3.1 STRATEGIC OBJECTIVES.................................................................................................................................. 3 3.2 PRODUCTION PROCESS .................................................................................................................................... 4
3.2.1 Production of Labneh...........................................................................................................................4 3.2.2 Production of Cheese...........................................................................................................................4
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1 Executive Summary The proposed project consists of developing a goat dairy factory. This industry will collect the milk from the farmers in Jezzine caza, produce, and package goat dairy products to be marketed in the region and other parts of the country. The production unit will target grocery stores and small retailers as well as supermarkets and restaurants. The distribution of the dairy products will cover Jezzine caza and the South of Lebanon as well as Beirut and other major cities. Choosing to produce goat dairy products makes sense for Jezzine caza since goat breeding is more extended than cow breeding and has a high potential for development. (According to the Ministry of Agriculture, there were 8,624 goat heads in Jezzine caza in 1999 (no census was performed after this date). Moreover, this kind of product avoids direct competition with highly developed cow milk dairy producers, which are mainly concentrated in the Bekaa. The production unit’s initial investment costs are estimated at $176,232. They include the cost of equipment, and the cost of vehicles as well as the working capital needs to start the business. The main assumptions are conservative and consider that in the first year 17% of the total goat milk production in Jezzine caza (estimated at 1.4 million kg per year) will be processed in the center, i.e. an annual amount of 238 tons. An annual growth rate is applied to sales starting in year 2 with 10%, 7% in year 3, 5% in year 4, and 2% in year 5. These growth rates should be achievable with high quality products and services and a dynamic marketing and distribution plan. The projections are taken over a period of 5 years. The production unit is expected to provide an average annual net profit of $35,784. Dividends are distributed starting year 2. The production unit provides an internal rate of return (IRR) of 29% and a payback period of 4 years and 5 months. These results show that the project is viable. A worst case scenario was developed with the assumption that an annual amount of 200 tons are processed in the center. This scenario gives an IRR of 15% and a payback period of 6 years 7 months. A best-case scenario based on an annual amount of 266 tons gives an IRR of 37% and a payback period of 3 years and 7 months. Besides the business benefits and good performance that the goat farm unit is expected to achieve, it will also impact positively the economic environment of Jezzine by offering 10 job opportunities. This industry will make use of the extended goat farming in Jezzine to produce dairy products that will be sold and marketed in the South as well as in the Capital and main cities. Moreover, the business offers a potential for exports in the medium to long run.
2 Project Description The project consists of developing a goat dairy factory for the production of goat Labneh, goat cheese, and goat Laban in the Jezzine caza. The production unit will collect the milk from the goat farmers and produce dairy products that will be sold in Jezzine and the South of Lebanon as well as in Beirut and other major cities in Lebanon, and eventually be exported to Arab countries in the medium to long run.
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The factory will be rented to lower the initial costs of investment. The study assumes an annual rental of $10,000 for the premises. The equipment will include the following items:
INVESTMENT REQUIREMENTS
Cost Items Quantity Unit Cost Total CostLabneh Equipment Quantity Unit Cost Total Cost
Reception tank (300 l) with self-priming pump 1 4,550 4,550Pasteurizer & Heater (1,000 l) 1 8,450 8,450Milk storage tank refrigerated 1 9,100 9,100Chiller room for Laban 1 17,550 17,550Chiller room for storage and Labneh production 1 13,000 13,000Incubation room 1 5,200 5,200Dough mixer for Labneh 1 3,250 3,2502 decks SS Trolley 150 liter each 11 715 7,865Vacuum Filler for Labneh & Cheese 1 5,850 5,850Drainage basin for Labneh production 1 1,950 1,950Cloth bags 100 0.46 46Total Cost Labneh Equipment 76,811Cheese Equipment Quantity Unit Cost Total Cost
Steam boiler (500 kg steam / hour) 1 7,800 7,800
Cheese cooking vat (1,000 liters) 1 7,800 7,800Cheese coagulation vat 2 2,080 4,160Tower for cooling 1 4,550 4,550Stainless Steel Tables with wheels 2 650 1,300Bowls with stainers in stainless steel 200 10 1,950Scale (100 kg) 1 1,560 1,560Water Filtration Treatment 1 7,800 7,800Total Cost Cheese Equipment 36,920
Working Material (plastic cups, buckets and others) 2,600 2,600Electric generator (used) 1 3,900 3,900
Sources: Kamal Akl Est, Nafco Inox, FAO, Taanayel Commercial Center
3 Product Strategy 3.1 Strategic Objectives The main strategic objective of this production unit is to be one of the leading goat dairy producers in the Jezzine caza and to gain a market share in the South and ultimately all over Lebanon by building a loyal clientele. Its strategy will be aimed at securing reliable sources of raw materials, offering good quality products and focusing on providing an efficient coordination between production and marketing. In fact, the production unit will establish long-term deals with local farmers and owners of
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small and large goat farms to ensure that fresh goat milk is provided on a continuous basis. Additional ingredients including additives and salt will be purchased from local distributors. The strategic objectives also include providing training to employees and plant workers on quality and hygiene standards and, on the long run, developing exports.
