2 How much can be sold, where and when?

Main points in Chapter 2
How much can be sold, where and when?

Agroprocessors need to be able to work out the size of the potential market, identify that part of the market that they can supply and find out who their competitors will be. The chapter advises on ...

• surveying potential retailers and wholesalers;
• working out how much of a product can be sold;
• identifying the market for similar products;
• finding out the existing supply and the different market “segments”;
• learning about seasonality of demand.

Retailers and wholesalers are often happy to collaborate with your research.

Use a checklist so you don’t forget any questions.

THE POTENTIAL MARKET AREA

You need to develop realistic expectations about where you can sell your products. You should not be too ambitious and should not plan to go further afield than is necessary to sell your output, as this will increase costs. Some of the things that need to be considered when identifying potential locations to sell are:

• how perishable is the product? Milk, for example, is very perishable in hot climates. Transport to distant cities has to be in refrigerated trucks. A small dairy may be attracted by better prices in the towns but may find it has insufficient milk to use the trucks to full capacity, so pushing its costs up;

• who consumes the product? Many consumers have very little money. They may not often be able to afford processed items such as pasteurized and packaged fruit juices, cheese, dried fruit or snack foods. Thus your potential market may, depending on your product, be limited to the richer parts of urban areas. Processed food consumption is also likely to vary from one ethnic group to another. Religion can be another important determinant of consumption patterns;

• what is the competition? It is vital to consider the competing products. Can you produce products that can compete in taste and appearance with those that are manufactured by large commercial companies or even imported? If not, you will have to sell your products where the commercial products are not available. For example, large companies may sell their products only through supermarkets in large towns. Such items may not be available in smaller shops, particularly if they are perishable. Thus you may be advised to concentrate on selling in small shops and in villages rather than in town supermarkets.

• what transport is available? This is a very important question. You need to be certain that you will always have transport available. Many small and medium ventures will not find it to be viable to own and operate their own truck and they will therefore be dependent on transport services. Are those services reliable? Where do they go? How often? How much do they cost? Are they suitable for food products? What are their terms and conditions? These questions need to be answered before potential sales locations can be investigated.

SURVEYING POTENTIAL OUTLETS

Once the potential sales area has been identified, the next step is to consider how the product should reach consumers. Very small-scale processors who are centrally located in a village or small town may feel that they can sell directly to consumers from a small shop next to their factory (e.g. a small dairy). Alternatively, the local retail marketplace may be a suitable outlet for some types of product. In most cases, however, retail shops are likely to present the best opportunity for reaching consumers. Once you have decided to sell to retail shops, you also need to decide whether to sell direct to the retailers or through wholesalers, if such wholesalers exist (these options are discussed in more detail in Chapter 5). You could also consider selling to government institutions such as schools and hospitals and, depending on your product, to hotels, restaurants, or fast-food suppliers.

Asking questions

When the possible outlets for your products have been identified the next step is to carry out a detailed survey of those outlets. Depending on the type of product and the number of potential outlets identified, you may plan to visit all shops in the area. However, larger processors that are planning to sell over a wide area will have to take a sample of shops. No hard and fast rule can be made about the minimum number of shops to sample, but it is important to ensure coverage of all types (e.g. supermarket, high street shop, corner shop in urban area, village shop). If possible, when there are only a few supermarkets all should be contacted, as they will almost certainly be the largest distributors and sampling of a small number could cause major inaccuracies.

It is also important to know how many shops of each type there are in the area, so that the information obtained from the sampled shops can be used to make an estimate of the total market size (see Figure 1). Preferably, their location should be marked on a map to help you sample shops from different areas. Such a map will also be of assistance later when you begin to promote your products and plan delivery routes. Sampling of consumers is discussed in Chapter 3. Similar techniques can be applied when sampling retailers.

HOW MUCH OF THE PRODUCT CAN BE SOLD?

In order to estimate potential sales, your surveys should try to find out:

• what quantities of the product are already being sold in the area?

• what quantities of similar products are being sold, and at what prices? Are there any that people may stop buying in order to buy your product?

