Potential Business Models and Financial Feasibility of Selected Medium-Scale Business Enterprises for Orange- fleshed Sweetpotato (OFSP) Value-added Products • Five potential and financially viable business models were examined for OFSP value-added products in the Kenyan context. • These potential OFSP value-added products are cookies, cupcakes and mandazi (donuts), and OFSP purée for bakery products. However, the choice of products might differ in other regions based on market demand and cost of ingredients. • The required minimum investment level varies between US$ 31,000 and 43,000 depending on the business model selected. • The payback period varies between 1 to 2.8 years and average Return on AUGUST Investment (RoI) is more than 100%. 2019 Fig 1. Vacuum-packed OFSP puree requiring freezers and a cold chain (Model 2) (Credit: J. Low) What was the problem? A intake in young children (Low et al., 2007), the use of this nutritious crop as an ingredient in processed products Africa is undergoing rapid urbanization, which impacts should be explored. If such products are financial viable, it consumption behavior and dietary habits. Many of creates significant market opportunities for orange-fleshed these effects are negative. There is an increase in high sweetpotato (OFSP) growers. malnutrition, particularly among urban poor; Vitamin A deficiency also higher among urban poor than well- off households (Holdsworth and Landais, 2019). Food What objectives did we set? price fluctuation influences the quality of the African diet We have identified potential business models for OFSP (Masters et al. 2018). The rapidly growing urban consumer value-added products and measured the the financial market also increases demand for processed products in viability of the selected business models for investors/ Kenya due to changes in food habits and life-style (Rischke entrepreneurs to consider for producing OFSP value-added et al. 2015; Demmler et al. 2018). Further, the presence products. of “supermarkets” leads to increases in the consumption of processed food. There also can be positive effects. Supermarkets handle large volumes which can mean What did we achieve during SASHA Phase 2? lower prices and there is evidence that they contribute We conducted the study using a “Financial Cost-Benefit to improved diet diversity. Given these different effects, Analysis (FCBA)” using real and hypothetical data on the net effect on nutritional outcomes and health is not technical and financial operations, collected from key straight-forward but merits further investigation (Rischke informants with expertise in this domain. Firstly, the et al. 2015; pp-18). Some studies conclude that processed study identified potential business models for various and highly processed food contribute to unhealthy diets. OFSP value-added products in the industry, based on the Therefore, there is need to introduce nutritionally rich existing marketing system in Kenya. Secondly, the study products (Popkin, 2014; Demmler et al. 2018). So, if the determined financial viability for the identified potential processed products are affordable and are also nutritious, business models by cal three financial indicators as i. Net this would be a win-win for urban consumers. From the Present Value (NPV), ii. Internal Rate of Return (IRR) and iii. supply side, farmers’ participation in the supermarket Sensitivity Analysis. In addition, the study also estimated channel is significantly associated with higher calorie and the payback period to measure the length of time required micronutrient consumption at household level apart from for an investment to recover its initial outlay and become increasing income (Chege et al., 2015). Since Orange- profitable. The Return on Investment (RoI) determines fleshed Sweetpotato (OFSP) is rich in β-carotene and is well the gain or loss generated from an investment relative accepted by young children and further increases Vitamin to the amount of money invested. It is normally used to compare the efficiency of the different investments “Business to Business” (B2B) category. The third business under different scenarios. Five potential business models model is similar to the first business model, but producers were considered, namely i. Model 1: Purée directly used will not produce OFSP purée rather purchase from a in product, no storage >1 week; ii. Purée vacuum-packed processor making OFSP purée as a product. The fourth & stored in freezers; iii. Buy the purée already made & use business model focuses on ingredients similar to the it to make products; iv. Model 4: Use OFSP purée with second business model but uses preservatives and vacuum preservatives that stores for 3 months; v. Hot-fill machine + package technologies and has no freezers. Finally, the 5th more expensive packaging (theoretical) with a 6-12-month business model is similar to model 2, but has a different shelf-life (Table 1). processing technology for the purée. The hot-fill machine (Fig. 2) included in this business model makes a purée with The first business model focuses on processors who enhanced shelf-life (6-12 months) and special packaging, produce OFSP value added products (i.e., cookies, without using preservatives. The advantage of this model cupcakes and mandazi (local