3.2 Production Process The company will have three main lines of production:
§ Production of Laban from raw milk § Production of Labneh from Laban § Production of cheese from raw milk
The Labneh will be distributed to supermarkets in two forms, packed in plastic bags or as Labneh balls mixed with oil, sold either in bulk or in glass jars. For the restaurants, the Labneh will be distributed bulk as 200g shaped rolls. The Laban will be distributed in buckets and plastic boxes and the cheese in bulk. The production set-up is divided as follows:
Ø The milk is heated in pasteurizers to a certain temperature near to 95 deg. Ø It is then cooled down to 51 to 53 deg. Ø Warm milk is transferred into containers and starter is added. Ø After 10 minutes, the milk mixture is transferred into trolleys and taken to the
incubation room and left for 3 hours at a temperature of 42 deg. Ø It is then transferred into a refrigerated room where it is cooled down to 4 deg. Ø Salt is added. The mixture is then moved to bags and transferred for cooling in a
chiller room where they are left for 4 days. Note: Compared to the regular Labneh, the production process requires more salt and at a higher temperature. (Labneh balls need to be put on a piece of cloth for drying).
3.2.2 Production of Cheese
Ø Milk is transferred from pasteurizer into double-jacket vats with heating and cooling
capacity. Ø Rennet is added at specific temperatures (34 to 37 deg), the liquid is then transferred
into trolleys and kept for 45 to 60 minutes, depending on strength of rennet. Ø The liquid coagulates, then is agitated to separate curd from whey; and whey could be
processed into double cream cheese. Ø Shaping is done manually. Ø The cheese is pressed into stainless steel bowls into their final shape. Ø The finished cheese is placed into tanks or buckets filled with brine (water and salt). Ø They are placed in a cold room. Ø The next day, the cheese is delivered into buckets to supermarkets and restaurants.
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4 Market Analysis 4.1 Goat Milk production, Imports and Exports of dairy products According to the Ministry of Agriculture, the total number of goats in Lebanon in 2004 (the most recent data provided by the Ministry of Agriculture related to agriculture is 2004) was about 234,000 and these goat herds produced about 36,000 tons of milk, over the year, valued at LBP 21,460 million ($14.3 million).
Source: Ministry of Agriculture, 2004 It is important to note that despite the existing cow and goat breeding, Lebanon imports large quantities of dairy products, from manufactured cheese to powder milk and butter derivatives. The table below shows the quantities imported from 2000 to 2004; on average, 60,000 tons are imported per year, for a value of LBP 235 billion. The quantities imported have been increasing over the years.
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0
500
1,000
1,500
2,000
2,500
2000 2001 2002 2003 2004
Tons
Exports of Dairy Products 2000-2004
218%
117% -41%
28%
As shown in the chart below, cheese is the most important category of imported dairy products (around 52% of the total), followed by powder milk (around 32%) and by the butter and its derivatives (around 10%). The imports of milk and cream represent only 5.7% of the total and the yogurt and derivatives imported are very negligible (0.3%) compared to the total quantities of imported dairy products.
Imports Distribution of Dairy Products 2004
Powder Milk
32.4%
Milk and Cream
5.7%
Cheeses
51.1%
Yogurt and
Derivatives
0.3%
Butter and
Derivatives
10.5%
On the other hand, the exports of dairy products have been steadily increasing these past years, from 215 tons in 2000 to 1,428 tons in 2004, valued at LBP 733 million and LBP 3,886 million, respectively.
