Staken FarmsLimited

It was a beautiful winter morning in December 1989 and Robert and David Kennedy were having a meeting to discuss future plans for the egg production operation of their company, Staken Farms Limited (Staken), which they operated on the west coast of Newfoundland. David began, "Robert, I think it's time we did something about that grading equipment. Either we use it or get rid of it and use the space for something else."

"I agree, David," said Robert. "We've had a couple of producers interested in buying it, but because we felt we might grade our own eggs some day we turned the offers down. I suppose it's time we made a decision one way or the other."

Background Information

Stanley Kennedy became involved in farming quite by accident. By having a few chickens and cows at his summer cottage lie got to know the farmers in the area and after a short while realized an opportunity existed to operate a financially viable farming operation. He formed the company Staken Farms Limited (STAnley KENnedy), with himself as the majority shareholder, and began growing broiler chicken. Since the mid 1970's, the broiler chicken operation expanded and other types of farming were added. In 1989, Staken was very profitable and had grown to the point where it was involved in the production of eggs, pullets, broiler chicken, milk and forage.

This case was preparedby Bonnie L. Simmons for the Atlantic Entrepreneurial Institute as a basis forclassroom discussion, and is not meant to illustrate either effective or ineffective management. Thematerial in this case has been disguised.

Copyright © 1993, the Atlantic Entrepreneurial Institute. Reproduction of this teaching note is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

The production of eggs required layer hens which were approximately 20 weeks old; prior to this age, their egg production was nonexistent. Every six months, one half the flock was replaced by new layers and they would lay for one year before being replaced. The process of egg collection was almost completely automated requiring one individual to oversee collections twice a day.

The pullet operation involved the raising of hens for future egg production. Oneday old chicks were brought to the farm every six months and raised for twenty weeks until they were ready to be transported to the layer barn to begin egg production.

The broiler chicken operation was different again. Oneday old chicks were brought to the farm and raised for four to six weeks after which time they were sent to the local abattoir to be processed for human consumption.

Milk production involved several operations includingacomplicated breeding process to ensure a top quality herd and a sophisticated and automated milk collection facility.

The forage operation included the growth and harvesting of hay and silage. The hay was the grass which was dried and stored in the barn. The silage was the grass which wasn't completely dried and was stored in an airtight vacuum. Because of the moisture in the silage, it was a higher proteincontent feed for the cattle than was the hay.

In June of 1989 Stanley decided to retire and sold his shares to his two oldest sons, Robert and David. Shortly thereafter, each of the dairy and broiler chicken operations were sold to outside third parties and Robert and David decided to concentrate on the production of eggs, pullets and forage. Both sons had worked in the business since it began and had gained considerable practical knowledge of the operation, from a farming and a business perspective. In addition, both received postsecondary education from a wellknown agricultural school.

Prior to the change of shareholders, the company purchased grading equipment for eggs, but it had been allowed to sit idle for a few years. At the time the brothers took over the company's operations, all of Staken's eggs were graded by Northern Dairies Limited (Northern). David and Robert felt they should simply keep the equipment in the event the situation with Northern someday changed to Staken's disadvantage. However, they realized the longer the grading equipment sat idle, the less valuable it was.

The Problem

Although the grading equipment seemed to be an opportunity waiting to be utilized, there were other factors to consider. The main problem was the size of Northern, their potential competitor. If Staken began grading and marketing eggs, Northern had the resources to lower prices to the point where Staken could no longer compete and would be forced out of business. It was this risk of jeopardizing the other, successful, operations of Staken that caused Robert and David to avoid making a decision. However, they both felt this had gone on long enough and decision time had come. They decided they had two options available:

  1. Sell the grading equipment at the best offered price; or
  2. Take the necessary steps to begin grading and marketing their own eggs.

They knew that before they made any decision they would have to look at the cost and benefits of both options. The option to begin grading would require the most work since they knew they would need to gather information and formulate some kind of "business plan" for the operation. At first they were sceptical about spending time and money on a business plan if they would only decide later not to pursue the grading operation. However, they were soon convinced of the benefits of such a plan when they realized how much money could be lost if they started operations right away and it turned out to be unprofitable!

"Well, Robert, we definitely need to follow through on this business plan idea, but it's difficult to know where to begin. There's an awful lot of different information we need to collect." "Exactly," Robert responded, "we'll need to talk to people from the local wholesale and retail operations and consumers, as well as to Northern. Then we will need to make some calculations based on these conversations and any other information we have."

