What makes a great feasibility study
IntroductionConsumption of food and drinks is an enduring human need. In the modern age, lack of time is fast becoming a norm. Satisfying the need to consume food and drinks by cooking at home is becoming increasingly challenging. Cooking is now often a weekend activity, particularly associated with social gatherings rather than a part of daily routine. This has fuelled the growth in demand for packaged food and drinks around the globe. Many front running companies have achieved remarkable success by introducing the “right product” in the “right market” through the “right channel”, that offers quality, nutrition, convenience and value for the “target consumer”. Opportunities remain aplenty for entrepreneurs and established (non food and drink) businesses to enter the packaged food and drinks industry and reap success. Consumers are increasingly knowledgeable and their needs for nutrition and well-being are constantly evolving. As a result, there is always space for genuine innovation. But belief in opportunity is not enough to invest your hard earned reserves in a new food and drinks business. Without a deeper understanding of what lies ahead, the result could easily be frustration and financial loss or even bankruptcy. Even world leading companies are familiar with the bitter taste of failure when a new product launch, packaging redesign or product reformulation backfires and results in a massive drop in sales. So, what is the way forward? As a budding entrepreneur, or as an established business looking to foray into food and drinks, there are a few important questions to answer first: • What is the “right product” for the “target consumer” in the “right market”? • How to transfer the recipe from the home kitchen to the industrial kitchen? • How much of this product can be sold realistically? How much market share is achievable? • How much would it cost to set up the business of producing and selling this product? • How much would it cost to run the business successfully and profitability over its lifetime? A great feasibility study can answer these questions.
What is a feasibility study?In simple terms, a feasibility study objectively evaluates a project’s potential for success and delivery of value. It helps answer the fundamental question – “Should we invest in this business?” Arriving at an answer to this question will save time, effort, money and heartache. A thorough feasibility study helps to define specific business scenarios and explore them in great depth. It is a journey of exploration that investigates a variety of ways to set up your business and get your products to the market. As a result of such in-depth analysis and assessment, flaws are identified and alternatives are eliminated before arriving at a decision. Despite the merits of conducting a feasibility study, many business tend to skip this important step in taking business decisions. Reasons are many: • Internal pressure: “Other businesses are successful, we would be too”, “We conducted a study many years ago and found it to be a viable business idea”. • Consultant vs in-house study: “Why pay a consultant when we can conduct the study internally?” • Supplier pressure: “A leading equipment supplier has conducted a market study, and it can provide the technology required to meet the sales forecast.” This is potentially a dangerous path to follow. For example, consider making the decision based on the opinion of a leading equipment supplier. Yes, there could be high demand in the market. Yes, other companies are successfully selling similar products. And yes, the supplier’s equipment could potentially help you produce the forecasted volume. But how about sourcing the right raw materials; cost of raw materials and packaging material; sourcing the right processing equipment; manpower requirements; quality standards and regulatory requirements; getting the product to market; cost of warehousing and distribution; getting listed with retailers; achieving the required shelf-life, and so on. The list of unknowns is long. Once a business decision has been made, it is often very difficult and costly to change course.
What constitutes a great feasibility study?
Entrepreneur’s visionThe root of a feasibility study is the vision of the business or entrepreneur. The vision usually takes shape from a simple idea. For example, “packaged ready meals for the urban population”. The idea grows into a vision based on the entrepreneur’s aim (build a multi-million dollar business in 10 years’ time), interest (cooking, healthy eating), values (quality products, affordable pricing, high availability) and knowledge (recipes). The next and most important step in the feasibility study is to take this vision to the next level by evaluating how viable it is. This requires answering a few fundamental questions: • What are the opportunities? • Are there any reasons not to proceed? • Will it be financial viable? • Does it make sense from an operational standpoint?