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The table above shows that the quantities of cheese exported have increased by 572% from 2000 to 2004 while the quantities of yogurt and its derivatives increased by 521%. Moreover, in terms of value, the exports of cheese represent around 80% of the total 2004 exports of dairy products, followed by the milk and cream (around 8%), the yogurt and its derivatives (7.5%), butter and derivatives (3%) and powdered milk (2.2%).
Exports Distribution of Dairy Products 2004
Butter and
Derivatives
3.0%
Yogurt and
Derivatives
7.5%
Cheeses
79.5%
Milk and Cream
7.8%Powder Milk
2.2%
Nevertheless, the size of the exports of dairy products is still small in comparison with the import. This demonstrates the increasing potentials for dairy products’ exports.
4.2 Goat Farming in Jezzine caza According to the ministry of agriculture, the agricultural land in Jezzine caza is equal to 30 ha. The distribution of the agricultural land and the number of farmers is as follow:
Number of farmers
Irrigated land (ha)
Jezzine 4,601 30
The main animal breeding activities in Jezzine caza are goats both for meat and milk.
Livestock
Number of breeders
Cow Sheep Goats
Jezzine 174 455 673 8,624 As indicated in the above table, goat breeding is much more extended than sheep and cow breeding. There are two types of goats: the Baladi or local type and a mixed breed, between local and Shami breed, which is less prevalent. More recently, Swiss imported Alpeen and Saanen types of goats were introduced by the cooperative in Azour financed by the World Rehabilitation Fund- USAID. These new types of goats have been providing a large milk production that is 3 times more than the local Baladi type of goats. The local breeds of goats are well adapted to the environment. Nevertheless, their milk production doesn’t exceed 300 kg per lactation; adult females reach the weight of 45-50 Kg, males 60-65 Kg. The Alpeen or Saanen Swiss types of goats produce between 900kg milk and 1,000 kg. The feeding system is essentially based on natural pasture and goats are sometimes fed during the winter. In fact, grazing lands are still quite abundant in southern Lebanon but the intense goat grazing may lead to a degradation of pastures on the long run.
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The females give birth at the end of January until April; prolificacy almost never exceeds 100%. Milking is done by hand. Milk production takes place from May until September; during the months of August and September, the milk produced by the goats is thicker and of better quality, thus it becomes more expensive. The size of goat herds may vary from 40-60 heads to 1,000 to 1,500 heads; on average each cattle counts 200 to 500 heads. The owners of large herds often manage related activities such as butcheries and milk transformation enterprises to process and market their products. Generally, the marketing of milk and meat is performed locally in a relatively efficient way. 4.3 Industry Analysis
· The average consumption for the dairy products in Lebanon per inhabitants and per year is
Average Consumption per inhabitant and per year
Milk 14 liters Cheese 34 Kg Yogurt and Labneh 20 Kg
· The production of dairy products is considered one of the most important industries in the food and beverage sector
· The market for dairy products is becoming highly competitive and is increasingly growing, especially with the evolution in consumption trends.
Many factors have contributed to the expansion of the market for dairy products:
· The returning expatriates who have imported with them new sophisticated culinary tastes.
· The growth in number of restaurants and hotels that offer a wide range of ethnic and international products.
· Lebanese consumers, thanks to satellite TVs, are more aware of new products in Europe (fruited yogurts, large varieties of cheeses,) and are eager to try them.
4.3.1 Labneh and yogurt
· Goat Laban is very limited in the market and has a high potential to gain a market
share if good quality and adequate marketing strategy are ensured. · In September, the goat milk produced is generally thicker and can be sold for the
production of “kechk”. · The market for Labneh is important in Lebanon. Lebanese people like to consume
Labneh, which is enjoyed at breakfast, accompanies any meal or is used as a dip with crackers or bread. Labneh has a greater portion of the nutrients in yogurt because the whey has been removed resulting in a higher concentration of calcium per volume than other dairy products.
· Four kinds of Labneh exist on the market: regular cow Labneh, diet or low fat cow
Labneh, baladi cow Labneh, and goat Labneh; the latter kind is more expensive than the others, almost twice the price.
· Goat Labneh has a higher preservation time than the regular Labneh; and its shelf life
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· Labneh balls in oil with different textures and packed in jars are generally good for exports in Arab countries, especially during the Hajj period.
