Executive Summary
Why Local?
Unfortunately, the food systems that tend to dominate modern agriculture are based on an industrial model that has a destructive impact on the land, the people, the local economies, and the health and nutrition of its consumers. What small and mid-size farms, many of which are family owned and operated, lack in scalability, they make up for in sustainability. Unlike factory farms, a sustainable food system enriches the farmland and the community in which it exists. Most of all, a sustainable food system produces healthy, nourishing food. How “local” your food is depends, of course, on where you live. In regions with the climate and biodiversity to support agriculture, local could mean your town, county or your state. Here in New England, we're fortunate enough to have a various microclimate that enable our growers to provide a wide variety of products throughout the year.
Who We Are
At FarmFresh 2 Go, we strongly believe in the importance and the benefits of local food systems. As proud distributors, we will work hard with local growers to ensure that our products are the highest quality and freshest available. By bringing these products to our customers' kitchens and shelves, we feel that we can make a significant and lasting impact on our environment, our public health, and the local economies of the communities we serve.
What We Do
FarmFresh 2 Go provides distribution of locally grown, organic food to restaurants, markets and corporate clients. Our innovative web-based marketplace will give customers access to an incredible bounty of local produce in ways never before possible. Products can be sorted by type, distance from a particular zip code, or by grower, giving our customers maximum flexibility and control to ensure they get the products they want. Customers can also purchase items from several growers in a single transaction, because we aggregate the vast number of suppliers at our centralized distribution facility. For the farms, we provide a number of benefits. In particular, we assist them with their marketing, ordering, billing and delivery tasks, allowing growers to focus on supplying us with the highest quality food available. Additionally, we provide our suppliers with inventory management and customer data analysis tools to help them optimize their product mix and crop schedules, ensuring that their product supply is consistent with their customer demand. While we will focus primarily on the Boston-Metro market, our model is eminently adaptable, and as such we are well positioned for growth and expansion into other regions.
Our Market Space
The U.S. natural foods market across all retail and direct-to-consumer channels is approximately $60 billion in size. Prior to the current recession, this market was growing 10% annually. The U.S. organic food market is a sub-segment of the natural food market and is approximately $33 billion in size, with nearly 20% CAGR, though growth has slowed since the U.S. entered a recession in 2008. While this market is not recession-proof, it has proven to be far more resilient than many other food and beverage markets, which are either in decline or have experienced only single-digit growth. The key drivers for growth include: heightened awareness of food and nutrition leading to healthier eating patterns; better-educated and wealthier consumers; increasing consumer concern over the purity and safety of food due to the presence of pesticide residues; and iv) environmental concerns due to the degradation of water and soil quality. Additionally, the market for wholesale fruits and vegetables in the US is over $75 Billion, and within New England, approximately $4 Billion. Within this market, locally sourced food is the fastest growing segment. Local food is also becoming a major national issue. Recently the USDA launched an initiative called “Know Your Farmer, Know Your Food”, aimed at promoting awareness of locally grown food. The mainstream media has taken notice as well. This is indeed an excellent time to enter this space.
Our Customers
Our main customers will likely be restaurants, specifically higher end, full service restaurants. We found that as you move down the line on price point, the quality and sophistication of their products tends to decrease, and so we will likely stay in that upper tier of restaurants. We expect this segment to make up well over 50% of our customer base. In addition to restaurants, we will also cater to gourmet and specialty markets - while their margins tend to be much smaller than restaurants, these are actually one of the faster growing segments within the food service industry. Corporate clients may also be an attractive customer segment for us, as many companies are looking for ways to be more environmentally sound. Finally, we will look at serving institutional customers, like schools and hotels. It may simply not be possible for us to provide the kinds of quantities that would be necessary for large universities; though over 200 college campuses across the country have instituted some sort of farm-to-campus, including schools like Yale and Vassar.
Competitive Landscape
We have three primary types of competitors: Large, national distributors, smaller regional distributors, and the farm networks, who use a direct sales model through such channels as farmers' markets, community sponsored agriculture programs (CSA's) and roadside stands. For the distributors, we will compete on the basis of price and the variety of available offerings. Most established distributors are not equipped to distribute food from small farms, and over 80% of products from small farms are distributed through the farm network. In this case, the burden of distribution is on the grower or the customer, and in either case efficient distribution and supply chain management are not core competencies.