Research and insightsAnswering these questions starts with collecting relevant data and converting this into actionable insights. Comprehensive data collection will encompass the following: • Market quantification – Market volume, market value and growth of the target product category. • Competition – Is the market dominated by a few companies or is the market highly fragmented with many small companies? Are there already brands with a similar approach? • Consumer – What is the target consumer demographic (infants, children, young adults, young professionals, senior citizens, men, women, sports, expatriates, and so on)? And what are their taste preferences (traditional taste vs acquired taste)? • Packaging preferences – Plastic vs non-plastic, clear packaging vs opaque packaging, small containers vs large containers, screw caps vs sports caps vs straw vs flip closures. • Pricing – Pricing by pack type and pack size, pricing by regions within target market, pricing by channels. • Sales channels – Modern retail, traditional stores, wholesale, kiosks, hotels, restaurants, catering. • Distribution – Own distribution vs third party distribution, distribution infrastructure, cold chain, ambient chain. • Regulations – Quality standards, packaging and labelling standards. • Future outlook – Potential for the product category to see sustained future growth. • Macroeconomic trends – Political and economic situation in the country, major events in the horizon (elections, sporting events, Brexit!). Collecting such detailed information is not a straight forward process. A series of primary interviews with retailers, manufacturers, importers, distributors, associations and major stakeholders may be needed to collect penetrating insights. Such primary data needs to be supplemented by secondary data, such as published reports, news reports, journals, data from statistical agencies, import/export data, etc. Analysing such detailed data will lead to the development of a fuller market picture with more actionable insights. In addition to market insights, a thorough analysis of the value chain is also essential. This analysis will reveal the various costs along the value chain, such as: • Raw materials and packaging materials • Warehousing and distribution – own or third party • Retailer and wholesaler margins. These costs will be essential when developing the financial model for the business.
Route-to-market recommendationsOnce the market and value chain potential is established, the next step is to develop the route-to-market recommendations. Detailed assessment of the market will lead to the identification of gaps and opportunities within the chosen product category. This will in turn help develop route-to-market recommendations. Such recommendations should include: • Product range(s): Product variants and portfolio evolution for the first 5-10 years of the business. • Volume analysis: Identifying the forecast market share and volume and value projections. • Segmentation, targeting and positioning: Recommendations on brand positioning in order to identify packaging types and pricing • 5-10 year sales profile: Volume sales by pack type and by pack size for the first 5-10 years. By this point in the feasibility study, the following outputs would be ready for further exploration: • Sales volume projections • Revenue projections (based on value chain analysis and product pricing) • Cost of goods sold (COGS) – this is the cost of raw materials and packaging material • Gross margin – calculated as ‘revenue minus COGS’
Technical feasibilityThe next and equally vital part in the process is the assessment of technical feasibility. Now that we know what the projected sales volume is, the next step is to define the process of converting this idea into reality. It starts with the development of a production process, beginning with “raw materials in” through processing and packaging to storage and “finished goods out”. Once the production process is defined, the next step is to identify the most suitable technology for various stages in the process flow. These include equipment for raw material storage (cold storage or ambient, based on requirements), raw material processing (cooking, pasteurisation, UHT treatment, mixing etc.), filling, packaging and finished-goods warehousing. As part of this, shift and manpower requirements will also be defined along with conceptual details of the factory set up required. Considerable research is required in stage. This should include conversations with original equipment manufacturers (OEMs) to understand whether an off-the-shelf solution is available that can meet the requirements of the business, or whether a bespoke solution needs to be created. Further local research must be conducted to identify operations costs such as staff salaries, costs of fuel, electricity, local taxes, cost of construction, other costs such as project management, insurance etc. All these need to be collected in order to develop a fully comprehensive financial model The technical feasibility assessment should generate the following outputs:
|• Production capacity required • Number of machines required to meet the production capacity • Shift and production patterns • Manpower requirements||• Factory area and layout requirements • Capital expenditure (CAPEX) requirements of the factory • Operational Expenditure (OPEX) requirements of the factory • Factory concept design|