4.3.2 Cheese
The cheese market in Lebanon comprises a wide range of products that are classified mainly into three broad categories: white cheese, processed cheese and natural cheese. The Lebanese market for cheese incorporates different types, sizes and tastes. They are sold either in bulk to outlets where it is sold loose by weight, or vacuum packed in transparent plastic packages and preserved in brine (water and salt mixture). The market for white cheese includes a wide array of local products such as Halloum, Baladi, Moujadali, Jebneh Helwe and Naboulsi. In addition, an important range of imported white cheese products is also present on the Lebanese market. These products range from Feta, Bulghari, and also Halloumi. However, it is important to note that the demand for local white cheese is gaining in importance especially with the taxes levied on imported dairy products. In fact, the latter carry high taxes, which make them less competitive on the market. On the other hand, the processed cheese market is mainly dominated by international brands. Concerning goat cheese, there is a high demand by traditional restaurants in Lebanon, as well as in some “European-style cafés”, in addition to supermarkets. Moreover, goat cheese has a high demand in Europe; generally in the form of 100 g of white cheese that is packed in jars of 2 Kg. In the long run, if the industry develops enough and manages to manufacture goat dairy products with competitive prices, exporting the products to some European countries would be an interesting opportunity. 4.4 Competition analysis
The dairy products market has been dominated by Taanayel Commercial Center, which was, along with Massabki, one of the first dairy producers in Lebanon. However, the year 1995 witnessed the entry of a number of new brands on the market and since that time, the number of dairy products companies has been rapidly increasing. In fact, Taanayel Les Fermes entered the market in 1995 and managed to establish itself among the leading producers on the market. Dairy Day and Daliah followed in 1998, mainly targeting high-income level consumers. In 2000, two international brands appeared in the market: Candia and Yoplait both of them franchises run by a local operator Liban Lait which produces dairy products with non-traditional methods. Concerning goat dairy products, the available competing brands for Labneh packed in plastic bags are Taanayel les Fermes, Centre Jdita, Centre Jdit (under the Monoprix logo at Monoprix supermarkets), Laiterie Khater, Chal, and Karam, which is produced by Massabki. As for Labneh balls with oil packed in Jars, the competing brands differ, comprising An Nabil, Al Rabih, Mechaalany, Karam and a “Spinney’s” product at Spinney’s supermarket. It is important to note that some companies make agreements with supermarkets to sell their products with the logo of the supermarkets, such as the jars containing Labneh balls labeled “Spinney’s”. In fact, the company may sell more because the customer is attracted by the logo of the supermarket and the resulting lower price and the supermarket benefits of such a deal because it receives a higher margin on sales.
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4.4.1 Pricing
The table below shows the current retail prices of goat laban, labneh, labneh balls and cheese. It is important to note that the wholesales price is around 12% less than the retail price.
4.5 Target Market The dairy products will be sold in mini-markets and grocery stores as well as in large supermarkets and restaurants. They will be distributed in Jezzine caza and the South of Lebanon as well as Beirut and other main cities. Moreover, in the long run, export markets, mainly in the Arab countries and some European countries, will also be targeted. These dairy products will be attractive for the population of Jezzine caza who already consumes goat milk and for some families who used to convert the goat milk at home into Laban or Labneh. Moreover, the products will be appreciated by a growing market all over Lebanon. Finally, the Lebanese expatriates who come during the holiday seasons constitute a steadily growing demand of local traditional food.
4.6 SWOT Analysis
STRENGTHS WEAKNESSES
Ø With its production of goat dairy products, this small industry will be entering into a “niche” market and can realize good sales if quality and efficient marketing and distribution of the products are ensured.
Ø The plant will manufacture high-quality
dairy products, with the adequate food hygiene and quality norms. One of the major strengths will be to secure reliable sources of raw material by contracting long-term agreements with goat farmers in Jezzine.
Ø In addition, the production unit will hire
a qualified manager who will be in charge of marketing the products. He will develop strong relations with a network of distributors, from mini-markets to large supermarkets and restaurants in the South of Lebanon and in Beirut and other major cities.
Ø The production unit will offer a diversity
of products, some of which would be interesting for exports.
Ø The main weakness that is inherent to any enterprise in Jezzine is the very low level of economic development. In addition, regular inhabitants tend to be worse off than the expatriates, who come in the summer, and those who work in major cities. Ø The problem that may be encountered
in a first phase is directing a substantial part of the milk production towards the center. For that reason, it is important to inform large goat farmers and emphasize the benefits of long-term deals. Ø The production unit involves an
important investment and high running costs, which need to be covered by important revenues; thus it is crucial for the center to develop intensively its markets in the main cities, with large supermarkets, restaurants and hotels.