The major distributors have massive scale and volume advantages, which allow them to price very competitively. We believe, however, that their lack of locally sourced food will limit the extent to which we compete directly with these players.
Our Operational Strategy
Each week, the farms in our network update their inventory. Restaurants place their orders and those quantities are reconciled with farm inventory. Any stock-outs are resolved at that time. Farms are notified of the quantities demanded and the delivery dates. Unlike traditional wholesale distribution, in which the distributor holds the inventory for as much as two weeks, we don't pick up our inventory from our suppliers until within 24 hours of delivery to the customer in order to ensure peak freshness and minimize the amount of inventory that we hold. Once we pickup the products, they're brought back to our distribution facility for picking, and are then delivered to our customers. Our customers will get 30 days to pay us from the time an order is placed, and we are assuming net 30 days on our payables from the time we pick them up, so that should help us to manage cash flows effectively.
The Management Team
A proud foodie and localvore, founder Teddy Harvie has over 5 years of experience working with farms, farmer's markets and farm non-profits around the Boston area, and has developed relationships with local growers and restaurants. Alice Fontaine brings her experience in pricing strategies and a passion for organic foods. Alice is a native of France, where local agriculture plays an important role in food consumption. Olena Dmytruk is a serial entrepreneur and brings her experience as an operations expert.
Company Description
At FarmFresh 2 Go, local, sustainable food is our passion. We also feel that locally grown food presents a real opportunity to support local food systems, as well as serve a growing market. Our company is a distributor of locally grown food to food-service retailers in the greater Boston area. Our suppliers are not only local farms, but also producers of other specialty foods including artisan breads, cheese, jams and honey. We offer benefits for our suppliers, by handling their marketing, billing, ordering and delivery tasks, letting them focus on doing what they do best - grow fresh high quality food. To our customers, we offer unprecedented access to an outstanding network of farms and an incredible variety of locally sourced products. Best of all, this is really a triple bottom line opportunity - the opportunity, as we will explain, is big and growing. We're also providing our customers with healthy and tasty local food, supporting local economies and helping the environment by encouraging sustainable farming practices.
As a logistics business, we understand that efficient supply-chain management, food handling technology and source/supply logistics are key success factors. Local food systems have generally relied on direct marketing channels such as farmers' markets, farm stands and more recently, community-sponsored agriculture. This is especially true in rural areas, though distribution networks are beginning to develop in more urban areas. These networks tend to be in the form of Co-op's and “farm aggregators”, and don't offer conventional distribution to restaurants and markets. By giving locally grown food a traditional distribution channel, we believe we can significantly grow the very market in which we operate.
The Opportunity
The trucks are everywhere - U.S. Foodservice, Sysco Inc, and countless regional distributors transporting food from suppliers to restaurants and markets all over the country. Even here in Massachusetts, the majority of the food we eat travels thousands of miles before it ends up on our plate. Melons from Guatemala, stone fruit from Chile, cucumbers from Honduras, tomatoes from Mexico - each of these products can be produced sustainably right here in New England.
The process through which restaurants receive food from distributors is as intricate as it is competitive. Agriculture, as is the case for many industries, has undergone a great deal of consolidation. A Major grower may have literally hundreds of smaller growers operating under its umbrella, often times growing only one or two crops. These crops are harvested and warehoused, and ultimately collected by distributors and transported across the country, in some cases taking as much as a week to reach their final destination. In many cases, the food undergoes various processing steps, such as peeling, chopping and washing, all of which accelerate the spoilage process and further compromise the products' freshness and quality, as well as increase the already heavy environmental toll that industrial food production and distribution impose on our planet.
For an increasing number of consumers, chefs and restaurateurs, this model simply won't do. The food service market is made up of increasingly eco-conscious consumers, many of which have galvanized to create a local food movement. In fact, sustainability and local sourcing were listed as the top 2 menu trends of 2010 by the National Restaurant Association. More importantly, these trends translate into real dollars.
The US market for natural products is over $60 Billion. The organic products market is a subset of this market and currently stands at over $33 Billion and has been growing at approximately 10% per year (though growth has slowed since the US went into a recession). Additionally, the US market for wholesale fruits and vegetables is over $75 Billion, with approximately $4 Billion in revenues coming from New England. Within this market, locally sourced products (defined as products that are both produced and consumed within New England) make up the fastest growing product segment.
A massive outbreak of E-coli in 2006 prompted stricter regulations and testing to ensure product safety. The costs of these measures have further squeezed small farms out of the traditional distribution system. A willing distributor, however, can assume those liabilities more easily and effectively bring small farms back into the fold.
