Cooperative Model in South Africa

esophagusbunnyManagement

Nov 20, 2013 (3 years and 8 months ago)

76 views

Roy Fujimoto, Amanda Hat, Diego
Otarola
,
Agustina

Sacerdote

Haas School of Business, University of California Berkeley

May
30
th
, 2012

P.E.A.C.E. Foundation:
Establishing a Secondary
-
Tier Agricultural

Cooperative Model in South
Africa


Final Presentation



International Business Development

Proprietary and confidential. Do not distribute.

1

Agenda for Today


Introductions


Project Objectives


Project Approach


Findings & Implications

-
Qualitative Research

-
Planning & Implementation

-
Financial Assessment


Q&A


Proprietary and confidential. Do not distribute.

2

Team Introductions


Roy Fujimoto

Amanda Hat

Diego
Otárola

Agustina

Sacerdote

Tokyo, Japan



Before Haas


7 years in business
development and
project management,
IT


Intercultural Studies,
Kobe University,
Japan

Mexico City, Mexico



Before Haas


5 years in marketing &
brand strategy
consulting


Marketing & Finance at
The Wharton School,
University of
Pennsylvania

Central Valley,
California



Before Haas


5 years in business
development,
financial services


Business &
Economics,
University of Arizona

Santiago, Chile



Before Haas


4 years in investment
management


Assistant
Professor at
Catholic
University of
Chile Business School

Proprietary and confidential. Do not distribute.

3


Project Objectives


P.E.A.C.E. oversees a number of agricultural primary cooperatives across different
regions of South
Africa. These cooperatives are
currently struggling to achieve scale and
lack a
go
-
to
-
market strategy



C
ooperatives
’ ability to produce value
-
add goods is
hindered by a lack of resources and
limited access
to processing
facilities and distribution networks



P.E.A.C.E. would like to understand what services and functions can be pooled at a
second
-
tier level in order to take advantage of scale opportunities across
primary
-
tier
cooperatives

1

2

3

PROJECT OBJECTIVES


Create an implementation plan for a second
-
tier cooperative that:


C
ommercializes value
-
added products and/or services


Addresses institutional factors posed by the local social and political environment


Provides a sustainable source of economic growth for South African rural communities


Proprietary and confidential. Do not distribute.

4

Our aim is to create a plan for P.E.A.C.E. that leverages global best
practices and addresses the challenges posed by the local context

1

2

3

Qualitative

Research

Planning &
Implementation

Financial
Assessment


Benchmarking
Exercise


Qualitative Interviews


Farmers


Farm Managers


Agronomists


Academics


Local
Government
Officials


Financial Analysis &
Conclusions


Assumptions


Net Income &
Land Productivity
Requirements


Break
-
Even


Cash Flow




Implementation
Approach


Key
issues


Primary activities


4


Stage
Implementation Plan


Objectives


Key Activities


Estimated Timing


Current Status

PROJECT APPROACH

Proprietary and confidential. Do not distribute.

5


We chose to study a number of cooperatives that represent a range
of
structures, operations and markets

Primary Tier

Local Reach

Third Tier

Multinational Reach

Mut

Vitz

Not Pictured: e
-
Choupal

BENCHMARKING EXERCISE

ZAHVAC

Proprietary and confidential. Do not distribute.

6

At an overall level, the services provided by each structure increase in
sophistication and scale

Tertiary

PRIMARY TIER

SECONDARY TIER

TERTIARY TIER


Land


Labor for planting, growing and
harvesting


Investments in
small assets


Access to
basic funding




Access to markets


Farm management
training


Capital investments


Bulk purchasing


Improved access to
technology


Access
to
credit


Market price data



Access / expansion to markets
(often international)


Political representation and
advocacy


Major capital investments


Transportation / access to
distribution networks


D
ecision
-
making and
governance


Social impact


Investments
in large
assets


Market research




FARMING OPERATIONS

BUSINESS OPERATIONS

STRATEGIC PLANNING

Proprietary and confidential. Do not distribute.