OPPORTUNITIES THREATS
Ø The Lebanese population consumes dairy products frequently and in large quantities.
Ø The population in Jezzine caza and in the South of Lebanon may find the goat dairy products more expensive than the cow dairy
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Ø Goat breeding is extended in Jezzine caza and goat milk is widely available.
Ø The industry will benefit from the lower
cost of labor available in Jezzine and can be competitive in terms of pricing its products.
Ø The market for dairy products is
increasing and the demand for local production is growing, especially with the taxes that are levied on the imported dairy products.
Ø The demand for goat dairy products are
not only limited to mini-markets and supermarkets but also extends to restaurants and hotels. Moreover, these latter constitute a steadily growing demand, especially during the tourism and holiday seasons.
Ø The large diaspora originating from
Jezzine, which are living abroad could help in finding new markets outside the Lebanese boundaries for goat dairy products.
products and consume the latter ones, thus affecting the sales of the production unit.
Ø The market for dairy products
witnesses in general an increased competition and price wars among local producers. In addition, there is also competition from cheaper Syrian cheese products, which enjoy relatively cheaper milk costs.
5 Marketing Plan The goat dairy production unit’s main marketing objectives are: Ø Ensuring high quality products, with the adequate food hygiene and sanitary norms. Ø The manager will ensure efficient coordination between production and marketing. The
distribution of the dairy products will cover mini-markets and grocery stores as well as supermarkets and restaurants in Jezzine caza and in the South of Lebanon in a first stage and in Beirut and other major cities in a second stage.
Ø The manager will ask the salesmen to fill daily reports showing the number of points of sales reached, the time spent at each point of sale and the quantity sold in order to keep track of the work of each of the salesmen.
Ø Focusing in the long run on the promotion of the products to reach external markets
for exports. 5.1 Pricing strategy
The bulk selling prices of the dairy products to supermarkets, grocery stores and restaurants will be set as follows:
Selling price per kg Price/kg (in $)
Labneh in plastic bags 5.25
Labneh Balls Bulk in supermarkets or for restaurants 8.76
Goat cheese in supermarkets or for restaurants 10.51Laban 1.05
It is important to note that in supermarkets, agreements on bulk price of Labneh balls are made and the cost of the oil is paid upon delivery, separately from the price of Labneh.
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5.2 Advertising and promotion
The production unit will allocate a yearly budget of approximately 2% of sales for marketing, which comprises advertisement in local magazines and printing flyers/brochures. During the first few months of operation, the production unit will also have to offer free samples, especially to important potential clients. In addition, tasting events in the points of sales can take place. The production unit will develop new packaging that will be more attractive to customers and that will raise awareness concerning goat dairy products. 5.3 Sales Channels The production unit will establish strategic alliances with small retailers and large supermarkets as well as restaurants & hotels to ensure the adequate distribution of the dairy products. This requires that the production unit ensures timely delivery, freshness of goods, etc… to be competitive in order to attract a large base of customers.
5.4 Public Relations The public relations efforts will mainly rely on the following:
· Develop direct contacts with all the farmers of the caza as well as neighboring cazas · Get in touch with the largest supermarkets in the South but also all over the Lebanese
territory.
· Develop a sustained public relations effort, with key leaders in foreign countries with high concentration of Jezzine people in order to distribute the products in the exports markets.
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6 Financial Plan This section details the calculations, assumptions, and methodology used as a basis for the projections of the expected financial performance of the goat dairy production unit.
