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Moving up the value added chain

The first interview I saw about Tesla was from a well-known car analyst who marvelled at how quickly Tesla would introduce changes to its vehicles.  He said one day, that the 2023 Model S and the 2019 Model S looked the same on the outside, but inside they were very different.

The reason Tesla was able to make changes is that he controlled the entire manufacturing process.  From owning battery plants to forging the vehicle parts to the software, it is entirely controlled inside of Tesla.

The analogy with farming is not evident but it is there.  We now own 5 companies that purchase and transform our produces, creating massive value added.   To give an example, 35% of our production is transformed.

One of the businesses makes pies, that are sold through internet  The reasons, (1) our volumes are too small (2) the organic/bio/natural/ecological branding used is not appealing to the high street market, and (3) our pies use no additives, their shelf life is short.  This is a major issue for the classical distribution channels.  Total value of ingredients for our pies is about £ 3.00.  In this market, the price point for these pies is around £ 12.00.  Now this is not all profit, there are labour, shipping and other expenses, however, our all-in cost, delivered to the end user is £ 6.50.  Which means a profit of £ 5.50 per pie.  This price point is achieved only when we sell 1,500 pies per week.  Break-even is 950 pies anything below that and the company loses money.  

This is the key, we focused our value-added business in non-traditional distribution channels.  Our partners started the business a decade ago in their kitchen and slowly grew the business.  At one point they needed to triple in size, that's where we came in.  

This is the kicker, because everything is integrated (aside from the flour), we were able to change recipes to match certain supplies but also use some of our waste products -- organic whey, a high in protein organic ingredient.  Whey greatly improved the flavour of our pies (especially the vegetarian ones).  This change alone led to a 30% increase in sales, that the bigger facilities could easily produce.  Our share of the profit is slightly more than 60%.  We invested nearly £ 750k in this venture.  right now our IRR is 52%, it will fall a little over the next five years as the original owners "buy back:" their participation back to 50%.  Not bad.  

If these two businesses continue on their current trend, the percentage of our production that will be untransformed will fall from 65% to less than 50% in two years. If you are wondering, it is my wife who is in charge of all non-farm businesses.  She's the one who monitors and manages these ventures.

When I wrote that transformation accounts for 80% of profits in the UK food industry, this is a perfect example.  What is truly amazing is that this company could not get a bank loan for this project.    

Note:  I had pushback about the price of the pies, the only thing I will say is that most pies available on the internet are tiny (6 inches).  Ours are 12 & 14 inches, and the cheapest is £12.00 the most expensive is £24.00.

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