project potato chips

Project Potato Chips Zurab Lalazashvili

Vano Zhuzhunashvili

Nizan Weisman

The Study

Potato Chips – The Product

Production Process

Current Market Situation

South Caucasus market potential

Market Penetration

Risks and Threats

Plant Configuration

Equipment

Plant Investment

Raw Materials

Financial Projections

Benchmark

Contents

BDO LLP was engaged to examine and assess the feasibility study of a

new potato chips plant in Georgia.

Currently, the Georgian potato chips market is mainly dominated by

foreign producers, especially from Germany and Turkey.

The Study

Meetings and discussions with experts and directors:

Industry worldwide experts.

International specialist for potato growing - Mr. Isaac Tzarfati,

Agronomist.

Mr. Italo Pozzi, Area Manager, FENCO Ltd.

Key roles holders at the leading companies along the potato chips supply

chain, such as: Populi, Goodwill, food service & Mgroup.

The Study

The Study (1)

4

Other sources

Snyder's Lance financial statements for the year ended 31 December, 2010. sanat-o-tijarat.org/Feasibilities/317AgricultureFeasibility.pdf

Inventure Foods Inc. financial statements for the year ended 31 December, 2010. Multitest LTD- medical laboratory

Golden Enterprises Inc. financial statements for the year ended 31 December, 2010. Pringles- (www.pringles.com)

"Potato- a world production, a European business", 2010. Lay's- (www.lays.com/)

Agro products- (www.agriculturalproductsindia.com) Bickels- (www.bickelssnacks.com/)

Nutritional Information of potato chips (www.answers.com/topic/potato#ixzz1jbbaiiTH) Golden Flake- (www.goldenflake.com/)

www.enotes.com/potato-chip-reference/potato-chip Sowvegetables- (www.sowvegetables.co.uk/crop_rotation.htm)

High beam Business (business.highbeam.com/industry-reports/food/potato-chips-corn-

chips-similar-snacks)

Central Intelligence Agency – (www.cia.gov/library/publications/

the-world-factbook)

PR web-(www.prweb.com/releases/snack_foods_salted_snacks) Mgroup- (www.mgroup.ge/)

Potatopro- services for the potato industry (www.potatopro.com) Goodwill-(goodwill.ge/)

Market research report "Potato crisp, Snacks Production in the UK", SIC C10.310,

December 2011. Populi- (populi.ge/)

www.livestrong.com/article/160846-what-is-corn-oil/ Eric Schlosser- "Fast Food Nation" Houghton-Mifflin, 2001.Food and beverage markets in Russia

(www.kpmg.com/RU/en/IssuesAndInsights/ArticlesPublications/Documents/Food-and-

beverage-survey-2011.pdf)

Sources:

Potato chips are:

Deep fried or baked thin slices of potato.

Slice thickness is usually 55/1000 of an inch.

Sold in bags of 50g-500g.

Predominant part of the snack food market, can be used as an appetizer,

side dish or snack.

Potato Chips – The Product

Washing – cleaning and de-

stoning.

Peeling - peel removal.

Slicing – cutting into

paper-thin slices.

Drying- de-watering of the

processed product.

Frying - in boiling oil.

Flavoring- powdered seasonings.

Packaging – forming pillow bags

of 20gr-500gr.

Potato Chips – Production Process

Current Market Situation (1)

The Global Salty Snack Industry

The "salty snack" industry includes mainly potato chips, corn chips and

tortilla chips.

The global savory snacks market grew by 5.3% in 2009 to reach a value

of $67,928.3 million who represents approx. 7,892.5 million kilograms.

In 2014, the global savory snacks market is forecasted to have a

volume of 9.3 million ton, an increase of 18.2% since 2009.


Global Market Leaders


Currently, there are only few small local producers of potato

chips in South Caucasus.

The main market share is captured by imported products.

In countries with local production, the product is sold to retailers

directly or through distributors.

Retailers include mainly supermarkets and grocery shops.

Chain of Supplies


South Caucasus Market Size

The potato chips plant will be established in Georgia, and will sell its

products to both local market and customers in Azerbaijan and Armenia.

There is number of importers and distributers, each one's volume of

trade seems low.

There are no significant investments in promotion or brand efforts.

local production, if any, is of low quality.

We assume that current local market volume of trade is less than total

of 2,000 ton per year, of which Georgia is less than 1,000 ton per year.

South Caucasus Market Potential

With the advent of globalization, South Caucasus eating habits are

changing to emulate those of the West.

The potential market size of fast food products is increasing at an

exponential growth rate.

It is assumed that potato chips consumption is closely linked to changes

in standards of living, as reflected in countries GDP.

