Feasibility Study by the Association of Family Farms, Inc. In Fulfillment of the Requirements of the National Rural Funders Collaborative Grant

To

James Richardson
National Rural Funders Collaborative

Lawrence Yee, Linda Kleinschmit
Community Alliances for Interdependent Agriculture

Robert Mailander
Rocky Mountain Farmers Union

 

December 31, 2002
Table of Contents

 

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

II. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. Market Overview . . . . . . . . . . . . . . . . . . . . . . . . . 11

IV. The Natural Meat Business Plan . . . . . . . . . . . . . . . . . . . 21

V. Risks and Opportunities . . . . . . . . . . . . . . . . . . . . . . . 40

VI. Next Steps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

VII. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

A – Pro Forma P&L
B – Animal Husbandry and Protocols for Natural Meat Co-op Members.
C – Hub and Spoke Supply Chain System.
D – Animal Fabrication Spreadsheet, with List of Meat Types, Cuts, etc.
E– List of retail products, prices and sales percentages.
F – Competitor Website Pages.
G - Consumer Values & Behaviors Overview – Cultural Creatives.
H – AFFI Overview.
I – AFFI Presentation to USDA in September 2002
J – NRFC Grant

Executive Summary.

A. Purpose of the project.
The purpose of the project is to determine the feasibility of a business plan for the Association of Family Farms, Inc. (AFFI) to create solid, “implement-able” plans that will help lead toward a new cycle of growth in American agriculture. For the purposes of the specific plan in this feasibility study, the Rocky Mountain Natural Meat Co-op (RMNMC or “the co-op”) will be profiled, understanding that AFFI’s intent is to work with many producer and co-op organizations. The fundamental concept of AFFI is to combine these multiple groups under one common umbrella.

B. Business Plan.
1. Overall goals:
 Profitability for producers “on the hoof” and in the P&L.
 Full utilization of the animal.
 Aggressive growth to achieve large size and significant scale.

2. Strategies to achieve goals.
 Build the company from the beginning with the eventual goal of $150 million or more in sales.
 Create three separate programs to maximize utilization of the animal: Natural meat, ethnic meat, and pet food.
 Run AFFI as a food company, budgeting food company sales & marketing expenses and hiring experienced food company professionals.
 Utilize a network of co-pack partners for supply chain rather than purchasing “bricks and mortar.”
 Minimize overhead by leveraging AFFI facilitation team for leadership and functional expertise.

3. Financial and P&L.
 The financial plan shows a company that grows to $150 million in size, with 5% operating income and 3.5% net income.

4. Supply Chain
 Create a management and financial model for producers which ensures their long-term economic health and vitality.
 Institute a system of animal husbandry protocols that assure the production of true natural beef, with 3rd party verification and certification to lend credence to the health and husbandry claims.
 Utilize a “hub and spoke” supply chain system of slaughter and fabrication facilities, cold storage and logistics to achieve the local / regional goals of the AFFI system.
 Partner with a group of appropriately-sized slaughter and fabrication facilities who can maintain high quality and HAACP procedures, segregation of inventory, a “closed” with no outside trim or inputs, source traceability of animals via a tagging system, and processes to capture the offal for use in the pet food initiative.
 Use high-quality public cold storage facilities that follow the USDA Institutional Meat Processing Standards (IMPS) procedures for meat storage and handling.

5. USDA.
 There is considerable enthusiasm and excitement within the family farm sector of USDA for the AFFI concept. USDA officials see AFFI as a very promising new model for economic health of family farms. A copy of the AFFI presentation to USDA, made in September 2002, is shown in Exhibit K at the end of the report.
 USDA particularly likes how AFFI combines co-op and not-for-profit organizations and their affiliations with a common-sense, for-profit business model in consumer products, in a company whose leaders are experienced food industry professionals.
 USDA has agreed to assign an experienced staff member to work on AFFI full-time for at least one year. This position could be filled as early as Jan-Feb 2003.

