MAKING OLIVE OIL
- Racking and Filtering
- Finished Product
- Turning Olive Oil into a Business
- Business Plan
- Sample Costs
- Making Perfect Olive Oil
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The Executive Summary
Business Goal or Mission
Market Research: Industry, Marketplace, Customers, and Competitors
What are the important elements to capture in a solid business plan? As with any new venture, entrepreneurial spirit and individual enthusiasm is what gets you started. You love the romance of a “lifestyle” business, the excitement of embarking on a new adventure, the potential for success. But it is the process of putting together a plan with realistic expectations that can turn your passion into a profitable business. It is also important to realize that timing is everything. We get many calls from people who have made their first oil four years after planting their trees, asking for bottles and labels. When asked about whom they plan to sell to and where they are going to distribute it, they often have no answers.
So make sure you have a roadmap of where you will be going. You cannot decide on an orchard layout until you choose your olive variety. You cannot choose an olive variety unless you know what type of oil you will try to sell. You cannot know what will sell until you understand what your customer wants or needs. In other words, your business goal will determine the first steps you take (such as planting trees), so it is best to have a well-researched plan.
It is a real challenge to break away from the competition and create a brand that sets your product apart from all the others vying for limited shelf space and loyal customers. A “what if” plan can help you think through issues you may not have anticipated. It should be flexible enough to address changes in market or orchard conditions. As you develop your plan, you will likely come face-to-face with two realities: one, it takes more capital to get started in the business than you would imagine; and two, it takes more time to get to the “turn” (that is, when cash coming in exceeds cash going out, aka profitability) than you may have counted on. To have a good chance of success, the value of a little planning and analyzing your options cannot be understated.
Note that the cost and price examples we use below are in 2010 dollars.
THE EXECUTIVE SUMMARY
The Executive Summary is a one-page synopsis of your entire plan. It is often written last. It is what you would tell a friend or investor over a cup of coffee. While most olive oil entrepreneurs will not go to a venture capitalist, the Executive Summary would be useful for your banker or accountant. It should stand alone, and not refer to other parts of your plan.
The Company Profile is a brief (one or two pages) description of the company you have founded or want to found. It will address such things as:
- What is the name of your company?
- Does it currently exist or when will it be formed?
- What organizational structure will it take (e.g. sole proprietorship, partnership, corporation)?
- Is there relevant founder or personnel experience that makes you particularly qualified to succeed in the business?
- How big do you expect it to become?
- Where will it be located?
This section deals with the most fundamental decision you will make. It defines exactly what area of the olive oil business you will be in.
- Will you grow olives?
- To be sold to other processors?
- To be processed at your own facility?
- To be processed at a public mill?
- To be sold to other processors?
- Will you buy product from others?
- In raw form (olives) to be processed at your own facility?
- In raw form (olives) to be processed at a public mill?
- In already processed form (bulk oil)?
- In raw form (olives) to be processed at your own facility?
- Will you sell processed product (olive oil)?
- Wholesale in bulk form to others?
- Wholesale as a “private label” product for others?
- Wholesale or retail as a finished “branded” product?
- Wholesale in bulk form to others?
This is also where a little market research really comes in handy. Knowing answers about market prices (e.g. bulk olives can sell for anywhere from $450 to $1,000/U.S. Ton) and equipment costs (e.g. entry level processing equipment can run upwards of $60,000 for a machine that can process 350 to 500 pounds per hour) will probably help you make some basic decisions about your direction. We provide some other cost examples on our Sample Costs page. You will also find useful numbers on our Useful Number Conversions page.
BUSINESS GOAL OR MISSION
Start with a clear business objective in mind. If you can state the goal in simple terms, you can set measurable thresholds that can track your success and keep you focused. A specific objective will also allow you to quickly recognize when things aren’t “going according to plan”. Some people call this “the mission statement”. It only needs to be a single well-considered paragraph.
Answers to the following questions can help in articulating your business mission:
- What market need will your company address?
