Value adding as part of a commercial business model

[Kobus Jooste]

How many people here have costed out and modelled profits with value adding added to your product line up.  The fresh market in South Africa is far better in a value added product - sometimes double the value (pillow bagged lettuce vs lettuce heads, punnet of herbs vs bushels).  The Cap Ex is not too bad at all, and in my models, make the prospect look very attractive.  Models are not the real thing though..............

 

Any thoughts? 

[Jay Wolf]

My business plan is finished and I am currently sourcing funding.  I have not considered value added anything due do start up costs for an additional processing room.  If you want, I can play around with modeling it. The current demand in my market for fresh produce is still extremely high and good returns.  The only way I personally see doing value added products is maybe a way to market and brand your company.  Anyone else have thoughts on this?

[Nate Storey]

If you're not doing some type of value added process you cannot survive as a commercial AP venture.  Plain and Simple.  If you're producing a traditional product with no simple value added business, you will accept traditional margins on the product, which, with higher operating costs, will drive you out of business, especially as a small producer.  The simplest process is consumer education and product branding- if you do this effectively, you can get away with adding value to your product without changing the product at all.  This is the cheapest means of incorporating a value added process into your business, and I think most AP producers do this on some level.  This might not be enough though.  Consumers are price driven, whether they like it or not, so your product has to have cultural/social, economic, environmental, etc. benefits evident as well as being competitive on a price level.  Our business is based on the consumer education and using our displays, a tactile value-added process that reduces our costs.  These are the best kind of VAPs out there- increasing revenues while lowering costs, but they're rare, and they require many years of development and planning.

[Kobus Jooste]

Is there no difference in packaging something in the US?  Here, if you have 30 grams of herbs and you sell it as is, you only get 50% of what you would get if it is in a pillow bag or punnet and on the shelf of a store.  The trick is in getting the volumes to go for the value add.

Jay Wolf said:

My business plan is finished and I am currently sourcing funding.  I have not considered value added anything due do start up costs for an additional processing room.  If you want, I can play around with modeling it. The current demand in my market for fresh produce is still extremely high and good returns.  The only way I personally see doing value added products is maybe a way to market and brand your company.  Anyone else have thoughts on this?

[Kobus Jooste]

And you have to appreciate the level of development in the thought patterns of your customers Nate. The less thought goes into the aspects you market on, the more difficult it becomes to value add with the production principles.  I see a whole lot of consumer education ahead of me before being at the point that you describe here.  I'm looking forward to it though. 

Nate Storey said:

If you're not doing some type of value added process you cannot survive as a commercial AP venture.  Plain and Simple.  If you're producing a traditional product with no simple value added business, you will accept traditional margins on the product, which, with higher operating costs, will drive you out of business, especially as a small producer.  The simplest process is consumer education and product branding- if you do this effectively, you can get away with adding value to your product without changing the product at all.  This is the cheapest means of incorporating a value added process into your business, and I think most AP producers do this on some level.  This might not be enough though.  Consumers are price driven, whether they like it or not, so your product has to have cultural/social, economic, environmental, etc. benefits evident as well as being competitive on a price level.  Our business is based on the consumer education and using our displays, a tactile value-added process that reduces our costs.  These are the best kind of VAPs out there- increasing revenues while lowering costs, but they're rare, and they require many years of development and planning.

[Nate Storey]

Don't think of VAPs simply as packaging or processing.  Think of them as any type of process. i.e. if we package we might be able to get more, but while we package, we're also spending more money on packaging, marketing, refrigeration, labor, etc.  In the end while we make more money going this route (this is a secondary market for us), we don't make as much as if we get creative with the issue.  We use our displays as a simple VAP, the consumer receives value from the process of picking their own vegetables in the convenience of the supermarket, and we receive value in terms of both increased revenue generation and cost reduction (packaging, labor, etc.).  These kinds of opportunites, in conjunction with consumer education/branding are what producers need to look for if they want to make money and not just slowly slide out of existence.

 

So, I guess what I'm saying is think outside the box.  You may make more money by packaging.  And if you're competing on the traditional market with traditional margins, then that's what you have to do.  I would just as rather avoid the traditional market/margins altogether (I know how low they are), and build my own niche market where my margins are well over 100%, and my labor and logistics headaches are gone.  This might not be something that most producers can do.  Especially with raft production.  It took me years to figure it out, but it's completely worth it.

[Jay Wolf]

Personally I think value added products depends on who you are marketing to.  I personally am not going the grocery route.  That being said, value added products don't make sense to me.  Although Kobus does make a good point if you are going that route.  Then I believe it is a must.  I am sure I might change my mind after I get up and running.  

