Forecasting Future Sales and Profit for Value-Added Agriculture

Transcription

1 Forecasing Fuure Sales and Profi for Value-Added Agriculure Haluk Gedikoglu and Joseph L. Parcell This research analyzes facors affecing produc and profi lifecycles for new value-added producs. The mehodology presened shows how sales and profis evolve and how exogenous facors such as iniial markeing effors affec sales and profis. Resuls indicae ha producers can increase he level of profis over ime hrough iniial markeing effors. The heoreical model is applied o a qualiy cale program o assess he analyical performance of he model. Value-added agriculure sems from using a commodiy o produce a produc ha is eiher a complemen o or subsiue for an exising end-use or indusrial produc. Someimes he produc is differeniaed very lile (e.g., ehanol) and oher imes he produc displays significan differeniaion (e.g., Blue Diamond Almonds). Mos of he economic quesions surround he significanly differeniaed value-added producs. The mos imporan quesions are, How profiable will he new produc be? and, How long will he profi sream las? General wisdom is ha he profi sream will shoren as compeiion arises. The objecive of his sudy is o show, hrough comparaive dynamics, he value o agriculural producers of iniial markeing effors of exending a produc s lifecycle. Produc-lifecycle heory is widely used in he markeing-sraegy lieraure o evaluae he expeced sales and profi levels for new producs or a produc-line exension. The heory predics ha profis will increase as sales increase. They will hen reach a maximum, afer which profis will rend o zero because of compeiive facors. However, cerain choices and acions can change he lengh of he produc lifecycle, mos imporanly he period for which profis are posiive. These facors include iniial markeing effors (delay facor), he ime a which profis obain he maximum (inflecion poin), and he projeced sales ceiling. The resuls of he curren research are direcly applicable o value-added businesses seeking a compeiive advanage during sarup. Furhermore, his research can be used o emphasize he need for adequae iniial working capial. Gedikoglu is Associae Lecurer, Deparmen of Economics, Universiy of Wisconsin-La Crosse. Parcell is Associae Professor, Deparmen of Agriculural Economics, Universiy of Missouri-Columbia. Theoreical Model The produc-lifecycle approach has been used o analyze and forecas sales and profi levels. Cox (1967) showed ha he lifecycle of a new produc is characerized by four sages: inroducion, growh, mauriy, and decline. The inroducion sage is when he produc is firs markeed and sales are less han five percen of he marke share. During his period, profis improve from negaive o posiive. In he growh phase, sales volume increases rapidly, and posiive profis coninue o increase. The growh phase ends wih profis reaching he maximum level. The nex phase is he mauriy phase, in which boh he rae of increase in sales volume and profis plaeau and begin o decline. The las phase is he decline sage. During he decline phase, boh oal sales and profis decline rapidly. Figure 1 shows he sages of he produc lifecycle (Cox 1967) and Figure 2 shows he corresponding profi lifecycle. In he lieraure, he profi lifecycle is obained implicily from he produc lifecycle, bu an analyical framework for he profi lifecycle is missing. As he decline sage is economically undesirable, he curren sudy does no ake ino accoun his sage. The formulaion of he produc lifecycle model is (Cox 1967) (1) F F S = + A e 1 (I I ) for = 1,2 T, where is he index for ime, F is he cumulaive sales level a ime, S is he sauraion (maximum) level of sales, T is he ime a which cumulaive sales reach he sauraion level of sales and I is he inflecion poin and he ime a which profis reach he maximum he beginning of he mauriy phase. A is he delay facor which shows how long he

2 32 November 2009 Journal of Food Disribuion Research 40(3) S Cumulaive Sales Inroducory Growh Mauriy I T Noe: Verical axis values for presenaion purposes only. Figure 1. Produc Lifecycle Example. $200 $150 $100 Profis $50 $0 -$50 Inroducory Growh Mauriy I T -$100 Noe: Verical axis values for presenaion purposes only. Figure 2. Profi Lifecycle Example.