6. Sales.
 Natural foods forms the core of the AFFI selling strategy, esp. with the goal of building leadership in the two dominant chains, Wild Oats and Whole Foods, as well as leading independent stores and co-ops. AFFI has the potential to gain overall category leadership in natural, and the AFFI concept of promoting family ranches / farms fits perfectly with the strategic vision of the leading natural retailers. The current AFFI model calls for distribution in 258 natural food retail outlets.
 Grocery represents a significant opportunity, esp. with independents, the more upscale chains and the upscale store formats of larger mainstream chains. The plan calls for distribution in 500-600 Grocery outlets, but the potential is much greater than the distribution listed in the plan and could eventually reach 10,000 or more stores.
 The ethnic / carneceria channel is expanding rapidly to meet the needs of the growing Latino consumer base. For AFFI, the opportunity is to gain distribution with a natural meat program that offers high quality ethnic cuts (tripe, kidney, brainmeat, etc.) for Latino consumers who wish to preserve and prepare the rich cuisine of their homeland.
 Food service is a promising channel, but has not been build into the plan as presented in the feasibility study. More work will need to be done on the opportunity in this channel.
 Trade expenses will be budgeted conservatively but adequately to achieve distribution and sales goals. The current estimate of trade expenses (not including payroll) for the natural meat program is 4.5% of retail sales. Other categories and other programs have different trade dynamics and will require separate calculations of trade expense in their own income statements.

7. Marketing.
 AFFI products will go to market with strong, unique brand names and imagery that capture the essence of the qualities of the products.
 Each AFFI brand has a unique creative platform that defines the target, the brand, the frame reference, the differentiating benefit, support points, and tonality.
 The AFFI name itself will not be the primary name, but will be a logo, badge or identifier on each package to link together the different products that form the AFFI family.
 Understanding the budget limitations of the plan, marketing programs will be fielded that utilize grassroots and guerrilla techniques to leverage maximum marketing benefit within budget constraints. Programs include packaging, in-store marketing, sampling, public relations, event marketing, tie-in promotions, internet marketing and “connectedness” marketing.

C. Risks and Opportunities.
Risks:
 Consumer awareness and concern about the issues of natural meat – hormones, antibiotics, omega 3’s, CLA, etc. – does not increase as quickly as anticipated, leading to reduced acceptance of natural meat products and slower growth for the company.
 Retailers decline to accept introduction of the products, or take fewer sku’s than anticipated, leading to slower roll-out in Grocery vs. plan.
 Supply of natural steers lags plan, causing insufficient supply of natural meat.
 Latino carneceria consumers fail to “connect” with the idea of branded carneceria meats, or find the benefit of being natural not sufficiently compelling.
 Utilization of meat, both retail natural meat and offal, is lower than budget, leading to cost of goods variances.
 Drought or other unfavorable natural conditions cause feed costs to rise, increasing cost of goods.
 Outbreak of BSE, Foot & Mouth or other bovine disease could reduce meat demand.

Opportunities
 Customer retailer acceptance develops quicker than anticipated, leading to accelerated rollout of the program to additional retailers vs. budget.
 Consumer awareness and concern about the issues of natural meat increases faster than anticipated, or is “spiked” by a study, 20/20 TV show, etc, which leads to faster adoption of natural meat.
 In pet food, an expose, article or event highlights the distasteful ingredients often found in conventional pet food (e.g. rendered meat, possible presence of euthanized shelter animals, etc.) causing a rapid switch by consumers to more natural alternatives.

D. Next Steps.
1. Build the business plan and the P&L for pet food line.
2. Develop balance sheet and cash flow models for the company.
3. Complete the work with organizational expert Steve Hock on the structure and organization of AFFI and the relationship between AFFI and its member organizations, including the meat co-op.
4. Develop brand names, packaging graphics and brand imagery.
5. Develop “road show” presentations to take the company and its strategy out to different constituencies:
6. Begin negotiations and contract discussions with co-pack partners, warehouses, freight companies, etc.

I. Introduction.
A. Purpose of the project and the grant from National Rural Funders Collaborative (NRFC).
1. Purpose of the project.
The purpose of the project is to determine the feasibility of a business plan for the Association of Family Farms, Inc. (AFFI) to create a new cycle of growth in American agriculture. For the purposes of the specific plan in this feasibility study, the Rocky Mountain Natural Meat Co-op (RMNMC or “the co-op”) will be profiled, understanding that the AFFI concept can work with any number of co-op organizations and is not tied to any single organization. The business plan will provide the co-op with successful and profitable outlets for natural cattle raised by the co-ops 250 member ranchers. NFRC is dedicated to funding projects that will aid in the economic development of family farms and ranches and that will lead to greater economic health for rural farming and ranching communities.