[Nate Storey]

The problem with not having any type of VAP Jay is that you end up being completely subject to the market, which for a small producer is a bad thing.  So, if you're not selling to grocery stores, you're selling to restaurants, if you don't have them contractually obligated to purchase your produce, they're going to go for the cheapest thing on the market (which won't be you).  As a small producer, you probably won't be able to draft and get a contract signed for every restaurant.  If you're subject to direct to consumer sales, that's even worse because they're even more price oriented and your loyal market will be smaller.  You need to be competitive year round, so competing with seasonal producers can't be an option.  For every 50 AP businesses that start and make their money primarily on produce, only 2 are still operating in the first two years, and less than that at year 5.   All of them try to compete in the traditional market, and all of them inevitably fail.  I would seriously consider some type of VAP for your products, even if it's minimal- i.e. branding/marketing/consumer education.  Hope I'm not discouraging!  AP has a lot of potential for commercial applications, it just can't be what everyone else has tried and failed at!  :)

[Kobus Jooste]

You are not discouraging Nate - Realism is needed in any business.  We have modelled extensively and as you say, the pickings are meagre if you only sell in the traditional market.  We have a couple of unique variables going for us in the South African market though, which cannot compare to what you in the US can or have to do.  The bottom line remains the same - you will have a tough time surviving if you do not place yourself in a bracket that increases the value and demand for what you do.  This is true for most start-ups and the failure rate you describe for AP start-ups is likely similar for all business types.

Nate Storey said:

The problem with not having any type of VAP Jay is that you end up being completely subject to the market, which for a small producer is a bad thing.  So, if you're not selling to grocery stores, you're selling to restaurants, if you don't have them contractually obligated to purchase your produce, they're going to go for the cheapest thing on the market (which won't be you).  As a small producer, you probably won't be able to draft and get a contract signed for every restaurant.  If you're subject to direct to consumer sales, that's even worse because they're even more price oriented and your loyal market will be smaller.  You need to be competitive year round, so competing with seasonal producers can't be an option.  For every 50 AP businesses that start and make their money primarily on produce, only 2 are still operating in the first two years, and less than that at year 5.   All of them try to compete in the traditional market, and all of them inevitably fail.  I would seriously consider some type of VAP for your products, even if it's minimal- i.e. branding/marketing/consumer education.  Hope I'm not discouraging!  AP has a lot of potential for commercial applications, it just can't be what everyone else has tried and failed at!  :)

[Nate Storey]

That's right Kobus.  I'd be interested to hear what you're thinking about a startup in South Africa.  I bet you have some really unique market variables to consider.

 

 

[Kobus Jooste]

There is quite a few interesting factors.  First up, we have a very "south African" agriculture set-up but rely on a large amount of international visitors for income.  People often struggle to source the types of vegetable product these visitors are used to.  Second, we have a huge poverty problem and government is interested in assisting communal farming schemes for the sake of food security and job creation, thus if your focus is here, there are options for developmental assistance.  Last, for me, the economy of scale is clearly on a larger operation.  Our government (again, bless then all) have invested heavily in industrial development zones and are now looking for tenants for their infrastructure.  There is one close to me with aquaculture and agri processing zoning (lots of incentives).  You need to go big though, and that is where we are pitching our concepts now, linked to a second communal farming economical development proposal. for the communities around the IDZ.    

Nate Storey said:

That's right Kobus.  I'd be interested to hear what you're thinking about a startup in South Africa.  I bet you have some really unique market variables to consider.

 

 

[Jay Wolf]

Everything you said is true.  Depending on where you are located.  There are many other avenues besides restaurants, farmer's market, and grocery stores.  I am sure you know what I am talking about.  I am not against VAP, I just don't believe it is necessary.  I guess we agree to disagree. 

Nate Storey said:

The problem with not having any type of VAP Jay is that you end up being completely subject to the market, which for a small producer is a bad thing.  So, if you're not selling to grocery stores, you're selling to restaurants, if you don't have them contractually obligated to purchase your produce, they're going to go for the cheapest thing on the market (which won't be you).  As a small producer, you probably won't be able to draft and get a contract signed for every restaurant.  If you're subject to direct to consumer sales, that's even worse because they're even more price oriented and your loyal market will be smaller.  You need to be competitive year round, so competing with seasonal producers can't be an option.  For every 50 AP businesses that start and make their money primarily on produce, only 2 are still operating in the first two years, and less than that at year 5.   All of them try to compete in the traditional market, and all of them inevitably fail.  I would seriously consider some type of VAP for your products, even if it's minimal- i.e. branding/marketing/consumer education.  Hope I'm not discouraging!  AP has a lot of potential for commercial applications, it just can't be what everyone else has tried and failed at!  :)

[Nate Storey]

I guess that's true too.  If you have a high dollar crop that can make money as it is, then you're set.  For most folks though, that's not always an option/possibility.  You're right Jay.  It just depends on your market/product!