Agriculture Business

Guidelines for establishing a sustainable agriculture business

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Over the last four years the agro-processing sectors in South Africa have seen significant change and large expansions. Previously unknown, obscure operations located far off the beaten track rose to prominence and we are seeing large processing factories where five years ago there was vacant land. With few exceptions these investments were made by knowledgeable, hands-on operators who proactively identified trends and opportunities in their sectors.

As the leading banking and finance partner of these successful ventures, Standard Bank offers the following guidelines to prospective entrepreneurs and investors.

1. Changing consumer preferences and awareness will determine sustainable top line revenue and underpin the gross margin by creating opportunities to price for a superior product.

Gone are the days when consumers bought what was offered on the retail shelves. Successful food retailers and FMCG providers differentiated themselves by meeting the exact needs and preferences of the end consumer. In economic language, the food sector became demand pulled rather than supply driven. Consumers look for easy, convenient ways to include so-called “good-for-you” products into their lives, analysts says.

The principle is logic and simple enough to understand. The solution however is complex because consumer preferences shift and these shifts became more dynamic in recent times. The ventures supported by Standard Bank, generally align with global trends, the most prominent of which is the concept of “naturally functional foods and ingredients”. It shows the intrinsic health benefits of a food or ingredient in a way that is easy for consumers to understand and media to communicate without having to make specific health claims. FMCG providers leveraged this trend in various ways. For example, by tying in aspects such as weight wellness and emphasising place of origin. They also make use of creative marketing and packaging, in essence creating media appeal. A related trend is the strong focus on the portion controlled snacks.

These intense changes made it possible for new entrants to quickly carve a niche for themselves. Yes, established major food companies are also reacting to these trends, but their responses are complicated by legacy systems and product ranges which ever-better informed consumers seem to be acutely aware and suspicious off.

2. Innovation must have a commercial relevance

When thinking about innovation, technology and technological innovation springs to mind. In a world where profits are driven by doing more with less, technological innovation is indeed a non-negotiable. All the processing factories financed by Standard Bank are considered state-of-the-art and conforms to international specifications. They are not only operationally efficient, but also leave a very limited ecological footprint, yet their operational capabilities are robust.

But innovation must have commercial relevance. At the recent launch of one of the Standard Bank supported manufacturing plants, the Chairman summarised this concept well by stating that an engineering feat must not be compromised by a marketing defeat.

Innovation goes beyond production technologies and includes, amongst others, product-, marketing- and organisational innovation.

Especially the relevance of organisational innovation are often overlooked or taken for granted—very much to the entrepreneur’s detriment. Recently Standard Bank supported a large new venture primarily because the organisational innovation created a very robust, integrated business model.

While not being oblivious to the challenges it present, Standard Bank widely advocates the commercial relevance of integrating sector value chains. If done responsibly and by applying the relevant skills sets, the commercial benefits will outweigh the inherent risks. Through organisational innovation it is possible to establish natural affinities along the value chain which imbed demand-, supply- and other stakeholder fundamentals way beyond what is possible through traditional contractual means.

3. Financial astuteness

Taking business decisions have financial implications and it was encouraging to note how close to the mark the ventures supported by Standard Bank came. The projects were delivered on time and on budget - but this was no coincidence – without exception the CEO’s and CFO’s involved were seasoned business leaders with a very strong financial acumen.

This financial acumen not only bodes well for the venture in a direct sense but also creates confidence amongst financiers and investors alike.

The mistake many less experienced entrepreneurs make is to underestimate or not fully appreciate the financial impact of their business decisions. They may recognise this weakness and compensate by pushing out the numbers, but still the cause and effect link is not made.

For example, a strategy to grow revenue through aggressive marketing at lower margins not only impact on the income statement in the form of lower profitability, but will also have a material impact on the working capital cycle and therefore free cash flows.

Indeed, less experienced entrepreneurs regularly wrongly estimate the cash generative ability of their ventures or don’t fully comprehend how their decisions impact thereon, except for perhaps sensing a casual link. This leads to crises decisions being taken which compromises the business- and operating models and ultimately the venture as a whole.

4. Inclusivity

Business ventures do not function in isolation or independent of the environment within which it operates. In Business Management language the term “sustainability” is often defined as managing the triple bottom line, being profit, people and planet.

The ventures supported by Standard Bank build their business models around their stakeholders which included, amongst others, suppliers, employees, off takers, the Local Authorities and the wider business communities within which they operate. This was done by integrating and aligning the interests and expectations of the stakeholders. Achieving this is not easy; in fact the dynamics are highly complex but judging from the praises sung by community leaders, the dancing and song of employees, doubling as shareholder, the ISO accreditations from industry and the unanimous product listing by the major retail chains (and products already on shelf), the right things have been done.