- Who are your target customers?
- What products and services will your company sell?
- Where are you going with your company?
- What are the philosophies that will guide your business development?
Think of it as the big picture view of why you are going into the olive oil business and what you hope to get out of it (the long-term vision). If the answer is “I just want to make a lot of money quickly”, then we might suggest looking elsewhere. The specialty food business is as notorious as the restaurant business in its high rate of failure.
But this section assumes you are serious and dedicated about getting into the olive oil business, so once you’ve got a “mission statement” nailed down, the next step is figuring out how to achieve it – within your resources – and in a way that sets you apart from a tough field of foreign and domestic competitors.
MARKET RESEARCH: INDUSTRY, MARKETPLACE, CUSTOMERS, AND COMPETITOR
Before any business activity begins, market research is essential. Without it, you are operating your business “blindly” with very little chance for success. It helps to have a good grasp of the business environment in order to make smart choices about how you will compete for sales.
- How do you define the industry? Food industry, specialty food, or gourmet food business?
- How will you classify your product? Cooking staple or condiment?
- What are current trends and important developments?
- Who are the largest and most important players? Do they matter to your business? How?
- What problems is the industry experiencing: Oil qualities? Supply vs. demand? Oversaturation of new brand entries? Shrinking competition (attrition) from boutique brands?
- What national and international factors influence the industry? Imported volumes? EU subsidies? Weak/strong dollar?
- How do you define your marketplace? Your sales territory?
- How large is it and how fast is it growing?
- How is it segmented by type of marketplace? Gourmet food stores, health food stores, cheese shops, farmers’ markets, etc.
- What companies currently service this market?
- What trends are important in your marketplace?
- Who is your customer? What segment of the market are you targeting? Timid buyers looking for a bland oil? Adventurous types who want something spicy with a lot of bite?
- What characteristics define your target customers? High income, price sensitive, environmentally concerned, health-focused?
- How many types of customers do you have? Distributors, retailers, food brokers, food lovers, restaurants, home cooks? And what are their concerns?
- What motivates buying decisions? Is it price, bottle, color of the oil, label, word of mouth, local connection?
- What evidence do you have that potential customers will want your product?
- What are the five top brands you expect to directly compete with? Are they the big multinational players or locally grown brands?
- What are their size, location, target market, and growth history?
- What are their products? How are they priced? What market position do they use to differentiate themselves?
- How is your product different/better? Be realistic and specific. We get several calls a day from people who tell us (and believe) their oil is “the best in the world” or “unique”.
Any good business plan includes short-term (1-2 year) and long-term (5-year+) objectives. The short-term section addresses what it takes to get up and running. The long-term plan lays out what needs to happen in order for you to still be in business five years from now, meeting or exceeding your projections for growth and profit.
But even before you go through the exercise of costing out what it takes to get in business, have a realistic frame of mind about what will make you successful. Remember three things:
- What you want to sell will ONLY sell if the consumer wants it. In a business that is too often driven by “product-focused” sales, be “customer-focused” in order to stay ahead. And remember, if you have decided to create and sell a retail brand, you have two types of customers: the sales channel (distributor, food broker, or retail store owner); and the end user.
- You must have a clear point of differentiation. Over the past decade, the olive oil business has exploded. There is a lot of competition out there for shelf space and consumer brand loyalty. Figure out the best way to tell your unique story. Otherwise, you are just another “best ever extra virgin olive oil” on the shelf.
- Perseverance and pluck can win out. Even if you think you have the perfect plan, continue to monitor the market, stay flexible, and think creatively. The goal might not change, but the best way to get there may.
There are six key areas that determine what kind of approach to take when creating and retailing a specialty olive oil brand. We have already addressed some of these above, but at this point, we will focus on the “retail and branded” business scenario.
- Will you grow the olives or buy the fruit or oil in bulk?
- Will you process it yourself or hire a miller?