3 Gedikoglu and Parcell Forecasing Fuure Sales and Profi for Value-Added Agriculure 33 sales of a produc will say in he inroducory phase ( A [ 0, 1 ] ). A value of A close o one indicaes a long inroducory phase, whereas a value close o zero indicaes a shor inroducory phase. A shor inroducory phase is desirable in ha i allows posiive profis o be rapidly obained. In general, markeing effors in he inroducory phase cause A o approach zero (Morrison 1995). Morrison (1995) graphically presened he effec of a change in he levels of S, I,, and A on he produc lifecycle. However, he analyical framework o analyze he effec of hese changes simulaneously on he produc lifecycle or F was missing. The pres en sudy provides he analyical framework o show how changes in S, I,, and A simulaneously affec he shape of he produc-lifecycle curve. The change in F due o a change in A can be represened as (2) df (S( S ( A ), I (A A ),,, A ) F F (.) ds = + da S da F F (.) di ( + F.) I da for = 1,2 T. The resuls show ha for < I, F (.) increases by decreasing A. However, for > I, F (.) decreases by decreasing A. 1 Even hough sales are imporan for producers, and he produc-lifecycle model analyzes sales, he profis obained from sales deermine wheher companies coninue producion. The produc-lifecycle model does no provide an explici formulaion for he profi funcion. However, we show how iniial markeing effors affec profis. Profi Lifecycle To observe he change in he level of profis a each period, he profi funcion is specified as 2 F (3) π (S S( A ), I( A) ),, A) = ( P F.) c b F (.) (AA ) for = 1,2 T, where is he derivaive of he cumulaivelifecycle funcion wih respec o, which gives he insananeous sales amoun a ime, while P is he price of he produc a ime. A linear cos funcion is assumed wih respec o an insananeous sales level in which b is he slope and c(a) he inercep. The erm c(a) includes he iniial markeing cos and fixed producion coss, which implies, as markeing effors reflec a decrease in A. We assume c(a) does no rend over ime and is only affeced by A, where A can only be alered during he inroducory phase. The effec of a change in A on he level of profis aained in each period is 3 (4) + /- for { Inroducory } } π (.) = for { Growh } }. for { Mauriy } } The negaive sign in Equaion 4 indicaes iniial markeing effors cause profis o increase for he corresponding years and he posiive sign indicaes a decrease in profi due o iniial markeing effors. As he change in c(a) hrough iniial markeing effors occurs only in he inroducory phase, profis are expeced o be lower in he inroducory phase (iniial years) and higher in he years following he inroducory phase due o increased sales. Depending on he magniude of he markeing coss, posiive profis may also be realized in he inroducory phase. Applicaion of Produc- and Profi-Lifecycle Theories 1 Appendix informaion ha shows he derivaion of he resul is available from auhors upon reques. 2 Figure 2 shows he profi curve for S = 21000, A = 1, I = 7, and T = 12. The Show-Me-Selec (SMS) Heifer Program of Missouri was iniiaed in 1997 o develop a high- 3 Appendix informaion ha shows he derivaion of he resul is available from auhors upon reques.

