Building Responsible Small Food Enterprise

Burgess COMMENTARY

Peter Burgess

Building Responsible Small Food Enterprise Posted by brittell November 25, 2014 Home kisoboka-01-high-resolution

Exciting news: one of the companies I helped co-create and develop with an entrepreneur in East Africa is being looked at by an impact investor. Whether the new small food enterprise receives any money or not is beside the point. It was after a conversation with the impact investment division that Kisoboka Food’s work was recognized as ‘above and beyond’ their expectations measured against other food enterprises in the region and of our size. This helped solidify the value of Kisoboka Food’s work in agriculture and offered some validation: the direction the company is heading is a good one – and not just when using financial metrics but social, human, and environmental ones too.

In just one year the company has grown to 44M/= UGX in assets, measured in local currency or $20,000 USD, with only $6,000 in seed capital from Capitol Food Ventures. Kisoboka has realized 11M/= UGX ($4,500 USD) in revenues over the year, built an inventory of 30M/= UGX ($13,000 USD), and diversified revenue channels away from trading to processed (dried) tropical fruit products by investing in equipment such as solar dryers and packaging. And there is a story here too.

All the research we found on dried tropical fruits indicates that local markets are rarely ever the target market, and when they are, the product simply does not move off of urban shopping center shelves. Having shopped at these grocers throughout the country, it is not hard to see why this is the case. Most dried fruit is packaged in a rudimentary way – a fuzzy see through thick plastic with a label that looks like a typewriter was used to create it. At Kisoboka Foods, we have been finding completely different results with our products. Considering our limited capacity to process, dried products represent over 30% of revenues and there has never been a buildup of inventory because customers are eating them up too quickly!

See Kisoboka Food’s product labels here: Label - Kisoboka Foods Dried Banana vFinal Label - Kisoboka Foods Dried Mango vFinal Label - Kisoboka Foods Dried Pineapple vFinal

Next year looks promising too. Using very conservative estimates on just about everything, the low end revenue growth will be 55M/= UGX ($20,000 USD) for the year with an expansion of inventory to 114M/= UGX ($50,000 USD). This takes into account (almost) full reinvestment of revenues, the addition of 2 management and 4 operations personnel, and an expansion of their farmer network from 5 to 20. These figures may appear small to an international audience, but consider this: on average rural Ugandans make anywhere from $550 to $1,600 per year, depending the region while on average urban Ugandans make anywhere from $1,700 to $5,000 per year, depending the region. Further, inequality is extreme in this part of the world, so the top 10% make significantly more than those in the bottom 50% combined, creating a very negative (left) skew and in reality shifting the ranges listed above downward by about 40%. According to my estimates and using the GINI coefficient as a proxy, most rural Ugandans make anywhere from $340 to $970 per year, depending the region while most urban Ugandans make anywhere from $1,040 to $2,700 per year, depending the region. See here for full table analysis.

Table 7.1: Average Monthly Income by Region and Residence (UGX)UBOS Income Table 2010*Source: UBOS

But financial metrics are only a part of the story with Kisoboka Food Products (pronounced chee-so-bo-ka). Kisoboka’s overarching mission is a heavy one: to transform farming (and agriculture) into a culturally valued opportunity for Ugandans. Why is this a challenge? Throughout Sub-Saharan Africa (even the world) an exodus of youth are leaving the countryside for urban centers. It is estimated by the African Development Bank that “more than 90% of future population growth will be accounted for by large cities in developing countries.” And even though urban youth only make up about 33% of the population in SSA, when compared to most urban areas, the proportion living in slums is significantly greater, by about 20 percentage points over other regions in the world. Also, today, the average age of a farmer in SSA is around 60, a crude metric in itself, where either the masses are all old and all young (double peaks or multimodal distribution), in general mostly older (skewed left) or some balance in-between. But there are important reasons, other than urban opportunity for why youth are leaving: they are not taught about the value of food and agriculture while growing up and therefore do not pursue initiatives or enterprises that are associated with food or agriculture. Their entire mission as children, told over and over by their parents, is to go to school and get away from activities related to food and agriculture – NOT to participate in it. Kisoboka Foods is helping to shift this culture (along with others) by coordinating the food market for local small farmers – delivering greater value to smallholders through offering transaction transparency, agricultural training, and business development services for sustainable impact. In doing so, their aim is to attract young entrepreneurs into food and agriculture with better business models that can serve society – as opposed to just selling a lifeless product to it. And they approach it from a non-NGO ideology. The social metric, as observed by their offering to society, is inherent in their approach. One of the most important differences in the way Kisoboka Foods transacts is with documented contracts for farmers – something unheard of in rural areas. They also look at the human capital aspects, i.e. labor (wage) fairness, based on prices customers and consumers pay and then reflect this down to their supply sources with better pricing arrangements. The environment, as evidenced by soil quality, forests, plant types, and water are also incorporated into the agriculture practices Kisoboka Foods educates their farmers on, encouraging the farmer network to transform land use practices for the benefit of their enterprise. Meaning, that farmers can improve soil qualities by using organic methods, using appropriate tree cover or nitrogen fixing trees, using companion planting (polycultures), and using conservation methods via precision water use, conservation tillage, and mulching – farmers are improving their enterprise value, not reducing it. See 8 Forms of Capital for more on this thinking. How did Kisoboka Foods get into this?