12

South Caucasus Market Potential (1)

4.6

3.4

2.1

1.6

0.5

1.2

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0

1

2

3

4

5

GD

P Pe

r C

apita

Kg

Country

Consumption (Kg per capita) GDP

In order to estimate local market potential we used linear regression

on potato chips consumption data presented in different countries

GDP per

Capita (USD)

Population

in millions

Consumption

Potential (in tons) %

Consumption Potential per

capita (in Kg)

Georgia 4,900 4.59 1,875 17% 0.41

Azerbaijan 10,900 8.37 7,615 70% 0.91

Armenia 5,700 2.97 1,412 13% 0.48

16 10,902 100% 0.68


in current GDP level, potato chips estimated average potential

consumption is 0.68 Kg per capita. Total potential consumption is

approx. 11,000 tons.

Segmentation by countries is as follows:


Differentiating the product from imported brands by adding flavors to the

produced potato chips that reflects local market special preferences.

Private label brand strategy together with slow manufacturer brand

development.

High quality potato chips in international standards of quality due to

state of art machinery and knowhow.

Strict quality assurance system.

Excellent customer service.

Penetration Strategy


According to our estimations, in coming years the South Caucasus market

will grow by 5% per year to 11,500, 12,000 and 12,600 tons, of which the

Georgian market size is estimated at 1,970, 2,070 and 2,170 tons in

2012, 2013 and 2014, respectively.

Penetration Strategy

Marketing Strategy

Creating a brand name that would allow differentiating the

company from competition.

Working on creating a brand name image.

Increasing sales turnover.

Contracts with leading distributors in Azerbaijan and Armenia.

Securing reliable sources of raw materials.

Risks and Threats

Strengths

Adapting final product tastes to local preferences

can create significant competitive advantage on

imported brands.

Shorter lead time and no need for transportation

expanses will create advantages over import

alternative.

Using modern and new equipment can reduce

production costs.

Sales in local currency are always

preferred in local market.

in Georgia.

Opportunities

Lack of high quality local production in south

Caucasus market (Georgia, Azerbaijan and

Armenia).

With improvement in the living standards and

changed life style, the demand for potato chips is

bound to register a considerable boost.

Weakness

Currently, there is no reliable source of

MAJOR raw material (potatoes).

Lack of technological knowhow and

marketing experience.

Need to build a brand name, while the

competitors are known.

Need for initial high investment.

Need to recruit and keep Potato

Chips production experts.

production experts.

Threats

Failure in providing raw material (Potatoes)

of required quality and quantity.

Entrance of new global players to the local

market.

Unforeseen technological, marketing,

financial and organizational interruptions

that will add costs and delays to the original

budget.

Plant Configuration

Total estimated area of 8,000 SQM is divided as follows:

4,800 SQM are roof covered.

3,200 SQM are open area for loading, open storage and parking.

One production line will run 250 days per year, 20 hours a day.

Production of 2,500 tons of finished product per year.

This level of production will process 20,000 tons of raw materials

Plant Configuration (1)

19

Total estimated area – 8,000 sqm of which 4,800 are roof covered and 3,200 sqm is open area for loading, open storage and parking.

1 2

6

3

4

Raw material selection area Raw material storage area (potatoes) Final product distribution area

4

5

Production area

7 6

Offices area

Compressor area

Equipment

Services provided by main suppliers are as follows:

Engineering

Erection

Commissioning and know-how

Company name Country Web Site

Fenco Italy http://www.fenco.it/

Kiremko Netherlands http://www.kiremko.com/

Economode India http://www.economode.in/

Tummers Methodic Netherlands http://www.tummers.nl/

Flo Mech UK http://www.flo-mech.com/

Plant - Investment

Investment in Potato Chips plant establishment USD

A - Preparation Line 1,400,000

B - Packing Line 1,175,000

General Services 200,000

Steam Generator 400,000

Compressed Air Group 30,000

Power Distribution panel 200,000

Laboratory 120,000

Sub Total 3,525,000

Transportation of equipment 200,000

Land and civil engineering 1,200,000

Distribution tracks 150,000

Reserve (5%) 250,000

Total investment 5,325,000

In order to produce commercial quantities of high quality Potato chips,

raw material supply has to meet two basic requirements:

Quality - potato type must satisfy specific characteristics:

Quantity - continuous and reliable supply of large quantities of

specific type of potatoes.

Raw Material– Potato (1)

Current situation in Georgia:

Georgia's agriculture in its current stage cannot guaranty a reliable

supply of appropriate raw material:

Quality - sample of 12 types was sent for laboratory testing and none

was found suitable for Potato chips industry production.

Quantity - local growers produce only an average of 5-10 tones of

potatoes a year.

Potato Price for industrial use is $ 300-350 per ton.


Solving this raw material issue is a crucial condition before moving

forward with plant establishment.

The proposed solution is establishing large farms that can produce

10,000 ton of appropriate type per year.


In growing potatoes, the same piece of land can not be used year

after year. Thus, four year cycle “crop rotation” should be created.

The optimal yield of potatoes is 40 tons per hectare a year. In order

to produce 10,000 tons per year, a bed of 250 hectare is needed.

The total farm should be at least 1,000 hectare in 4 sections (250*4).


