Main points in Chapter 1
Why do we need market
research?
Agroprocessing ventures are often
unsuccessful.
Lack of market research can be one reason for
this.
The chapter looks at what is meant by “market”
and what is market research.
Agroprocessors need market research to ...
The chapter concludes
with brief
summaries of Chapters 2 - 8.
Market research can sometimes make the difference between this...
... and this!
INTRODUCTION
Why is it that agroprocessing ventures are often unsuccessful? Processing developments often fail to take into account the simple fact that the processed product has to be sold. Activities are started because they are technically possible, because they are “in fashion” in other countries and, perhaps, because there are abundant raw materials. The fact that people have to buy the finished product and that ways of selling and distributing it have to be developed often receives only limited attention. The result can be a shiny new factory, which loses money because it cannot sell enough of the processed product. Such “white elephants”[1] are to be found in every country.
Individual entrepreneurs (businessmen or women) or private companies are perhaps less likely to make such a mistake because they are investing their own money in the processing facility. More likely to fail are facilities established by groups or cooperatives, with the support of outside bodies such as government departments, NGOs or donors. The private sector usually begins with the question: “can we make money by making this product and, if so, how much?” An important way of finding out the answer is to do market research. Outside bodies, on the other hand, frequently start with the question: “what can we do to help people in this area?” Such a question rarely leads to a detailed investigation of the market.
Processing must be based on market demand
...
... not just on the availability of raw materials.
Market research is essential before beginning any venture of this type. Without market research there is a risk that consumers do not need or want the product, or do not like it or the way it is packaged and presented. There is a danger that retailers do not want to sell the product. There is the possibility that the price the processor wants to charge is too high for consumers to afford.
Research is also required to ensure that the agroprocessing can be carried out efficiently and, hence, profitably. Are raw materials available when required and at an affordable price? Are other ingredients and packaging materials easily available? Will problems be experienced with constructing and equipping the factory?
Any one of these and many other potential problems is enough to result in the failure of an agroprocessor. The purpose of this guide is therefore to help entrepreneurs, companies, cooperatives, NGOs and others to better understand the market for the products they plan to produce. In this way it is hoped that agroprocessing will become more profitable. Researching export markets is not considered here. Companies should usually have a solid foundation on the domestic market before thinking about exporting. It must also be stressed that market research is not a “one off” activity to be done at the planning stage. Agroprocessors should monitor their markets as an ongoing activity. Market conditions can change overnight and processors need to be aware of such changes.
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Box 1 DAIRYAND ANIMAL PRODUCTS FRUIT PRODUCTS VEGETABLE PRODUCTS GRAIN PRODUCTS ROOT CROP AND TUBER PRODUCTS MISCELLANEOUS PRODUCTS |
The emphasis of this guide is on research that processors can carry out themselves. However, many countries have specialist market research consultants and companies. Companies or organizations planning large processing investments would be well-advised to use such specialists. This guide can then be used to help processors identify the type of research they require.[2]
What is a market?
For the purposes of this guide a “market” is firstly defined as the characteristics of consumers’ demand (i.e. what they want) for a product. This definition also includes the requirements of those involved in supplying that consumer demand, such as retail shops and their wholesalers. Secondly, the term “market” also embraces the actions of competitors, such as how they set their prices, organize their distribution and decide on promotion. Understanding competitors is just as important as understanding consumers.
One of the most important aspects of demand is clearly the quantity of a product that consumers want to buy. But when we talk about demand and the “market” we consider many other factors, such as those outlined in Box 2.
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Box 2 PRODUCT PRICE PLACE PROMOTION |
A “market” as discussed in this book is, as noted above, a set of characteristics of demand and supply, not a physical location. For small ventures such a “market” can be local, for larger ones, national. To avoid confusion, when we are talking about physical market locations we will refer to “marketplace” or “wholesale” and “retail” markets.
What is market research?
Market research is the process of investigating a market in order to find out the sales prospects for a product and how to achieve success with it. Put another way, it is the set of activities necessary to obtain the information required about the market that we have listed above. At the simplest level such research may just involve talking to people in the same village to find out what they want to buy and what they can afford to buy. At the most complex level large organizations may carry out person-to-person or telephone interviews with thousands of potential consumers. However, both activities have the same aim: to make sure that a product can be sold and that it can be sold profitably. Market research activities that will be considered in this guide include:
Why do agroprocessors need market research?
