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MBA Urban Farming Sample Business Plan

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This report is prepared for the Social Purpose Business course at Schulich School of Business as a practice to apply the social entrepreneurship business model planning methods.

Published in: Business, News & Politics

MBA Urban Farming Sample Business Plan

  1. 1. NMLP6350 Team Project – Part 2 Business model valuation: “Aquaponic Hotspot Business Model” Tuesday, March 20, 2012 By Group D: Miriam Aguilar (211991031) Satyameet Ahuja (211334778) Suzanne Pragg (203062932) Hiroyasu Sudo (211145257) Peter Wambera (210611788)
  2. 2. Brief Description of the New Business ModelSince we have changed our business model from the previous report, we summarize the newbusiness model as a preface of this report.Customer Pain:  Building owners have anxiety as to their rent income  People living in Toronto ‘food deserts’ have barriers reaching fresh foodBusiness Model (Multi-Sided Platform):  Set up an aquaponic hotspot in a Toronto food desert  The units would be modular (and they do seem to be)  Hotspots could grow in intensity, but also diversity of locations  We would start with 1 hotspot and see the growth in intensity and add locations  The units would be set up in or around apartment buildings in Toronto food deserts  Partner with progressive building owners who purchase aquaponic equipment  So capital costs of individual hotspots carried by owners  Owners would do so to make their buildings more attractive to renters, and down the road, allow them to charge higher rents  Our business brings the farming and retailing expertise. We manage the units and sell food products to building occupants, who currently do not have easy access to fresh food  We would seek to have at least 1 staff from each building, but true farming expertise resides with our company 2
  3. 3. Contents Target Customer Analysis............................................................................................................... 4Market Analysis .............................................................................................................................. 5The Competition ............................................................................................................................. 6Risk ................................................................................................................................................. 7Market Strategies ............................................................................................................................ 8Organizational Infrastructure .......................................................................................................... 9Legal Considerations ...................................................................................................................... 9Financials ...................................................................................................................................... 10Exit Strategy: ................................................................................................................................ 11Bibliography ................................................................................................................................. 12 3
  4. 4. Target Customer Analysis Who are they? : As stated in the business model overview, we will set up aquaponic hotspots bypartnering with building owners. Our criteria for selecting the buildings will be to look forbuildings in Toronto food deserts, which refers to areas with no healthy food retailers within a 1km radius (Martin ProsperityInstitute, 2010). Figure 1 showsthese areas in Toronto. Theseareas are characterized as low-income families. This impliesthat the reason why there are nohealthy food retailers is that thepotential customers in theseareas are not attractive for theretailers. In addition, the factthat these areas are not servedwell by the subway lines mayhave resulted in the deserts.What are their behaviors andpriorities? : To analyze our Figure 1target market, the building owners in the food desert, we used a method called‘netnography’, which was pioneered by R. Kozinets, professor in marketing atSchulich School of Business. By conducting ethnographical research in the online space, thismethod enables us to figure out real consumer behavior, as opposed to somewhat biasedconventional methods. The key findings of our netnography research on the concerns that thebuilding owners have are: i) politics (especially taxes), which is the most frequently mentionedwords in the online BOMA (Building Owners and Managers Association) community.