food)) using a smaller number as compared to model 2 is that this model does not require of freezers and without vacuum packaging techniques. freezers and high consumption of electricity. However, this These processors are part of the bakery industry. In this model is a proposed business model, as it is not yet tested case, the purée will be stored for a few days and used for with OFSP in the Kenyan market. So, results from this producing OFSP value added products immediately. These model must be used with caution. products are then sold directly to consumers. Hence, it is categorized under a “Business to Consumers” (B2C) For the business models 1 and 3, the study assumed that business model. The second business model focuses on an investor would require 36 SQM area to run a business OFSP purée production only where processors will be using which is in an urban area of Nairobi, Kenya where the vacuum packaging technologies but no preservatives for investor would be renting this place rather than investing the purée. The purée is kept in a large number of freezers. in purchase of the land. In contrast, for the business In this model, consumption of electricity is greater than models 2, 4 and 5, 100 SQM of area is required to run a the first business model. Since OFSP purée will be sold to business at optimal level and we assume it will be rented bakery industry, this model will be categorized under a in a peri-urban area of Nairobi. Table 1 shows the total Table 1:Types of potential business models and minimum required investment level SN Type of business model & Key Equipment Final Product Market Area size Total Investment Maximum Capacity of Production Technology required Required Puree requirement and production (Kg) per year 1 Model 1 (without storage): High Fibre Puree (HFP) final product (i.e., B2C 36 SQM $43,030 16,000* Freezers + no vacuum machine (1.5 m long * cookies, cupcakes packaging 0.7 m width * 0.85 high), and mandazi) Steamer (this is a gas; 80-100 kg batch), Depositor (Cookies machine), baking equipment 2 Model 2 (Cold chain storage High Fibre Puree (HFP) Ingredients (Puree) B2B 100 SQM $33,370 375,000** with no preservatives): No machine (1.5 m long * 0.7 m only preservatives+ vacuum width * 0.85 high), Steamer packaging +lots of freez- (this is a gas; 80-100 kg ers+ more electricity batch), Vacuum machine with label printer 3 Model 3 (OFSP bakery Depositor (Cookies ma- final product (i.e., B2C 36 SQM $31,390 16,700* products without use of chine), baking equipment cookies, cupcakes preservatives of OFSP puree): and mandazi) Buy vacuum packed OFSP puree without preservatives 4 Model 4 (Shelf-storable pu- High Fibre Puree (HFP) Ingredients (Puree) B2B 100 SQM $34,170 375,000** ree with preservatives): Use machine (1.5 m long * 0.7 m only preservatives+ no freezers+ width * 0.85 high), Steamer vacuum packages (this is a gas; 80-100 kg batch), Vacuum machine with label printer, Ribbon mixer 5 Model 5 (on-going business Hot fill machine, High Fibre Ingredients (Puree) B2B 100 SQM $37,170 375,000** model) hot-fill machine: Puree (HFP) machine (1.5 m only hot-fill machine+high long * 0.7 m width * 0.85 level of packing+less high), Steamer (this is a gas; freezers+less electricity 80-100 kg batch), Vacuum machine with label printer Source: Key Informant Interview (KII) with private players in year 2018-19; author’s calculation Note: ‘*’ indicate that investors buy puree from puree producers which is a requirement for investors per year; ‘**’indicate that investors produce puree at a maximum capacity per year. estimated minimum required investment for each business three-month establishment period of the business with model to run a business. At the current lending rate of minimum capacity of the production level, i.e., 40% of the 18% in Kenya, the cost and benefit of the project were maximum capacity of the production. Sales will happen discounted at 18% in the financial analysis for 14 years for only 30% of the maximum production capacity in the of the project life-cycle. A 14 year life-cycle was selected initial periods of the business. This will increase up to 96% based on the estimated life span of the items used for the of the maximum production capacity to be sold in the production. The study assumes that 3 months are required market, assuming 1% wastage in the production process. to establish the business if the investment is received in the initial year 0. After establishment, the business can operate The study estimated input costs (i.e., cost of purée and cost at optimal level with limited resources. Though sales will of other ingredients) for producing cupcakes, cookies and start after the 3-month establishment period, 100% of mandazi (Table 2). One of the major inputs is OFSP purée. production might not be sold in the market. Therefore, the The cost of OFSP purée per unit is estimated to be US$ study made assumptions to measure production and sales 0.36 per Kg in year 2014 (Magnaghi et al, 2015). However, uptakes for potential commodities that the business can due to inflation, this study has re-estimated the cost of focus on under each business model. Under this scenario, production which is US$ 0.40 per kg. Since, this business the production activities will start after the completed of model