4 34 November 2009 Journal of Food Disribuion Research 40(3) qualiy, branded, bred heifer supply effecively creaing an increased value via branding for he heifers. Profiabiliy was a crucial crierion for farmers o remain paricipans in his program. We use his example because of he compleeness of available daa o provide credence o he heoreical model. The daa needed o formulae cumulaive sales and profis for he SMS Heifer Program was obained via he documenaion of SMS Heifer Program special sales, available for he 1998 hrough 2004 period (Paerson and Randle 2006). The daa used in he simulaion analysis were obained by aggregaing he informaion supplied by individual producers. Therefore he resuls more closely reflec changes in Missouri beef indusry levels. Bayus (1998) demonsraes ha he lengh of a produc lifecycle can differ for individual producers and suggess ha he conclusions abou he produc lifecycle should be made based on indusry-level daa insead. The use of he produc-lifecycle mehod requires sales daa. However, for new producs a forecas of sales is he only available informaion. Morrison (1995) provides approximaion mehods for parameers in he produc lifecycle of new producs. More specifically, an esimaed version of Equaion 1 can be used o arrive a (5) F (.) = F S A I 1+ e (I ) for = 1,2...T, 4 An example is beneficial. Following Morrison (1995), for a producer who wans o sell a new ype of omao in a small own, Ŝ is calculaed. I is known by his producer, from marke research, ha here are 1,000 people in he own who buy omaoes, wo every year. Also, hrough consumer surveys i is learned ha 25 percen of he poenial consumers will purchase a new omao. From he marke informaion, he sauraion level of sales is approximaed Ŝ = 1000 * 2 * 0.25 = 500 omaoes. where Ŝ is he approximaed value of he sauraion level of he sales volume,  is he esimaed significance of he delay facor, and Î is he projeced value of he inflecion poin. According o Morrison (1995), he value of Ŝ is found o be he maximum cumulaive amoun of sales he produc is expeced o achieve. 4 The oal number of regisered heifer buyers aending sales for 2003 was 595, he average herd size for a regisered buyer was 90 animals, 61 percen of he regisered buyers bough SMS Heifers, and 73 percen of hose who bough SMS Heifers indicaed hey wan o coninue buying SMS Heifers (Parcell e al. 2005). The number of acual buyers is calculaed by muliplying he oal number of regisered buyers (595) by he percenage of buyers who acually bough heifers (61 percen). To approximae he number of fuure buyers, he number of acual buyers (363) is muliplied by he number of buyers who wan o coninue buying SMS Heifers (73 percen). Finally, o find he expeced fuure oal sales of SMS Heifers, he average herd size (90 head) of hese acual buyers is muliplied by he esimaed number of fuure buyers, equaing o Ŝ = (595 * 0.61 * 0.73) * 90, or 23,845 heifers. The value of  and Î are calculaed by using he non-linear opimizaion procedure from Kros (2005). Using he calculaed value of Ŝ, he values for  and Î are seleced o minimize he sum of squared errors beween he acual cumulaive sales daa and he expeced value of cumulaive sales for heifers in he program beween 1997 and Specifically, 8, (6) min ( F ) A, I A(I ( = 1 ) 1+ e s.. 0 A 1, 0 I, where F is he acual cumulaive sales daa for year. Two consrains are assumed:  is beween zero and one, and Î is posiive.  is found o be The small magniude of  is likely due o significan iniial markeing effors for he SMS Heifer Program. 5 The value of Î is 7.5, showing ha profis for he program coninued o rise for 7.5 years afer he program began. 5 Producer-owner represenaives a sale locaions adverise widely, wih he Universiy of Missouri Exension sysem serving as caalys for markeing effors. The consignmen cos for each heifer markeed hrough regisered sales ranges from $15 o $20 per animal. Mos of his consignmen fee goes oward markeing. In addiion, he Universiy of Missouri Exension service offered free news releases for his program because i was iniiaed hrough Universiy of Missouri Exension monies. 2

5 Gedikoglu and Parcell Forecasing Fuure Sales and Profi for Value-Added Agriculure 35 The shape of he cumulaive lifecycle (CLC) curve for he SMS Heifer Program is creaed wih wo differen values of Â, 0.37 and 1 (Figure 3). Recall, an  equal o 1 indicaed no markeing effor. As can be seen from Figure 3, when  = 1 he shape of he CLC curve is similar o he shape generally displayed in exbooks. Toal sales are iniially low, grow rapidly, hen reach mauriy. When  = 0.37, a higher level of sales can be reached a an earlier ime in he inroducory phase. As an example, he level of sales for year wo is compared for each value of Â. In Two, oal sales are projeced o be 2,646 heifers when  = 0.37 and 200 heifers when  = 1. The acual daa indicae ha Two sales were 1,844 heifers. Overall, he CLC curve is beer approximaed by  = 0.37 han by  = 1. As can be seen in Figure 3, a decrease in A causes boh S and I o increase. The increase in S causes sales o increase for all periods, which is consisen wih he findings of Morrison (1995). However, Morrison (1995) did no incorporae he change in S as a response o a change in A. For he SMS Heifer Program, he decrease in A causes he sales level o increase for s One hrough Six and 13 hrough 19. For s Seven hrough 12, sale quaniies are projeced o decline due o large iniial markeing effors. 6 6 If S can increase sufficienly, hen he level of sales may no decrease for any period. This value of S is calculaed o be 30,666 for SMS Heifer Program. However, his value of S could no be obained even for A = 0. Hence facors oher han A also need o be used o increase S. This poin requires furher research Cumulaive Sales Acual CLC Esm. CLC for A=0.37 Esm. CLC for A=1 Figure 3. Comparison of Cumulaive Lifecycle (CLC) of A = 0.37 versus CLC of A = 1.