Two weeks had passed and Robert and David were sitting in their offices going over the following information they had gathered:

  1. Most wholesalers and retailers felt that eggs were a necessary evil of the grocerybusiness. Because of the several sizes, cooling requirements and ease of breakage,the most important feature for them was not quality, freshness or even brandname preference, it was price. A small initial financial incentive would benecessary to deal with this. Therefore, price would be set at slightly lower thanNorthern's, anywhere between $1.09 and $1.67, depending on the grade (seeExhibit 1). They also thought they could offer to deliver twice a week rather than once (as Northern did) to lower the storage requirements for the grocery stores.
  1. Since the retailers and wholesalers were not excited about eggs, Robert and Davidfelt they had to convince the consumers of their product superiority so theywould demand its availability at their local grocery store. Although Staken couldnot say their eggs were better, freshness and quality would be suggested byhaving the farm name on the carton.
  1. From an analysis of Northern's operations, it was decided they were not a veryaggressive marketer. Eggs were not a top priority for Northern and they hadlearned the hard way the effects of price wars when they unsuccessfully tried topenetrate the east coast market the previous year. It was felt that with a goodpromotional campaign Staken could make themselves known fairly quickly. Theydeveloped the catchy phrase, "Have you had your Staken Eggs (SteakandEggs)today?" as a slogan.
  1. It was determined that, if necessary, Staken could handle grading of all the westcoast production. This was a possibility since Staken represented 35% ofNorthern's egg grading operation and if they lost Staken as a customer, it waspossible they would close the grading operations completely.
  1. From conversations with local wholesalers and retailers, Robert and David feltthey could sell all the eggs they produced which was approximately 554,840dozen per year (26,000 hens @ 22 dozen per year * 97% saleable product). Although the demand for eggs fluctuates daily, they felt an analysis based onaverage monthly sales would provide a realistic picture. The proportions ofgrade type sold are standard for all stores (see Exhibit 1).
  1. Initially, eggs would be graded approximately 13 days a month, for 5 hours aday.
  1. The lowest quote received from several suppliers of cartons and other relatedsupplies was $0.12 per dozen. This seemed to be a standard price in the industry.
  1. They had calculated that, on average, they received $1.24 per dozen fromNorthern for their ungraded eggs. Therefore, this is the price the gradingoperation would "pay" for the ungraded eggs.
  1. Other additional expenses included the following:
  • additional labour for grading (4 people @ $6.50 per hour);
    (no special skills required; industrystandard wage rate)
  • use of the company truck for deliveries ($182 per month);
  • electricity to operate the equipment ($416 per month);
  • repairs and maintenance on equipment ($417 per month);
  • advertising to promote the product ($417 per month); and
  • other miscellaneous operating expenses ($104 per month).
  1. No additional investment was required since the equipment and building werealready in place and fully operational. Only minor repairs would be needed tobegin production. In addition, with egg grading in the back of their minds, in theprevious year the farm purchased a 1ton truck which could easily be used foregg deliveries. Since these costs were already incurred, Robert and Gary knewthey did not have to include them in their analysis.

After spending several hours going over the information they had gathered, the brothers felt very confident the venture could work. Because of their business dealings with Northern over the years, Robert and David were convinced their operation could be more efficient, and because of this increased efficiency, their eggs would be fresher and subject to less breakage. They felt if they could convince the wholesalers and retailers of this, the venture would be profitable.

Robert and David were getting very excited about the idea but at the same time they were still apprehensive about the risk involved. As Robert said, "with Northern, we have the security that our 'egg cheque' will come every month; with this venture, however, our accounts receivable collections will not be guaranteed or regular." Although they felt the venture had the potential to earn additional revenue, they realized they could not make a decision until the business plan for the operation had been prepared. This plan would indicate to them what additional costs and revenues would be associated with the operation and if, in fact, a profit could be expected to be earned. In addition, since they would no longer be selling their ungraded eggs to Northern, these "lost sales" must be included in the cost of grading in order to determine if the operation was a viable one. Only if a profit resulted would the venture be worthwhile and this profit figure would be the "net gain" to the business by adding the grading operation.

Study Questions

  1. Calculate the total expected sales per month from the information in Exhibit 1.
    Assume Staken grades and markets all the eggs it produces.
  1. Prepare a forecast of monthly increase in profit with the grading operation usingyour calculation in 1. above and cost information provided in the case. Use theformat in Exhibit 2. How is annual profit for the company affected? Based onthese calculations, what would you recommend to Robert and David?
  1. Using the business plan outline in Exhibit 3 and the information provided in thecase, indicate the information you would include under each heading in abusiness plan for the egg grading operation.
Exhibit 1
Pricing Schedule
PROPORTION
OF
GRADE / TOTAL SALES / PRICE
Grade A Small / 3% / $1.12
Grade A Medium / 12% / $1.51
Grade A Large / 62% / $1.62
Grade A Extra Large / 15% / $1.67
Grade A Jumbo / 3% / $1.67
Grade B Pee Wee / 1% / $1.09
Grade B Cracked / 4% / $1.40

Exhibit 2

Egg Production Including Grading Operation

Forecast Monthly Increase In Profit
Sales / $xx,xxx
Cost of Goods Sold:
Ungraded eggs / $xx,xxx
Cartons / xx,xxx / xx,xxx
Gross Margin / xx,xxx
Operating expenses:
Labour / $x,xxx
Vehicle / xxx
Electricity / xxx
Repairs & maintenance / xxx
Advertising / xxx
Other miscellaneous operating / xxx / x,xxx
Net monthly increase in profit / $xx,xxx

Exhibit 3

Business Plan Outline

INTRODUCTION

MARKETING

Product

MarketslCompetition

PRODUCTION

MANAGEMENT

EMPLOYEE

FINANCIAL INFORMATION