Given each of the circumstances described above, we see a tremendous opportunity to provide distribution of locally sourced food to a growing market. We also see an opportunity to create value for our company, our customers, local economies and the environment.
Customer Analysis
Restaurants
Our main customers are restaurants, specifically higher end, full-service restaurants. We found that as you move down the line on restaurant price point, the quality and sophistication of their products tends to decrease, as does their reliance on fresh ingredients (over frozen and canned products) and so we will target the upper tier of restaurants. There are literally thousands of restaurants in the Boston area, but approximately 1600 fit our target criteria of high end (based on annual revenue per seat), and cuisine/food needs that are generally consistent with the variety of offerings that can be produced in New England.
Currently, restaurants that wish to source local food must interact individually with each grower, which translates to more time spent and logistical headaches incurred. By aggregating our suppliers into a focused network, we can give Boston-area restaurants access to a wide range of growers and products in a single phone call.
Specialty Markets
In addition to restaurants, we will also cater to gourmet and specialty markets - while their margins tend to be much smaller than restaurants, these are actually one of the faster growing segments within the food service industry. It is also becoming increasingly common to see these types of retailers carry locally-sourced products. Additionally, while the restaurant industry has been hit hard by the economic recession, markets are somewhat counter-cyclical as customers eat out less and look to prepare more meals at home.
Institutional Customers
Finally, we will look at serving institutional customers, like schools and hotels. It may be difficult for small farms to consistently provide the kinds of quantities that would be necessary for large universities and hotels, so we assume to take on institutional customers in year 3, once our supplier network has been developed. We find it to be extremely encouraging that over 200 college campuses across the country have instituted some sort of farm-to-campus, including schools like Yale and Vassar. Cornell University has pioneered such programs, and we may very well take some cues from them. From our research, these customers appear to be among the least profitable for large distributors, which makes them among the least attractive of our target customers.
Competitor Analysis
Market Overview
FreshFarm 2 Go is competing in the fresh fruit and vegetable wholesaling market. This is an intensely competitive and highly fragmented market consisting of numerous competitors at many levels: National Wholesalers, Regional / Local Wholesalers, Farmers Markets, and Farmers direct (i.e., known as “wholesale bypass”).
In 2009, according to IBISWorld estimates, the total U.S. market for fresh fruit and vegetable wholesaling is estimated to be $76.4B in size, representing a decline of 0.4% vs. 2008 due to lower fruit and vegetable prices. Between 2004 - 2009, the 5-year CAGR was estimated to be 1.9%, approximately the rate of GDP growth. Over the next 5 years through 2014, the market is expected to increase to approximately $88.3B in size, representing a 5-year CAGR of 2.9%.
National Wholesalers
The four largest national wholesalers account for about 10% of industry revenues and include: Sysco, Dole, Chiquita and Nash-Finch. There are numerous other national wholesalers (e.g., Fresh America, US Foods).
Both Dole and Chiquita generate a significant portion of their revenues from imported bananas, a portion of which comes from company owned farms. They tend to serve the supermarket / grocery store industry. Sysco is a better comparable in that it is more focused on serving the food service or “food-away-from-home” industry (i.e., restaurants, cafes).
Local / Regional Wholesalers
There are an estimated 5,000+ local / regional wholesalers in the United States, of which over 200 are in New England. On average, fruit and vegetable wholesalers in New England employ 15 people, so most of these are very small, privately owned enterprises. Over half of these are located in Massachusetts. An example would be Katsiroubas Bros, a 100-year old family owned company based in Boston. Katsiroubas Bros has a 30,000 sq ft facility, 65 employees and 22 refrigerated trucks. Katsiroubas' customer base consists primarily of restaurants, hotels and other institutions. Katsiroubas has established partnerships with many growers, including Calavo, Driscoll and Andy Boy.
Farmers Markets and Farmers Direct
A segment of the fruit and vegetable wholesaling market is comprised of farmer owned roadside stands and markets. Some of these are wholesalers who sell their products to consumers through catalogues or via the internet (e.g., Cushman). Farmers' markets and roadside stands allow consumers to buy fresh produce and allow growers to retain a larger share of profits. Some restaurants and chefs shop directly at a Farmer's Market and like to have that direct connection with the source of their food supply. Aside from roadside stands, consumers can purchase fresh fruit and vegetables from various produce stands at local markets.
