The due diligence of value-added expansion

Workers from KREBS Farm work together in the kitchen. Photo courtesy of Mary Macdonald

by Sonja Heyck-Merlin

Mary Macdonald recently discussed value-added production and the product development lifecycle during the University of New Hampshire Extension 2021 Direct Marketing Conference. Macdonald is the co-founder of Genuine Local located in Laconia, NH.

Genuine Local emerged when Macdonald’s family-owned catering business decided to start producing and marketing barbecue sauce and could not find a production facility. Genuine Local helps fill this void, providing services for value-added producers. Producers can rent the production facility and equipment or have Genuine Local supply the labor for a product. They also provide business and product development.

Macdonald defined value-added products as those that help avoid waste by converting planned or surplus crops into finished products that can extend the selling season. For growers interested in diversifying their business with a value-added product, Macdonald said the first step is to brainstorm a concept. The concept development process will be a time of researching and questioning, and she suggested answering these types of questions during this phase: Are you solving a problem for somebody? Is there demand for what you are producing? Is it a brand new product or something people are familiar with? Does it meet the needs of your target customer? What’s your market size? Who are your competitors? Where will you sell your product?

The next phase is to develop a prototype. “A prototype is a benchtop sample,” Macdonald said. “It includes all the details that you need in order to manufacture your products.” She suggested taking a few minutes to write a detailed description of the potential product. “What is it that you make? What are the ideal ingredients, materials and process for making it? For example, do you need to roast your tomatoes on the grill for six hours the day before you make salsa? Considering these things and pulling them all together is really important in maintaining the identity of the product you want to make.”

A prospective producer must  determine where they will process their goods. They must also choose what type of packaging they will use, where they will purchase additional ingredients, how and where to test the safety of their products and how to market and distribute their goods. Converting recipes into formulations is an important component of the prototype phase. A formulation uses a weight- and percentage-based formula, whereas recipes tend to be volume-based. “We call it a formula because we want to stress how important it is to do everything precisely the same way every time. It goes to safety and consumer expectation,” Macdonald said.

Once a recipe is converted to a formulation, scaling up the formulation is not as simple as quadrupling it. According to Macdonald, the formulation will not necessarily use the same amount of salt or sugar as it is scaled up, for example. After scaling up a formulation, Macdonald said producers need to compare the original prototype with the scaled version to decide if the changes in taste and appearance are acceptable. “They’re not going to be the same,” she stressed.

In the prototype phase, a producer must also complete a cost assessment to determine the unit cost of each good. “It’s critically important to identify what the true costs are and capture all of them and to include this information in the business plan,” Macdonald said. The cost assessment should include development costs (the costs incurred while researching and developing the new product). Some development costs are incurred during the pre-production phase and include the cost of food safety training or legal and professional fees associated with establishing the business framework. Numerous direct development costs exist – mainly putting a value on the time devoted to developing the product, packaging, labeling and the market.

Macdonald recommended minimizing the product development time in order to optimize costs. “Time is money,” she said, “and few of us have enough of either.” Rather than develop their own formulations, Macdonald encouraged producers to reach out to universities and the USDA, which have tested and approved formulations. “Do what you do best and find other people to help you do that which you don’t,” she said. Extension, state ag agencies and SCORE are other resources to consider.

After the intense planning and preparing required by the prototype phase, producers must decide how much they will charge the consumer. It is vital, Macdonald said, that the pricing includes payment to the producer. She also advised that it’s easier to drop the price than to try to increase it.

Macdonald said that a good idea is only the first step in developing value-added products. Producers must then complete their due diligence before they can take a product to market – do research, view the opportunity from all angles, be mindful of food safety and be aware that changes will occur as the product is scaled up. In Macdonald’s opinion, it is well worth the effort. “Value-added products have a huge value beyond the monetary. They can extend your growing season, diversify CSA offerings and help you create an inventory, which is a tax advantage at the end of the year,” she said. “You can avoid loss from crop surpluses and create opportunities for collaboration.”

2021-12-27T12:08:58-05:00January 5, 2022|Grower, Grower East, Grower Midwest, Grower West|0 Comments

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