7

6 Success Factors For Cooperative Development

Bottom
-
up
Organization


Farmers
proactively recognize
the need and believe in the
benefits of
cooperative
structures


Aligned Incentives



Cooperative provides
compelling reasons for
members to join organization,
and customers to buy from it

Empowerment
Through Education


Cooperatives provide skill
-
building training
in
farming and
business administration and
disseminate best practices


Product Marketing



Cooperatives sell their products
under strong
consumer brands
driven by a social mission

Value Creation



Cooperatives play a critical role
in creating value along the
supply
chain and expanding
markets

Emphasis on
Efficiency


Cooperatives
strive to maximize
efficiency through geographic
proximity, supply chain
management, and economies of
scale

1

2

3

4

5

6

Corporate Governance

7

Fair compensation and revenue
sharing policies, organizational
system of checks and balances

Proprietary and confidential. Do not distribute.

8

W
e’ve identified four primary institutional factors that impact the
development and success of agricultural cooperatives

Members forming cooperatives have significantly varied
levels of productivity, assets and farming expertise


Inefficient cooperative operations


Difficulty in achieving economies of scale

Perception

of cooperatives as local organizations
formed purely to serve the interests of the community


Overreliance on government funding


Lack of market orientation and business management



Lack of awareness and education around rights and
responsibilities associated with joining cooperatives


Lack of compliance to membership laws


Members join with wrong expectations


Set minimum standards for
potential productivity and
infrastructure as requirements
for membership


Position cooperatives
as
self
-
reliant,
market
-
oriented
enterprises


Proactively identify
cooperative candidates


Provide mandatory
trainings
at
time of enrollment


Perform preliminary data
gathering and evaluation on
potential members



1

2

3

4

Unclear public funding application processes and
guidelines


I
nefficient allocation of government grants


Wrong incentive for cooperative members

INSTITUTIONAL FACTOR

WAYS TO ADDRESS

Proprietary and confidential. Do not distribute.

9

Our aim is to create a plan for P.E.A.C.E. that leverages global best
practices and addresses the challenges posed by the local context

1

2

3

Qualitative

Research

Planning &
Implementatio
n

Financial
Assessment


Benchmarking
Exercise


Qualitative Interviews


Farmers


Farm Managers


Agronomists


Academics


Local
Government
Officials


Financial Analysis &
Conclusions


Assumptions


Net Income &
Land Productivity
Requirements


Break
-
Even


Cash Flow




Implementation
Approach


Key
issues


Primary activities


4


Stage
Implementation Plan


Objectives


Key Activities


Estimated Timing


Current Status

PROJECT APPROACH

Proprietary and confidential. Do not distribute.

10

Leveraging Global Best Practices

Bottom
-
up
Organization



Proactive identification of
potential cooperative
members


Productivity assessment


Aligned Incentives




Compensation / revenue
sharing structure


Pricing strategy



Empowerment
Through Education



Comprehensive education
curriculum


Mandatory training as part of
membership agreement


Product Marketing




Branding and packaging
initiative


Marketing communications
plan

Value Creation




Secondary cooperative
mission


Bulk purchasing


Marketing communications
plan

Emphasis on
Efficiency



Crop planting program and
other standard procedures


Bulk
purchasing


Financial management

1

2

3

4

5

6

Corporate Governance

7

FROM SUCCESS FACTORS TO ACTIONS


Organizational structure


Roles and responsibilities


Revenue sharing policy

Proprietary and confidential. Do not distribute.