Processing facilities can be costly to establish. Individual entrepreneurs may put all of their life savings into setting up a small factory. Banks may lend large sums of money to new ventures, or to existing ventures to enable them to expand their operations. Governments, donors or NGOs may similarly lend or give grants of large amounts. With so much at stake, no one wants the processor to fail.
Yet, as we have noted, rural processing ventures frequently do fail. Why? Some of the reasons can be:
Failure to identify the right opportunities for processing. As noted at the beginning of this chapter, processing activities are often started because there are plenty of raw materials. They are rarely started because of detailed market research that has identified particular opportunities. This could lead to a company failing to identify the most profitable products it could produce. For example, it may decide to process pineapple juice because pineapples are abundant, and fail to notice that orange juice processing could be much more profitable.
High fixed costs. As discussed in more detail in Chapter 8, a factory needs to achieve a certain minimum throughput in order to make products at a price consumers can afford. Processing facilities have a number of fixed costs and overheads, such as the cost of the building and the cost of the processing equipment. The more products that are produced, the lower the fixed cost per unit. On the other hand, the variable costs, such as the cost of the raw materials, increase in proportion to how much is processed. The profitability of a factory depends on its ability to minimize the fixed costs per unit produced. When production is significantly less than the capacity of the factory then fixed costs per unit will rise to unacceptable levels and the factory will have to close down. Two reasons why fixed costs per unit may be too high are:
demand for the product is much less than the capacity of the factory. If good market research is done from the beginning it should be possible to plan the processing venture so that its size matches the likely demand;
supply of raw material of the right quality and price is much less than the possible throughput of the factory. If, for instance, crop production is seasonal and lasts for three months, what will the factory do for the rest of the year? Initial research of processing feasibility doesn’t just involve studying the market for the product: it also involves making sure that there will be enough raw material to keep the factory operating at close to capacity.
High selling price. Large factories, if they are efficient, can benefit from “economies of scale”. This means that by producing big quantities they can share their fixed costs over a large number of products. Larger factories can often buy sophisticated processing equipment that can make the product at a lower unit price than can the equipment that small businesses can afford. The result of these economies of scale is that larger companies can frequently sell their products for much less than can small processors.
The price at which an agroprocessor will be able to sell the product and make a profit has to be known before the investment in the factory is made. In too many cases in the past, agroprocessing companies have expected too high a return, setting their prices more on the basis of wishful thinking or guesswork than on a serious analysis of the market.
Product and packaging quality. The agroprocessor may find that its products are not liked by consumers, particularly when compared with other brands of the same product that can be purchased in local shops. There could be many reasons for this: the available raw material (e.g. fruit for fruit juice) may be of bad quality or the wrong variety; other inputs (e.g. flavourings) may be of a different type to those to which consumers are used; the processor may have technical problems. And even if the product tastes fine consumers may still not buy it because they don’t like the packaging. Perhaps they are used to buying fruit juice in cartons of 0.25 litres and don’t want to buy it in plastic containers of 2 litres. Perhaps the labelling does not look very good, making consumers suspect that if the processor cannot get the labels right there may also be something wrong with the product. Again, before large investments are made the acceptability of the taste and appearance of the product has to be confirmed.
Failure to identify potential problems. Even if an agroprocessor is producing a tasty and attractive product problems may still be experienced. Perhaps the local retail shops don’t want to sell it. They may argue that they already have three brands of fruit juice on their shelves and don’t want any more. Perhaps they buy all of their supplies from one wholesaling company, which gives them weekly deliveries, and they can’t be bothered to buy directly from any other company, even if it is local. Alternatively, the shops may be happy to sell the product but will only do so if they can pay for it two months after it has been delivered.
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Box 3 Although this guide is mainly intended to cover the topic of market research, it inevitably also touches on more general aspects of developing an agroprocessing business, such as carrying out a detailed feasibility study. Market research is an essential input into such a feasibility study and into the preparation of a business plan. The usual business-planning sequence is summarized below: 1 MARKET RESEARCH 2 MARKETING PLAN 3 PRODUCTION PLAN 4 FINANCIAL PLAN |
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MARKET RESEARCH HINT Arrange for research results to be written down even if you are only carrying out a small study Presenting research results in an organized way makes it easier to evaluate the findings of the research and enables you to easily identify inconsistencies or contradictions that require further research. The structure of a report, which does not have to be very long, will vary according to the product and market and the amount of detail required. A suggested format is:
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If the agroprocessor has to pay farmers in cash for their fruit, but only gets paid two months after delivering the juice to retailers, it may well experience cash-flow problems (see Chap. 8).