Basis of Competition
The fruit and vegetable wholesale market is intensely competitive and so pricing power tends to be very limited. The key basis of competition includes the following factors:
1. Variety of Offering
The National Wholesalers and the larger Regional / Local Wholesalers are able to offer wide variety of fruits and vegetables year round, including those that are imported or sourced from other parts of the country. This is particularly important for ingredients that are required year round or as part of a permanent menu offering. The large wholesalers will establish contracts with many sources that ensure their ability to reliably supply year round. The large wholesalers also offer many food products besides just fruits and vegetables, so they can act as a one-stop shop for all foods including fish, meat, etc. The small local wholesalers and farmers markets by definition offer a very limited variety, since they are limited to locally grown food supply, which is seasonal.
2. Distribution / Logistics Capabilities
The National Wholesalers and larger Regional / Local Wholesalers have sophisticated distribution and logistics capabilities, including refrigerated supply chains. Since the product is perishable, the supply chain becomes critical and customers don't want to keep lots of inventory on hand. As an example, Sysco has 25 million sq ft of distribution space in the U.S. and almost 9,000 delivery vehicles. Sysco has the ability to offer daily delivery to large customers and special orders on even shorter notice. It has 13,000 sales reps and customer support staff and has the ability to partner with its customers to provide product usage reports, menu-planning advice, and food safety training and inventory control.
3. Brand / Reputation for Quality and Reliability
A reputation for consistent quality and reliable delivery is essential to the operation of a foodservice business and so this is a key basis for competition. The larger wholesalers ensure consistency and reliability through contracts with multiple suppliers that are geographically diverse to protect from local weather patterns. Local wholesalers and farmers markets do not have this ability to diversity and guarantee delivery.
4. Supply Source (e.g., Local, Organic)
Other important characteristics include the nature of the supply source. Some restaurants advertise that they use only local or use only organic food supply and they value and are willing to pay a premium for farm-fresh produce. Local wholesalers and famers markets have an advantage in this category.
A ranking of the major types of competitors along these key bases of competition is as follows:
The following diagram maps the competitors according to the two major attributes in the service offering:
Price Dynamics
There is a high level of competition within this industry due to the following three reasons. There is a low level of firm concentration as the industry's four largest firms account for an estimated 10% of industry revenue. Little product differentiation as most firms wholesale the same products. Low barriers to entry increase the threat of competition from firms outside the industry.
Because fruits and vegetables are perishable and customers demand reliability of supply, fresh fruit and vegetable wholesaling is characterized by relatively high inventory revenue with relatively low profit margins. This leads to high price competition.
Competitor Profiles
Dole Holding Company, Llc
The Dole Food Company was founded in Hawaii but is now an international company, which sources, markets, and distributes produce. It sources or markets produce in over 90 countries around the world. The company's fresh fruit segment accounts for 68% of the company's revenues, while its vegetable business accounts for a further 15%. Dole is the market share leader in Bananas in the US, and holds either number 1 or 2 market positions in a number of other segments. Its core abilities and sources of competitive advantage include its extensive refrigerated supply chain, its global brand presence and its diversity of sourcing locations. This allows the company to source produce from low cost nations with appropriate growing conditions and redistribute the produce to countries where it earns the highest possible margin on its product.
The company produces some fruit and vegetables itself, as well as sourcing produce from contracted growers. Its network includes over 9000 growers, to whom it provides technical agronomic assistance, who in turn produce to Dole's quality standards.
Chiquita Brands International, Inc.
Brand/Trading Name(s): FreshPoint Inc
Chiquita Brands International (Chiquita) is a multinational company that produces, distributes and markets fresh produce. The company is best known for marketing bananas, however it also markets other fresh fruits and vegetables, as well as value added salads and snacks and processed fruit ingredient products. Of the bananas marketed by Chiquita, around one third is produced by the company itself, with the rest being produced by contracted growers. Thus, within the United States, Chiquita is primarily engaged in the Fruit and Vegetable Wholesale Industry. Competitive strengths of the company include the strength of its brands, which is enhanced by effective brand management and delivery of high quality produce, as well as its ability to manage its supply chain and effectively source produce from third parties. The company relies on effective supply chain logistics, given that it sources fresh produce from the Philippines and Colombia. The company's strategic objectives presently include the delivery of innovative higher margin products. The company seeks to increase its revenues generated from value added products. This involves moving into the production of processed fresh produce, such as salads and all fruit smoothies. In addition, it is trying to extract a premium on its branded products.