- Will you have one product offering, or plan for expansion into other price points or product lines (extra virgin olive oil, flavored olive oils, dipping oils…)?
- Will you package it yourself or hire a co-packer?
- Will you build your own sales force or use a distributor/reseller to handle sales and distribution?
- Who is your best target consumer? How will you create awareness and demand for your product?
Answers to these questions will guide the direction your business takes and identify inherent costs. Once you’ve assessed the costs, it will be relatively simple to determine profit potential.
When you start to map out the longer-term plan, you’ll deal with issues like market distribution expansion, realized brand value, and exit strategies.
- Will you try to transition from specialty food stores to mainstream grocery chains?
- Will you create product line extensions to broaden your brand and expand avenues of distribution?
- Will you be interested in capitalizing on the inherent value of a successful brand and consider a “buy-out” by a major packaged goods manufacturer?
So get out a big piece of paper, list the questions above and start creating a decision tree. Then follow the path and fill in some timetables and costs. At the end of the exercise, you will have a pretty clear idea of what you are up against. And, if you are seeking outside funding for your new venture, you’ll already have answers to most questions any investor will ask.
Obtaining the Product
In the olive oil business, you have three choices to procure product:
- Buy olive oil that meets your specifications (extra virgin quality, virgin quality, type of olive, organically-processed, etc) in bulk.
- Buy fruit and either process it at your facility or use an outside production facility.
- Grow your own olives, then self-process or use an outside production facility to create olive oil from fresh fruit. In our Making Olive Oil pages, we provide detailed information about the farming process and all that it entails. The related cost factor of producing your own oil is obviously more complicated than pricing out bulk oil. If you opt for the latter, however, keep in mind that you are now a marketing company, not an olive oil producer, and your sales pitch becomes more difficult. Most importantly, remember to factor in the following costs:
Orchard expenses, including capital expenditures (equipment) and ongoing maintenance (agricultural requirements.
Labor expenses, including wages, workmen’s comp, medical insurance, employee tax. Remember to consider yourself an employee whether you take a salary or not when determining profitability.
Liability insurance (on-site and product).
Farming-related exceptional occurrences (e.g. early freeze, olive fruit fly infestation).
Milling expenses, including fruit transportation costs to and from, actual milling cost, product testing and certification.
Warehousing expenses, including rent, bulk storage containers, freight.
Marketing the Product
Any marketing strategy is all about finding customers. The best oil is useless if you don’t have buyers for it. In this section you must prove to yourself, and then the reader, that there is an eager market for your product. In prior sections you have explored the marketplace, competitors, and unmet needs and opportunities. Here is where you will discuss utilizing those opportunities. How is your oil different from your competitors? What unique features and benefits will your products have? Who are your customers? Start with some form of test marketing. It can be an inexpensive tool to gain invaluable insight into what might work and what won’t. Some olive oil entrepreneurs will buy oil made from the variety they intend to plant, bottle it in the proposed container, and sell it at farmer’s markets, or do focus groups, give it to friends, etc. to get feedback. This should all be done before you buy an acre of land or plant a single tree. You may be able to set up a card table at your local market if you offer tastings of their other offerings. Try to be objective and don’t let your bias toward your product affect your test subject. This is a learning experience. Why does the customer prefer the oil they do? Is it a product attribute you hadn’t thought about, like the color or bottle cap/cork?
Once you are confident of a direction, follow the traditional marketing approach of the “four Ps” and focus on four factors: product, price, packaging, and promotion. A more recent and critical addition to this list is “place” or distribution strategy. If you can create the right mix for each of these areas, you’ll have a good chance of success.
- Product Strategy
The single most important thing you can do to determine the best product configuration is to do your homework. If you have a good fix on what is out there (the competition), what is missing (what consumers may be looking for and not finding), and what your distribution options are (the best channel to push your product through), you can save a lot of expensive trial and error.