(Socialmention.com, 2012); ii) rent prices including the renter’s credits, real estate marketinformation, and factors that affect their rent prices, which are the main topic of the most viewedblog in this online community, “Property Management Daily”. (Technorati, 2012); and iii) 91%of the owners use social media as a business tool (Toronto, 2011).What is their need/pain? : Based on the netnography research, we concluded that the pain ofthe building owners is described as ‘anxiety’. Since they were directly affected by the financialcrisis in 2008, they feel insecure about their income. This is the reason why they are especiallyconcerned about the policies and the rent prices, and why they are eagerly trying to use the newtools for their business.What is their willingness to pay? : We conducted a questionnaire survey to figure out thebuilding owners’ willingness to pay for our product, however since it is hard to predict the ROIof this investment, we could not receive any accurate information. Instead, we decided tomathematically figure out the incentive of the owners. As the volatility of their income is themajor concern, we calculated the standard deviation of the rent prices in Toronto, σ=43, based onthe rent prices. (Kinnea, 2012) This means that the owners’ income may change by $43 permonth with 95% of probability. This risk amounts to more than $511 per year. As we assume 4
  5. 5. that this investment increases their rental revenue and we will take care of it for two years, theowners can feel relieved from the anxiety that arisen from the risk of $1,022 per the two yearperiod. Since we will target building owners, whose buildings presumably have at least 20 rentalspaces, we conclude that $20,440 ($1022 x 20) is fairly reliable number to estimate thewillingness.Market AnalysisSize and Place: The potential market is quite large since we aim at all the food desert areasshown in Figure 1. According to Toronto Star, 49% of the population lives in these areas inToronto (Toronto Star, 2010). Comparing this fact with the numbers in Figure 2 as well as theincome level shown in Figure 1, we could find that these numbers agree with each other, whichimplies that 40%-50% of the GTA population will be our target. In other words, 2.5-3.0 millionpeople are our potential customers.Figure 2 – Source: http://www.toronto.ca/demographics/pdf/profile_income2004.pdfCharacteristics: We conducted a survey to figure out to what extent people in the target marketare interested in our healthy products. The average household income level is $37,600, which isfairly equal to the national income level. The sample size of 30 represents +/- 17.85 of accuracywhen projected to 2.5 million people (and this range is correct at 19 times out of 20 times).Figure 3 shows that 53.3% of therespondents answered that they do notlike the food quality of the stores whosemain target market is the lower incomehouseholds. This number is the samewhen we extracted the people whosehousehold income is less than $15,000.Thus, we can expect at least 850,000highly potential customers [6 millionpeople x 40% desert area population x(53.3% - 17.9%)]. Furthermore, we seethe convenience we brought moreattractive to women, who are Figure 3presumably the main purchaser of foodproducts, since it allows them to save time to go more than 1km for grocery shopping whiledoing other housekeeping tasks such as babysitting and/or caregiving for elderly people. 5
  6. 6. Entry barriers/ substitutes: Barriers to entry is considered to be low. We will elaborate on thisissue in the risk section. As shown above, people are seeking good quality substitutes to thecurrently available foods. Thus, the threat of substitutes is negligible..Growth Trend: According to a community research conducted by University of Toronto, it isforecasted that the low income population, whose incomes are more than 20% below the average,will grow by 16.4% by 2020. (Hulchanski, 2007) This group is not an attractive segment for foodretailers, or even if so, the quality of the products provided to this group will be questionable.Therefore, the food desert will continue to exist, and most likely to grow at a fast pace.The CompetitionIn terms of an organization selling aquaponics systems to low-income, high-density buildings inToronto, there would appear tobe zero direct competition. List of Aquaponics System ProvidersAquaponics is a relatively new • Aquaponic Gardening (Boulder, CO, USA) concept, with little traction in • Backyard Aquaponics (Success, W Australia) Canada. There is no local • DIY Aquaponics (Orange Park, FLA, USA) aquaponics Toronto chapter. A • Friendly Aquaponics (Honoka’a, HI, USA) self-help aquaponics website • Growing Power (Milwaukee, WI, USA) exists in Edmonton, • Nelson + Pade (Montello, WI, USA) www.edmontonaquaponics.org, • Practical Aquaponics (North Maclean, QLD, Australia)however there is no similar • S&S Aqua Farms (West Plains, MO, USA) Canadian site. At this website, • Urban Aquaponics (Bundamba, QLD, Australia) almost all commercial (or retail) Figure 4links suggested to purchaseequipment are in the US or Australia (see Figure4).To summarize, the commercial and retail aquaponics market is in nascent phase, with no Torontoor Ontario presence, and with a fractured US presence. There would be appeared to be no threatof any of these suppliers competing with our business.Other urban farming organizations, such as Foodshare, or Young Urban Farmers, would also notpost a serious competitive threat, as they would either welcome our entry into the market, or findthemselves serving entirely different markets.Similarly, the issue of food security is so broad, the size of Toronto’s food deserts so large, thatany solution will have hundreds of components. The likelihood of any one solution in the marketcompletely addressing the social problem is essentially zero.Lastly, there would seem to be no credible competitive threat in terms of building improvement.A building owner looking to improve his/her building can do so in innumerable ways, so oneimprovement (e.g. better water pressure) does not preclude the addition of other improvements,such as an aquaponic system.In conclusion then, the key assumption would be that competition is either non-existent, toofractured or non-competitive, and research would support this assumption. If this business is tofail, it will not likely be because we are out-competed. 6
