be on radio or television, in newspapers or magazines, on posters and billboards, or by using leaflets handed out in the street or delivered to homes. For small agroprocessors, television and national newspapers are not realistic options, but other approaches could be used. In many countries the number of rural radio stations is expanding rapidly, and these may offer the possibility of relatively low-cost advertising.

A design suitable for a poster or a leaflet hand-out can be reduced in size for a newspaper or magazine advertisement.

Point-of-sale displays. These are special displays of a product or range of products inside a shop. In addition to the products being on their usual shelves, they are displayed at other locations, often, in the case of supermarkets, near the check-out area. A printed cardboard display stand could be used, possibly with posters and banners, which can be displayed around the shop.
Free samples. This technique is particularly useful for new products. People may be reluctant to try something new when they see it in a shop, without having first tasted it. In developed markets companies often deliver small samples of their new product to every household in a country. Agroprocessors could consider handing out samples at shops for people to taste when they are going in. This would have to be done in conjunction with a good point-of-sale display.
Word-of-mouth. For small processors this can often be very effective. You can organize parties and gatherings at your home or at the homes of employees and friends, in order to taste your products. If people like them they will, in turn, tell their friends about them.
Coupons. Manufacturers sometimes include coupons on their packaging. These can be used by consumers to get a reduced price on their next purchase. Coupons can also be included on leaflets. The use of coupons does, of course, require the cooperation of shopkeepers, for whom collecting the coupons and returning them to the manufacturer for reimbursement can mean a lot of additional work.

Free samples can be an important way of drawing attention to your product.

Tokens. Another technique is to include a small token on each packet or container. When people collect a specified number of tokens they can take them to the shop or return them to the manufacturer to receive a gift. Again, such promotions often require the cooperation of the shopkeeper.
Special prices. Reducing prices can be used as a short-term promotional technique. However, it is not enough just to cut your prices and have your product on sale for less -you have to tell people you are doing so. Thus price reductions have to be used together with other promotional techniques, such as advertising, and in-store displays.
Free publicity. Local newspapers and radio stations often look for local news items. They may be very pleased to do an article about your new factory. Make sure you don’t approach the media before your product is on sale. An article in the newspaper that “Joe is going to open a juice factory in six months” will not do you much good and may alert potential competitors. An article such as “Joe’s Juices go on sale today” will, on the other hand, be valuable free publicity, particularly if you can get the reporter to name some of the shops where your product is on sale.
These are examples of promotion to consumers. However, you also need to promote your products to retailers. Perhaps the best way of doing this is to convince them that your promotion activities for consumers will result in very good sales, so they will make money by selling your products. Another way is to offer special discounts for your first sales to a particular retailer (see Chapter 8). Free samples can also be used to attract the interest of shopkeepers in stocking your products (see Box 4). Gifts, such as pens or key rings, with the name and logo of your company on them can also be used. Many countries have specialist companies that supply such gifts.

Promoting cassava chips in Tonga The author of this guide once worked in the South Pacific island nation of Tonga. An FAO project assisted with the establishment of a food processing plant that, among other processed products, developed very tasty chicken-flavoured cassava chips. Promotion on the main island of Tongatapu was carried out by visiting all of the numerous small shops or kiosks on the island to give the shopkeepers two free packs of the chips, together with a leaflet telling them where they could buy the chips in wholesale quantities, and the prices.

Most promotional activities have a cost. Smaller agroprocessors may find that they just do not have the financial resources to do many of the activities outlined above. They may have to rely on free publicity through word-of-mouth or stories in the local media. Even very large companies have to balance carefully the cost of promotion against the likely benefits in terms of increased sales at profitable prices.
What type of promotion is being done?
During your research, visit as many shops as possible, even if you do not interview all the shopkeepers. You should look closely at the techniques used for promotion by all manufacturers, particularly those who will be your competitors.
Look to see what is on display in the shops, such as:

• posters;
• leaflets;
• banners;
• point-of-sale displays;
• special price offers.

You should ask shopkeepers what types of promotion they have been involved with, and why. If small shops have one or two posters on display, for example, it would be useful to find out why they are displaying those posters in preference to others. Which promotions do shopkeepers feel to have been the most successful, and why?
Messages of your competitors’ advertisements
You need to consider not only how your competitors promote but also what features of their products they highlight in their advertisements, and which features of your product you would like to highlight. Examples of the type of language used include:

• healthy and nutritious;
• luxurious;
• smooth tasting;
• easy to use;
• full of fruit;
• 100 percent natural;
• a product for the élite;
• good or best value.

Arrangements for promotions
You need to understand the agreements made between the manufacturers and wholesalers and/or retailers. For example, if products are offered to consumers at special prices, does the manufacturer expect retailers to reduce their margins for the duration of the promotion? What conditions do larger retailers attach to the use of point-of-sale displays? What financial and other agreements need to be reached to hand out samples inside or outside shops? Is the processor expected to provide the staff to hand out the samples, or is this arranged by the store?
Your discussions with shopkeepers should be aimed not only at finding out the types of promotion that are carried out but also the likely cost of such promotions to you. For example, when special price offers are made, by how much is the price normally reduced? How long do in-store promotions with free samples usually last, and how much is it likely to cost you to provide enough samples?

A WORD OF WARNING Do not promote your product before you have sufficient quantities ready for sale. This is a common mistake of processors and it means that: 1. Consumers will be frustrated when they cannot find the product in the shop. 2. Retailers will be annoyed that they are out of stock. 3. When you do, finally, have enough to sell you will have to do more promotion.

REACHING CONCLUSIONS
Your research should have given you a good idea of the types of promotion carried out in your area both in general and for the types of product you plan to produce in particular. You can then reach conclusions such as:

·         promotional activities are rare in my area. However, I shall have to do something to make sure people learn about my new yoghurt. The best method is probably to print some colourful posters, which I can ask the retailers to display;

·         all the other carbonated drink producers do lots of advertising. To compete with them I shall have to do radio advertisements and provide banners and posters to the retailers;

·         I cannot afford to advertise my honey. But the new FM radio station is always looking for news stories. I shall visit them with some samples of my honey and information about where people can buy it.

7 Are your agroprocessing plans feasible?

Main points in Chapter 7
Are your agroprocessing plans feasible?

Prior to making expensive investments agroprocessors need to research not only the market but also all aspects of their production process.
The chapter briefly reviews ...

• identifying the raw material supply;
• production location and product quality;
• buying costs;
• price and price seasonality;
• research sources and costs of other processing inputs;
• identifying sources and costs of packaging and label design and production;
• deciding on the equipment to be used;
• researching suppliers and cost of equipment;
• organizing factory rental or construction, and utility supplies;
• clarifying labour requirements, costs and availability;
• planning distribution arrangements.

