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?