Selling Food to Ontario Costing & Pricing for Profit

Erica Pate

Business Management Unit

Do You Feel This Way With Numbers?

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Agenda

• Costing your product(s) – Variable costs – Fixed costs – Breakeven analysis – 5-line income statement

• Margins and pricing – Margin vs. mark-up – Margins in wholesale channels – Calculating margins

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Our Case Study

Beth and Patrick farm in Norfolk County. Ten years ago they decided to experiment with growing strawberries. The experiment was a success and they became a popular vendor at local farmers’ markets. To help add value and extend their farmers’ market season, Beth and Patrick starting making jam to sell. Last year, their strawberry crop failed, so they bought strawberries from another neighbouring farmer. This allowed them to maintain their market stall and all their loyal customers.

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Our Case Study

Throughout the season, Beth and Patrick decided that they should focus on the jam-side of their business rather than growing strawberries. This year, they jumped in with both feet! They rented a commercial kitchen (from a local church) and invested in labelling, complete with a nutrition table so that they could expand their market opportunities. They have the capacity to make more jam than they’ve ever made before, but are scratching their heads: should they continue selling direct at more farmers’ markets or should they explore wholesale customers as well?

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COSTING

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Variable Costs

• Costs that vary based on output or production. • Variable costs for our jam business:

Variable Costs

Strawberries $ 0.38 per jar

Sugar $ 0.20 per jar

Pectin $ 0.04 per jar

Production labour $ 0.64 per jar

Jar & lid $ 1.22 per jar

Label $ 0.24 per jar

Total VC $ 2.71 per jar

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Fixed Costs • Costs that are independent of production levels.

– Can and will vary, but not in direct relation to production. – Stays consistent within a range of production

• Fixed costs for our jam business: Fixed Costs

Facility rental $ 1,080 per year Utilities $ 300 per year Waste removal $ 50 per year Non-production labour $ 4,000 per year Promotions $ 500 per year Farmers' market expenses $ 2,000 per year Insurance $ 500 per year Property taxes $ 1,000 per year

Depreciation $ 100 per year Total FC $ 9,530 per year 8

Note: Adding diversified activities to a farm

property can have a significant impact on property assessment.

Consult Municipal Property Assessment

Corporation (MPAC) for more information.

“But I’m not taking a wage…” “We were driving to town anyways…”

• To build a sustainable business you need to be comprehensive in

estimating costs: – Your time has value. – Using vehicles has a cost, even if they have a different

primary purpose.

$20 + + = $20

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Breakeven • The point at which revenue equals expenses and there is neither profit

nor loss. • Sales are enough to cover variable costs AND all fixed costs. • Note: At the farmers’ market the strawberry jam sells for $8 per jar.

Breakeven Fixed Costs

Gross Margin or Contribution Margin =

=

=

=

Fixed Costs (Selling Price per Unit – VC per Unit)

$9,530 (Sellict – Vr Unit) $8 $2.71

1,802 jars of jam 10

The 5-Line Income Statement

Sales - Expenses

Profit (Before Tax)

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The 5-Line Income Statement

Sales

Profit (Before Tax)

- Fixed Costs or Overhead Expenses Gross Margin

- Variable Costs or Cost of Goods Sold Sales - Expenses

Profit (Before Tax)

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The 5-Line Income Statement

Beth & Patrick's Strawberry Jam Business

Sales (2,000 units) $ 16,000 100%

Less: Variable Costs ($ 5,424) (34%)

Gross Margin $ 10,576 66%

Less: Fixed Costs ($ 9,530) (60%)

Income Before Taxes $ 1,046 6%

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FROM COSTING TO PRICING

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Terminology: Margin vs. Mark-up

Margin? Sales less the cost of goods sold.

𝑀𝑀𝑀𝑀𝑀𝑀 $ = 𝑆𝑀𝑆𝑆𝑆 − 𝐶𝐶𝐶𝑆

= $10 − $5

= $5

𝑀𝑀𝑀𝑀𝑀𝑀 % = 𝑆𝑀𝑆𝑆𝑆 − 𝐶𝐶𝐶𝑆

𝑆𝑀𝑆𝑆𝑆

=($10 − $5)

$10

= 50%

Mark-up? Amount by which the cost of a product is increased to derive the selling price.

𝑀𝑀𝑀𝑀 − 𝑢𝑢 $ = 𝑃𝑀𝑀𝑃𝑆 − 𝐶𝐶𝑆𝐶

= $10 − $5

= $5

𝑀𝑀𝑀𝑀 − 𝑢𝑢 % = 𝑃𝑀𝑀𝑃𝑆 − 𝐶𝐶𝑆𝐶

𝐶𝐶𝑆𝐶

=($10 − $5)

$5

= 100%

$5 or 50% $5 or 100%

$5 $10 Your

Business

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Volume vs. Price Dynamic

0

100

200

300

400

500

600

700

800

900

25 50 75 100 125 150 175 200 225 250 275 300 325 350 375 400

Gro

ss M

argi

n

Pounds of Tomatoes Sold

Wholesale Retail

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50 lbs sold retail $100 gross margin

200 lbs sold wholesale $100 gross margin

What’s a Reasonable Price?

• Researching industry prices is a must, but can be challenging. – Online resources (such as organicpricetracker.ca

and Agriculture and Agri-Food Canada’s Horticulture Wholesale Price Reports) can be a useful starting point for unprocessed product.