Delays in completing a factory can make the difference between success and failure.

Inputs and utility supply need to be researched before investments are made.

CAN YOU MANUFACTURE?
By now you have completed your market research and have a good idea about the potential markets for your products and the prices at which you can sell them. Before being able to calculate whether you can supply those markets profitably (see Chapter 8) you need to do a different kind of research. You must examine whether it is possible to manufacture your products on a commercial scale and what the costs of this will be. This research is just as important as the market research described in the earlier chapters and involves looking at the supply and cost of everything you require for the manufacturing process.
Some of the items that must be considered include the following:

• raw materials;
• other processing inputs;
• packaging and labelling requirements;
• equipment;
• buildings and utilities;
• labour;
• distribution and promotion;
• other requirements and costs.

Raw materials
A common mistake is for agroprocessing facilities to be constructed because there is a surplus of raw materials. For example, someone might decide to build a tomato-paste factory because farmers are producing too many tomatoes. The opposite also occurs: factories are built when there is insufficient raw material, on the assumption (which is often faulty) that the existence of the factory will encourage farmers to produce. An important issue, which frequently receives inadequate attention, is the subject of seasonality. If tomatoes are only available for three months of the year, what is the factory going to do for the rest of the year? If you make sizeable investments in equipment you will want those investments to be earning you money throughout the year, and not just for a few months.
The importance of the availability of raw materials does, of course, vary according to the size of your processing plant. A very small operation may consider processing activities a part-time operation to be done when supplies of raw materials are available. However, organizations that have a factory, special equipment and permanent staff need to be very concerned about whether they will be able to buy sufficient raw materials. They need to research the availability of fruits and vegetables, milk, meat, poultry, etc. and relate this availability to the size of their planned processing operations. Even if a market for the finished product were available, it would make little sense to buy a piece of equipment capable of processing one tonne a day if the maximum availability of the raw material was likely to be half a tonne a day.
For the raw materials you want to process you therefore need to research the following:

• the production in your area and the seasonality;
• the existing markets, the location of the farmers and buying costs;
• the prices of the raw materials;
• the quality of raw material that you can obtain;
• price seasonality;
• the scope for farmers to increase production.

Production and seasonality. Possible sources of information include the local agricultural extension service and local retail or assembly markets. Local offices of the Ministry of Agriculture may not have detailed information about production levels but should be able to tell you where the most important farmers are to be found. A crop calendar, which shows the seasonality of production, may be available. Larger retail markets may keep records of how much of each product is sold, although this is unlikely. The best way of getting information is probably by talking to the farmers and retailers who are selling in local markets. When are the products you are interested in considered to be abundant and when are there shortages?
Existing markets, farmer locations and buying costs.
Where do farmers presently sell their produce? Do traders visit them at their farms or do the farmers visit local markets to sell their products to consumers or to retailers? This is important information. Will you have to visit farmers in their fields to obtain your raw materials or would farmers deliver directly to your factory? What is the location of the farmers presently producing the crops that you need? How often do you need to visit them (some products may require processing almost immediately after harvest) and what are the transport and other buying costs?^[12]
Raw material prices. Where countries have national or local market information services you can use these to get information about the prices you may have to pay, particularly when they publish annual reports that can give you price trends over several years. If such information is not available, you should use your own knowledge of local market conditions, and supplement this with visits to markets to talk to the farmers and traders. One thing you may need to consider carefully is the impact your purchases could have on the market price. If your processing venture is only going to buy one or two percent of production in your area there is no need to worry. If, on the other hand, you expect to buy something like 20 percent of the crop, your purchases will almost certainly push up the price farmers expect, so increasing your costs.
Raw material quality. You will not get a high-quality product if you do not start with a high-quality raw material. When you plan your business you need to have a clear idea of the variety, size and other characteristics of the products you plan to process. You must then make sure that the available raw material matches these characteristics.
Price seasonality. Seasonal production results in seasonal prices. At the peak of production prices can be very low; when production goes down prices can rise to much higher levels. You need to work out in advance the likely periods when you can buy produce at prices that are profitable for your venture. This means that you have to carry out detailed calculations of the profitability of your factory’s processing operations at different buying and selling price levels (called a “sensitivity analysis” - see Chapter 8). For much of the year there may be no produce available or the price may be so high that you cannot process it profitably. The operations of your factory will depend on how much you can buy when prices are low and on how long you can store it properly before processing, as well as on the range of raw materials you are processing (particularly if they have different seasonal production patterns).
The scope for farmers to increase production. Your investigations may lead to the conclusion that, at existing production levels, you may not be able to purchase sufficient quantities of a product for your planned operations, at prices that will be profitable. One way round this problem may be to work with local farmers, possibly through the extension services, to ensure that they produce adequate quantities. This may require some kind of contractual arrangement with the farmers, as they are unlikely to increase production without a guarantee that they can sell the output. Clearly, very small processors cannot consider such an arrangement, but larger companies may find that it is in their interests to reach agreement with farmers.^[13]
Other processing inputs
Agroprocessing requires more than the basic raw materials such as fruits and vegetables. You may need products such as cooking oil, flavourings, vinegar, sugar, salt, citric acid or other preservatives, gelatine, yeasts, pectin and baking powder. While some of these may be easily available in rural areas, others may be more difficult to obtain. Before you start processing you have to identify sources for such inputs and be sure that the inputs will be easily available when you require them. Failure to do this could be disastrous. For example, you may buy a large amount of fruit only to find that you cannot process it because you have run out of sugar. Consumers are often very sensitive to the taste of a product. Once you have developed a product it needs to remain consistent if you are to keep the loyalty of your customers. This means that you have to use ingredients of equivalent characteristics and quality. If, for example, you make chips it could be disastrous to change the type of cooking oil and the brand of flavouring that you use, as customers would soon notice. This means that you have to be sure you will not run out of your preferred ingredients.

Make sure that you have a reliable supply of all ingredients.

Customers will soon realize if you have to change the formulation.