2. Origin of the grant.
In early 2002, the Community Alliances for Interdependent Agriculture (CAIA) The Rocky Mountain Farmers’ Union and AFFI jointly applied to NRFC for a grant to develop a feasibility study and business plan for the AFFI concept. This 3-way collaboration agreed to apply for a NRFC grant with the understanding that the funds would be used to commission a feasibility study and business plan from several members of the Association of Family Farms (AFFI), who have had experience developing and implementing business plans in the natural foods arena. The grant was duly applied for and awarded by NRFC. In its selection of the grant, NRFC cited the unique business model proposed for the Family Farm system and the unique ways in which the co-op could benefit by participating in an enterprise based on the collaborative principles of the Family Farm model. A copy of the grant is shown in Exhibit L at the end of the report.

B. Goals of the feasibility project.
1. Determine the feasibility of the AFFI business model.
2. Develop a specific business plan for the natural meat business within the AFFI system.
3. Assess market conditions, competition, branding opportunities, retail channels, sales strategies and the other variables upon which the business will be built.
4. Recommend the different categories and forms of products, made with natural meat ingredients, which will be most successful in the marketplace.
5. Recommend sales channels within which the natural meat products will find success.
6. Create a market platform and branding strategy for natural meat products in each product category and each channel.
7. Create pro-forma income statements, balance sheets and cash flow statements for the business, which will show the “road to profitability” for the enterprise and the funds required to run the business.

C. Methodology
1. Primary research into the natural meat category, costs, logistics, retail prices, etc.
2. Reviews of similar business efforts, such as Coleman Natural Meats, Cattlemen’s Texas Longhorn Registry, etc.
3. Interviews with experts in different functional areas.
4. Retail store audits and other direct investigations of the market.
5. Selected trips to Washington DC, Missoula MT, etc. to meet with functional experts at USDA, in law and organization-building, etc.

II. Background.

A. The Association of Family Farms, Inc. (AFFI)

1. Purpose.
The purpose of AFFI is to provide producer groups with a common national brand structure with distinct individual brands. AFFI will provide access to markets, sales management expertise and marketing programs to create consumer pull. The desired result is improved economic, social and ecological health of family farms and ranches and the local community.

2. Mission.
AFFI’s mission is to provide consumers with local, fresh products produced by family ranches and farms marketed under one master branding structure with distinct individual brands. The combination of AFFI branding structure and individual brands will help to tie with consumers in terms of principles and values of the family farms / ranches and healthy communities, resulting in:

 Better tasting food.
 A viable future for small family farms / ranches.
 Equitable distribution of the food dollar.
 Decreased dependency on chemical-intensive agriculture.
 Restoration of healthy soils, water and air.
 Restoration of the independent American spirit.

3. Concept.
The AFFI concept is for family farm & ranching organizations, op-ops and community alliances to unite under one organizational “umbrella” with a unifying branding structure a la VISA, which has accomplished a similar organization with its 22,000 member banks. The AFFI organization and managerial facilitation team would be staffed with consumer products industry experts capable of executing national product roll-outs, sales and marketing campaigns successfully. The AFFI member groups would pay a percentage of sales to fund the facilitation team and the sales / marketing campaigns. By pooling funds, AFFI members would have access to expertise and programs at far less than the price that the individual organizations would pay to have their own proprietary resources.

4. Message.
AFFI products are fresh, local, safe and delicious products from authentic family farms & ranches, available anywhere you shop or eat. AFFI products feature the following attributes:

 High quality, great-tasting food.
 From authentic family farms / ranches.
 Ecological growing / husbandry practices.
 Part of a vibrant local food system.
 Source-identified to able to be traced back to individual farms / ranches.

5. Services provided by AFFI to its members.
AFFI will aggregate individual producer groups, co-ops and organizations under one overall structure and a master branding architecture, with distinct individual brands. AFFI will provide access to retailers and distributors to sell the products. This is accomplished by creating compelling consumer messages that promote all of the positive aspects of the products, their benefits for consumers, and the positives aspects of being from family farms / ranches. Among the services provided:

 Work with retailers and distributors to assure access to AFFI members.
 Develop and execute marketing and branding programs to create consumer pull.
 Provide sales management and consumer branding expertise.
 Provide processing, distribution and supply chain expertise.
 Continue to concentrate on building local food systems.
 Provide a governance structure to achieve the goals of members and to ensure equality among members.