There may also be production problems. The effect of seasonal raw material supply has already been noted, but difficulties may be experienced in obtaining other essential inputs and poor cash flow may make paying for them difficult in the short term. Pricing of the product may also jeopardise a factory’s success. Failure to consider at an early stage the price at which a product can be sold may lead to a factory being unable to make a profit at the prices consumers are prepared to pay.
The items above are just a few examples of the difficulties that agroprocessors are likely to face if they do not carry out market research. The amount of research required will, of course, vary according to the size of the venture and the area the venture sees as the potential market. Someone planning a bakery in a village will clearly need to do less research than someone planning to sell fruit juice to a city. But they will still need to do some market research.
Market research can never guarantee success nor totally eliminate risk. It can, however, reduce risk. The costs of carrying out market research are relatively small compared to the potential costs of not doing any, which can be the loss of an entire investment. Market research should not, however, be seen just as a way of minimizing problems. Good research can identify new products that can be produced profitably. It can help agroprocessors to reduce costs by avoiding expenditure (e.g. on packaging characteristics that consumers do not demand or on unnecessary labelling). It can help the processor improve the taste or appearance of products so that more consumers want to buy them. It can help a company to work out how and where to sell its products in the most efficient manner and at the best price. It can help make decisions about whether advertising or promotion is necessary and how this should be done. Finally, market research is an important input into decisions about the price at which the processor should sell the product.
THIS GUIDE
Chapter 2 looks in detail at ways of assessing how much of a product can be sold. This involves identifying the quantities of similar products already being sold and assessing the extent to which consumer demand is being supplied. Is demand seasonal? Who are the potential buyers? Could everyone be expected to buy the new product or only more affluent consumers? If the market is already well supplied what will the agroprocessing venture have to do to make sure its products are purchased? Is it wise to produce a new brand of a well-supplied product?
Chapter 3 looks at how to investigate consumer attitudes about products it is planned to produce. It also considers how to test consumer reaction to the taste and appearance of new products and how to assess whether consumers would buy them in preference to similar products already available.
Chapter 4 reviews the research necessary to find out how the product should be presented to consumers. What type of product do consumers want? What quality? What package size(s) is required? What type and quality of packaging? Are labels necessary, both to make the product attractive to consumers, and for legal reasons? Would the use of a “brand name” be a good idea?
Chapter 5 covers researching methods of distributing the product. Where are the best places to sell it (e.g. supermarkets, shops, retail markets)? How should the product be transported and delivered (e.g. in cardboard boxes)? How do costs vary according to location of sale? How often should deliveries be made? What are the business terms of the potential distributors? When do they pay, and how promptly?
Chapter 6 considers how products should be promoted and advertised. Do competing products do any promotion or advertising? What type of promotion is most appropriate for the product, the distributors and the consumers? What are the costs involved?
Chapter 7 reviews production feasibility and production and marketing costs. Will processing equipment, raw materials and other inputs (e.g. water, electricity, packaging) be available and has the cost been identified?
Chapter 8 looks at simple ways of calculating whether a venture will be able to make a profit or not. It also pays attention to ways of setting prices. The processing venture needs to make sure that it can get the ex-factory price it needs. At what retail price does the product need to be sold to achieve this ex-factory price, that is, what are the costs between the factory and the consumer? What pricing options are available for the venture? Can it charge more than it really needs to? Should it charge less in order to attract customers? How does it price different sizes?
The chapters and the activities you need to carry out are presented here as a sequence. This is to facilitate presentation of the various types of issue. In reality, of course, many of the market research activities outlined here (particularly those of Chapters 2, 4, 5 and 6) are carried out at the same time. When researchers visit shopkeepers they will want to cover the points raised in all four chapters. Annex 1 presents a checklist of questions to help them do this.
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[1] White elephants were
considered to be sacred. The Kings of Siam (Thailand) used to reward opponents
with white elephants which, as it was not permitted to put them to work, were
extremely expensive to keep. [2] see Fellows, P.J. and Axtell, B. (eds) pages 64-68 for a discussion of the benefits of doing research oneself or hiring outside consultants. |