In addition to identifying sources of processing inputs, you need to find out how much they cost, in order to calculate the viability of your planned production. You should also find out what the payment terms of the suppliers are. Do you have to pay cash? What are the minimum quantities they supply? Do they give discounts for larger quantities?
Packaging and labelling requirements
Your market research should have given you a good idea of the packaging you need and the sizes required. As with other inputs, you need to make sure that these are easily available. In many countries, and in remote areas of all countries, this may not be the case and considerable effort may be necessary to identify potential suppliers. Many smaller countries may have to import glass jars and bottles, plastic containers for yoghurt, and bags suitable for snack foods, for example. In such circumstances you would be taking a big risk to rely on such essential items arriving at the last moment and it is best to ensure that you have them in stock before you start processing your raw materials.
Packaging can be a major cost. In some cases the packaging may cost more than the cost of the raw materials. You therefore have to pay close attention to your packaging purchases. The quality must, of course, be good enough to protect your product but you should not buy a higher quality than you need as this will put up costs. You need to identify all suppliers, learn about the qualities of packaging they can offer, the sizes they can supply and their unit prices for different quantities. You should also check how long it takes them to deliver.
Where you plan to use labels these need to be designed. Many countries have legal requirements regarding the information that should be presented on labels and you need to find out what these are. In the same way as you try out the taste of your products on consumers before finalizing the recipe, you should also test the appearance of your labels with consumers. Labels then have to be printed. Finding a supplier of suitable labels, working out an acceptable design and getting the labels printed can take much longer than you might expect. You must be certain that the labels will be ready before you start to process and, again, you need to know the costs of label purchase, design and printing in advance, as these will form part of the calculations of profitability.
Equipment
Agroprocessors often have to buy specialized processing equipment. This can be difficult to find and, because demand for such equipment is limited, can be very expensive. Except for the largest countries, much of this type of equipment is not manufactured locally and has to be imported. Costs can be considerable and would-be processors need to have full information about them. In order to work out the profitability of the planned venture it is also useful to have an idea of how long each piece of equipment can be expected to last. This can have a big impact on profitability. A piece of equipment costing $10 000 and lasting ten years costs $1 000 a year. If it only lasts five years it costs $2 000 a year. You also need to estimate the annual servicing, maintenance and running costs.
Buildings and utilities
You will, of course, have to decide on the size and capacity of the equipment to be purchased. You certainly do not want to buy costly equipment that is much bigger than you need. On the other hand you can’t afford to buy equipment that is too small. Just one piece of equipment that is too small for your processing line can cause major bottlenecks.
Processing has to be carried out somewhere. Except for the smallest ventures, agroprocessors will have to either build or rent a building or use an existing one that they own. It can be difficult to work out the cost of a new building without a detailed design and, therefore, the annual rent of similar buildings is often used when doing feasibility studies. You need to find out the cost per square meter of renting similar buildings in your area. You also need to estimate how much it would cost to get a building ready for your operations, such as installing the equipment and connecting the utilities.
Water drainage, electricity, gas for cooking (piped or in cylinders) and telephone, must be available and connections should be easy to arrange with a minimal delay. An adequate supply of water is essential for many types of processing and the quantities that you require may be considerable. You need to be sure that the flow and pressure of water is suitable for your needs. You may need to install water purification equipment. Similarly, in many areas electricity supply is very basic and/or unreliable and you may need to install a small generator. All of these aspects have to be researched and costs identified for the solutions you arrive at.
Labour
How many employees will you require to ensure that your new production line will function at maximum efficiency? You need to give considerable thought to this. You don’t want to employ people to sit around doing nothing but, on the other hand, you do want to ensure that your production process won’t break down because of inadequate staff.
Are workers of a suitable calibre available in your area? How much does it cost to employ them and what other terms and conditions of employment will you have to meet? Will you have to spend anything on staff training? You also need to look closely at your country’s labour regulations. You may want to employ people on a seasonal basis but in some countries it may be difficult to hire and fire short-term staff. Many countries require the employer to make social service contributions and even pay the employee’s tax. Some countries require the employer to pay a “thirteenth” or even a “fourteenth” months salary, and this also has to be included in your calculations.
Distribution and promotion
Earlier chapters looked in detail at the kind of information you need in order to decide what products to sell, where and to whom to sell them, in what quantities and how often. You should also have considered how to promote your products. With this information you should now be able to develop a plan for the distribution of your products to wholesalers, retailers or consumers and a promotion plan. It is then necessary to work out the costs of implementing these two plans and also to make sure that they are consistent with your processing capabilities.
The main distribution cost will be transport. Do you need to buy a vehicle? If so, how much will it cost to buy, run and service? Alternatively, if you plan to hire transport, how many vehicle-days do you need per week or month to carry out your deliveries? How much will that cost?
Chapter 6 discussed the types of promotion that you could consider. You need to work out the costs of advertisements, posters, leaflets, in-store display, free gifts, etc. Contact radio stations and newspapers to find out their advertising rates. These may vary according to the time of day, as may the type of person listening. Try to find out when the people you expect to buy your product are most likely to be listening. Don’t make the mistake of thinking that you only need to do promotion when you introduce your product onto the market. Although this is the time when you want to make the biggest promotional effort, you should consider promotion as an ongoing activity which needs to be done more or less all the time.
If you decide to give out free samples of your products, you need to take account of the cost of this. Such costs could include the cost of packaging, the cost of plastic cups for samples of drinks, and the cost of employing people to hand out samples and leaflets. With regard to the cost of the products you give out for free, this is perhaps better taken into account when you do a feasibility study, as discussed in Chapter 8. For example, if in the first month of your operations you produce 1 000 litres of juice and use 100 litres for free samples, then you are only able to earn revenue on 900 litres.
Other requirements and costs
You need to research all legal requirements associated with running a business in your country. Food processing facilities are normally governed by regulations to ensure hygienic practices, and you will have to observe these. National and local licences may be required for a variety of reasons and their cost needs to be incorporated into your feasibility calculations.
There may also be regulations relating to the product you plan to produce. For example, the alcohol content of beer may be specified by law, as may the fruit and sugar content of jam.
At the start of your operations you may need to identify specialist help with, for example, setting up and operating your factory. Larger companies will require accountants. All such costs need to be worked out in advance and incorporated in your feasibility calculations, as must the cost of the market research you carry out.
Taxation is something that entrepreneurs often overlook until they are presented with a bill that they cannot pay. In addition to Income Tax, many countries have a system of Value Added Tax (VAT). You need to incorporate that in your price calculations and register to pay the tax before you commence operations.
REACHING CONCLUSIONS
Earlier research indicated that you had a good product that could be marketed successfully. The research in this chapter should have enabled you to identify:

·         whether sufficient raw materials will be available, when and at what cost;

·         how easy it will be to obtain supplies of processing inputs such as flavourings, preservatives, yeasts and pectin as well as packaging and labels;

·         what equipment you need and whether it is easily available, and at what cost;

·         whether suitable buildings are available for your factory and whether utilities are easily available.