Be as detailed as possible about defining your product. Will you sell one single blended oil or will you have a whole line of single varietals? Some producers press oil at different times of the year to create “early” and “late” versions with different characteristics. While blended oils have traditionally received the highest ratings and appealed to the broadest market, single varietals are interesting and can increase sales out of curiosity and appeal to individual tastes. Some olive oil producers will sell cured olives or olive tapenades. Do you want to sell the oil in different types of packaging, such as stainless fusti or gift baskets? Will you sell olive oil accessories such as tasting or dipping bowls and olive motif tablecloths? Will the product be a condiment, a staple, or be bought as a gift or souvenir? Remember that an important goal is to have repeat customers and to build loyalty.
- Pricing Strategy
The second area to focus on is the mechanics of determining price. You can approach this one of two ways: work from a cost-basis (aka zero-based budgeting) and calculate a final retail price by building in margins after you compile your costs; or research what is already selling and for how much, and project what you think the final retail cost of your product could be, then work backwards into what your net sales value is after distribution costs. This approach will also give you a very quick way to see if you will be cash-positive or cash-negative after selling a bottle of oil.
In the specialty food business, most companies try to achieve a 10% net profit margin. So, don’t get infatuated with the “image” of supermarket shelf placement unless your projections show that higher volume can offset lower margins. Just remember there is no quicker way to go out of business than to be wildly successful selling a product at a loss.
So, what are the margins you can expect in the course of taking your product from ex-warehouse (cost when it leaves your warehouse) to a point of purchase? It will vary a little depending on what channels of distribution you go through, but the following pricing exercise provides some norms for what each point of distribution expects to get as a cut of the final price.
Price to Consumer $11.99 Less 40% ($4.80) (Retailer Margin) _______ Cost to Retailer $7.19 Price to Retailer $7.19 Less 25% ($1.80) (Distributor Margin) _______ Cost to Distributor $5.39 Price to Distributor $5.39 Less 5% ($0.27) (Broker Margin) _______ Cost to Broker $5.12 Price to Broker $5.12 Less 20% (-$1.02) (Gross Profit Margin) _______ Your Ex-Warehouse Cost $4.10
- Distribution Strategy (Place)
The third area to consider is what channels of distribution to use. You may choose to start out going directly to consumers, selling at farmer’s markets and seasonal fairs. As already mentioned, it is a great way to go through a low-cost test marketing phase and get direct consumer feedback without retail chain exposure before you are ready. Best of all, this route incurs no sales commission margins. Or you might start out as your own sales force, with a trunkful of product, visiting every local retail outlet that you have already researched and think you have a high probability of success with, in which case you will only need to consider their margin. Or use a broker (who will impose a 10% margin instead of 5% if they don’t sell to a distributor) to get to a retailer. But you get the idea. If it passes hands in the process of getting to the consumer, you have to factor in a sales cost/commission for each link in the chain.
There are a few other variables to keep in mind. Brokers do not “buy” your product, they only represent it, serve as your field sales force, and expect you to manage the store-door delivery and accounting. Distributors will buy your product, but usually only if they are confident that it is already “pre-sold” to their customers. If it doesn’t move off the shelf quickly enough, a repeat order won’t be forthcoming.
Finally, remember that you will face many sales costs besides commissions. Discounts for early payment (e.g. 2% 10 day discount), slotting fees (large scale grocery store only), “breaking” cases for smaller retailers, product sampling, sales promotion discounts (e.g. buy ten cases, get eleventh free) are all part of the distribution business that you will probably face at one time or another.
- Packaging and Promotion Strategy
In specialty food businesses, marketing almost always makes up the greatest expense. You have to create awareness of your product at every level of the distribution process and create demand from all your customers.
In order for your product to sell into the distribution chain, you may face the expense of trade show attendance, mass mailings to a purchased retail list, internet marketing, and sales kit promotional materials.