6.1 Investment Costs INVESTMENT REQUIREMENTS
Cost Items Quantity Unit Cost Total CostLabneh Equipment Quantity Unit Cost Total Cost
Reception tank (300 l) with self-priming pump 1 4,550 4,550Pasteurizer & Heater (1,000 l) 1 8,450 8,450Milk storage tank refrigerated 1 9,100 9,100Chiller room for Laban 1 17,550 17,550Chiller room for storage and Labneh production 1 13,000 13,000Incubation room 1 5,200 5,200Dough mixer for Labneh 1 3,250 3,2502 decks SS Trolley 150 liter each 11 715 7,865Vacuum Filler for Labneh & Cheese 1 5,850 5,850Drainage basin for Labneh production 1 1,950 1,950Cloth bags 100 0.46 46Total Cost Labneh Equipment 76,811Cheese Equipment Quantity Unit Cost Total Cost
Steam boiler (500 kg steam / hour) 1 7,800 7,800
Cheese cooking vat (1,000 liters) 1 7,800 7,800Cheese coagulation vat 2 2,080 4,160Tower for cooling 1 4,550 4,550Stainless Steel Tables with wheels 2 650 1,300Bowls with stainers in stainless steel 200 10 1,950Scale (100 kg) 1 1,560 1,560Water Filtration Treatment 1 7,800 7,800Total Cost Cheese Equipment 36,920
Working Material (plastic cups, buckets and others) 2,600 2,600Electric generator (used) 1 3,900 3,900
Sources: Kamal Akl Est, Nafco Inox, FAO, Taanayel Commercial Center The above table shows the costs of the equipment needed for the production of Labneh, cheese and Laban, such as tanks for the reception and storage of the milk, chiller rooms, and cheese cooking and coagulation vats. In particular, for hygiene standards, the water filtration treatment machine ensures that the water used is clean and that the water that is poured in the tanks and the other machines does not contain germ or bacteria. Moreover, the working material includes special clothes for the staff working in the factory to ensure cleanliness.
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In addition, 2 refrigerated vehicles are needed to enable the salespersons to distribute the dairy products to the various groceries, supermarkets and restaurants. The project’s total cost is evaluated USD 176,232. This includes the total cost of equipment and the cost of the vehicles as well as the working capital needs at the start of operations. The working capital needs includes the initial quantity of milk needed to produce Labneh and cheese as well as the additives and the packing materials.
Beginning Inventory Quantity Unit Cost Total Cost
Quantity of Milk used over a week 4,577 0.53 2,429Additives needed 27Packaging needed for a month 2,213Total Beginning Inventory 4,668
6.2 Major Assumptions The assumptions are based on current market levels. They are conservative and take into consideration the general economic situation. Four kinds of products will be sold to supermarkets and restaurants at the following prices:
Selling price per kg Price/kg (in $)
Labneh in plastic bags 5.25
Labneh Balls Bulk in supermarkets or for restaurants 8.76
Goat cheese in supermarkets or for restaurants 10.51Laban 1.05
The following table shows the main assumptions concerning the total milk production that will be processed in the center per year and the proportions used for the production of the different dairy products.
Milk Production
Number of goats in Jezzine 9,000
Productive females 7,000
Average production of Milk per goat per year 200 in KgTotal production of Milk per year 1,400,000 in Kg
Percentage of total milk production processed in the center per year
17%
Milk production processed in the center per year
238,000 in Kg
% of Milk production used for Labneh 25%
% of Milk production used for Labneh Balls 35%
% of Milk production used for Cheese 35%
% of Milk production used for Laban 5%
Quantity of Milk used for Labneh 59,500 in Kg
Quantity of Milk used for Labneh Balls 83,300 in Kg
Quantity of Milk used for Cheese 83,300 in Kg
Quantity of Milk used for Laban 11,900 in Kg
It is important to note that the quantities of milk needed to produce 1 Kg of Labneh, Laban, and cheese are different and are set as follows:
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Quantity of milk used per productQuantity of Milk (in kg) used for production of 1 Kg of Labneh
6.5
Quantity of Milk (in kg) used for production of 1 Kg of Cheese
5.5
Quantity of Milk used for production of 1 Kg of Laban 1
The following table shows the cost of production of 1 Kg of Labneh, Laban and cheese. They include the cost of the milk and the cost of the additives. The packing materials are not included.