SYSCO
SYSCO distributes fresh fruit and vegetables through its subsidiary FreshPoint Inc, the largest distributor of fresh fruit and vegetables in the US. FreshPoint owns about 20 distribution facilities across the US and supplies restaurants, hotels, cruise ships and grocery stores. Originally UK-based Albert Fisher owned the company until 1996. Then in 2000, the company was acquired by SYSCO after a failed merger with rival Fresh America in 1999. In the fiscal year ending June 27 2009, fresh produce accounted for 8% of SYSCO revenue.
Nash-Finch Company
Originally established in 1885 and incorporated in 1921, today Nash Finch Company (NFC) are one of the leading food distribution and retail companies in the United States. The Minneapolis-based company distributes food products through three primary operating segments: food retailing, food distribution and military food distribution. The food distribution segment accounted for about 58.3% of sales in 2008. The food distribution segment sells and distributes a wide variety of nationally branded and private label grocery products from 16 distribution centers to more than 1700 independent grocery stores and institutional customers located in 25 states across the United States. The company's distribution arm operates a fleet of 219 tractors and 722 semi trailers. In addition, the company owns and operates around 85 supermarkets in the Upper Midwest.
A Few of the Largest Farmers Markets in the U.S.
Dane County Farmers' Market
The Dane County Farmers' Market is located in Madison, Wisconsin, and is reportedly the largest farmers' market in the US. The market operates twice weekly in summer months, and less frequently in the winter. Approximately 300 vendors sell fruit, vegetables, flowers and specialty products. On average there are approximately 20,000 customers each Saturday during the summer period and approximately 150 to 160 vendors each week, of which this amount is considered to reach full capacity. The association has a membership of about 300 vendors.
Pacific Coast Farmers' Market Association
The Pacific Coast Farmers' Market Association (PCMA) is a not-for-profit corporation that establishes and maintains farmers' markets in the Northern California area. The PCMA currently has 37 farmers' markets operating, with over 250 certified agricultural producers, as well as 100 non-agricultural producers that may provide goods such as breads, fish or shellfish or specialty cheeses. All PCFMA markets are Certified Farmers' Markets; therefore all food producers are certified by the California Department of Agriculture to sell.
California Federation of Certified Farmers Markets
Currently there are around 500 certified farmers markets in the State. This is expected to continue over the short term. The Cooperative seeks a competitive advantage by marketing the regional location of the produce. Californian Produce accounts for the single largest contribution to the nation's total agricultural output, in fact according to the US census and Country Business Survey, the state of California accounts for the single largest representation of fruit and vegetable markets nationally.
Operations Plan
Our main activity is distribution; this is our core business and we want to keep a full control on this part. For this reason, all deliveries and transportation activities will be handled in house.
Our operations can be described as follows. Every week the participating farms update their inventory on our website. They indicate what goods will be available that week and in which quantities. Restaurants will place their order online, by phone or email. If they login online, they will be able to see what produce are available. They can click and add the items that they want to their baskets and proceed to checkout. At that time, an invoice will be sent to the customer, the payment is due in the next 30 days, as per industry standards. The operating system of the website then automatically send a notification to the farms to inform them of the items along with quantities that would be needed that week and the date at which they should be ready for pick-up. From our customer survey, we believe that a restaurant will require daily delivery. In these conditions, a driver goes daily to the farms and picks-up the produce prepared by the farmers. This model is valid for all farms that are within a reasonable distance from our warehouse. If farms located farther away from our warehouse want to join, we will agree with the farmer another model. He accepts to bring the goods to our warehouse or we can agree of a more convenient location within our operations area where we would pick-up the products; this will be discussed on a case-by-case basis. The driver then brings everything back to the warehouse so that baskets are prepared. In the first year we will have only one truck and one driver but in the second year, to cover the area, we will need two drivers out at the same time to pick-up all items from the farms. Once the food is in our warehouse, we dispatch the items and prepare the boxes for delivery. In the first years, two trucks will be sufficient to organize delivery and go to all our customers in a reasonable timeframe. However, as operations scale-up we might need to increase the number of trucks going out for delivery. Of course, time constraint is very important because restaurants need to be delivered in a tight time slot in order to have the food in time to prepare meals. Moreover, most restaurants will probably require delivery at approximately the same time. However, the positive point for us is that several restaurants can be located in the same area. The diagram below illustrates our operations. The lower part of the diagram describes the cash conversion cycle.