focuses on cookies, cupcakes and mandazi, the cost Table 2: Cost of production per unit for selected final OFSP products in year 2018 (prices for year 2018) Ingredients Quantity in Total cost Total Cost % Share of recipe Unit name Cost/unit (Khs) (ksh) (US$) inputs Qty (Kg) % of Total Weight Cost of producing 828 cookies or/biscuits Wheat Flour 8 Kg 54 432.0 4.4 32.0 8.0 38.5 OFSP purée 10 Kg 40 400.0 4.0 29.7 10.0 48.1 Sugar 2 Kg 160 320.0 3.2 23.7 2.0 9.6 Baking powder 0.4 Kg 250 100.0 1.0 7.4 0.4 1.9 Eggs 8 no of eggs 12 96.0 1.0 7.1 0.4 1.9 Total cost of ingredients 1348.0 13.6 100.0 20.8 100.0 Cost per biscuit/or cookies excluding cost of cup and labeling 1.6 0.016 Price range per pack (10 COOKIES -200 GRAM) in US$ 0.6-1.0 Cost of producing 48 cupcakes Wheat Flour 1 Kg 54 54.0 0.5 11.0 1.0 29.2 OFSP purée 1 kg 40 40.0 0.4 8.2 1.0 29.2 Sugar 0.6 kg 160 96.0 1.0 19.6 0.6 17.5 Baking powder 0.05 kg 250 12.5 0.1 2.5 0.1 1.5 Water 0.15 kg 1 0.2 0.0 0.0 0.2 4.4 Egg 12 eggs 12 144.0 1.5 29.3 0.6 17.5 Vegetable oil 0.6 kg 240 144.0 1.5 29.3 0.0 0.9 Total cost of ingredients 490.7 4.9 100.0 3.4 100.0 Cost per cupcake 10.2 0.103 Price range per cupcake during cash flow period in US$ 0.40-0.50 Cost of producing 40 mandazi (40 gram per pc) Wheat Flour 2 Kg 54 108.0 1.1 56.1 2.0 62.1 OFSP purée 0.8 kg 40 32.0 0.3 16.6 0.8 24.8 Sugar 0.25 kg 160 40.0 0.4 20.8 0.3 7.8 Baking powder 0.05 kg 250 12.5 0.1 6.5 0.1 1.6 Water 0.12 kg 1 0.1 0.0 0.1 0.1 3.7 Total cost of ingredients 192.6 1.9 100.0 3.2 100.0 Cost per mandazi (small size) 4.82 0.049 Price range per unit during cash flow period Source: authors’ calculation; Exchange rate 1 US =99.2 Ksh as on November 2018 Table 3: Financial Feasibility Indicators for business models Models Scenarios NPV IRR Discount Payback period Return on Investment Rate (Years) (RoI) per year (%) 1 Model 1 (without storage) $291,560 85% 18% 1.3 164 2 Model 2 (Cold chain storage with no preservatives) $247,018 90% 18% 1.4 198 3 Model 3 (OFSP bakery products without use of preservatives of OFSP purée) $262,342 90% 18% 1.3 203 4 Model 4 (Shelf-storable purée with preservatives) $265,404 77% 18% 2.8 252 5 Model 5 (proposed) hot-fill machine with packaging at 10 cents/kg $345,380 82% 18% 1.0 266 per cookie is estimated to be US$ 0.016 which includes product, then it is ideal for investors to focus on fourth 48% of the cost incurred due to OFSP purée and remaining model where preservatives used for producing OFSP cost incurred for other ingredients (Table 2). Similarly, the purée. Though the 2nd model is financially viable, it comes cost of per cupcake and mandazi is estimated to be US$ with the highest risk for those investing into this business. 0.103 and 0.049, respectively (Table 2). However, these costs do not include packaging, branding and labeling. What’s next? Therefore, the study has made assumptions for estimating the costs per unit of final product and added a profit Firstly, there is a potential for explore more value- margin to determine the price of the product. The price added products to enhance the financial viability of the needs to be competitive in the market to increase the sales business. Secondly, there is a scope to introduce lower volume and revenue in the long-run. cost technologies to reduce the cost of production further. Thirdly, economies of scale can be considered by All five business models are shown to be financially viable increasing the volume of the business-scale. Fourthly, in the long-run, with the level of average investment at there is a scope to introduce a vertically integrated supply 30,000 to 43,000 USD. However, the sensitivity of the chain by linking seed and root producers with processors business, net present values, internal rate of return, return through contract farming or the equivalent, which will on investment and payback period for the investment increase the consistency of quality root supply. Finally, differ across the five business models. Therefore, it is there is a scope to explore the loan repayment options at important for investors to understand the market demand various interest rates based on bank rates. for the products and available funds, and the type of business model that is appropriate for their resource base and setting. Partners • Euro ingredients Ltd. (EIL), Nairobi, Kenya Where there any key challenges or lessons References • Chege, C. et al. (2015). Impacts of supermarkets on farm household learned? nutrition in Kenya. World Development, 72, 394–407. http://dx.doi.org/10.1016/j. worlddev.2015.03.016. There are two significant risks involved in this business: Demmler, K.M., et al. 2018. Supermarket shopping and nutritional outcomes: A panel 1) lack of consistent supply of sweetpotato roots and 2) data analysis for urban Kenya. World Dev. 102, 292–303. market demand fluctuation for the product. If marketing Holdsworth, M., & Landais, E. (n.d.). Urban food environments in Africa: Implications strategies are well executed, the models 1, 3 and 5 can be for policy and research. Proceedings of the Nutrition Society, 1-13. doi:10.1017/ more viable business models than the two other models. If S0029665118002938 there are fluctuations in the market demand for the purée Low J. W., et al. (2007). 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