Post on 04-Feb-2022
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.
Current Market Situation (2)
Global Market Leaders
Current Market Situation (3)
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
Current Market Situation (4)
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
South Caucasus Market Potential (2)
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:
South Caucasus Market Potential (3)
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
South Caucasus Market Potential (4)
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.
Raw Material– Potato (2)
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.
Raw Material– Potato (3)
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).
Raw Material– Potato (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