Kisoboka Foods started as an isolated and individual producer and quickly evolved into a cooperative with fellow neighboring farmers. This was the easy (and fun) part. Their original intent was to be a part of the agriculture community and learn if the struggles farmers faced were any different from their own. Take note that this choice was made easier due to limited alternative opportunities – i.e. no job prospects for a new graduate. However they soon realized that not only were cooperatives difficult to maneuver but they were often corrupt and they had no real conversation with ‘the market’ and wanted to get a little closer to the buyers. Kisoboka Foods then dove head first into trading and started where all traders start – the (physical) market. Quickly they learned what could and would not work, unfortunately the hard way – by losing a significant amount of the initial investment. *In a more entrepreneurial interpretation, Kisoboka Foods was testing their model and seeing what worked. And now, they believe they have a much better grasp on how to intermediate the market for their products – delivering value to farmers and their customers and understanding the underlying pricing mechanisms in place for their products.

What sets Kisoboka Foods apart? The company differentiates itself in a number of ways such as: they are formalized as a legal business entity; they are strategic and organized in how they operate; they are responsibly managing revenues by investing in productive assets; they look at multiple aspects of impact – not just financial, but social, human, and environmental impacts; they incorporate farmer education into their business model – something unique in this stage of the food value stream (i.e. supply chain); and they receive technical assistance from Capitol Food Ventures on company operations, financial management, and product/market development. I would be remiss if I didn’t share lessons learned or challenges faced. Here is a list of what both Capitol Food Ventures and Kisoboka Foods has learned this past year: Many people outside of food do not understand how much small food enterprises have to struggle to survive and they likely do not understand what – operationally – it means to get by; would knowing help them make different choices when purchasing their weekly groceries?; If you have a good partner, the management team can operate from multiple locations; you need to have trust and a partner who is willing to work together more so than any technical expertise; It is fun building enterprise organically which happened to turn into something many other people value, that is rewarding; A small investment goes a long way if managed properly and invested into productive assets over developmental ones (at the beginning); and You do not need 10x returns or 5x returns like a traditional VC; 1-5% returns are just fine and help with longer term sustainability in terms of organizational capacity and growth. Over the last year, there were a few issues which posed undue stress. In particular they were: Using a large part of the initial investment towards non-productive assets such as for legal and registration fees; these costs are very heavy for a small enterprise just getting started, eating directly into working capital; Paying out dividends early; this cut into our bottom line creating a negative return in the first year, however CFV investors saw part of their investment returned (approximately 13%) in the first year of operation; Communicating over long distances and not being present during the local election season to distribute the workload limited our revenue potential; Worrying about security related issues – not necessarily of our product or physical assets, but for our human capital; due to corruption, our business was targeted in an attack by local police officials – with no legal reason identified. However, even with these challenges and stresses, creating a small food enterprise that specifically responds to the social (farmer) challenges (of market access, agricultural training, and business development) and to the market challenges (of reliable buyer supply, product quality, and a service oriented enterprise) has been rewarding. There is much more to this story that I would be happy to share. Please stay in touch with both Capitol Food Ventures and Kisoboka Foods by following us on FB and Twitter. What is a Small Food Enterprise? I have used the term since 2010 to encompass the ongoing expansion and growth of interest in the food space – anywhere from input suppliers, producers, and processors to distributors, retailers (food coops), branding folk, and financiers. And most often of local consumer food product startups. And more recently of the commercial kitchens springing up. I am ecstatic that Slow Money is adopting the term to reflect the companies they invest in too! If you use a conventional SME definition, it is a bit too big for what we are talking about