On the basis of this you should then be able to reach conclusions, such as:

·         although apricots and peaches for drying are only available for three months of the year, my fixed costs (see Chapter 8) are low and I should still be able to run a profitable business;

·         the equipment I need to produce peach juice is very expensive. Peaches are only available for three months of the year and I will not be able to cover my costs. Are there other juices I could produce from fruits with different seasons?

·         I need to buy about 50 percent of the tomatoes produced in my area if I am to have enough for my planned factory. That would put up the price of tomatoes to a level higher than I can afford. I have to consider giving farmers a contract to grow for me;

·         there is no suitable building for me to rent for my factory. I may be able to get a bank loan to build a factory but that would increase the financial risk to me if the venture does not succeed. I need to examine the economics very carefully.

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[12] See Shepherd, Andrew W., “A guide to marketing costs and how to calculate them”. [13] For more information see, for example, Eaton, C.E. and Shepherd, A.W., “Contract farming - Partnerships for growth,” (details in “Further reading”).

8 Will your business be profitable, and at what prices?

Main points in Chapter 8
Will your business be profitable, and at what prices?

Having completed research into the market and having considered the availability and cost of all production inputs, including equipment and buildings, you are now ready to carry out some basic calculations and work out what prices to charge.
The chapter considers ...

• calculating the likely annual profit from your planned processing;
• calculating the return to your time and capital;
• reviewing your cash flow;
• covering your fixed costs;
• different ways of setting prices.

Before starting a venture it is essential to calculate its profitability

WILL YOU MAKE A PROFIT?
Throughout the previous chapters this guide has stressed that it is not enough just to identify a potential market for your products. You must be sure that you can supply that market in a way that is profitable for your enterprise. Most products can be sold if their price is low enough. However, if the price is too low you will not make money.
By now, your research should have given you a good idea of the prices your products can be sold for in the shops and the prices that the shopkeepers or wholesale distributors are prepared to pay you for them. You should also have a clear indication of the costs of the inputs, including the raw material, utility, equipment and packaging costs. With this information you should now be able to make some profitability or feasibility calculations.

A WORD OF WARNING When calculating the profitability or feasibility of your planned venture you must include the full cost of everything you need in order to process your products, even if some things, such as processing equipment, are subsidized or even provided free of charge by a donor, an NGO or the government. At some stage you will have to replace that equipment and pay the full commercial price for it. Therefore, you need to know from the beginning whether your activity is likely to be commercially profitable or is only profitable because it is being subsidized.

Feasibility studies can range from the very basic to the very detailed. As the purpose of this guide is mainly to advise on market research techniques we shall not discuss the more complex types of study. The “Further reading” section at the end of the book gives some sources of more detailed information about carrying out such studies. If you are planning to borrow money from a bank to set up your venture you will need to have detailed discussions with the bank to find out what information it requires in order to make a decision on whether to lend you money.^[14]
Profitability calculations
In order to calculate profitability (see Figure 5) you should:

·         have calculated the exact quantities of ingredients required to make your product. For example, if you are making pineapple juice, what quantities of pineapples, sugar and other ingredients are required to make a kilogram of juice? Make allowances for wastage. Some of the agricultural products you buy will not be suitable for processing. When you peel fruit prior to processing, this can remove much of the weight. You may need to buy 100 kg in order to get 80 kg of processable fruit;

·         recognise that some of the processed product will not reach the consumer. It may, for example, get spilled during bottling. In Figure 5 it is assumed that you will need to produce 10500 litres of fruit juice in order to sell 10000 litres;

·         have an approximate idea of the cost of utilities (gas, electricity, water) used for your processing;

·         estimate not only the price paid for ingredients but also the cost of buying them, for example costs of visits to farms;

·         give a cost to all ingredients even if you grow some on your own land (the cost should be the price you could get if you sold those ingredients fresh). Otherwise you could end up processing produce that it could be more profitable to sell in the local market or to other processors;

·         take into account the different packaging sizes you will be offering and the fact that revenue and costs will vary according to the size;

·         take into account miscellaneous costs, such as licences. Disposal of waste material (e.g. fruit peelings) can also be a significant cost;

·         build into your calculations the costs of factory buildings and equipment. The easiest way to treat these is simply to divide the cost of the investment by the number of years you expect it to last. (This should be part of your research - see Chapter 7). Thus you may divide the cost of a building by 25, the cost of a delivery vehicle by seven or the cost of a simple food mixer by three. Also, don’t forget that buildings and equipment have servicing, maintenance and insurance costs and these need to be included in your calculations. As you will have probably borrowed money you should not forget to include interest and loan repayments;

·         calculate your staffing requirements and the cost of that staff;

·         take into account any significant start-up costs, such as technical consultancy services or market research costs. These are unlikely to be repeated every year so it would bias your feasibility calculations to charge these as annual costs for the first year. Consider apportioning such start-up costs over three to five years.

Figure 5
Simple profit and loss account calculation

Total annual revenues			$
Estimated revenue from annual sales of fruit juice
	6 000 litres in one litre bottles
	4 000 litres in 0.333 litre cartons
	TOTAL REVENUE
minus transport, delivery and payment collection costs
(a) net revenues
Annual costs			$
Building and equipment costs:
	Factory cost ÷ 25
	Truck cost ÷ 7
	Other equipment costs ÷ 4
	TOTAL ANNUAL ASSET COSTS
Start-up costs ÷ 5
Maintenance and servicing costs for factory and equipment
Estimated cost of fruit to produce 10 500 litres of juice
Estimated cost of other ingredients, including wastage
Estimated cost of utilities
Packaging costs:
Labour costs
Interest and loan repayment
Other costs (e.g. licences)
Taxation provision
(b) total annual production costs
Promotional costs including costs of producing free samples
(c) total annual costs
Annual profit		(a) minus (c)

Return to time and capital
Once you have calculated your likely profit, two further calculations are required before you can decide whether it is worthwhile to go ahead with your venture:
1. If you are the owner of the business, then you must calculate the return to your time and that of family members who work without wages. Make a realistic estimate of the number of days you and your family expect to work. Don’t forget to include the time spent buying the raw materials and selling the products and any bookkeeping you have to do, as well as time spent on processing and marketing. Then divide the profit by the number of days. Is this profit per day attractive to you? Could you make more by taking a paid job somewhere? Perhaps the daily rate for a paid job may be less but you could do that throughout the year, whereas your processing business will only keep you occupied for three months. Could you make more by doing a different activity?
2. If you use your own funds to finance the business, is this a wise use of your money? Could you earn more by simply depositing it in the bank? To make this decision you should work out the return to your capital invested. From your calculated profit in Figure 5 subtract the amount of money you could earn from an alternative activity and then calculate the percentage rate of return on your investment, as shown below:

	$
Estimated profit for one year’s operations	9 000
Estimated income from paid job	7 000
Additional benefit from processing	2 000

Capital invested $10 000
Percentage return on capital
[(2 000 ÷ 10 000) × 100] = 20%

Don’t forget that there are always risks associated with going into business. In order to compensate you for taking these risks the percentage annual return in the long run should be more than you could earn by putting your money in the bank and the return to your time more than you could get by working elsewhere. In the short run, however, you should be willing to accept lower returns, in expectation that your business will eventually expand and profitability will increase.
CASH FLOW
If it looks like your processing plans will result in a good profit, you are almost ready to proceed. However, you also need to do an analysis of your cash flow. This is to ensure that the cash you plan to put into the business, or that you plan to borrow from the bank, will be enough to meet your needs on a continuing basis. Will you spend all your available cash before you are earning any revenue? Will you be able to pay your bills? Will you be able to buy your ingredients from farmers and other suppliers? If not, you are likely to have problems, even though your earlier calculations have convinced you that the business will be profitable. Poor cash flow is one of the major reasons why companies all over the world run into problems.
Figure 6
Cash flow analysis

	Month 1	Month 2	Month 3	Month 4	Month 5	Month 6	Month 7	Month 8	Month 9	Month 10	Month 11	Month 12	Month 13	Month 14
Cash available	10 000	4 000	700	1 100	2 500	2 900	4 300	6 200	10 300	9 700	9 100	8 500	7 900	5 800
Income			4 700	4 700	4 700	4 700	4 700	4 700
(1) Equipment	4 000
(2) Fruit		2 000	2 000	2 000	2 000	2 000	2 000							2 000
(3) Staff	200	200	200	200	200	200	200	200	200	200	200	200	200	200
(4) Bottles	1 000		1 000		1 000								1 000
(5) Ingredients	500	500	500	500	500	500							500	500
(6) Utilities		300	300	300	300	300	300	100	100	100	100	100	100	300
(7) Loan repayment 300		300	300	300	300	300	300	300	300	300	300	300	300	300
Expenses:	6 000	3 300	4 300	3 300	4 300	3 300	2 800	600	600	600	600	600	2 100	3 300
Cash balance	4 000	700	1 100	2 500	2 900	4 300	6 200	10 300	9 700	9 100	8 500	7 900	5 800	2 500

The simple cash flow analysis in Figure 6 assumes that you have borrowed $10 000 from a bank to put into your business. Repayment starts immediately at $300 a month. It assumes that you use your own building at no cost, but the equipment you need costs $4 000 and you must pay for it before it is delivered and installed. Before you can start processing you will have to buy bottles. The minimum quantity that the bottle company will supply will cost $1 000 and will last you two months. Again, you will have to pay cash. A month’s supply of other ingredients will cost $500. An employee will cost $200 a month and will need to be recruited for training a month before production starts. You will need to pay $2 000 a month for fruit* and your monthly sales revenue is expected to be $4 700. You estimate that you will be able to buy fruit for six months and you will not be able to store it for more than a few days so you will only be processing for six months.
* For the sake of simplification we assume in this example that the price of fruit will remain unchanged. This is unlikely to be the case, however.
In doing a cash flow analysis you need to work out:

·         when you have to spend money for equipment, raw materials, rent, etc;

·         when you have to pay your employees;

·         when you are able to begin processing, when you can make your first deliveries, and when you can expect to be paid. At the time you carried out your market research, you should have discussed payment terms with potential buyers (see Chapter 5).

You must pay attention to your cash flow. Otherwise, you could run out of money to buy raw materials.

A WORD OF WARNING Although it is important to ensure you do not have cash-flow problems and do not run out of money, you should, at the same time, be careful not to borrow more money than you really need. If too much is borrowed there is a risk of losing all the profit to repay the loan. Consider increasing your contribution as the owner. For larger ventures, consider finding a partner who can put money into the business. Alternatively, consider whether you and your family could increase your inputs in order to reduce costs of employing labour, so lowering your finance requirements. As the owner of the business you may want to take out some of the profits; be careful that you do not take out so much that you run short of cash for the next processing season!

The cash flow analysis shown in Figure 6 indicates that although you have $10 000 available and are only spending $4 000 of this on equipment, you will come dangerously close to running out of money at the end of the second month. If there are any delays in receiving payment from the shops you supply or if the price you get from selling your product is not as much as you expected, you may not have cash to buy enough fruit from farmers. In turn, you will not be able to make enough processed product, your revenue from sales will go down and you will have to close your new business. In this example, therefore, it would be wise to increase slightly the amount of cash you have available. To get a clearer position of your cash flow at the beginning of operations you could do the projections on a weekly rather than monthly basis
When you are processing fresh produce, you can only do this for as long as you can buy and store that produce. For the rest of the year you will not earn revenue but you will continue to have some costs. You need to have cash available to meet these costs and to prepare for processing in the following year.
Fixed and variable costs
Some of your costs are fixed. This means that you have to pay them whether you are processing or not. These costs include rent, loan repayments and interest, permanent staff costs (as opposed to temporary employees hired only when you are processing) and fixed utility charges.^[15] All other costs are considered variable costs. This means that they change according to how much you produce, how much you pay for your ingredients, the cost of utilities, etc.
As you have to pay the fixed costs no matter how much or how little you produce and sell, you need to be sure that you will sell enough processed product to cover those costs. Consider the following ...

	$
Revenue from annual sale
of 5 000 litres of fruit juice	3 000
Variable costs	2 000
Gross profit	1 000

... this looks like a profitable venture: you are making 50 percent profit on every litre of juice sold.
However, when fixed costs are taken into account the picture can look very different ...

	$
Revenue from annual sale
of 5 000 litres of fruit juice	3 000
Variable costs	2 000
Gross Profit	1 000
Fixed costs	1 200
LOSS	200

... from this it is clear that while you are covering your variable costs very well, you are not producing enough to cover your fixed costs.
If you can double your production and sell the juice at the same price the picture changes ...

	$
Revenue from annual sale
of 10 000 litres of fruit juice	6 000
Variable costs	4 000
Gross Profit	2 000
Fixed costs	1 200
NET PROFIT	800

Now you should work out the break-even point for your venture. This is the quantity you need to produce and sell in order to cover your fixed costs. This is calculated as follows ...

Fixed Costs ÷ Gross Profit per unit of sale

In our example this is ...