5. Leadership

At the heart of the ventures supported by Standard Bank is exceptional leadership whom succeeded, not only to sell a vision to the various stakeholders, but also to execute their strategy down to the finest detail. Leadership of the various ventures was keen and quick to understand and then to deal with business situations as they arose, leading to good outcomes. They had excellent knowledge and understanding of the financial, accounting, marketing and operational functions of their businesses and subsequently showed superior judgement and appropriate, timely decision making.

Sustainable business in action

KZN facilities, Dairy Day (Pty) Ltd create jobs, give investment value to farm employees, and hedge revenue for milk producers

In a ground breaking move, 30 dairy farmers in KwaZulu-Natal have created three business entities through which they can guarantee supply of dairy products to retailers, giving themselves an innate hedge against market fluctuations in prices and a bigger share of the consumer’s wallet.

Each farmer has a shareholding in Dairy Day in direct relation to the number of litres he or she can supply. Dairy Day holds 85% of the shares of an operating entity running two acquired dairies, Honeydew and Stonelees, and a newly built, in excess of R100 million, 22 000 m2 processing plant in Howick, which packages private labels on behalf of retailers and brands and produces its own products under the Honeydew brand.

The operating entity, known as Dairy Day (Pty) Ltd is capable of processing 600 000 litres of fresh milk daily, includes cold rooms and production lines, operates in excess of 100 vehicles, and employs 1 200 people.

It produces sterilised milk, maas, yoghurt, cream, juices, dairy blends, butter, and powdered milk.

The remaining 15% of the shares in Dairy Day are held by the Dairy Day Workers Trust in which the producers’ employees participate.

“Unlike other farmer-owned or co-operative organisations, we are focused on providing a service rather than simply a product to our customers, who are the major retailers,” says Paul Marshall, CEO of Dairy Day. “We achieve this by underwriting our supply to the retailer.”

“We know exactly what our own milk producers can deliver and, therefore, what the processing plant’s output will be. Because our suppliers have the benefit of revenue from the plant, we are less vulnerable to farmers choosing to supply a different processor in the quest for short term price advantages.”

“So, we can do integrated and very accurate planning from the farm gate, through the processing plant, to the customer. This gives our customers a sense of security and builds their loyalty to us.”

“By the same token, it gives our suppliers a sense of security. They’re not going to be abandoned during times of over supply, when processors can pick and choose their suppliers purely on price. It truly is a business model in which everyone wins.”

Ensuring stability of supply to retailers will create demand that should drive steady growth for the farmer shareholders.

“Ideally, we would like growth of supply to come from within our existing and future shareholder base,” Mr Marshall says. “In fact, a large part of what we’re doing is geared towards enabling such growth.”

“Dairy Day has been established to stabilise dairy farm profitability. This should assist in making dairy farming an attractive career and, thereby, draw new entrants.”

“If we do get into the fortunate position of having more demand than our existing suppliers can fill, then bringing in more shareholding farmers will simply help us create a bigger pie, of which everyone’s cut will be proportionately bigger.”

Bertie Hamman, Senior Manager: Secondary Agriculture for Standard Bank, Dairy Day’s primary banker, believes that the Dairy Day business model addresses a number of issues in the dairy sub-sector and in agriculture in general. “We have believed for many years that the dairy industry is too fragmented. Producers have an organisation, as do processors. But none of the linkages in the value chain, including logistics providers and retailers, have been closely integrated.”

“From a broader agricultural industry perspective, it is our conviction that farmers do need to get involved up and downstream of their farm gate in order to diversify their income and spread their risk.”

“So, we were delighted to give our support to Dairy Day. We believe its focus on using superior service to retailers and consumers as the basis for creating growth for its suppliers will deliver value at all levels of society.”

Mr Marshall says that Standard Bank’s belief that Dairy Day’s business model is sustainable has given the company and its shareholders a great deal of confidence. “Most other “co-operative” style companies in agriculture have low capital input and much higher funding than we have needed, because we obtained 100% of our capital from our shareholders, upfront.”

“So, we were an attractive option for any bank. However, Standard Bank has a strong agricultural division and deep insight into the industry. They understand that what we’re doing is good for the farmer, retailer and consumer and that makes for good business. By supporting us, they’re saying our vision is right. And, they’re supporting the evolution of the dairy industry in South Africa.”

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