– Chefs and retailers may be willing to tell you what their distributor charges for a comparable product or what that product is currently trading for at the Ontario Food Terminal.

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Restaurants and Foodservice

Year: 2010 Average Canadian Foodservice Operation

Revenue 100.0% Cost of Goods Sold (Food and Beverage Purchases) (36.0%) Gross Margin 64.0% Expenses: Salaries and Wages (33.9%) All Other Expenses (25.6%) Total Expenses (59.5%) Pre-tax Profit 4.5%

Source: Canadian Restaurant and Foodservices Association 2012 Operations Report

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Grocery Stores & Retailers Sample Independent, Full-Serve Grocer

Revenue 100.0% Cost of Goods Sold (COGS) (75.0%) Gross Margin 25.0% Operating Expenses (23.0%) Pre-tax Profit 2.0%

Local Fresh Produce

Revenue 100%

COGS (60%)

Waste (8%)

Gross Margin ~32%

Local Fresh Produce High Probability of Damage

Revenue 100%

COGS (50%)

Waste (18%)

Gross Margin ~32%

Local Processed Product

Revenue 100%

COGS (70%)

Waste Minor

Gross Margin ~30% 19

Food Distributors

Your Business COGS: $2.50

Retail/Food Service/Institutions Pay Wholesale Price:

$5.56

Distributor $5.56 x (1-30%) = $3.89

Pay Distributor Price: $3.89

Broker $5.56 – ($5.56*10%) = $5.00

Pay Wholesale Price less

Commission: $5.00

Distributor Expectation: 17-30% Margin on Wholesale Price

Broker Expectation: 5-10% Commission on Net Invoice Price

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Price Variability

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Price Variability

• Many factors can impact the price of a product, such as:

– Seasonality – Supply (often impacted by weather) – Demand

• A wholesale customer’s tolerance for price variation will depend on their willingness and ability to pass changes along to their customers.

• Reasonable warning should always be given when prices are changing.

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Back to Our Case Study…

• Beth and Patrick have been approached about two potential opportunities with wholesale customers:

1. A local restaurant that serves all-day breakfast. Increasing, they are trying to work with local producers which they promote to restaurant patrons.

2. A local kitchen store that carries gourmet local food products. It is a popular destination for locals and tourists.

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Assessing Options: Changing Costs

Option #1: Restaurant • Willing to pay $6 per jar. • Fixed costs expected to

fall to $6,800.

Option #2: Kitchen Store • Willing to pay $5.60 per

jar. • Fixed costs expected to

fall to $6,500.

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Assessing Options: Breakeven

Breakeven Fixed Costs

Gross Margin or Contribution Margin =

=

=

=

Fixed Costs (Selling Price per Unit – VC per Unit)

$6,800 (Sellict – Vr Unit) $6 $2.71

2,068 jars of jam =

= $6,500

(Sellict – Vr Unit) $5.60 $2.71 2,251 jars of jam

Option #1: Restaurant Option #2: Kitchen Store

Expected Annual Order: 3,500 jars

Expected Annual Order: 4,000 jars

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Assessing Options: 5-Line Income Statement

Current: Farmers’

Market Sales Option #1 Restaurant

Option #2: Kitchen Store

Sales $ 16,000 $ 21,000 $ 22,400

Less: Variable Costs ($ 5,424) ($ 9,493) ($ 10,849)

Gross Margin $ 10,576 $ 11,507 $ 11,551

Less: Fixed Costs ($ 9,530) ($ 6,800) ($ 6,500)

Income Before Taxes $ 1,046 $ 4,707 $ 5,051 26

Making a Decision

• Financial Considerations: – Costs – Prices – Margins – Volumes – Breakeven – Income Statement

• Other Considerations: – Operations – Marketing – Human Resources – Control

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Costing & Price is an Ongoing Exercise

• Business plans are living documents that should be revisited and updated regularly.

• The same is true of costing and pricing analysis.

• For example, what is the significance of October 1st for costing analysis? – On October 1, 2016, Ontario’s minimum wage will rise from $11.25

to $11.40. Minimum wage is now tied to inflation, so the new rate will be announced each April 1st to take effect that October.

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OMAFRA Resources

• OMAFRA Budgeting Tools: – http://www.omafra.gov.on.ca/english/busdev/bear2000/Budgets/bu

dgettools.htm – Cost of production information for livestock, field crops, fruits,

vegetables, specialty crops. • OMAFRA Direct Farm Marketing Business Resources:

– http://www.omafra.gov.on.ca/english/busdev/directfarmmkt/ – Three margin calculators:

• Performance Analysis by Marketing Channel • On-Farm Processing Recipe Based Costing Tool • Cost of Meat Processing Tool

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Other Resources

• Farm Credit’s One Page Business and Financial Plans – http://ngfn.org/resources/ngfn-cluster-calls/one-page-business-plan

• Farm Budget Database – Farm Management Canada

– Enterprise budgets for crop and livestock enterprises across Canada – www.fmc-gac.com/farm-budget-database

• Market Information and Wholesale Price Reports (Infohort) – http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-

market-information/by-product-sector/horticulture/horticulture-canadian-industry/market-information-infohort/?id=1184695160057

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QUESTIONS?

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