Summary of FarmFresh 2 Go Operations and cash conversion cycle
When starting the venture, the management team will take ownership of all the operations. We will organize pick-up and delivery ourselves.
In the very first stage we will need someone to help us build the website. We will hire graduate with proven expertise in web development and we will pay $5,000 for the website. The website plays the role of an online marketplace; it is therefore key to our business. We will pay an average of $1,000 a month for maintenance and updates.
After the first year, in May 2011, as the season begins and activities scale-up, we will hire an intern to help us promote our services to restaurants and increase our customer base. The intern will also help us to build our farm network. The intern will mostly assist us with all marketing activities. In year 4, we will hire a second intern during summer to help expand our operations and customer base.
As we forecast a maximum of 54 customers in year 2, we will need to hire a driver to help us with farm pick-up and delivery. We will try to hire a contractor who will work for us from 6 AM to noon. In year 3, as we think we will reach a maximum of 94 customers we will hire a second driver. We also hire two warehouse staff at that point in time to guarantee the effectiveness and timeliness of the operations, hence enabling us to maintain our competitive advantage. Management team will then entirely focus on strategy, marketing and finance. In year 4, in order to achieve a rapid growth of the business, we will hire a sales representative to help us grow our customer base. The founding team will not receive a salary in the first two years, in an effort to increase cash flows. The table below summarizes our headcount in the first five years.
As a conclusion, our operations will give us a major advantage in terms of quality and flexibility. Indeed, we will pick-up the fruits and vegetables at the farms on the day of delivery, hence guaranteeing an unmatched quality and freshness. Because all operations will be handled in house, we will have a good flexibility for our customers. We will give restaurants the opportunity to choose local produce from different farmers, and our operations will fully support this competitive advantage. Therefore, our operations will enable us to fulfill our marketing strategy by emphasizing quality and freshness.
Management Team
Edward Harvie - Founder, CEO
With over 5 years of experience working with farms, farmers' markets and agricultural non-profits, Teddy brings his passion for locally grown food and extensive industry network. Teddy is also an MBA fellow at Babson College and has focused on sustainable business models, as well as implementing sustainability strategies to various steps in production supply chains. Thanks to his work as an intern for an angel investing group and an officer of the school's venture capital club, Teddy has developed a broad network of investors in the Boston area.
Alice Fontaine - VP, Sales & Marketing
Alice is sales and marketing manager. Alice is a graduate from HEC Paris in France, ranked first European Business School. She has a background in pricing which will be valuable for FarmFresh 2 Go marketing strategy. She also has previous experience in sales and communication. Alice is a native of France, where local agriculture plays is quite developed and plays an important role in food consumption.
Olena Dmytruk - COO
Lena Dmytruk is currently a student in Babson's full-time MBA program. Prior to Babson, Lena founded several start-ups in her home country of Ukraine, including a medical uniform business and a cosmetics retail boutique. She also has prior experience with web development at MIT and as a manager at Ukraine's leading telecom company. She holds an undergraduate degree in civil engineering and a graduate certificate degree in computer science.
Marketing Plan
We will bring this service to market by targeting high end, full service restaurants, specialty markets and institutional customers. We aim to reach this audience through grassroots marketing and a direct sales force.
Understanding the customer
Our main customer will be the restaurant that promotes healthy eating and high quality food. Some restaurants advertise on their menu that they use locally grown foods as ingredients. Other restaurants advertise organic ingredients. We will seek to sell to this customer base initially as well as convert other high-end restaurants to incorporate locally grown ingredients into their menus.
The specific person at the restaurant that will be our target customer will be either the general manager or the chef. Other influencers in the decision may be the owner (if different). We are not targeting the large chain restaurants but would prefer locally owned restaurants.
In addition, to the restaurants we are going to sell produce to schools. Since it is a price competitive market we will focus our attention on parents and quality of nutrition.
Also we are going to sell to local farmers markets. We will sell all remaining food to markets. And the customer will be urban busy people that trying to eat healthy and support local farming.
Target customer profile
Restaurant: high-end, healthy-eating, trendy chef and clientele, Boston area.
In addition, we are looking for less price-oriented menu than the average restaurant. Our customer is looking for the best produce, wants reliable service and good quality control.