• is the existing supply of competing products adequate to meet the demand, or is there a shortage? If there is a shortage, are there any known plans by other suppliers to increase their supply?

• does the market have different segments according to the type and quality of the product or according to the type of consumer? Is the potential market limited to some types of buyers?

• is demand seasonal? This is important. If demand is highly seasonal, for example, during a religious festival, shops will not want to take delivery until just before the festival. You will then have to store the product for long periods, so adding to your costs.

Total quantities being sold

At the simplest level, if you are planning to produce just for your local village you need to ask questions of local shopkeepers and also talk to consumers. For example, if a village has no bakery there may be a good opportunity to open one. The first step of the market research process is to find out how much bread is already being sold locally. In this case it would be important to know what type of bread is sold. Is it fresh bread from a bakery in a nearby village or town, or commercially baked, wrapped bread from the city? If the latter, would people buy fresh bread instead, or do they prefer wrapped bread because it lasts longer? Do people want a fresher version of wrapped bread, or do they prefer more traditional styles?

Similarly, there may be scope to open a small dairy and a survey of shops can be done to find out how much long-life (UHT), condensed or evaporated milk and milk powder is sold. However, it cannot be assumed that a dairy can replace all UHT sales with fresh milk sales. People may prefer UHT milk because it lasts longer. In Tonga, in the South Pacific, there was a reluctance to buy fresh milk from the country’s first dairy because, after becoming used to long-life milk, people found the taste of the real thing to be too strong. In the Middle East milk powder is used for making sweets and desserts, so a liquid milk supplier cannot assume that the total milk market is for liquid milk.

People tend to have unreliable memories. Also, when shopkeepers sell a wide range of products they cannot be expected to know off the top of their heads exactly how much of each they sell. You could therefore ask larger shopkeepers to check their records. These could be delivery notes from the supplier or receipts from visits to a wholesaler. If possible, you should ask the shopkeeper to provide information about quantities purchased over the previous twelve months.

In practice, however, shopkeepers may be unwilling or unable to provide such information. Checking records may take up too much of their time, or they may simply consider the information confidential. Try making estimates of their sales in a more subtle way. For example, you could ask them how much they sold in the previous month and then get them to say whether that month was an average one for sales, or not. Then try to find out in which months sales are normally higher and in which months they are less, and by how much.

It is also useful if you can get retailers to give you a general idea about trends in sales. Have annual sales of the products you are interested in been increasing or declining? Have particular brands been increasing their share of the market and, if so, why?

A calculation such as that in Figure 1 can then be done. It is important to get information on quantities sold for all size units. You need to know not only that the shopkeeper sold 3 000 litres of packaged fruit juice last year but also how much of that total was in one-litre containers, how much in half-litre containers, etc.

It is important to first find out whether, for the product being researched, the shop or supermarket deals directly with producers or importers or whether it buys through wholesalers. Some very small retailers in villages may even get their supplies from larger retailers in nearby towns. In some major cities wholesalers may have large warehouses, which retailers visit to get their supplies. In other cases the wholesalers may deliver to retailers. Where retailers buy only from wholesalers then detailed interviews should certainly be held with those wholesalers. Wholesalers may have trouble in providing accurate information about sales to a particular area and will probably not be prepared to give information about sales to individual shops. Such information should be regarded as confidential and should be obtained from the shops themselves. Information from wholesalers about quantities sold is therefore likely to be of most use to larger agroprocessors who are planning to supply large areas of a country.

While interviews with those selling the products are usually the best way of getting information about the size of the market, there may be some instances when useful information already exists in published form. This will apply particularly to ventures that are planning to supply an entire country, for example, in the case of small island states such as in the Caribbean or Pacific. In these countries, import statistics may give a useful indication of total market size, particularly where there are no local producers. However, it is always wise to be cautious about official statistics. Customs and Excise categories are often fairly broad and may include products other than those you are interested in. Furthermore, the accuracy of import statistics is frequently questioned in many countries. Official statistics on national production of a wide range of products may also be available. These should also be used with some caution, and should certainly be supplemented by interviews with shopkeepers. In some cases manufacturers’ or trade associations may exist for the products you are interested in, and they can often provide useful information.

