At first glance, creating a value-added business may seem a lucrative way to increase profits and employ family members, but the road to success can be filled with potholes. Below, our experts and experienced value-adders list the dangers, and provide advice on how to avoid them.
1. Being star-struck by your own product
Gary Morton, a Nova Scotia ag business consultant with 25 years experience says the mistake he sees most often starts when producers are product driven, not market driven. “Too many are in love with the concept but haven’t validated the market,” he explains.
“Don’t trust family and friends,” Morton continues. “The only opinion that counts is the person giving you money to buy it.”
Morton says he’s seen people spend hundreds of thousands of dollars to develop a product that has no market. Getting funding isn’t necessarily validation of an idea, he adds.
2. Not knowing your real costs
John Jaques owns Sunshine Farms in Thamesville, Ont., which produces and sells 23 kinds of pickles. He says that when he is approached by someone wanting him to process a product using their grandmother’s recipe and get it to market, they rarely have an accurate picture of the costs. Jaques says that when he goes through a cost of production analysis with them, they are usually shocked. If they’ve been making pickles on their kitchen stove using cucumbers from the garden, they likely haven’t accounted for the cost of insurance, electricity, labour, buying the cucumbers, storage or transportation. “The actual costs may work out to more than what they’ve been selling them for,” Jaques says.
Jessica Kelly, the Ontario agriculture ministry’s program lead for direct farm marketing calls this “farmer math.”
“Farmers laugh when I say this because they know it’s true,” Kelly says. “Too often they don’t put a cost on their labour or using their vehicle.”
The cost of certification alone can add up to tens of thousands of dollars. Jaques is certified for organic, kosher, and the On-Farm Food Safety Program, and is working on Safe Quality Food (SQF) certification. Jaques says “people’s mouths fall open when I tell them the costs involved in obtaining these certifications.”
Once you go beyond selling at the local farmers market, there are other fees that value-adders may not be aware of. Jaques says he regularly receives invoices for thousands of dollars from grocery stores charging him for in-store promotions, listing fees, and breakage. “If they drop a case in the warehouse, I get an invoice,” he says.
He also pays a distributor and brokerage fees to ensure his product is actually on the store shelves. “If you’re going to take that next step, there are likely going to be a lot more costs than you anticipated,” he warns.
A mentor can help you avoid some of these pitfalls, says Morton. Other farmers who have gone down this path can save you a lot of time and expensive mistakes, he says.
Kelly agrees. In her experience, most value-added business owners are keen to work together and help each other out. “You can’t put a price on that kind of advice.”
Jason Persall, owner of Persall Fine Foods in Waterford, Ont., says while farmers shouldn’t underestimate what they are capable of, they should focus, plan and not be afraid to ask for help.
3. Insufficient research
Kelly sees too many farmers who haven’t done enough research into what will be involved in producing and selling their product. What impact will zoning have on your value-added business? What are the insurance implications of having people come on your property? Will your value-added business trigger a property tax increase?
Also be sure you do thorough research into your product, and into your customer too. Morton sees too many value-adders who don’t really understand who their customer is.
It helps if you go through a process to put your thinking into actual words. “It’s important to understand what problem it solves,” Morton says. Develop a value proposition, he recommends. This is a single sentence that explains why someone would want to buy your product.
Such a statement will help keep you on track, Morton says, and it will be a touchstone for making critical marketing decisions, such as packaging and points of sale.
4. Underestimating the complexity of value adding
Value adding requires a different skill set than primary production. “Be prepared for a big learning curve,” says Janet Horner, a hog farmer who ran a full-service catering company for 30 years. Horner currently serves as executive director of the Golden Horseshoe Food and Farming Alliance for Greater Toronto, which has a goal of growing the second-largest food cluster in North America through a collaboration of municipalities, farmers, researchers and the food industry.
Value adding often requires skills that farmers don’t already have, such as direct marketing, social media, customer service and human resource management, explains Horner. “Farmers are great ‘do-it-yourself’ folks who can usually find a way to fix anything around the farm, but that may not apply to a value-added business. You may need to hire technical expertise in food science or technology.”
Says Horner: “Many farmers are comfortable with a barn full of livestock but should never deal directly with people.”
5. Not scheduling downtime
With two enterprises on the go, especially if one of them is dealing with the public or direct marketing, there can be a tendency to work seven days a week. But watch out. It can be a recipe for trouble, cautions Horner. She recommends scheduling at least one day a week when you can renew your energy.
6. Not having a plan for how to get out
Many value-added operations are located on-farm, but this can be a problem when you want to sell, says Horner. “If you try to sell the operation, you’ll be selling a business that includes primary production, the secondary business and your home.”
Farmers may be wise to locate the value-added operation away from your home farm, she says.
7. Not knowing when to pull the plug
Even if you do the market research and spend the necessary time and money to develop your product, your value-added business may not be successful, says Horner. “Know when to pull the plug before you drain your original enterprise. Have qualified advisers, and keep them informed of your business successes and failures.”
Biggest value — add blunders “online”
Rebecca Ruddle is vice-president of social media management at a boutique social media company called Succinct Social Media in Toronto. The company specializes in farm and ranch-based businesses. (Ruddle hails from a farm in Creemore, Ont., while the company founder is from a farm in Claresholm, Alta.) Below, Ruddle shares the big tech mistakes farmers and value-adders make:
- Having a dated website that’s hard to navigate and doesn’t adjust to mobile devices.
- Not realizing the importance of having a presence on social media. Ruddle says it’s the best way to connect to people including new prospects, as well as bloggers and journalists who will write about your product. “It’s also the first place people will go to contact you with praise or problems — social media has become crucial for customer support.”
- Pushing product with social media. Your website is your store, Ruddle says. Social media are for interacting. “Social platforms are for people to engage with you and get to know you so they will trust you. Use your authentic voice and have fun.”