B. The Rocky Mountain Natural Meat Co-op
The Rocky Mountain Natural Meat Co-op is an organization representing 250 family ranchers, principally in Colorado, Wyoming, Nebraska and New Mexico. Currently, many of the co-op’s members sell naturally raised steers to natural meat companies. The co-op has explored several different ownership models to ensure its economic success in the future. Several members also began a kosher meat business in 1996, which has since discontinued operations. The production capability of the co-op is at least 60,000 steers annually, but could increase to over 120,000 with the assurance of a market for the output of member ranches. The production protocols (shown in Exhibit B at the end of the report) call for natural animal husbandry techniques, including a prohibition on growth hormones and antibiotics.

C. Other participating co-ops in AFFI.
1. Farm Return, Inc.
 Organization of 80 produce growers in California whose distribution extends nationally.
 Sales potential of Farm Return Inc. in range of $300-500 million.
 Production occurs primarily in the San Joaquin, Santa Maria, Salinas, Coachella, Imperial and lower Colorado valleys.
 Sales presentations already made to Kroger corporate and Safeway corporate. Reps from these companies have toured facilities and given “thumbs-up” for Farm Return Inc. as an approved vendor.

2. Other potential AFFI members.
Several different co-ops have expressed interest in joining the AFFI system, including co-ops working pasta, orange juice and rice. In a few unfortunate cases, the co-ops themselves dissolved even while the AFFI opportunity was being discussed during 2001-2002. This insolvency is a graphic demonstration of the problems of current systems and the need for alternatives such as AFFI to breathe new life into American family farms. As AFFI takes form and is more broadly known, we expect that a large number of producer co-ops will express strong interest in joining the organization.

D. Rocky Mountain Farmers Union (RMFU).
RMFU is the leading voice and representation for independent farms and ranchers in the 3-state Rocky Mountain region of Wyoming, Colorado and New Mexico. Founded in 1907, RMFU currently has 20,000 members. The organization provides important services such as insurance for members, and it works actively in government at both the state and the national level to ensure that independent farmers and ranchers have a voice in governmental policy.

RMFU has worked with member co-ops on several innovative new ventures to create new economic models for success in the future. With the Rocky Mountain Natural Meat Co-op, RMFU has helped the co-op and its members to look at different company models for future success, including AFFI.

III. Market Overview.
A. The Red Meat Market.
Red meat is one of America’s largest and most important food categories, both at the farm level and at retail. According to USDA, cattle comprise 17% of all farm cash receipts, making cattle the #1 component of American agriculture. At retail, red meat is one of the largest category in the supermarket with over $55 billion in supermarket sales. However, despite this large size and importance, red meat has declined steadily in consumer consumption over the past generation, and per-capita beef consumption is about 30% lower today than it was in 1970. Several broad societal trends have contributed to this decline, including the broadening of the American diet to include other types of protein (chicken, soy, etc.) and increased concerns about fat and cholesterol. There has also been an overall change in perceptions of red meat. Formerly it held the status as the primary source of protein that comprised an integral part of nearly every meal. Today red meat has shifted somewhat to a newer, more “specialty” status in which it is featured less frequently in the diet, but is considered a “special” entrée to serve on fewer but more important occasions.

The change of red meat’s status from an everyday item to a specialty item, together with consumer concerns about health, are both significant contributors to the growth of higher-end, specialty meats, both conventional and natural. The non-branded conventional meat segment has been driven to standardization, larger scale and lower prices to ranchers. On the conventional side of the specialty segment, there has been a move towards premium types of meat with some aspect of product differentiation, branding and special status. Examples of specialty conventional meat include the Certified Black Angus program and the Vintage program run by Ralph’s supermarkets in Southern California. The quest for specialty status has led to over 40 different “registered beef” programs registered with USDA. On the natural side, several different “natural beef” programs have entered the market, the best known of these being Coleman Natural Beef. The natural beef market will be profiled in greater depth in section “C” below.