11

Implementation Plan

Phases & Objectives

Phase

Feasibility

&
Standardization

Planning &

Assessment

Structure

&
Governance

Implementation

Duration

Ongoing

4


6 months

6


12 months

6


12 months

Objectives

Ensure potential
primary

cooperative
members are meeting
minimum productivity
and asset benchmarks

Establish

mission for
organization and
i
dentify operational
needs of primary

cooperatives and the
most effective way to
meet them

Define secondary
cooperative

management, revenue
sharing and corporate
governance

Build

operational plans
for key function,
associated costs and
timing

Key
Strategic
Areas


Data Gathering


Definition

of
Standards


Initial Evaluation


Existing Minimum

Standard

Support




Demand, Revenue
and Cost

Forecasting


Financial Strategy
& Management


Stakeholder and
Ownership

Assessment


Market Data
Analysis


Operational Needs


Membership

Participation


Human Resources


Revenue
Distribution and
Governance



Operations


Member Education


Product Marketing


Community
Engagement

1

2

3

4

IMPLEMENTATION PLAN OVERVIEW

Proprietary and confidential. Do not distribute.

12

Phase
1: Feasibility
and
Standardization

Data Gathering and Definition of Standards

Strategic

Area

Key Activities

Objective

Timing

Status

Data Gathering

Identify pool of potential primary

cooperatives members based on

geography

Gain solid understanding of
potential

primary
cooperative members to
proactively select those
with greatest possibility of
success

Ongoing

Gather necessary data

for initial
assessment:

-
Land ownership

-
Farm size

-
Infrastructure: irrigation,
warehouse, processing

-
Membership structure

-
Financial records

-
Services provided

-
Motivations and objectives

2



4
weeks

Definition

of
Standards

Define minimum operational
standards for

potential member
cooperatives

-
Irrigated, cleared and fenced land

-
Evidence of potential productivity

-
Long
-
term objectives

Standardize

primary
cooperatives’ operations
be景牥r晩fa汩z楮i
membe牳桩r 瑯 獥捯nda特r
瑩t爠r牧rn楺a瑩tn

1 month

Discuss

and reach operational
standards a
greement
for primary
cooperatives

1 month

Not started

In progress

Complete

ILLUSTRATIVE

Proprietary and confidential. Do not distribute.

13

Our aim is to create a plan for P.E.A.C.E. that leverages global best
practices and addresses the challenges posed by the local context

1

2

3

Qualitative

Research

Planning &
Implementation

Financial
Assessment


Benchmarking
Exercise


Qualitative Interviews


Farmers


Farm Managers


Agronomists


Academics


Local
Government
Officials


Financial Analysis &
Conclusions


Assumptions


Net Income &
Land Productivity
Requirements


Break
-
Even


Cash Flow




Implementation
Approach


Key
issues


Primary activities


4


Stage
Implementation Plan


Objectives


Key Activities


Estimated Timing


Current Status

PROJECT APPROACH

Proprietary and confidential. Do not distribute.

14

Our financial analysis is focused on assessing profitability across the
different tiers that form the cooperative system

Individual Farmers

Primary Cooperative

Secondary Cooperative

FOR 10
-
YEAR PERIOD




Break
-
Even
A
nalysis


Productivity


Required hectares



Cash Flows



Funding Requirements



Economic Profit

ANALYSES

COOPERATIVE SYSTEM

Proprietary and confidential. Do not distribute.

15

We leveraged internal and external data sources to model the financial
performance of a secondary
-
tier agricultural cooperative in South Africa

Global

Best Practices


Crops Produced / Yields


Investments Made


Primary Cooperative Cost
Structures


Average Prices

Sicabazini

Projections

ECIAfrica

Market Data

1

2

3

Mut

Vitz

ZAHVAC


Services Provided


Investments Made


Secondary Cooperative

Cost
Structures


Value
Added

DATA SOURCES

KEY ASSUMPTIONS

Proprietary and confidential. Do not distribute.

16

0
10
20
30
40
50
60
70
80
90
100
110
-2,000,000
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
% Increase in Land Productivity

RAND

COOPERATIVE SYSTEM NET INCOME

Net Income
Growth of Land Productivity
1
st
-
TIER INVESMENTS

& EXPENSES

2
nd
-
TIER INVESMENTS

& EXPENSES


Land clearing


Fencing


Irrigation


Other investments and
expenses


Trucks


Warehouse


Office management


Salaries, training
and investments in
1
st

tier cooperatives

% Increase in Land Productivity

For a cooperative system to be sustainable in the long term, a
secondary
-
tier organization must increase productivity by 28
-

30%

Proprietary and confidential. Do not distribute.