  7. 7. RiskThere are multiple kinds of risk associated with this business plan. It is important to be aware ofall potential sources of risk before undertaking this venture so that every possible action can betaken to mitigate these risks and increase the viability of this business.Potential Entry: The first source of risk would be from the potential entry of firms using similarbusiness models. Though aquaponics itself and this business model specifically are new inToronto it can be easily replicated by those with access to the correct technology and thetechnical knowledge to be able to use and maintain the units adequately. Though the businessmodel (and the aquaponic units themselves) is new in Toronto there is nothing proprietary aboutthe technology and, as a result, there is not much our company could do to prevent anotherbusiness from sourcing and selling their own units to interested parties within the samegeographic market. Naturally, competition in the market would drive product prices down and, infact, there is no way of ensuring our company is not undercut by those entering the same market.However, we should try to differentiate our business as much as possible. One way this is done isto utilize the first mover advantage. This allows us to tap into the ‘blue ocean’ in which we canexpect high profitability and high growth. As long as we can grow rapidly, we can remaincompetitive to some extent even if there are low-price competitors since it is difficult for thebuilding owners to replace the units once installed. In addition, we could switch our supplier to amore cost-effective supplier if the competition intensifies.Wrong Prediction: Another huge source of risk would be the chance that aquaponics – or theway we have presented it to potential customers through our business model – would not gaintraction among Toronto consumers. This technology is unlike any that exists in the Torontoagriculture market currently and there is a chance that will not be embraced by building ownersin general. If for whatever reason the technology is rejected, then the business model as it existsnow would inevitably be a failure. In this case, we should immediately cease our business model.Therefore, we should constantly pay attention to the inventory level so as to sustain the liquidity.Supplier: At present, our business plans to import these aquaponic units from a supplier in eitherthe US or Australia. The risk here is the chance of this supplier going out of business/bankrupt.Since the commercial and retail aquaponics market is in nascent phase, there is a chance that wemay be left with no supplier in the case our supplier goes out of business on short notice. Anydelay in sourcing these units (or parts or accessories for the units) could have a negative effectnot only on sales but on customer relationships.Currency: As we purchase the aquaponic units from abroad, our procurement activity is alwaysexposed to currency risk. Although a conventional wisdom tells us that we could entirely hedgethis currency risk by using currency forward contracts, it is not easy for us to implement becausewe also need to keep the inventory level low. In other words, we would have to have so manylong-positioned contracts that our labour cost increases. In addition, the labour would need tohave a skill to settle these OTC contracts. This also adds up the labour cost. Instead, we couldpursue cash transaction without incurring accounts payables. This way, we could at leastnegotiate purchasing price with the supplier even though we are still fully exposed to the risk. 7
  8. 8. Market StrategiesIn this section, we will draw market strategies for the building owners as well as the buyers ofthe fresh vegetables in the food desert.Pricing/Promotion/Distribution Strategies:The price of the aquaponic unit should be less than $20,000, considering the procurement cost,$13,000, and the building owners’ willingness to pay, $20,440. In order to fully utilize the firstmover advantage, we will set the selling price at $15,000. For the vegetable buyers, the pricesshould be 5-10% more than thefood they can normally consume,according to our survey. (seeFigure 5).The promotion for the ownersshould utilize social media sincemost of them are eagerly using it.Furthermore, they are consideredto be more cost effective thantraditional media such asmagazines and TV ads. For the Figure 5vegetable consumers, we shouldrely on local papers as our netnography research tells us that they hardly form onlinecommunities in which our brand awareness could spread with word-of-mouth effect. Nonetheless,since the building owners will try to promote their properties, the