Business Basics for Alberta Food Processors - Starting Out

 
 
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 Is entrepreneurship for you? | Is my idea an opportunity? | Is the idea feasible - will it fly? | An opportunity...

Starting or expanding your food business takes some planning. Six months to a year is not an unreasonable amount of time to expect to spend in preparation for opening your business.

Is Entrepreneurship for You?

It is not possible to eliminate the risks associated with starting a small business, but you can improve your chances of success with good planning and preparation. Start by taking stock of yourself; evaluate your strengths and weaknesses as the owner and manager of a small business. Consider the following questions.

Are you a self – starter?
It will be up to you, not someone else telling you, to develop projects, organize your time and follow through on details.

How well do you get along with different personalities?
Business owners need to develop working relationships with a variety of people including customers, vendors, staff, bankers and professionals such as lawyers, accountants or consultants. Can you deal with a demanding client, an unreliable vendor or a cranky staff person in the best interest of your business?

How good are you at making decisions?
Small business owners are required to make decisions constantly, often quickly, under pressure and independently.

Do you have the physical and emotional stamina to run a business?
Business ownership can be challenging, fun and exciting, but it’s also a lot of work. Can you face a 12-hour workday, six or seven days a week?

How well do you plan and organize?
Research indicates that many business failures could have been avoided through better planning. Good organization of financials, inventory, schedules and production can help avoid many pitfalls.
Is your drive strong enough to maintain your motivation?

Running a business can wear you down. Strong motivation can make the business succeed and help you survive slowdowns.

How will the business affect your family?
The first few years of business start – up can be hard on family life. There may be financial difficulties until the business becomes profitable. The family may have to adjust to a lower standard of living or risk family assets.

On the upside, for the right person, the advantages of business ownership outweigh the risks.

  • A new venture is exciting and you are your own boss.
  • The hard work and long hours benefit you directly, rather than increasing profits for someone else.
  • Your earning and growth potential are far less limited.
  • Running a business provides endless variety, challenge and opportunities to learn.
Is My Idea an Opportunity?

It is possible for you to be a self starter and have a good product or a good idea, but not have a business opportunity. Your product must meet the needs and wants of the consumer. Remember, the purpose of your business is to sell products, not to make products that might sell. Some products fill a niche in the general market, while others will have wider appeal. Some are new or improved, making them an alternative to similar products already available. Anyone with a new product idea must know their target market and its needs.

Is the Idea Feasible – Will it Fly?

Before you get too involved in business development, you need to determine whether or not your business idea is feasible. Do a basic assessment of the idea to determine whether it is worth your time and investment. This involves market research, cost calculations to see if you can make money, determining prices and calculating a break even point. You will also want to consider your distribution channels and develop a marketing plan.

Step 1: Market Research
Marketing is directing your goods and services to consumers in response to their wants and needs. Marketing begins with the consumer. It involves acquiring a thorough understanding of what consumers need and want and making products that meet those needs.

When you start a business you must develop a keen understanding of your market: your consumers. You need to know everything about the buyers: their age, sex, income, buying habits as they relate to a particular product or segment of the market, where they live, how much they spend on related products and even what they read. This and other information about them is called demographic information. Gathering demographic information is part science and part intuition, part detective work and part research. A healthy combination of all these techniques will be needed.

Many food products come about because friends, family and others who have tasted a homemade recipe have pronounced it suitable for sale. They have assured you that they would buy your mustard, jam or barbecue sauce, and that their friends would too. They encourage you to consider selling the product by suggesting to you that there is a market: an audience for the product.

Think back to the time when friends began to suggest that you had a saleable product and you began to wonder if they were right. You may have thought, okay, everybody who tries it likes it, but would they pay for it? Just gather them together and ask them. Assemble your own focus group. Ask who might buy the product and why, what they would pay for it, what would they do with it. How often would they buy it? Then, consider what you know about them: are they gourmet cooks, or harried moms looking for something to make life easier? Do different kinds of people like it, or does it require a more sophisticated palate? Where do these people shop? Is it something they would give as a gift? Is it an alternative to a mass market product they already use? Keep going until you have looked at the product from every possible point of view.

Next, do your homework. Visit the library. Find recent newspaper and magazine articles about food trends and your kind of product in particular. If your library has a reference librarian, ask for their help. College and university libraries are good places to do research. While they may not let you check out books, most will allow you to read and copy materials in the building. Study everything you can find about the target consumers. Read trade journals and food processing magazines.

Talk to gourmet food store buyers, gift basket buyers, grocers and others who might be potential buyers. Do not forget the ethnic food stores. While you are in retail stores, talk to customers. Find out what they buy, what they are looking for and why they shop where they do. Your research will help you discover if there is an existing market or an emerging market for your product. And it will tell you a lot about your potential customer.

These are the basic steps of discovering your potential customers. With this knowledge you will be better able to judge if you actually have a shot at success.

Step 2: Can You Make Money?
You must calculate the costs associated with making your product before you can set the price, and you must set the price before you can answer the ultimate question: will consumers pay the price?

First you will need to calculate all of your costs, both fixed and variable. Fixed costs are costs that do not change whether you produce one jar of jam or 10,000. These include rent, basic utilities, insurance, indirect labor and taxes. Variable costs are those that vary with production: ingredients and packing materials, direct labor, shipping and sales commissions.

At a certain production level, the sum of fixed and variable costs is your total cost.