6 36 November 2009 Journal of Food Disribuion Research 40(3) I is possible o compare he ne gain in sales from a decrease in A, i.e, increased markeing effors, as A goes from 1 o For an increase in markeing effors, he heifer sales increase 15,489 head During s One hrough Six, decrease 14,929 head During s Seven hrough 12, and increase 12,887 head during s 13 hrough 19. Therefore he increase in cumulaive sales due o enhanced markeing effors for he 19-year period simulaed is 13,447 head. A decrease in A causes I o increase. By decreasing A from 1 o 0.37 for he SMS Heifer Program, he inflecion poin I increased from = 6.5 o = 7.5. Thus early markeing effors can subsanially increase he ime during which profis will coninue o rise before peaking. Overall, he fac ha acual sales daa for SMS Heifer Program is beer approximaed by he CLC for A = 0.37 insead of he radiionally hough CLC for A = 1 shows ha here will be a higher number of sales han expeced and a longer period during which posiive profis will be achieved. Profi Curve The profi funcion for he SMS Heifer Program is simulaed following he cumulaive lifecycle as (7) min (.) (.) p F b 7 F + c(a) ( ) + π. b, c = 1 The values of insananeous rae of sales for each period, F F (.), used in he esimaion procedure are prediced from a previously esimaed cumulaive lifecycle for he SMS Heifer Program using he value  = To esimae he profi level for each year, he price level used, p, is he average price per heifer for SMS Heifer Program sales over he seven year period, $981/head. The esimaed profi curves for A = 0.37 and A = 1 are shown in Figure 4, acual profis are available for seven years. Comparing he profi curves for A = 0.37 and A = 1 shows he effec of markeing effors on profis. Iniially, profis are lower for A = 0.37 han for A = 1. This is due o increased markeing expendiures. The profi levels for A = 0.37 become significanly 2 higher afer Six. Profis diminish faser for A = 1. This shows ha producers receive more periods of posiive profis when iniial markeing effors are underaken. The approximae area under he profi curve for A = 1, over he seven-year period, is calculaed o be $617/head, while he area under he profi curve for A = 0.37 is $955/head. When yearly profis for boh levels of A are discouned by a discoun rae of eigh percen, he ne cumulaive gain hrough enhanced markeing effors urns ou o be $156/head. The esimaed cumulaive gain is greaer han he added cos incurred hrough a markeing campaign. While sarup coss can be huge, in heory here is a greaer chance of achieving profiabiliy sooner by invesing in iniial markeing. This resul reinforces he need o inves in markeing early in produc developmen. Brand Value The general wisdom in agriculure is ha he brand value creaed by produc differeniaion will las for a very shor ime, as replicaion of an agriculural produc is ofen easy in comparison o oher indusries. However, we show ha hrough markeing effors, shor-erm profiabiliy can be increased, and he period of profiabiliy can be expanded. For he curren sudy, he brand value is defined as he difference beween he per-head profi levels for he SMS Heifer Program and non-program commercial bred heifers: SMS S (8) B = π SMS S π and non-sms S π for = 1,2,... T. non-sms S π are he profi levels for he program and non-program heifer for each period, respecively. The change in he brand value due o iniial markeing effor can be represened as (9) = SMS B B π π SMS SMS non SMS SMS = SMS π = SMS π 0 for = 1,2,... T, SMS SMS non SMS π where is equal o zero because he iniial SMS markeing effors for he program do no affec he profi levels of non-program heifers. Therefore he