17

There is a minimum combination of productivity and hectares managed
to ensure the viability of the secondary tier

INDIVIDUAL FARMER LEVEL

SECONDARY TIER COOPERATIVE LEVEL

Productivity x Farm Size

Number of Farmers

RANDS earned

per farmer

=

1

Calculate RANDS earned per farmer

2

Compare to opportunity cost (farming
alternative)

3

Break
-
even productivity per hectare per
farmer

Increase in

Productivity

0%

20%

40%

60%

80%

Hectare /

Farmer

0.58

0.48

0.40

0.35

0.3

Fixed Expenses /
Inv

Total Hectares

Expenses per

Hectare

=

1

Calculate fixed expenses and
investments per hectare

2

Break
-
even productivity per hectare

Increase in

Productivity

0%

20%

40%

60%

80%

Minimum
Hectares

251

202

166

140

120

2

Compare to incremental value generated
by secondary tier cooperative

Proprietary and confidential. Do not distribute.

18

Cash flows both at the secondary and system
-
wide levels will be
negative for the first 8 years, stressing the need for a long
-
term view

-3,500,000
-3,000,000
-2,500,000
-2,000,000
-1,500,000
-1,000,000
-500,000
0
500,000
1,000,000
RAND

SECONDARY TIER
CASH FLOWS

-8,000,000
-6,000,000
-4,000,000
-2,000,000
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
RAND


COOPERATIVE SYSTEM CASH FLOW

Proprietary and confidential. Do not distribute.

19

N
egative cash positions illustrate the need for funding, primarily in the
form of long
-
term debt

-20,000,000
-15,000,000
-10,000,000
-5,000,000
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
RAND


COOPERATIVE SYSTEM

CASH POSITION

-10,000,000
-9,000,000
-8,000,000
-7,000,000
-6,000,000
-5,000,000
-4,000,000
-3,000,000
-2,000,000
-1,000,000
0
RAND


SECONDARY COOPERATIVE

CASH POSITION

Margin (Value Added)
-


Expenses


Salaries


Training


Marketing


Other admin Expenses


Net
Working
Capital


Secondary Cooperative
Investments

Price of Goods Sold
-



Cost of Goods Sold


Irrigation
, clearing and
fencing Investments

Proprietary and confidential. Do not distribute.

20

Although the secondary tier cooperative does not become profitable for 8
years, member primary cooperatives begin to turn a profit earlier

-40,000
-20,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Economic Profit/Member (RAND)

SICABAZINI: PROFIT / MEMBER

Co-operative 5
Co-Operative 1
Co-Operative 2
Co-Operative 3
Co-Operatie 4
-2,000,000
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
RAND

SECONDARY COOPERATIVE

REVENUE & NET INCOME

Net Income
Revenues
Cooperative 1

Cooperative 2

Cooperative 3

Cooperative 4

Cooperative 5

Proprietary and confidential. Do not distribute.

21

Financial Analysis: Key Takeaways

1.
In order for a secondary cooperative to be financially sound, all farms it serves should
have
a) access to irrigation b) cleared land and c) fencing

before joining



2.
Beyond basic infrastructure investments,
land productivity and the creation of
value (i.e. margins) are critical to long
-
term sustainability



1.
Break
-
even levels at the primary and secondary level may be achieved through either
a) larger farms or b) increased productivity per hectare. These
break
-
even figures
are not the same for primary and secondary cooperatives



1.
The secondary tier cooperative will incur
negative

cash flows for 8 years, 5 years
for primary cooperatives; consequently funding will be required at both levels



1.
Assuming an adequate combination of investment, farm size and land productivity,
secondary cooperatives represent a sustainable structure for farming and
economic development in the longer term

1

2

3

4

5

Proprietary and confidential. Do not distribute.

22

GEESE STORY

Proprietary and confidential. Do not distribute.

23


Thank you