Considerations in Determining the Feasibility of a New Enterprise (Part II) Rodney B. Holcomb Oklahoma State University Food & Agricultural Products Center

Primary Objectives of Feasibility Preview  Identify key planning steps for feasibility assessment  Determine the required resources for an enterprise  Setting stop/go points  Assistance programs for helping fund feasibility studies

Pre-Feasibility Questions  What are my/our goals/objectives?

– Better price for my/our commodity?

– Add value to my/our commodity?

– Business development in my/our community?

 How much can I/we put into this venture and still keep food on the table?

– Sweat equity, start-up costs, and eventually investment

A Venture Should...

 Be deemed worthy/unworthy on economic merits.

 Be taken under consideration as a business completely separate from the farm/ranch.

 Not be pursued just because of political pressure.

 Be funded by at least 50% owners equity.

Now, What To Do?

 Several factors to be considered for determining a course of action.

– Assessment of all possible processing possibilities for a commodity.

– Catalogue all needed resources for processing.

– Market research for all processing possibilities.

 Growth, trends, advertising/promotion.

 Competition, market share, acquisitions/mergers

Market Potential for Outputs  Universe of Marketable Product – Retail, foodservice, exports, fundraisers  Determinants of Market Quality – What characteristics are deemed most desirable by customers and how can you provide them?

 Wholesale Product Value – Don’t focus on retail prices.

Geographic Market Potential  Potential Local Buyers  Potential Regional Buyers  International Markets – Build in expenses/steps for exporting products.

 Government Programs – Potential for large volumes, low margins.

– Market generation (e.g. ethanol)

Market Competition  Existing Businesses – Where they are, where they distribute products, what brands they manufacture, etc.

 Businesses that have ceased operations – Why did they cease operations?

– Are their facilities/equipment for sale?

 Import/Export Market – Companies, countries, barriers.

Market Opportunities  Best-Fit Opportunities – Brand vs. co-packing, retail vs. foodservice  Strategies for Market Approach – 4 P’s of marketing  Barriers to Market Entry – Regulatory barriers – Industry concentration – Co-product barriers

Raw Product Supply  Supply Markets – Captured supply through investor/members? – Proximity/concentration of the commodity?

 Complexity and Variability – Collection/delivery system – Quality specifications – Year-to-year variation

Raw Product Costs  Commodity value  Transaction costs – e.g. verification and certification  Storage costs  Transportation costs  Tax costs

Facility Specifications  Location Factors – Picking a location that makes the most sense from an economic standpoint.

 Design Factors – Functionality, flexibility, expandability.

– Thinking through the processing steps.

 Further Processing Components – Making sure all the pieces fit.

Facility: Location Factors  Availability/costs of land and utilities  Access to inputs and markets  Transportation infrastructure – Roads, rail, barge, and even air  Availability of service providers  Labor and labor training  Taxes and community attitude

Facility: Design Factors  Much will depend upon regulations associated with a processing venture – walls, ceilings, floors, storage facilities  Ambient vs. cold storage  Expandable  Suited for processing system – Not always best to fit the system to a building

Facility: Further Processing Components  Flexibility in further processing  Competent engineering design  Do all pieces of equipment “speak the same language”?

 Common equipment or specialty?

 Location and reputation of equipment manufacturer(s)  CIP or other sanitation programs

Further Processing  Value-Added Outputs – How many products? (Co-products?) – Suggestion: Start with less than 6.

 Customers and Value – Always the basis for what gets produced  Estimated Product Values and Margins – Check with an “expert”

Further Processing (cont.)  Manufacturing Requirements – Space, prep, consolidation of activities  Production Throughput – Shrinkage, remix, waste, product loss, etc.

 Necessary Equipment, Costs, and Staffing – Start shopping around – Ask around for names of potential key staff

Stop/Go Points  Build “phases” into feasibility and business planning, stop/go point at the end of each.

– Phase I: Market and industry overview – – Phase II: Determination of physical needs Phase III: Assessment of “what you have” and “what you can get” – Phase IV: Business plan

Available Assistance  Land-grant universities and extension specialists – Value-added centers, food technology centers  State funds?

– Through established assistance programs – Through your legislator  USDA Value Added Product Market Development Grants (VADG) – – $40 million/year through 2007 Requires a minimum $-for-$ match

Final Comments  Do your homework  Base all decisions on economic rationale  Think like a processor, not a producer  Don’t get caught up chasing “free money”  “Expect it to cost twice as much to start, take twice as long to get going, and lose twice as much as expected in the first year.”

Any Questions?