here. Formally, SME is defined differently by different institutions but ultimately assess # employees, annual revenues (or turnover), and assets. OECD states, “small and medium-sized enterprises (SMEs) are non-subsidiary, independent firms which employ fewer than a given number of employees.” SME Definition Table rev What we are talking about is much smaller in scope than the full SME definition, I believe, likely closer to a micro-enterprise, except a little larger. And it differs for different countries throughout the world as markets are developed much differently – so it doesn’t make sense for a single uniform numeric standard and no proxy has been set yet to measure against country size, development, PPP, etc. Therefore, a small enterprise in Uganda is defined by the government as employing less than 50 people, turnover of less than 50M/= UGX (~$20,000 USD), and assets of less than 50M/= UGX. Micro-enterprises are defined as…much smaller, by far. In Uganda, for instance, micro-enterprises are those with less than 5 employees, turnover less than 10M/= UGX (or ~$4,000 USD), and assets of less than 2.5M/= UGX (or ~$1,000 USD). Elsewhere, like in the US, micro-enterprises, like SME’s, are defined by industry type. So even though the range for employees is anywhere under 250, revenues under $45M, and assets of $45M – the differences are really stark for say services when compared to agriculture. SMEs share some organizational and behavioral attributes with large firms. Still, when compared to large firms, SMEs are: less influential or less likely to have significant personal contacts within high levels of government and the financial sector, and therefore less able to negotiate special fiscal incentives or influence government benefits (“corporate welfare” or “sweetheart deals”); therefore less likely to be involved with government corruption; more often managed by their owners, more centralized in their management, with substantially weaker delegation and departmentalization; more focused on short-term needs and medium-term survival than on long-term profitability or market share; less likely to prepare and follow business plans; less technologically sophisticated and slower to adopt available and affordable technology; more flexible and able to adapt quickly to changes in the economic and regulatory environment; more often only able to hire (and therefore compelled to train) unskilled workers who generally will not meet the hiring criteria of large firms; more likely to be deeply rooted and active in one community (locally or regionally focused); and, more dependent upon personal relationships between management and workers and between management and customers. Because of the fuzziness of definitions, and its ongoing evolution in practice for identifying what it is, I believe there are some functional and behavioral characteristics we should be looking at to complement the three quantifiable metrics of employees, turnover, and assets. In particular, Small Food Enterprises are: formal, that is to say, registered with government ministries or other registration bodies; obligated to pay taxes, and on the path to social security (welfare) charges, as they are generally too large or visible in the community to avoid paying such governmental charges; able to allow their employees to take sick leave and vacations while receiving compensation; on the path to provide formal skills training for their employees and providing such training for a substantial percentage of such employees; on the verge of being able to finance accounts receivables; typically unable to invest in capital with a payback of longer than 12 months; and able and inclined to voluntarily organize or contribute to local community projects but likely unable to make monetary charitable contributions. This is a mixed list based on the Brookings Global Economy and Development findings and my own findings at Capitol Food Ventures. Ultimately, the term is still being defined, however, to give it more body and shape, we are suggesting Small Food Enterprises reflect the following characteristics: They exist anywhere in the food value stream within the food and agriculture industry (including beverages and nutrition supplements) They earn less than $25M in revenues (or somewhere there about; I pick this figure because US markets vary widely with developing country markets) They employ less than 250 employees They still embody their original or fundamental values (these can change, but not to the extent that they lose sight of their core mission or purpose) and mission They are entrepreneurial in nature (flexible) and therefore risky since they may not follow a business plan They are still learning They aim to address specific social, environmental, and economic (market) challenges Since this is more of an ongoing dialog, it would be good to hear what other people believe ‘small’ should be. 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