The market for similar products

Many processed food products cannot be considered “essential” and many are not purchased regularly. Snack foods, sweets or candies, soft drinks, ice cream, etc. are not vital to people’s diets and are often only purchased when people have some spare money. What they buy will depend on a variety of factors such as what is available in the shop, what they have eaten and enjoyed before or what advertising they may have seen. In many cases a purchase may be made on a “whim.” Sometimes, if you ask someone when they walk out of the shop why they bought a particular product they may have no real explanation. They may just say that they “felt like buying it at the time.”

In many cases, therefore, you need to try to identify the total demand for a wider range of products than just the products you can supply. For example:

• potato chip (crisp) producers need to examine the entire market for all snack foods, and not just the market for potato chips;

• orange juice producers need to review the market for all fruit juices, and not just orange juice;

• ice lollipop producers need to consider the entire ice cream market and not just the lollipop market;

• sausage producers need to take into account the total market for meat and meat products;

• tomato sauce producers need to look at the market for all sauces, and not just that of tomato.

It will, of course, not be possible for a sausage producer to persuade people to eat only sausages and no other meat. However, if market research indicates that existing sales of sausages are very low, that will not always mean that additional sausages cannot be sold. Persuading people to eat sausages instead of other meat for just one meal a month may be more than enough for a profitable sausage-making business.

In carrying out interviews with shopkeepers, therefore, you need to get information both on existing sales of the product you plan to produce and about sales of other products that could be substituted by your product.

The existing supply

There is a big difference between a market for packaged fruit juice where annual sales are 120 000 litres and those sales correspond to what people want to buy, and a market where annual sales are 120 000 litres but where the shops are always in short supply and 200 000 litres could be sold if adequate supplies were available. You therefore need to check the shelves of shops to make sure that they have stocks on display, and also confirm with shopkeepers that supplies are always available.

If there is a shortage of supply, you should try to find out from the shopkeepers the reasons for this. There could be several explanations. For example, on a small island imported supplies may arrive by boat just once every two weeks and run out after the first week. In other cases, there may be a shortage of the raw material or of imported packaging. How do the existing suppliers explain the shortage to the shopkeepers? Has there always been a shortage, or is it just a temporary problem? If there has been a shortage for some time, are the shopkeepers aware of plans by the existing suppliers to increase production? Clearly, if the demand for a product is not met by the supply and other producers or importers are not planning to increase supply then there may be good potential for a new processor. If, on the other hand, an existing supplier is just about to complete a new factory, which will double that company’s production, then a new processor may face considerable problems.

Market segmentation

This refers to the types of products and the types of customers who buy them. It is very important that market researchers take market segmentation into consideration. If this is not done there is a great risk of overestimating the market size. In the case of orange juice, for example, there are in many countries several different products available in the shops:

1. 100 percent natural fruit juice;
2. A combination of 100 percent natural fruit juice and reconstituted juice;
3. Reconstituted juice in cartons, bottles, jars or cans;
4. Frozen, concentrated orange juice;
5. Concentrated juice in cans or bottles.

Each of the above is likely to appeal to a different type of consumer. The richest consumers, who like and can afford “fresh” products, can be expected to prefer Nos. 1 or 2. The poorest consumers may buy only No. 5, in part because this may be the only fruit-juice product available in villages and poor districts of towns and in part because it is all they can afford. Thus, when surveying the market size, you need to break down the total market into different categories. You also need to find out which categories of product are sold in which areas and in which shops. Careful research will ensure that the market for your product is not overestimated and will also avoid mistakes being made later, such as trying to sell expensive “fresh” juice in inappropriate areas.

Seasonality

It is not enough to know that 120 000 tons of fruit juice are sold every year. You also need to know if that represents 10 000 tons a month or if in some months 15000 tons are sold and in others 5 000 tons. Where consumer demand is seasonal so will be the purchases of shopkeepers. When consumer demand is low retailers will not want to buy products that they cannot sell. When demand is high they will want to be sure that you can supply enough. Ask retailers about seasonality and try to verify the information they provide by asking if they have monthly sales figures.