Year 1 Year 2

Year 3Year 4

PotatoesCow feed

silage

CarrotWheat

Crop Rotation

Frozen French

Fries plant

Potato Chips

plant

Dairy farm

Sorting & Packing Facility

Potato seeds

farm

Independent

farmers

Carrot

Processing

plant

Agricultural Complex

Modern Potato & Carrot Systems

27

Marketing

Harvest & Storage

Inputs & Services End Users

Potato & Carrot

FarmingMechanized

Harvesting

Training &

Extensions

Cold Storage

Other Inputs

Consumers

Institutional

Restaurants

Sorting & Packing Facility

Fresh Markets

& Retailers

Industrial

Processing

Seeds

Raw Materials - Oil

In Georgian market, both local and imported vegetable oil are

obtainable. Average prices for cooking oil per 1 litter are as follows:

Corn oil is extensively used in Potato Chips production process.

The main local producer of cooking oil is Batoil.

Import of oil is mainly from Ukraine, Azerbaijan and Russia.

Financial Projections - P&L

USD in thousands Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Potato Chip Sales, ton 1,100 1,250 1,600 1,850 2,100 2,400

Potato Chips Revenues 8,000 9,750 12,400 14,300 16,300 18,500

Average price per ton 8 8 8 8 8 8

COGS:

Potatoes 1,400 1,650 2,100 2,450 2,800 3,140

% of sales 17% 17% 17% 17% 17% 17%

Oil 725 900 1,100 1,300 1,470 1,660

% of sales 9% 9% 9% 9% 9% 9%

Flavours 320 390 500 570 650 740

% of sales 4% 4% 4% 4% 4% 4%

Manufacturing 2,970 3,470 4,150 4,650 5,180 5,710

% of sales 37% 36% 33% 33% 32% 31%

Total COGS 5,415 6,410 7,850 8,970 10,100 11,250

% of sales 68% 66% 63% 63% 62% 61%

Gross Profit 2,585 3,340 4,550 5,330 6,200 7,250

% of sales 32% 34% 37% 37% 38% 39%

S, G&A 2,000 2,440 2,730 3,150 3,260 3,700

% of sales 25% 25% 22% 22% 20% 20%

Fin. Expenses 213 213 197 180 162 142

% of sales 3% 2% 2% 1% 1% 1%

Profit before tax 371 687 1,623 2,000 2,778 3,407

% of sales 5% 7% 13% 14% 17% 18%

Ebitda 964 1,280 2,199 2,559 3,319 3,929

% of sales 12% 13% 18% 18% 20% 21%

NPV Calculation

At a rate of 15% NPV for 20 years is expected to be USD 6.1 M.

IRR for 20 years is expected to be 27.5%.

Investment payback period is 7 years.

Financial Projections

Discount Rate 15%

IRR 27.48%

PBY 7

NPV 6,140

Financial Projections - Cash Flow

USD thousands Year -1 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

Cash flows from operating activities

Profit before tax – – 371 687 1,623 2,000 2,778 3,407

Investment in working capital – – (1,600) (155) (477) (342) (360) (396)

Depreciation – – 379 379 379 379 379 379

Net cash from operating activities – – (849) 911 1,525 2,037 2,797 3,390

Purchase of property and equipment (3,195) (2,130) – – – – – –

Net cash from investing activities (3,195) (2,130) – – – – – –

Cash after investing activities - (3,195) (2,130) – – – – – –

Shareholders investment 1,598 1,065 – – – – –

Debt 3,352 201 – – –

Loan repayment – – – (270) (286) (303) (321) (340)

Cash flows from financing activities 4,950 1,266 – (270) (286) (303) (321) (340)

Net increase (decrease) in cash and cash equivalents 1,755 (864) (849) 642 1,239 1,734 2,476 3,050

Balance of cash and cash equivalents at beginning

of year – 1,755 891 41 683 1,922 3,656 6,132

Balance of cash and cash equivalents at end of year 1,755 891 41 683 1,922 3,656 6,132 9,182

Benchmark

Key statistics of the snack food main public players (as of 2010)

The snack food Sector has to meet the needs of its customers in a competitive environment.

The sector financial results are impacted by changes in raw material and energy costs.

Average Gross Profit and Operating Profit to Revenue ratios are 36% and 4%, respectively.

The Sector market leaders generate a positive cash flow from operations, with an average

EBITDA to revenue ratio of 7%.

NPV Calculation – potato 100%

import

At a rate of 15% NPV for 20 years

is expected to be negative.

Investment payback period is 13

years.

Financial Projections - Scenarios

Discount Rate 15%

IRR #DIV/0!

PBY 13

NPV (5,814)

NPV Calculation – potato 50%

import

At a rate of 15% NPV for 20 years

is expected to be USD 165K.

IRR for 20 years is expected to

be 15.39%.

Investment payback period is 9

years.

Discount Rate 15%

IRR 15.39%

PBY 9

NPV 165

Discussions