overall advertising effect willbe not as strong as the traditional media.The distribution of the aquaponic units should be delivery with installment as the buildingowners have little knowledge about the system. Distributing food products to end-consumersshould occur in or beside the buildings in which the aquaponic units are installed. Not only doesthis bring the vegetables and fish to the areas, it builds a sense of local community.Strategic Alliances:In addition to the relationships with the building owners, we need to have support from i) theaquaponics supplier, ii) building owners associations such as BOMA, and iii) governmentalentities. The aquaponics supplier is important for cost control. We have to negotiate the priceexploiting the economies of scale we have while seeking technical support. In other words, weshould create a win-win relationship by providing the manufacturer with increase in sales whilereceiving large discounts. Builder owner associations can be a very effective marketing toolsince the online community of the building owners are built around these organizations. Finally,governmental agencies can provide the building owners with further incentives to installaquaponic units, such as “greening” subsidies. 8
  9. 9. Organizational InfrastructureIn order to carry out our business plan, there are four different functionalities required.Management/Governance: Decision making, maintaining relationships with key partners,representing a company as a legal entity (compliance), and coordinating all the otherfunctionalities. The CEO and the assistant will assume this task.Sales and Marketing: Implementation of the promotional strategies described above and all thetransactional activities including supplier negotiation. The sales person assumes this task.Finance: Accounting, seeking investors (see the finance section), budget management, and riskhedging. The CEO and the assistant will assume this task.Technical Operations: Aquaponic unit delivery, installation, maintenance, and advisory.Assistance in selling foods to building occupants. The technical staff will assume this task.To fulfill these four areas of functionalities, we will need eight employees:CEO (1): Undertakes the management/governance and the finance functionalities. Fairknowledge of management, strategy, and finance is required. In addition, strong passion forsolving the food desert problem is required.Assistant (1): Supports the CEO. Competitive communication skill and knowledge ofaccounting are necessary. Strong interest in the social problem is required.Sales (2): Undertake the sales and marketing function as a team. Directly reports to the CEO.Experience in B2B sales, and knowledge of social media marketing and the real estate industryare required. Part of the salaries is commission-based to incentivize these staff.Technical Staff (4): In charge of the technical operations and directly reports to the CEO as ateam. Knowledge of agriculture (especially urban farming) is necessary. Passion to solve thesocial problem is required. At the inception, we will require two employees. After 6 months, weplan to add another two depending on the sales growth.Since most of the clerical functions are done by the CEO and the Assistant, the employees willwork from home, except the Assistant who will work at the CEO’s place.Legal ConsiderationsLegal Framework: As a food business, there are several key legal considerations, which includebut are not limited to:  Register our business with Ministry of Business and Consumer Services  Gain a municipal license  Obtain a provincial operating license  Secure proper municipal zoning approvals for our farming units  Obtain a business number from Revenue Canada  Registering for the PST  Prepare for being employers, in particular compliance with Ministry of Labour regulations and Workers Safely Insurance Board rules  Securing business insurance 9
  10. 10.  Having regular health inspections  Obtain a food handler’s certificate from Toronto Public HealthOur business will also require sufficient insurance for employee claims, and any food salesliabilities.Legal Structure: This business operates as a private for-profit company to minimize reportingrequirements. Co-op could be another option because the building owners have an establishedcommunity, however it may be difficult to ask them to be members without considerable supportfrom the community leader such as the BOMA. Additionally, the somewhat hierarchicalgovernance style may not fit the characteristic of co-op, which delegates voting share to eachmember regardless of the amounts of their investment.It is our assumption that we will require modest capital startup funds, as our business would startsmall and then scale up. If our organization could secure business development grants or externalinvestors, we would ideally structure as a for-profit business. This would allow our organizationto make quick decisions and retain maximum flexibility with decision making. Should start upcapital come from a foundation or government granting agency, our organization may be forcedto set up as non-profit, though not a registered charity. Forming as a non-profit is not desirable,as it limits the scope of activities the organization could undertake.FinancialsWith Aquaponic units being installed in buildings with intent to sell the produce to the buildingoccupants, we will be selling the largest size units called the deluxe (Backyard Aquaponics). Inorder to map out our financial forecast, we make the following assumptions: 1. While the retail price for these units (including installation) is $11,475, we believe that including the shipping costs we will be able to import this product at $13,000. 