In order for your product to sell at the in-store stage, consumers need a reason to buy it. Your marketing message gives them that reason. They may have read a positive review in the local paper (think public relations push), seen a bottle on a friend’s kitchen counter (happy customers are your very best sales force), received a mail-order catalog featuring your product, or made an impulse purchase because of an attractive end-aisle display or shelf talker at the gourmet food store. They could have even picked your bottle out from among ten other brands on the shelf simply because they liked the looks of the label. No matter what motivated them, it resulted in a purchase because they responded to a marketing message (one of some 7,000 that Americans are exposed to every day).
Marketing and Sales Forecasts
Can you put together a rough sales volume and revenue forecast with marketing and sales expenses? Try to go several years out. Once you begin selling, you will be able to fine-tune your forecasts but you need to start somewhere.
Remember that $4.10 ex-warehouse cost in the above example? Well, “ex-warehouse” covers the cost of the product (aka cost of goods). Your gross profit margin of $1.02 covers all your other costs, including administrative and marketing (aka cost of sales). If you are trying for a net 10% profit margin, a rough industry standard in the specialty food business, all of your business expenses including salaries and overhead have to amortize to half your gross profit margin, or in this example, $0.51 per unit.
Marketing expenses are covered in both the fixed and variable sides of the expense sheet. Fixed marketing costs (expenses you have no matter how much product you sell) include trade show attendance, sales and marketing kits, mailing lists, telephone sales solicitation costs, internet website development and maintenance, public relations, and industry publication advertising to name a few. Variable marketing costs are the expenses tied directly to sales volume (e.g. product packaging, labeling and hang tags, shipping containers, sales commissions, in-store marketing materials and demos). And finally, don’t forget to factor in your core business expenses, including rent, payroll, insurance, taxes, business supplies, and office equipment.
This is the section of the plan where you pull together all the aspects of the business of being in business. Many of these factors will already be identified elsewhere, but it helps to have an operational summary in the plan.
Operations can include farming, transportation, logistics, travel, printing, consulting, after-sales service, etc. For an olive oil grower this would include land preparation, planting, pruning, watering, harvesting, transportation of olives, milling, storage, bottling, shipping of finished product, etc.
How will you produce and deliver your oil? Don’t assume you must become a farmer. Many of the oils awarded gold ribbons at the L.A. county fair each year are produced by companies that purchase oil from a reputable supplier that has been blended to their specifications. These companies can concentrate on marketing and sales instead of pest control. Very few U.S. olive oil companies actually grow all the product they sell. What will you do in-house, and what will you outsource? (Do you want the headaches of your own mill with the resultant control it gives you? Can you afford a bottling line or will you have someone else bottle your oil?)
What comparative advantages do you have with your operational design? The olive variety you pick and pruning and harvesting methods you choose can give you an advantage. Some companies are planting special dwarf clone varieties that are planted in hedges for cheaper mechanical harvesting.
What kind of people will you need to hire? (Farm help, consultants, drivers for delivery vehicles, seasonal labor for picking, bottling, etc.)
Operation plans include plans for worker safety, emergencies, toxic waste disposal, employee compensation and payroll. Handicap access and discrimination plans may be needed. Compliance with city, county, and state health departments will take some research. Include a description of the operating expenses that appear in your financial statements.
Development describes your timetable for going from research to selling the final product. If you are starting an orchard, this timetable will be a long one. Include development expenses.
Management is the people part of your plan. What is the ownership, who does what? Do you want an advisory board, stock, corporate status, etc.? Who will be your key managers and what are their titles and duties? With most olive oil companies, there is a production person responsible for the orchard and oil production, and a marketing and sales person responsible for promotion and getting the product to the customer.
This section should include cash-flow projections, income statements, and pro-forma balance sheets going several years into the future. If you are planting trees, you need to know that you have enough capital to survive until you start selling product. What are your financial risks and capital requirements? Where will the capital come from? If you will have investors, how will the investment be paid back? After creating pro-formas, many companies decide they need to buy an oil similar to the one they will be making to sell while their trees are getting started in order to get their business going.
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