MAKING A PROFIT AS A COMMUNITY BASED PRODUCER ORGANISATION
Martin M Jones and Nicola Bradbear, Bees for Development, 1 Agincourt Street, Monmouth NP25 3DZ, UK
Beekeeping is a powerful tool for development. Bees for Development was the first organisation worldwide to recognise this important fact when we began our work over two decades ago – and we continue to work hard to promote low-cost, communityled, environmentally sustainable approaches to beekeeping for the benefit of poor communities.
We know that beekeeping training on its own is not enough to help communities to move out of poverty. While beekeeping provides a valuable source of food for beekeepers and their families, to significantly increase their income, communities must be able to sell their honey to larger, distant markets. Exactly how to do this can be complicated. During the past four years our Uganda Honey Trade Project has been working with a small rural co-operative to enable individual farmers to collectively sell their honey. We have been collaborating also with TUNADO (Uganda’s National Beekeeping Organisation) to promote the industry at national level. Local communities throughout Uganda take great pride in their honey - which perhaps explains the persistence of small community based organisations (CBOs) producing and packing their own honey - giving rise to the hybrid business model of the producer-packer organisation. This phenomenon is perhaps unique to the honey trade sector. You do not generally see dairy co-operatives (producers) bottling and selling their own milk direct to the general public. Nor do small coffee co-operatives roast, process, pack and sell their own coffee direct to local households. In both sectors the dominant trend is for producer organisations to sell directly to a packer organisation. Why then, do CBOs continue to process, pack and sell their own honey, and does this represent the best way of boosting incomes in rural households?
Several factors could explain this phenomenon:
1. Business advice from various stakeholders including Government, invariably includes a rallying cry to add value to products, such as the idea of bottling honey themselves, or turning honey into premium mead for the middle classes of Kampala. However as with any business decision, individuals and organisations need to ask “Is the extra effort of adding value worth my while?” and “Will the extra income be worth the increased time, effort and cost of adding value?” When it comes to packaging honey for sale, an activity which adds a lot of value to honey, it seems that few producer-packer organisations do this at sufficiently low-cost to enable the finished product to be sold at a reasonable price on the shelves of supermarkets. The result? Ugandan honey is perceived to be an expensive product (in a country blessed with an extremely accommodating environment for beekeeping) and demand for home-produced honey remains low - due to price competition from lower-cost imports from neighbouring Kenya and Tanzania.
2. Community based producer organisations may believe that by selling their honey in an unprocessed or unpackaged state they surrender their ability to add value to their honey, and therefore reduce the benefits to their members. They feel that the value chain will be lengthened, middle-men will be involved, and this is perceived as working against the interests of the community.
3. There is reluctance among CBOs, who play a very valuable role in bulking honey, to sell their honey on to processing organisations who will then sell “their” honey under a different brand. Under this model there is no recognition of the hard work of the community which produced the honey – apart from the financial reward of income from sale of the honey to the packer.
4. Perhaps cash-flow is the main issue? By their very nature, CBOs are more likely to have limited capital bases and therefore selling their valuable honey in smaller units allows them to improve their cash flow. Is it the inability of small organisations with limited capital bases to wait for payment for large bulk orders that is driving them to become producerpackers? This explanation does not explain why CBOs continue to demonstrate a strategy for selling to supermarkets in as large a volume as possible. A more nuanced iteration of this argument could be that supermarkets are the least untrusted of bulk purchasers in the sector – and more trusted than honey packers, for example.
Evidence suggests that the greatest overall profits are gained from selling bulked honey directly to packers. This avoids producer CBOs having to fund the overhead costs of processing and packing – the extra staff who are under-utilised, the equipment that lies idle much of the time, and the small volumes sold due to the high price of the finished goods on the shop shelf. Let us for example analyse the sale of the 500g jar of honey – a common sales format in much of Uganda. The costs shown in Table 1 (above right) are actual costs from December 2013 from an existing CBO:
The example above produces a 500g jar of honey at a cost of UGX 5,317 (US$ 2.11; €1.56). This does not include any of the fixed costs that the organisation might incur – such as rent, electricity, water, internet and staff costs. Given that the Kampala market is highly competitive and saturated with many CBOs selling their own self-packed 500g jars, it is difficult to find a customer who will give large orders at a price much above UGX 5,500 (US$ 2.18; €1.61). Given the cost of producing a jar in our example is UGX 5,317, this leaves a profit of UGX 183 per jar (US$ 0.07; €0.05), which is equivalent to 3.4%. Out of this profit you need to subtract the costs of transport from the CBO to Kampala and still pay for staff, rent and utilities. Extremely large volumes need to be sold just to cover these fixed costs. An organisation with fixed costs of UGX 16,000,000 (US$ 6,337; €4,681) per year will need to sell over 111 tonnes of honey in such a format simply to cover total costs. At this level the organisation still has not realised a profit. In short, it is extremely difficult for CBOs to realise a profit this way!
The figures in this article come from a real CBO. Their costs appear to be representative of many producer-packer organisations in Uganda. Crucially, their total fixed costs, 16,000,000 UGX (US$ 6,337; €4,681) are those in example A (Table 2 above): they must sell 111,878 tonnes of honey in this way to survive as an organisation – totally impossible for them. The result is that their honey business is unprofitable.
Things to consider from this article are:
1. You must calculate all the costs of producing your honey – not just the obvious ones. These are variable costs.
2. You must sell your honey for more than it costs to produce.
3. You must calculate the cost of running your organisation that is not the direct result of producing that honey – such as rent, electricity or non-production staff. These are fixed costs.
4. Your profit from all the honey you sell must at least equal the value of your fixed costs. If they do not, you cannot survive as a business.
5. Do not assume that because you are selling a lot of kgs or selling at a high profit per jar that the organisation will be profitable. You need to follow points 1–4.
6. The most profitable organisations are those who keep fixed costs to a minimum (1), minimise the variable costs (2), ensure that they maximise the profit made per jar while still allowing many kgs to be sold.
In the next edition of BfD Journal we will analyse the focus on honey sales direct to packers. We welcome your thoughts regarding the issues affecting the honey market. Do you represent a CBO producer? Do you pack and sell your own honey – or do you sell in an unprocessed form to a honey packer?