Costing Assumptions in $
Average cost of 1 Kg of Milk in high season 0.56
Average cost of 1 Kg of Milk in low season 0.50
Average Cost of 1 Kg of Milk 0.53
Average cost of Additives (salt & others) per Kg of Labneh
0.03
Average cost of Additives per Kg of Cheese
0.04
Average cost of Additives per Kg of Laban 0.01
Cost of production of 1 Kg of Labneh 3.48
Cost of production of 1 Kg of Cheese 2.96
Cost of production of 1 Kg of Laban 0.54
The quantities of Labneh, Laban and cheese that will be sold are shown in the table below:
Sales assumptions in Kg Year 1 Year 2 Year 3 Year 4 Year 5
Increase in sales (in kg) 10% 7% 5% 2%
Labneh 9,154 10,069 10,774 11,313 11,539
Labneh Balls 12,815 14,097 15,084 15,838 16,155
Cheese 15,145 16,660 17,826 18,718 19,092
Laban 11,900 13,090 14,006 14,707 15,001
Apart from the production costs, the production unit will also have packaging, marketing and management costs as follow:
Other assumptions
Packing Materials as % of sales 8% of sales
% of waste 5% on sales
Commissions on sales 1.7%
Maintenance on equipment 2% on equipment costsMarketing expenses 2% of sales
The following table shows the income statement assumptions:
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Income Statement Assumptions
Annual increase in general expenses 4% annually
Annual increase in salaries 2% annually
Income Tax Rate 15%
The following table shows the balance sheet assumptions:
Balance Sheet Assumptions
Accounts Receivable 2 months of sales
Inventories 1 month of cost of good sold
Accounts payable 1 month of cost of good sold
Expenses payable 20% of general expenses
Dividends payout ratio (starting year 2) 90% net income
The following table shows the depreciation rates, which follow international accounting standards:
DEPRECIATION RATES
Plant equipment 10%Vehicles 12%Office equipment and computers 20%Furniture 7.5%
6.3 Staff structure
The staff of the production unit will be carefully selected in order to ensure a good quality production and the adequate marketing and distribution of the products. The necessary training will be provided to the plant workers for the use of the equipment.
STAFF STRUCTURENumber of Monthly Total Annualemployees Salaries salaries NSSF Salaries
The income statement shows satisfactory income levels with an average net profit margin of 9% and average profits of $35,784 per year. The cost of goods sold includes the cost of laban, labneh, labneh balls and cheese as well as the packaging costs amounting to 8% of total sales. The factory will be rented to lower the initial costs of investment. The study assumes an annual rental of $10,000 for the premises for the first year.
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6.6 Projected Cash Flows The following table shows the projected cash flows of the company.
Dairy PlantSTATEMENT OF CASH FLOWS Year 1 Year 2 Year 3 Year 4 Year 5
Net income 21,694 31,546 38,550 43,292 43,838 Adjustments to reconcile net incometo cash provided by operating activities
Depreciation 17,768 17,768 17,768 17,768 17,768 Changes in receivables (55,325) (5,533) (4,260) (3,256) (1,367) Changes in inventory (12,853) (1,285) (990) (756) (318) Changes in payable 26,529 1,846 1,503 1,236 724 Total Adjustments (23,882) 12,796 14,022 14,991 16,807
Cash provided by operating activities (2,187) 44,342 52,572 58,284 60,644
Cash Flow from Investing ActivitiesCapital expendituresInvestment in fixed assets (165,431)
Net cash used in investing activities (165,431) - - - -
Cash flow from financing activities
Net Investment by owners 176,232 Dividends distributed (28,391) (34,695) (38,963) (39,454)
Cash provided by financing activities 176,232 (28,391) (34,695) (38,963) (39,454)
Cash at beginning of year - 8,615 24,565 42,442 61,762 Changes in cash 8,615 15,950 17,877 19,321 21,190 Cash at end of year 8,615 24,565 42,442 61,762 82,953
The statement of cash flows shows the cash provided/used in operations, investing and financing activities. The projected cash flows show the initial net investment in fixed assets. It also shows the net invested capital by the owners. The distributed dividends are shown starting in year 2.
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6.7 Ratio analysis
The following table shows the main financial ratios for the production unit. Ratio Analysis
Liquidity Ratios year 1 year 2 year 3 year 4 year 5
Current Ratio 2.89 3.51 4.11 4.69 5.30Quick Ratio 2.41 3.01 3.60 4.18 4.80Working capital 50,264 71,187 92,810 114,907 137,059Inventory to working capital 0.26 0.20 0.16 0.14 0.12Profitability Ratios
Debt to equity ratio 13% 14% 15% 15% 15%Management Effectiveness
Return on Assets 9.7% 13.7% 16.4% 18.0% 17.9%Return on Investment = ROI 15% 24% 34% 46% 57%Return on Equity = ROE 11% 16% 19% 21% 21%Asset Mnagement (Efficiency)
Total Assets Turnover 1.48 1.59 1.66 1.71 1.70 Total Debt to Total Assets 12% 12% 13% 13% 13%Working capital cycle
Days Receivables 60 60 60 60 60Days of Inventory 30 30 30 30 30Days of payables 30 30 30 30 30Working Capital Turnover=Sales/Working Capital 6.60 5.13 4.21 3.57 3.05 The current ratio, which is current assets divided by current liabilities and the quick ratio which is similar to the current ratio but excludes inventories increase and reach high levels as the current assets increase at a faster rate than current liabilities. The profitability margins are satisfactory in all years. The operating profit margin and net profit margin increase gradually over the years with the increase in turnover and the improved leveraging of the operations and the increased utilization of the plant capacity. The total debt to equity ratio is stable at around 15% starting year 3. Return on assets increases gradually over the years as the plant utilization rate increases and the profitability of the company improves. The return on investment and the return on equity improve significantly over the years led by the growth in profitability to reach 57% and 21% by year 5, respectively. The assets turnover increase over the years with the growth in sales that is faster than the growth in assets. Total debt to assets fluctuates at around 13%. The days of receivables are based on 2 months of sales, the inventory turnover is based on 1 month of cost of goods sold and the days of payables are based on 1 month of costs of goods sold. These levels are based on the past performance of the company taking into consideration the nature of the business and the market conditions. The company's operations provide an internal rate of return (IRR) of 29 %.