$1 200 ÷ $0.20 (i.e. $2000÷10000) or 6 000 litres

This is the break-even level of production and sales. More than 6 000 litres will give you a profit, less than 6 000 litres and you will make a loss. If you can easily expand production and sales above 6 000 litres then you are likely to run a profitable business. If increasing production much higher than 6 000 litres is likely to cause problems you should reconsider your plans.
The break-even point can also be stated as a percentage. Taking into account the fact that raw materials may only be available for a few months every year, how much could you process and sell in a year? If the maximum you could produce is 20 000 litres, then the break-even percentage is 6 000 ÷ 20 000 or 30 percent. The lower this percentage the greater the scope you have for increasing production and making your business more profitable.
SETTING THE PRICE
The different ways of setting prices include:

• market-based pricing;
• competitive pricing;
• introductory pricing;
• prices for different sizes;
• geographical pricing;
• cost-plus pricing.

Market-based pricing
This sets prices at the level already found in the market and, of course, can only be used when there are similar products already on sale. You need to look at the competing products with regard to their price and quality. What do your tasting tests tell you about the quality of your product and how it compares with others already available? Using market-based pricing you should aim to set the price of your product at no more, and probably less, than brands of similar quality. Where you are competing with well-established brands marketed by large companies with a big advertising revenue, you almost certainly have to set your prices at a lower level than those brands even if tasting tests indicate that consumers prefer your brand. You should certainly not be charging the same price as brands that you believe are of higher quality because consumers will definitely continue to buy those brands.
Competitive pricing
Competitive pricing involves setting prices at a lower level than those of your direct competitors. This will, you hope, lead to increased sales. Any price difference must, of course, be large enough to influence consumers’ buying decisions as just a small price difference may have no impact on your sales. You need to discuss this with retailers and get their ideas regarding prices that will attract people to buy your product. When you have decided on a competitive price you then need to estimate what impact this will have on your total sales and repeat your profitability calculations using the new figures.
For example, using the fruit juice example on pages 100 and 101, assume that you reduce the price from $0.60 a litre to $0.55 a litre and that your sales rise from 10 000 litres to 12 000 litres ...

	$
Revenue from annual sale
of 12 000 litres ($0.55 × 12 000)	6 600
Variable costs [$4 000 × (12 000 ÷ 10 000)]	4 800
Gross Profit	1 800
Fixed costs	1 200
NET PROFIT	600

In this example you have increased your sales by 20 percent, but the lower price means you are worse off. You would have to increase your sales to almost 13 500 litres before you benefit from the price cut. This illustrates the value of doing a sensitivity analysis (see below) and the need to be careful before trying to compete on price. You also need to consider that lowering the price too much may not necessarily make your product more attractive to consumers. People often associate low prices with low quality and if quality is more important to them than price they will not purchase a low-priced product.
Introductory pricing
This is short-term, competitive pricing for the purposes of introducing your product onto the market. It is very difficult for new products to be accepted by consumers who are already used to, and enjoy, existing brands. If you pursue a policy of introductory pricing, you may lose or make very little money in the short term, but in the long run this should increase customers’ familiarity with your products and eventually increase your sales and your profits.
The next calculation uses the first fruit juice example, with the following assumptions:

• price reduced to $0.50 per litre in the first three months and thereafter increased to $0.60;
• sales are 5000 litres in the first three months and 12000 litres for the rest of the year.

Then ...

	Jan-Mar	Apr-Dec	Total
	$	$	$
Revenue from sale
of fruit juice	2 500	7 200	9 700
Variable costs	2 000	4 800	6 800
Gross Profit	500	2 400	2 900
Fixed costs	300	900	1 200
NET PROFIT	200	1 500	1 700

Prices for different sizes
If you sell juice in one-litre bottles and half-litre bottles, you should not sell the larger bottles for twice the price of the smaller bottles. The larger the container the lower the price per litre (or kg) of contents is the general rule. The smaller container almost certainly costs more than one-half the cost of the larger bottles. Also, the cost per litre of filling the smaller bottles, putting them in boxes and distributing them is much higher than for larger bottles. You will need to work out these costs.
Geographical pricing
You need to consider whether your product should be sold for the same price everywhere or whether you could vary the price. One reason for varying the price could be the high transport costs you may incur in getting to remote areas. However, another reason could be that consumers are more affluent in some areas than others and you may thus be able to charge a slightly higher price.
Cost-plus pricing
This pricing technique starts with the calculation of your variable production costs per unit. To this should be added an amount necessary to cover fixed costs at the production level you expect as well as an amount to cover the profit that you want to make. While cost-plus pricing can perhaps be used for a new product that is not presently available in your area, it is not of much value when there are competing products. If you set a price that is too high people will not buy your product.
UNDERSTANDING THE RISKS
All business ventures involve risks. A wise entrepreneur cannot completely avoid such risks but he or she can develop an understanding of what they are. The best way to do this is to carry out a sensitivity analysis, which tests how sensitive your profits are to price and cost changes.
A sensitivity analysis is done by making different assumptions to those you used in your basic profitability and cash flow calculations. It is best to recalculate on the basis of a set of “what if?” questions, such as:

·         what if my competitors reduce their prices and I have to sell at prices 10 percent lower than I planned?

·         what if the price I have to pay for labour goes up by 10 percent?

·         what if the raw material prices are 20 percent more than I expected, and I can only buy 80 percent of what I planned?

·         what if sales are 30 percent less than I expect?

All of the above are very possible occurrences. There are further, less likely, risks, but these are also worth considering, particularly in relation to your cash flow.
Examples include:

·         what if factory construction is not finished in time for the fruit production season and I have to delay processing for a year?

·         what if there is a strike at the bottle factory and I run out of bottles? How will this affect my cash flow?

REACHING CONCLUSIONS
The issues discussed in this chapter should enable you to:

·         calculate the likely profitability of your proposed agroprocessing venture, on an annual basis;

·         review your financing requirements, to ensure you have adequate cash available to keep the business running (i.e. cash flow);

·         work out the return to your time and capital;

·         work out how much you need to process, in order to cover your fixed costs;

·         decide on the best approach or approaches to price setting;

·         consider the risks associated with your plans, by carrying out a sensitivity analysis.

You should then be in a position to reach some conclusions, such as:

·         my fruit juice business is likely to be profitable. However, there are a lot of risks that could jeopardise that profitability and I need to consider these carefully;

·         everyone likes my jam and retailers are happy to sell it. I am sure that my business will be profitable. However, I may run into cash flow problems because I have to pay for the fruit, the jars, other inputs and the label design and printing a long time before I will be paid for the jam. Perhaps I need to make arrangements with my bank in case I need a loan in a hurry;

·         my forecast of yoghurt sales is too close to my break-even point. I can easily produce more but I need to work out ways of increasing my sales first.

