The paper attempts to define value adding as it might be applied to commodities and highlights ways in which companies can become involved in the production of branded products. It deals with Do it Yourself Production, Contract Manufacturing and Joint Ventures and the virtues of each.A concise appraisal of the benefits and pitfalls of value adding is also covered and three golden rules are provided in conclusion.On the assumption that it is always best to begin at the beginning I feel a definition of value adding might be appropriate.
Value adding can mean different things to different people. In my company we could be considered to be value adding by merely roasting the nuts before packing them into bulk cartons for export...and that is true. In the broadest sense, value adding means taking a raw material and processing it or adding something to it to change it into a saleable item that would be purchased by a different group of customers. For example bulk wool is sold to knitting mills but the jumpers & cardigans, the value added products, are sold to retailers and then on to the end users.The primary objective of value adding is to increase the value of each of the materials combined in the process to enable the company to sell a finished product that meets a consumer need ...and make more profit as a result. Value added products are nearly always given a BRAND NAME that differentiates them from similar competetive products.Value adding is not restricted to branded products. Bulk commodities from a specific region can be value added and still be sold in bulk for further value adding. Quality is generally the added ingredient..."Tasmanian apples are better than Canadian apples, or Australian wool is the finest in the world." These messages, heavily promoted and publicised add value to the commodity and give buyers a valid reason to pay a premium for the bulk product.
The decision to go into value adding is not one to be taken lightly. There is considerably more risk involved in value adding than in selling the bulk commodity, however the rewards can be greater. The first, and most important, consideration is to objectively assess the business you are in and decide if the value adding idea fits with your current production, distribution and marketing disciplines. If you make things from wood should you consider making a new line of products from metal ? Could the new product be sold through the same network of wholesalers & retailers as your existing products ? Is value adding a diversification for your business ? Is it an extension of your existing business or is it a totally new discipline. If you are entering a market that is new to you, be sure you understand the language...each has its own jargon, rules and social structure.There are several ways to take advantage of value adding oportunities.
I'd like to use the macadamia industry to illustrate the PROS & CONS OF VALUE ADDING AS A MARKETING STRATEGY.60% of all the macadamias harvested in the world are value added by the processing companies themselves. With a few exceptions each processor has created "branded" products that bear their name and they all engage in marketing and distribution through the traditional retail chains and duty free stores.Macadamias are value added into boxed chocolates, as chocolate coated macadamias, roasted and salted and sold as snack packs, chopped and chipped and mixed into biscuits and candy coated for inclusion in ice cream.
The entire crop from one major processor is value added in their own factory. They mix their own chocolate, enrobe the nuts, package, label box & ship a full range of confectionery.They have a heavy investment in capital equipment and have established themselves as market leaders in confectionery and they guard their market shares around the world very jealously.In short, they do it themselves; from processing the nuts to selling the chocolates and snack packs.
The second way of value adding macadamias is to have contractors manufacture products to your specification and package it for you. This however, means putting profit in someone else's pocket but it may be the best way to go if you're entering a small developing market and the investment in specialised capital equipment cannot be justified. Often too, there are firms that only make biscuits or who make only chocolates and they may have spare capacity and welcome some contract manufacturing. Their rates can often be quite attractive...but watch the growth of their own products because their spare production capacity can dry up quickly and you could be left without a manufacturer after you've spent considerable marketing money creating demand for your brand. Most of the processors of macadamias in Australia that have gone into value adding have chosen this route. They have done so for several reasons.
The third way to get into value adding is the Joint Venture. This method can often be the most beneficial and most profitable for all concerned...and the most fun too.It generally involves an agreement between a supplier of raw materials and a specialised manufacturer of a retail product.The two firms draw up a contract that binds the raw material supplier to provide certain quantities of certain quality stock while the manufacturer agrees to produce and market certain quantities of finished product, along with his other "branded" products. The agreement would generally provide for a sharing of the profits in proportion to the contribution made by each party.Joint ventures are an excellent way to get into a specific market, often with a market leader, without heavy investment in market development, advertising, promotion and manpower. Much of our business is done in this way. Though we do not have any profit sharing agreements with manufacturers, we do contract to supply certain quantities of nuts each season and that enables them to plan production and develop new value added products which tends to increase the volume we sell them each year. We call them "loose" joint ventures because we grow our businesses together.
On the positive side one must rate profit very highly.Value adding increases the price you get for your raw material because you are adding other, less expensive, ingredients and packaging to it to give it consumer appeal and you make a profit on everything you add because you build it into the cost of production.Secondly, you become the master of your own destiny in the market. As a small to medium sized processor of macadamias, for example, selling bulk nuts puts you in competition with all the big players in the market and you could be disadvantaged on price or find your customers shift without notice leaving you with unsold stock. Value adding helps you to avoid this vulnerability at the hands of the "fickle" customer.Thirdly, successful brands have a goodwill value when it comes to selling the company. The name "COKE" or "PEPSI" is worth many millions of dollars more than COLA.
Be mindful that the competition will probably react with a vengeance if your value added product becomes successful and a serious threat to their market share...and how will you defend yourself if this happens. Remember the macadamia processor andchocolate maker mentioned earlier ? Newcomers in confectionery must be prepared to meet this kind of competitor on his terms and vie for shelf space in the retail world.
Rule # 1 Be sure you have the resources to meet and beat the competition.
Carefully consider the volume of base product you have available and determine whether you can effectively support a sustained marketing effort for all of it, as value added products. Remember, once you step out of the bulk market and introduce your own brands you begin to compete with your bulk customers and they may drop you as a supplier. It is difficult to have a foot on both sides of the fence.
Rule # 2 Don't bite off more than you can chew by trying to win too large a share of the market.
Assess the scope for sales outside of your immediate distribution area and consider whether there is export potential. Be mindful that every market has different requirements and regulations for quality, packaging, importation and advertising and you should be ready to adjust before you get too far into value adding.
Rule # 3 Do your homework. People who fail to plan are planning to fail.
Let me wrap up with an example related to my own company. We process over 5000 tonnes of macadamias each year and that gives us approximately 1500 tonnes of edible kernel. We are the largest supplier of bulk macadamias in the world.Value adding is not a viable option for us. It is too costly to "dabble" in the market; there are already too many others doing that. The marketing of 1500 tonnes of kernel as value added products would mean dominating the chocolate confectionery and macadamia biscuit market in Australia... only 50 tonnes of nuts makes 1.25 million boxes of chocolates. For our company it is only possible to move such high volume if we sell to the big confectioners, the big cookie makers and the big snack packers in the USA, JAPAN & EUROPE.Value adding requires careful planning, thorough research and committment from top to bottom in the organisation. Be sure you're doing the right thing and be prepared to claw your way slowly up the ladder of market share with significant investment over several years if you're going to achieve success and that elusive extra profit.