These are usually featured in ZAGAT surveys with strong reviews, ideally already have a purchasing relationship with some local farms, and they appreciate the value of fresh ingredients.
Pricing Strategy
We are fundamentally a distribution business operating in a perishable goods market, so our margins will be thin even though we expect to price at the high end of our competition. Our customers will be a small premium for the high quality products we sell and the reliable and convenient delivery we offer. We expect to be priced approximately 10% higher than the large food distributors such as Sysco, though our pricing will ultimately be determined by what the market will bare.
Promotion Strategy
We have limited resources and so will rely a lot on grassroots marketing and using the owners as a direct sales force. It is easy to identify customer prospects (e.g., Zagat's, Best of Boston) and many restaurants list their menus on a website. This will enable us to develop good prospect lists. We will apply a traditional direct sales approach, visiting prospects and meeting with the general manager or chef during the day. We will bring samples of food to demonstrate the quality.
One unique aspect of our promotion strategy will be to bring along farmers occasionally to meet with the chefs and show the pride and high quality they have in their produce.
We will work with customers on a one-to-one basis to ensure their supply needs are being met and help develop unique marketing programs for each of them. We intend to prioritize customer service and make it a key component of our value proposition. We believe that providing our customers with what they want, when and how they want it, is the key to repeat business and positiveword-of-mouth advertising. Because we want to develop close working relationships with our customers, we want to establish accounts in as personable a way as possible. It is for this reason that we will overwhelmingly emphasize in-person sales calls to build accounts
In addition to personal selling, FarmFresh 2 Go has identified several other means of advertising and publicity: FarmFresh 2 Go will send news releases to local media and press, as well as trade magazines to try to get product and company feature coverage in front of the eyes of our customers - as well as the end consumer. We will also work with restaurants to convert their menus to locally grown and organic ingredients, using our own data and market research data to persuade new customers.
Development Plan
The following chart describes the timeline of activities that will be performed in the first two years. It also outlines the critical milestones and time to completion. The chart is divided between the activities that need to be completed before launch and the development of the major landmarks in the following months.
The different activities outlined above are split into the following categories:
Critical risks
Highly competitive market: All segments of the market are extremely competitive especially as many big national wholesalers play in this market. The market is highly fragmented and competitors are numerous in the Boston area. Moreover, there are low barriers to entry, which makes the rivalry intensity very high. FarmFresh 2 Go will compete with a distinctive offering and value proposition. We will provide local food only, with superior quality and freshness. Our relationship with farmers will be an asset for the service we will provide to restaurants in the Boston area.
Quality control: Because of the highly perishable goods that we will be selling, we need to make sure of the high quality of the food at all times. Especially with local fruit and vegetables, that are free from pesticides and other chemicals, the quality of the produce is more variable. Restaurants are very demanding customers and we need to achieve a very high level of satisfaction; we cannot afford to have spoilt fruits and vegetables. We will enforce very effective controls to make sure that quality standards are met. All goods will be brought to our warehouse and we will prepare baskets for delivery, it will therefore leave us a last chance to control quality.
Regulatory Aspects: Delivering food to restaurants, we are playing in a risky business. The Massachusetts Department of Public Health's Food Protection Program regulates and inspects all wholesale food businesses in the Commonwealth of Massachusetts. A license is required to transport and sell dairy, bakery products and milk. We will pay very careful attention to all those regulations and we will also carry a food product liability insurance to protect us against any claim.
Sales lower than expected: Our sales level will depend on our ability to secure contracts with restaurants. As we get started and depending on the economic environment, it might be more difficult than expected to get restaurants buy-in. Despite our marketing efforts, we might be facing a slow start. The flexibility of our business model will allow us to mitigate this risk. We will only pick-up produce from farmers when we have an order. Therefore we have no spoilage and no inventory problems. We will also retain enough cash to cover our operating expenses in the first stage, even if the sales do not reach the expected volume.
Seasonality: As we distribute only local food, our business is highly seasonal. Indeed, during wintertime there is much fewer produce that can be grown locally. This will create seasonality in revenues that we will need to take this point into account. The flexibility of our organization will give us enough leeway to adapt to this characteristic of our business. For example we will hire interns for the peak in the season in spring and summer and will have reduced staff during the winter. We will also continue to provide restaurants with bread, jam and other locally made goods. As a consequence, we will stay in touch with the restaurants to make sure that they keep doing business with us in the next season.