You will need to decide whether to adjust the throughput of your factory to reflect the seasonal demand. This will normally depend on the perishability of the product. Canned foods, for example, should cause no problems as they have a long “shelf life”^[3] and can easily be stored. Dairy and some meat products, juices and even some snack foods, on the other hand, have relatively short shelf lives. Another important consideration is the ability of your venture to finance stocks. If you are manufacturing products but not selling them because demand is seasonal then you will be spending money on the raw materials and on the workers in your factory, but not receiving money from their sale. You may need to get a bank loan to finance the stocks (see cash flow calculations in Chapter 8): alternatively you may decide to reduce or even temporarily stop production.

Seasonal demand for a few products can be fairly obvious. In countries that have pronounced seasons you can usually expect that sales of ice cream will be much higher in summer than in winter. People are also likely to drink more juices and other drinks in the summer. But there may be seasonal trends that are less immediately obvious; for example, consumption of products by children may depend on whether they are on holiday or at school. In Thailand 25 percent of milk is consumed by schoolchildren at school. Milk consumption tends to go down during school holidays.

In developing countries people in rural areas usually have more money available at harvest time and less when school fees have to be paid. Many countries require workers to be paid a 13^th month’s salary and some even a 14^th month. This additional money can also influence how much of a product people buy. You therefore need to question shopkeepers very closely about seasonality and try to get as much information as possible about their weekly or monthly deliveries. Where there seems to have been a period when they didn’t buy very much you need to find out why. Was it just because they had ordered too much before, or was it because they knew that demand would be low? In some cases seasonality of demand can be very pronounced. This is normally when products are mainly consumed during particular festivals.

Of course, it is not only demand that can be seasonal. Raw material supply for agroprocessors is also likely to be seasonal. If you are planning to produce a perishable product with raw material that is only available for a short period, and that period corresponds with a period when demand is low, then you clearly need to reconsider your plans. For example, one possibility would be to use the available raw materials to produce something with a longer shelf life.

REACHING CONCLUSIONS

Carrying out the research outlined above can help you to decide whether or not there is a potential market for the type of product you plan to produce and whether it appears practical for you to supply that market.

You should now have a good idea of:

• the total market for your product in the geographical area you can supply and whether demand is fully satisfied by existing suppliers;

• the quantities of each package size that are sold;

• the periods when demand is high and the times when demand is low;

• the potential market if you can persuade consumers to buy your product rather than something different (e.g. chili sauce rather than tomato sauce).

• the types of product similar to yours that are sold and when, where and to whom they are sold.

You can then reach some basic conclusions, such as:

• the total packaged orange juice market is around 100000 litres and I was planning to produce just 5000 litres a year. I should not have too much trouble taking just five percent of the market;

• the total packaged fruit juice market is 100 000 litres a year but only 20 000 litres is orange juice. I plan to produce 5 000 litres. Is my product good enough to take 25 percent of the market?

• the total annual market is around 10 000 packets, but I was planning to manufacture 20 000. Clearly I have to rethink my plans;

• no one is selling chips made from taro, but the snack food market is around 200 000 bags a year, so I should be able to sell 10 000 bags of taro chips if I can make a good product;

• no one is selling fruit leathers. I may be able to persuade children who buy lollipops, chocolate bars, etc. to buy my fruit leathers occasionally, but I am not sure;

• I was planning to process cheese, but it looks as if demand for cheese is very low. However, several shopkeepers indicated that they would like to sell yoghurt but cannot find a supplier. Can I make yoghurt?

If your initial research convinces you that there is a potential market for your product, then half the battle is over. But much more information is required before you can be really confident of success. Will people accept your product? Will you be able to present the product as customers want to buy it, and at the right price? Will shopkeepers sell it? What advertising will you have to do? Issues such as these will be considered in the next chapters.