7 Gedikoglu and Parcell Forecasing Fuure Sales and Profi for Value-Added Agriculure 37 $300 $250 Profis ($/head) $200 $150 $100 $50 $0 -$50 -$ Acual Profis Esm. Proifs for A=0.37 Esm. Profis for A=1 Figure 4. Profi Lifecycle for SMS Heifer Program. oal change in brand value due o he iniial SMS Program markeing effors is represened as he sum of changes in program profis for each period: (10). From Equaion 10, he oal increase in brand value will be equal o he oal increase in profis beween SMS Program heifers and convenional heifers. This is calculaed o be $156/head. Hence by invesing in markeing effors he program increased SMS Heifer Program heifer value by $156/head. The esimaed brand value is shown in Figure 5. The posiive brand value is expeced o las for 8.5 years when iniial markeing effors are underaken for he SMS Heifer Program. 7 The lengh of run for he brand value is exended by wo years due o iniial SMS Heifer Program markeing effors. Thus iniial SMS Heifer Program markeing effors 7 In Figure 4, T is equal o 12 years for A = 0.37 and en years for A = 1, which shows ha posiive profis are realized for wo more years due o iniial markeing effors. caused he brand value o increase in erms of an immediae price premium and due o long-erm marke peneraion. Conclusions This research evaluaes he heoreical and empirical impac of markeing effors on he value-added agriculure produc lifecycle. While he lifecycle mehodology and comparaive dynamics repored in he curren research can be exended o non-agriculural producs, he goal of he curren research is o show how he applicaion of such mehodology can explain he lifecycle of value-added commodiy goods. The resuls indicae, hrough comparaive dynamics, ha he produc lifecycle heorem is meaningful only afer incorporaing he impac of a change in iniial markeing effors. Thus he abiliy of a business eniy o susain profis from invesmens in a value-added business requires significan up-fron invesmen in markeing. Through iniial markeing effors i is possible for he value-added business eniy o decrease he amoun of ime unil posiive profi is realized and exend he number of

8 38 November 2009 Journal of Food Disribuion Research 40(3) $300 $250 Premium ( $ / head ) $200 $150 $100 $50 $0 -$50 -$ Acual Premium Figure 5. Brand Value for SMS Heifer Program. Esimaed Premium for A=0.37 periods producing posiive profis. Furhermore, he findings of he curren sudy indicae ha allocaion of monies for markeing effors is a criical componen for success, as shown wih he effec of a decrease in A on sales and profi. When he produc is successful, he increase in shor-erm profis ouweighs he added markeing cos. Finally, he produc-lifecycle projecion and profi-funcion analysis is applied o a producer value-added qualiy bred heifer program. Through simulaion, he esimaed level of price premiums for he bred heifer program was deermined o be similar o acual premiums. Thus wheher for a produc or a differeniaed commodiy, he produclifecycle heory applied here indicaes markeing effors are criical o he long-run success of he produc and is abiliy o garner price premiums and generae a posiive profi. References Bayus, B. L An Analysis of Produc Lifeimes in a Technologically Dynamic Indusry. Managemen Science 44(6): Cox, W. E., Jr Produc Lifecycles as Markeing Models. The Journal of Business 40(4): Kros, J. F Forecasing New Producs wih a Non-Cumulaive Logisic Growh Model: A Case Sudy of Modem Technology. Journal of Business Forecasing 24(1): Morrison, J. S Lifecycle Approach o New Produc Forecasing. The Journal of Business Forecasing Mehods & Sysems 14(2):3 5. Parcell, J. L., M. Cox, D. Paerson, and R. Randle Buyer Percepions and Willingness o Pay for Bred Heifer Characerisics. Unpublished Working Paper, Universiy of Missouri-Columbia. Paerson, D. J. and R. F. Randle Missouri Show-Me-Selec Economic Analysis and Summary Informaion. hp://agebb.missouri.edu/ selec/econsum.hm. Accessed November 2006.