You should now be in a position to make a final decision about whether or not to go ahead with your plans.

Good luck!

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[14] Pages 93-95 of the FAO publication “Guidelines for small-scale fruit and vegetable processors” (see “Further reading”) outline the points that need to be covered in a Business Plan. [15] Most utility providers charge a nominal monthly fee whether or not you actually use any water, electricity, etc.

Annex 1 - Questions for market research

Checklist for shop observations

_Ö_	What brands of the product are presently sold?
_Ö_	In what market segments?
_Ö_	In what size units?
_Ö_	In what quality?
_Ö_	What are the prices for each brand and size?
___	If similar products are on sale (e.g. if you are planning to sell orange juice - other types of fruit juice; if you are planning to sell potato chips or crisps - other types of snack food) what are the sizes, brands and prices of those?
___	Are the shelves full or does the product appear to be in short supply?
___	Are any promotions being done for the product you plan to produce or for similar products?
___	Is there any advertising for these products?
___	What type and quality of packaging is used by other brands?
___	What information is provided on the packages or labels?
___	What is your overall impression of the shop (including the staff)? Would it be a good place to sell your products?

Checklist for retailer interviews
Opening statement. “I am carrying out a study for the ABC company, which is thinking of producing a new product and selling it in this area through shops such as yours. As you sell this type of product do you mind if I ask you some questions, which will help our company decide whether or not to start producing it and, if so, where to sell it. Any information you give will be treated as confidential and only used to help us make a decision on whether or not to produce and how to market our products. Let me begin by asking...”

_Ö_	What products of this type do you sell?
_Ö_	Approximately what quantities of the product did you sell in the last 12-month period?
_Ö_	Do you sell more than one brand? If so can you say approximately how much of each brand you sold in the last 12 months?
_Ö_	How much of the product do you presently have in stock now?
_Ö_	In the last five years have your sales of this product been increasing or decreasing. If so, by how much? If there is an upwards or downwards trend in the overall total or for particular brands, can you suggest the reasons for this?
___	If you sell more than one size, can you say approximately how much of each size you sold in the last 12 months?
___	Do you stock all available sizes? If not, why not?
___	How do you get your supplies of this product? From the producer/importer, a wholesaler(s) (could you name them please?), other retailers? If you use more than one channel, what is your preferred method?
___	Approximately what quantities of similar products (e.g. all snack foods; all fruit juices) did you sell in the last 12 months?
___	Do sales of the product vary according to the time of the year? What are the reasons for this? Can you provide monthly sales figures?
___	Can you get enough of the product, or competing products, or is there sometimes a shortage? If the latter, do your suppliers give you any reasons for this?
___	Is the shortage said by suppliers to be a long-term problem or just temporary?
___	Are you aware of plans by producers or importers of similar products to increase the supply?
___	Would you be interested in stocking a new brand of the product? Under what conditions would you sell a new brand?
___	What do consumers say to you about the existing brands that you sell? Do they ever complain about the quality/packaging, etc. Do you think that a new product could sell well?
___	Which of the brands you sell do people prefer, and why do you think this is (quality, price, product appearance, packaging)?
___	What is the most important consideration for your customers? (price? quality? convenience? size?)
___	What do you pay your existing suppliers at present for each brand, size and quality?
___
___	At what prices do you sell these products?
___	Do you decide on the selling price or do you follow your suppliers’ recommendations? If you decide, how do you calculate your selling price? Do you follow the same mark-up for all products/brands or does the mark-up vary?
___	What mark-up would you apply to a new product?
___	What type of packaging would you prefer for this new product? Why?
___	Do you get complaints from customers about the containers used for other brands?
___	Would customers buy the product in different packaging, such as?
___	Do the brands you sell have “sell-by” or “use-by” dates? How long do they last? If so, what do you do with products if the date has expired? Can you return them to your supplier? Under what terms and conditions?
___	What quantities of your existing brands of the product do you take delivery of at any one time? How frequently do you receive deliveries?
___	If you agreed to sell a new brand of this product what are the minimum and maximum quantities of each size and type that you would accept delivery of at any one time?
___	How often would you expect deliveries to be made?
___	In what size of distribution containers (e.g. cardboard boxes) are other brands packed? How many retail packs are supplied in one container? Would you accept containers with less/more retail packs?
___	Do you accept deliveries at all times or only at certain times/on certain days?
___	When do you pay your suppliers? On delivery, at the next delivery, etc? How do you pay (cash, cheque)? If your suppliers give you credit, for how long?
___	In the past year, have any existing brands of the product carried out any form of promotion that you participated in, such as: · price reductions? · advertising? · free samples? · in-store displays? · other?
___	If so, please describe the arrangements under which you participated.
___	If the store displays advertisements you might ask... please explain why you display advertisements for these products and not others?

Checklist for wholesaler interviews

_Ö_	What area or “territory” do you cover? Are there similar wholesalers covering the same area?
_Ö_	What quantities of the product for each size unit and brand did you sell in the last 12-month period?
_Ö_	How much do you presently have in stock?
_Ö_	In the last five years have your sales of this product been increasing or decreasing. If so, by how much? If there is an upwards or downwards trend in the overall total or for particular brands, can you suggest the reasons for this?
_Ö_	Do you stock all available sizes? If not, why not?
___	What quantities of similar products (e.g. all snack foods; all fruit juices) did you sell in the last 12 months?
___	Can you get enough of the product, or competing products, or is there sometimes a shortage? If the latter, do your suppliers give you any reasons for this? Is the shortage said by suppliers to be a long-term problem or just temporary?
___	Are you aware of plans by any producers or importers of this product to increase the supply?
___	Would you be interested in stocking a new brand of the product? Would you attach any special conditions to selling a new brand?
___	If there is more than one wholesaler in the area you might ask... do you expect to be the only distributor of a particular brand?
___	Do you allow your suppliers to supply some retailers or caterers directly? If so, under what conditions?
___	What do retailers say to you about the existing brands of the product that you sell? Do they ever complain about the quality/packaging, etc. Do you think that a new product could sell well?
___	What do you pay your existing suppliers for each brand, size and quality?
___	At what prices do you sell these products?
___	Do you decide on the selling price or do you follow your suppliers’ recommendations? If you decide, how do you calculate your selling price? Do you follow the same mark-up for all products/brands or does it vary?
___	What mark-up would you apply to a new product?
___	If you agreed to sell a new brand what are the minimum and maximum quantities of each size and type that you could accept delivery of at any one time?
___	How often would you expect deliveries to be made?
___	In what size of distribution containers are other brands packed? How many retail packs are supplied in one container? Would you accept containers with less/more retail packs?
___	Do you accept deliveries at all times or only at certain times or on certain days?
___	When do you pay your suppliers? How do you pay (cash, cheque)? Do you expect your suppliers to give you trade credit? If so, for how long?
___	In the past year, have any existing brands of the product carried out any form of promotion that you participated in. If so, please describe the arrangements under which you participated.