Total cost of production = Fixed costs + variable costs.

To find your cost per unit, divide the total cost by the number of units.

Cost per unit =Total cost of production
Number of units produced

To the cost per unit, add the profit you want. This gives you only an initial wholesale price.

Wholesale price = Cost per unit + profit (markup)

There is more to consider, such as: listing fees, sampling costs and promotional programs.

The math is simple but gathering the complete costing information is complicated, however critical to the success of your business.

Step 3: What’s Your Break Even Point?
Knowing your customers enables you to judge how much they will pay for a product like yours. The next step is to determine how many units you will have to sell at a certain price to make a profit. You have to find out your break even point.

The break even point is the point at which you have sold enough product to cover all of your fixed and variable costs. Below the break even point, losses are incurred and above it, profits are realized.

Break even point =Fixed costs
Selling price per unit – unit variable cost

For example, your company has an annual fixed cost of production of $12,000. If your jam sells for $6 a jar, and your variable cost per jar is $4, what is your break even point?
Break even number of jars =
$12,000
$6 - $4
=
12,000
2
=
6,000 jars

Step 4: Will Customers Pay Your Price?
That is the hard question. You will need to establish both a wholesale and retail price. Remember, everyone who handles your product before it reaches the retail shelf marks it up so that they realize their profit, too. Specialty foods are generally priced somewhat higher than mass produced and mass marketed products. Consumers are generally willing to pay a slight premium for specialty and gourmet products but you must determine what the market will bear.

This is where you use your knowledge of your potential customer. Having a clear picture of your buyers’ income and spending habits tells you how price sensitive they are. If you know where they shop, you can find out if your product is priced right for those retail outlets. How? Visit the stores to check prices and availability of similar products. You can adjust your profit margin if you have to, but keep in mind the total cost of producing your product.

Step 5: Where Can You Sell That Much Product?
One of the last pieces to the marketing puzzle is determining where to place your product so that potential customers find it and buy it. This is called distribution, which is covered in more detail in the Distribution and Sales section on page 45.

Some key points to consider are:
  • Where are your potential customers likely to look for products like yours – in grocery stores, delicatessens, gift shops, specialty food stores, supermarkets, farm stands, food service or other establishments?
  • Can you sell directly to the retailer or food service buyer and are they receptive to your proposed product?
  • Are the locations and types of outlets you have identified selling similar products at competitive prices?
If your research indicates you can place your product into outlets where it will sell successfully at your proposed price, you are ready to continue to unravel the interlocking puzzle of markets, consumers, products and outlets.

Step 6: The Marketing Plan
The next step is to develop a marketing plan that targets your potential buyer: wholesale, retail, food service or direct to consumers.

Marketing is an ongoing function of business. You should never stop gathering information about your consumers and buyers. Staying abreast of new market trends enables you to react quickly to changes in consumer demands.

These days, consumers are health conscious and looking for convenience. They read labels with great interest and pay attention to nutritional information. Producers who understand and adapt to market demands for healthy products stay profitable, while others lose their share of the market. Take a trip down the food aisles and you will see labels that announce products that are organic, salt free and low fat. The makers of these products are all responding to market demand, which is consumer driven. Consumers demand, and producers and retailers respond. From your initial notion that you might have a saleable product until the time you retire from business, you must constantly be attuned to the market.

Step 7: Forecast Business Start-up Costs
Before you sell one unit of product, you will incur cost. You need to be sure that you have enough start-up capital available to get you started. It is recommended that these costs not be calculated into your production costs because they are one time costs and may result in pricing your product too high for the market. Typically these start-up costs are financed with owner’s equity or from profit you make when you sell your product. Some of the costs are:
  • product development and testing
  • market research
  • your own time
  • office expenses before product is developed (phone, fax, stationery, etc.,)
An Opportunity...

By following these seven steps and doing some rough calculations, you will have an idea of whether or not your business idea is feasible. Depending on your product and your expertise, you may need to concentrate on some areas more than others. Will you be able to get the money to finance your product? Will your cash flow be adequate to cover your expenses? Planning issues are covered in more detail in the section on business plans. You may want to review your seven step assessment with a third party such as Alberta Agriculture and Rural Development New Venture Coaches, community futures staff or someone in a similar business.

A list of resources that can assist in this initial assessment can be found in the resources section.
 
 
 
 

Other Documents in the Series

 
  Business Basics for Alberta Food Processors
Business Basics for Alberta Food Processors - Preface
Business Basics for Alberta Food Processors - Introduction
Business Basics for Alberta Food Processors - Starting Out - Current Document
Business Basics for Alberta Food Processors - Business Planning
Business Basics for Alberta Food Processors - Business Considerations
Business Basics for Alberta Food Processors - Food Processing Regulations
Business Basics for Alberta Food Processors - Facilities
Business Basics for Alberta Food Processors - Product Development
Business Basics for Alberta Food Processors - Processing and Packaging Equipment
Business Basics for Alberta Food Processors - Packaging and Labeling
Business Basics for Alberta Food Processors - Distribution and Sales
Business Basics for Alberta Food Processors - Promotion
Business Basics for Alberta Food Processors - Financing
Business Basics for Alberta Food Processors - Sources of Assistance
Business Basics for Alberta Food Processors - Additional Resources
 
 
 
 
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For more information about the content of this document, contact Ag Info Centre.
This information published to the web on June 1, 2005.
Last Reviewed/Revised on March 31, 2012.