2. With limited time (30 minutes per aquaponic unit) and farming expertise required, we believe that on an average one technical staff will be able to cater to 12 aquaponic units a day in an 8 hour shift and will be paid at an hourly rate of $12 per hour. 3. We will require 2 technical staff for the first 6 months, and as number of units installed increases we will require 4 staff in all. 4. Due to economies of scale, cost of producing the vegetables and fish will be 5% lower than what it would cost an individual to produce the same yield. 5. Sales personnel will be paid $3000 per month and a 3% commission on each sale. 6. We will be able to sell 55 units in the first year. (6% of the BOMA members) 7. Any unsold produce will be sold to restaurants or local markets. 8. The rent for the hotspot is one-year contract.The financial forecast is shown in Figure 6. Based on this forecast, we calculated the following:  Start-up Financial Need: $35,000  Net Profit Margin: Pessimistic = -35%, Baseline = 4%, Optimistic = 11%  Break Even Units: 43 units  Break Even Sales: $947,505 10
  11. 11. As explained in the risk section, we would have to withdraw from this business if the salestrajectory is similar to the pessimistic scenario. Therefore, we will provide the start-up cost inorder to make the liquidation process simple in case of the withdrawal. Assuming no interestcharge and no need to concern repayments, the business will be off the hook both from financingcost and a potential forced-bankruptcy. Unit Price Expected quantities Total amount of dollars Items $ per unit Pessimistic # Baseline # Optimistic # Pessimistic $ Baseline $ Optimistic $RevenueAquaponic Unit Sales 15,000 20 55 80 300,000 825,000 1,200,000Veggies and Fish per Unit 7,035 20 55 80 140,700 386,925 562,800Total Revenue 440,700 1,211,925 1,762,800Costs<Startup>Aquaponic unit for the hotspot 13,000 1 1 1 13,000 13,000 13,000Rent for the hotspot (1yr contract) 1,000 12 12 12 12,000 12,000 12,000Start Up Costs (Website/Social Media) 10,000 1 1 1 10,000 10,000 10,000<Fixed>CEO salary 5,000 1 1 1 60,000 60,000 60,000Assistant salary 3,000 1 1 1 36,000 36,000 36,000Tech. Staff salary for the first 6 months 2,880 2 2 2 34,560 34,560 34,560Tech. Staff salary after 6 months 2,880 2 4 6 34,560 69,120 103,680Sales Personnel salary (Fixed part) 36,000 2 2 2 72,000 72,000 72,000Utilities and Miscellaneous 1,500 12 12 12 18,000 18,000 18,000<Variable>Procurement for Aquaponic 13,000 20 55 80 260,000 715,000 1,040,000Veggies and Fish 1,743 20 55 80 34,865 95,879 139,460(including utilities and seedlings costs)Sales Personnel (Commission) 450 20 55 80 9,000 24,750 36,000Total Costs 593,985 1,160,309 1,574,700Net Profit (Total Rev‐Total Cost) ‐153,285 51,616 188,100Figure 6Exit Strategy:Up to one or two years from installation, the units already sold to building owners will be takencare of by the technical staff. After this period, our service will be limited to advisory, assumingthat the owners can either learn the way to manage the units or find someone to take this job overat their expense. This model enables us to effectively and rapidly expand in the market withoutbeing over-staffed, in order to attain the first mover advantage.This will help us to withdraw from this business in case of sluggish sales. In addition, the “just intime” business model, which refers to the low-inventory strategy in which we import the unitsupon orders from the building owners, will make it even easier to exit. 11
  12. 12. Bibliography Backyard Aquaponics. (n.d.). Cost Benefit Analysis of Aquaponic Systems.Hulchanski, J. D. (2007). Centre for Urban & Community Studies: Research Bulletin 41. Toronto: University of Toronto.Kinnea, J. (2012, March 17). Toronto Real Estate Statistics Database. Retrieved March 17, 2012, from Toronto Real Estate Statistics Database: http://juliekinnear.com/toronto-real- estate-market-statisticsMartin Prosperity Institute. (2010). Food Deserts and Priority Neighbourhoods in Toronto. Toronto: Martin Prosperity Institute.Socialmention.com. (2012, March 17). Mentions about "BOMA toronto". Retrieved March 17, 2012, from Socialmention.com: http://www.socialmention.com/search?t=all&q=%22BOMA+toronto%22&btnG=Search &start=15Technorati. (2012, March 17). Blogs relating to “real estate owners”. Retrieved March 17, 2012, from Technorati: http://technorati.com/search?return=sites&authority=all&q=real+estate+owners&x=11& y=20Toronto Star. (2010, June 14). A struggle to eat in Toronto’s food deserts. Retrieved March 18, 2012, from thestar.com: http://www.thestar.com/yourcitymycity/article/823514--a- struggle-to-eat-in-toronto-s-food-desertsToronto, B. (2011, July 22). BOMA Toronto @BOMATORONTO. Retrieved March 17, 2012, from Twitter: https://twitter.com/#!/BOMATORONTO 12

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