Financial Projections and Management Discussion
Comparable Analysis
We identified two comparable companies, United Natural Foods (UNF), Inc and Sysco Corp and based many of the assumptions from which we derived some of our financial projections on data from these comparables. UNF is a distributor of natural, organic and specialty foods in the United States and carries approximately 60,000 sku's. UNF is perhaps the best public comparable we found, although they have a considerably broader product scope than we do. Additionally, UNF operates their own retail channel, and does not distribute to restaurants, but rather to supermarkets. In order to capture restaurant distribution in our comparable analysis, we also examined Sysco Corp, which is one of the biggest restaurant suppliers in the country. We used data from each comparable, as well as industry average. Which company we used depended on what company was more appropriate given the context.
Income Projections
In order to determine our income projections, we made a number of assumptions. We began by looking at average annual income for restaurants in our target segment, which is approximately $1.5 Million. We assumed $1.2 Million, as many restaurants have seen depressed revenues because of the recession and this trend is expected to continue. This translates into a monthly income of $1,200,000/12=$100,000 per month. Industry averages suggest that food purchases make up 35% of the restaurant's cost structure, which comes to a monthly cost of $35,000. We then assumed that we could supply approximately 35% of a restaurant's monthly needs during our season. Therefore, we assume each customer would provide approximately $12,000 of revenue per month. We expect this number to shrink to $5,000 per month during our off season (December-March).
Customers Acquisition, Retention and Growth
While we assume very few customers in our first year, we also expect to achieve strong month over month growth, particularly in our first year, as we focus a great deal of marketing effort on growing this initial customer base. In year one, we assume 20% monthly growth beginning in July and ending in November. While we will operate 12 months of the year, the vast majority of our products are only available from June to November, so our customers and revenues from December through May will be down considerably. With respect to retention, we assumed that at the beginning of each new season, the majority of customer would be retained (65%), but that many customers would have to be re-acquired. This is based on the experience of several community sponsored agriculture programs in Boston, who retain somewhere between 50% and 80% of customers from the previous season. While these customers are individuals and families, not restaurants or markets, reestablishing the customer base each year is a key challenge that many seasonal businesses face.
Cost Assumptions
A number of our cost assumptions were driven by our comparables and industry averages. We estimated the amount of space we would need for our warehouse at 4000 sqft. This would ought to provide ample space in the first year (or even two), or perhaps beyond. Because of the short shelf life of our products, inventory is moved very quickly, regardless of whether or not it is sold. Therefore, less warehouse space is needed than would be required for non-perishable items, which can be held for weeks in inventory. Utilities were estimated on a per square foot basis at $125 per 1000sq ft based on the recommendation of an online commercial real estate resource (we rounded up from $475 to $500).
We determined the cost of capital equipment to be $60,000 ($35,000 for a new Isuzu Box Truck and $25,000 for warehouse stock tables, desks, computers and other equipment). Marketing costs were difficult to estimate. The initial marketing is likely to be expensive - we assumed $5,000 upfront, with an average monthly cost of $500 to sustain some marketing efforts throughout the year.
In general, we assumed an operating margin of approximately 3%, which is well below the industry average of 5.2% (Sysco generated margins of 5.8% in 2008). We discounted this margin because we lack the scale - especially at the outset - of many of our more established competitors. Moreover, our products are more expensive to produce than factory farmed food, and so this lower operating margin is also a reflection of not just less operating efficiencies, but also a lower gross margin.
Cash Needs
Our company is highly seasonal, which often spells disaster for many companies due to the lack of cash inflow during the off-season. In our first year, this seasonality will be compounded by considerable cash outlays for initial capital investments and relatively few customers. As we build our customer base, we will be generating cash, and favorable payable terms will allow us to maintain a sustainable cash cycle during the season. We assume net 30 days on payables from the time we take delivery of inventory, and net 30 days on receivables from the time an order is invoiced, which gives us a positive cash cycle. Nevertheless, we will require a line of credit to sustain our business during the offseason. Besides informal and institutional investors to provide seed capital, we will here are a number of other options for financing agricultural ventures. In consulting with the Massachusetts Federation of Farmer's Markets, we have identified several key sources of funding whose terms and payment structures reflect the unique challenges of agricultural businesses, such as seasonality. Some of these options include lines of credit and SBA-guaranteed loans from Farm Credit Unions. We have spoken at length with loan managers at First Pioneer Farm Credit Union to determine eligibility and viability of various financing options.