The payback period, which represents the period needed to recover the initial investment, is 4 years and 5 months. These results demonstrate that the project is feasible and provides healthy returns to its shareholders.
The above table shows the break even revenues required in each year to cover operating expenses. Revenues exceeding these levels start producing net income. Thus, in year 1, revenues of $ 272,366 are needed to break even.
6.9 Sensitivity analysis A worse-case scenario is taken by assuming an annual processing of 200 tons. In this case, the average profitability is $13,502 annually. The IRR in this case is 15% and the payback is 6 years and 7 months. A best case scenario is developed considering an annual processing of 266 tons. This scenario gives an average profitability of $52,203 annually. The internal rate of return is 37% and the payback period is 3 years and 7 months.
Sensitivity Analysis Worst-case Most likely Best-case
Total quantity of milk processed per year 200,000 238,000 266,000
Total Revenues of Sales of Dairy products year 1 (Labneh, Cheese, Laban) 278,950 331,950 371,003
Average net income 13,502 35,784 52,203
Average net profit margin 4% 9% 12%
Internal rate of return 15% 29% 37%
Payback period in years 6 years 7 months 4 years 5 months 3 years 7 months
In order to achieve good results, the plant should be well managed with intensive marketing and distribution efforts, and consistent quality.
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7 Recommendations and key success factors In order to achieve satisfactory results, there are some key success factors that should be highlighted: § Long-term agreements must be made with farmers with large cattle in order to collect an
important part of the total milk production of Jezzine caza as well as other neighboring cazas of Marjeyoun, and Nabatieh, which also have a high concentration of goat farmers.
§ The production unit must make sure that the milk collected comes from goat farms that are vaccinated against the diseases that can be transmitted to humans through the consumption of dairy products.
§ The production unit should focus on producing high quality products, conforming to adequate sanitary and food health standards. The main idea is to offer quality at affordable and competitive prices.
§ The staff will receive the adequate training for using the equipment and producing and packaging goat dairy products efficiently.
§ The manager should work to promote and market the products in Jezzine and the South of Lebanon and to reach an extended network of supermarkets and restaurants.
§ The manager should keep track of the work performed by the salesmen through daily reports; the quantities produced of each category of dairy products will be modified over time in case one category achieves higher sales than others.
§ It is important to reach new markets in the long run through an expanded network, where the center should strive to take advantage from the well-established expatriates in foreign countries.
8 Economic Impact Evaluation Establishing this goat production unit in the caza of Jezzine will have several positive repercussions on the socio- economic environment of the region: § Building up such an industry will allow using the goat farming available in the caza for the
production of dairy products that will be sold and marketed all over Lebanon in a first stage and later on, marketed abroad.
§ It will create 10 job opportunities, thereby offering new opportunities to young Jezzine citizens. Most importantly, it will help prevent this group of people from emigrating by opening new career opportunities to them.
§ Moreover, the center will be an important incentive for goat farmers to increase their production, since they will know that they will be able to sell all their output. Thus, it will improve the condition of a number of goat farmers in the region.
§ The creation of these jobs will also help lift the standards of the households and play a positive role in the community.
§ Moreover, the training the employees will have received will equip them with valuable skills for future job opportunities.
§ Finally, the potential success of this industry may enable the country to export goat dairy products to Arab countries and some European countries in the medium to long run.