Annex 2 - A consumer questionnaire

For the purpose of this example, we assume that the agroprocessor is thinking of producing strawberry jam.
1. Good morning. I work for a company that makes jams. Could I ask you some questions about what you think about jams?
2. Do you or your family eat jam?

_Ö_	yes
___	no

3. Could you tell me what types of jam you have had in your home in the last 12 months?

_Ö_	strawberry jam
___	mango jam
_Ö_	pineapple jam
___	orange marmalade
___	others

4. Who are the main consumers of jam in your home?

___	adults
_Ö_	children

5. Approximately how many jars of jam and marmalade have people in your home bought in the last 12 months?

___	more than 20
___	between 11 and 20
_Ö_	between 6 and 10
___	between 3 and 5
___	one or two

6. What size of jam do you normally buy? (show the different sizes to the person being interviewed)
7. Does your family buy jams all through the year or only on special occasions?
_______________________________________________________________
_______________________________________________________________
8. Of the jams you purchased, can you remember approximately how many were strawberry jam?
_______________________________________________________________
_______________________________________________________________
9. Can you remember the brand of the strawberry jam your family usually purchases? (if people cannot remember give them the names of the available brands to jog their memory)
_______________________________________________________________
_______________________________________________________________
10. From the words on this line how would you rate the quality and taste of that brand of strawberry jam?

excellent	very good	good	OK	poor
___	___	_Ö_	___	___

11. What are the two main reasons you buy that brand rather than a different one?

___	It’s the only one in the shops
___	The price is right
_Ö_	My family prefer this brand
___	It spreads very well
___	I like the label
_Ö_	It has the best taste
___	Other

12. What do you think about the colour of the strawberry jam presently available in the shops?

too bright	about right	too dull
___	___	_Ö_

13. What do you think about the sweetness of these jams?

too sweet	about right	not sweet enough
___	_Ö_	___

14. What do you think about the thickness of these jams?

too thick	about right	too thin
___	___	_Ö_

15. If most of the jam your family buys is not strawberry jam, what is the reason for this?

_Ö_	My family prefers other jams or marmalades
___	The strawberry jam in the shops is not very good
___	Other

16. If a new brand of strawberry jam was available in the shops, do you think you would try it?

_Ö_	yes
___	no
___	perhaps

17. At which shop do you buy most of your jams?
_____________________________________________________________
18. What are the reasons why you shop there?

___	It is near our home or work
___	The prices are good
___	It is a nice place to shop
___	It has a good selection
___	Other

Further reading

Austin, J.E. 1981. Agroindustrial project analysis. EDI Series in Economic Development. The Johns Hopkins University Press, Baltimore and London.
Brown J.G. with Deloitte & Touche. 1994. Agroindustrial investment and operations. EDI Development Studies. The World Bank. Washington, DC.
Coetzee, H., 2001. Market testing new food products with illiterate and semi-literate consumers. Food Chain No. 29. pp. 19-21. Rugby, UK. ITDG.
CTA. 2000. Marketing for small-scale producers, by A. de Veld. Agrodok No. 26. Wageningen, The Netherlands.
CTA, DSE, NARO & FAKT. 2000. Strategies for strengthening small-scale food processing in eastern and southern Africa. Proceedings of a workshop organized by CTA, DSE, NARO and FAKT, Entebbe, Uganda, November 1998. Wageningen, The Netherlands. CTA.
FAO. 1997. Marketing research and information systems. Marketing and agribusiness text No. 4, Rome.
FAO. 1997(a)., Guidelines for small-scale fruit and vegetable processors, by P.J. Fellows. FAO Agricultural Services Bulletin No. 127. Rome.
Eaton, C.E. and Shepherd, A.W. 2001. Contract farming - Partnerships for growth. Agricultural Services Bulletin, No. 145, FAO, Rome.
Fellows, P.J. & Axtell, B. 1993, Appropriate food packaging. TOOL/ILO Publications.
Fellows, P.J., Franco, E. & Rios, W. 1996. Starting a small food processing business. IT Publications.
Fellows, P.J. & Axtell, B. (eds.) 2001. Setting up and running a small food business - Opportunities in food processing. Wageningen, The Netherlands. CTA.
Francescutti, D., Gulliver, A. & Medeiros, K. 2000. Ruralinvest - Guía para la formulación y evaluación de pequeñas inversiones rurales. Manual de capacitación. Ruta-FAO. San José, Costa Rica.
Kindervatter, S. with Range, M. 1986. Marketing Strategy - Training activities for entrepreneurs. OEF International. Washington, DC.
Kindervatter, S. (ed.) 1992. Appropriate business skills for third world women - Doing a feasibility study: Training activities for starting or reviewing a small business. OEF International. Washington, DC.
Lecup, I. & Nicholson, K. 2000. Community-based tree and forest product enterprises: Market analysis and development. Booklet D Phase 2: Identify products, markets and means of marketing. FAO, Rome.
Shepherd, A.W. 1993. A guide to marketing costs and how to calculate them. FAO, Rome

NOTES

Desktop publication: George Ellis
Cover illustration: Emanuela D’Antoni
The following is a list of booklets published in the
MARKETING EXTENSION GUIDE series:
A guide to MARKETING COSTS
and how to calculate them
1993, 59 pp. (E F S)
A guide to MAIZE MARKETING
for extension officers
1999, 111 pp. (EF)
Understanding and using
MARKET INFORMATION
2000, 85 pp. (EFS)
MARKET RESEARCH
for agroprocesssors
2003, 114 pp. (E S*)
Other titles in this series are planned. Suggestions for further publications are welcomed.

Available in:	E- English
	F - French
	S- Spanish

* Forthcoming (mid-2003)

For further copies of this publication and for information on FAO’s activities related to agricultural marketing please contact:

Agricultural Marketing Group
Agricultural Support Systems Division
Food and Agriculture Organization of the United Nations
Viale delle Terme di Caracalla
00100 Rome, Italy

FAX: (39) 0657056850
E-mail: AGS-Registry@fao.org
Web Site: http://www.fao.org/ag/ags/agsm/marketin.htm

This publication is also available on the Internet at:
http://www.fao.org/ag/ags/agsm/markres.htm