Strategies for New Enterprise Development – Consider Market Size and Competition.

February 3, 2022

I often get calls from folks looking to start a new business who are only focused on the current profitability of a new crop or a new marketing strategy. What they often overlook is the size of the market and likely pressure from competitors.

As an example, consider food hubs. A study by Rebecca Cleary and others on the economic viability of Food Hubs showed that over-investment in food hubs as an aggregation and distribution source for small and mid-scale farms can have the unintended consequence of cannibalizing sales from other hubs and for-profit food businesses in the area. Their study found that a community would need 180,000 residents to support one food hub and remain profitable but would need over 500,000 residents to support two food hubs.

This same pattern holds true for farmers markets, CSAs and other direct marketing channels. Early entrants may see high returns, but as more and more marketing outlets are developed, unless the pool of customers expands proportionately, farms end up going to more markets to reach the same pool of customers and each market gets a smaller share.

So - if you are entering a new market with the goal of capturing high profits you should ask yourself the following three questions:

1. How many potential customers are there?

• Is this a growth area or a fad? The shift to prepared foods and home delivery seem to be growth areas due to long term trends in consumer behavior but consumption of locally grown tumeric may be a fad.

• Is there room for more businesses to enter or is the market already reaching saturation? Following on the example of local tumeric, there may be sustained demand for 1000 lbs of local turmeric in a region, but little opportunity for growth after that. If growers in the region are already producing 990 lbs, there is little opportunity for new entrants unless they can compete on price, quality or convenience. This will put pressure on existing providers.

2. How difficult is this market to enter? If it is easy and profits are high you should expect competition for customers. Before you enter this market, you should ask yourself:

• Do I have an advantage that will allow me to keep my customers as more companies enter (low production costs, business reputation, location or service). So if you can compete with other farms in the market on price, quality or convenience then you might want to pursue this venture.

• Is there another way of keeping other competitors out? (High initial costs of entry, control of key assets, regulatory barriers). Some products are cheap and easy to produce. If they are profitable, then everyone will try to sell it. Other products require high capital investment, need specific locations or technical knowledge or are restricted (think CBD permits or markets that require a specific certification)

3. How flexible is my investment and what level of profit do I need to make it pay off?

• Will this investment lead to other opportunities?

• Can I easily and affordably leave this investment?

• Is future profitability reliant on the current market conditions being sustained or can I still be profitable with lower returns?

These questions can help you decide if entering a new market is likely to make sense for your farm.