In the future, the red meat category will continue to diverge into two separate sub-segments. Specialty meats with extra “features” such as natural, Black Angus, grass-fed etc. will fill a larger portion of sales for those consumers who desire something more special or premium about those red meat purchases they continue to make. Success in this segment will require successful differentiation of products and clear communications to consumers of the aspects to the brand that will justify specialty, higher-than-commodity prices. The rest of the red meat market will be driven towards low-priced commodity status, in which cost controls, standardization, efficiency low prices will be the key drivers. Success in this segment will require capital and scale to achieve significant cost advantages, while continuing to deliver consistent high quality within the parameters of a non-branded segment. For family ranchers, smaller operators and those producing specialty products, the first segment is the only area of significant opportunity.

B. The Natural Foods Market.
1. Market growth.
The growth of the natural foods industry is well known by this point to most food industry observers, but a few important points are pertinent to the RMNMC feasibility study.

First, the natural industry is grown dramatically over the past two decades, with average yearly growth of 10-20% vs. 1-2% for the grocery industry overall (albeit from a tiny base). The overall size of the industry is approx. $38 billion as of 2002, about 7% of the total $500 billion grocery industry. As a result of two decades of growth, natural foods are considered by even the most anti-natural persons in grocery to be a valid segment of the food industry. Thus, natural products today are given credibility in the industry not seen previously, making the selling proposition of natural products considerably easier and more successful than previously. For natural meat, this acceptance of natural products means that a natural meat program can be taken to any grocery buyer or decision-maker nationwide in any chain and meet with respect, interest and a fair hearing (which is not to say guaranteed acceptance).

The growth of natural foods during the period 1990 – 2001 is shown in Chart 1 below:

 

The composition of the natural products industry is shown in Chart 2 below, and consists of three major segments: Natural Food (38% of sales), Dietary Supplements (51% of sales), and Natural Personal Care (11% of sales).

 

 

Second, the nature of natural products has changed, becoming more mainstream, while the tastes of American consumers have become more accepting of different alternatives, embracing natural products and alternatives which would have been rejected 20 years ago. In addition, the retail outlets for natural foods have become more mainstream, both in the development of supermarket-style “supernaturals” such as Whole Foods and Wild oats, and in the greater offering of natural products in supermarkets themselves. The convergence of natural products and American consumers means that a wider range of products than ever before is perceived to be appropriate and is purchased by a wider range of consumers than ever before. For natural meat, this convergence means that a broader range of natural meat products will be found acceptable by a broader range of consumers, increasing significantly the business opportunity vs. previously.

Third, there is increasing consumer awareness of health-related issues such as the effects of industrialization on the quality of meat, the presence of hormones and antibiotics, the use of toxic chemicals in agriculture and the proliferation of genetically-modified food products. Even such food giants as Tyson, Heinz, Kellogg and General Mills are offering natural and organic products that address the above issues. As more consumers become concerned about these issues and begin purchasing alternatives, it opens additional opportunities for products and brands which can effectively communicate their special, more-natural status.

2. Growth of specific brands in natural foods.
The rising tide of growth in the natural foods industry has facilitated even faster growth among several of its member companies. The growth rate of three of these companies is shown in Chart 3 below. These companies are chosen because they share many features in common with the natural meat business, including:
a) The categories are perishable rather than dry grocery or personal care.
b) The categories are large and important for grocery retailers and so warrant significant space, time and attention.
c) Within the store, these items are merchandised in the higher-traffic perimeter of the layout rather than among the central grocery aisles.
d) The foods purchased are bought by consumers several times per week.
e) There is a perceived health benefit to these products vs. their conventional food counterparts.

3. Keys to success in natural foods.
The natural foods industry world can sometimes seem a bit baffling to non-insiders, but a few simple guides will help to ensure success.

a) Be authentic
The natural foods trade is keenly attuned to the authenticity (or lack thereof) of its vendors. Any hint of manufactured or fabricated elements in the company “story” or brand positioning will be perceived as lack of integrity. Authenticity cannot be faked, neither can it be hidden, so a good guide is to allow the natural authenticity of the company and its products to be visible.

b) Walk the walk.
As a related topic to authenticity, the trade will also observe the company and its principals to determine whether they personally embody the values espoused in the company’s marketing materials and sales presentations.

c) Link to something greater than selling cases of product.
While much of the natural foods business, like its conventional counterparts, consists of the everyday “nuts & bolts” of moving of product to market, the natural foods trade likes to think of itself as serving a higher purpose. The company should link the products / services that it offers to more important and altruistic causes that ring true to the trade. Said another way, “issues matter” in natural foods. The buyer or store manager may bring up thorny economic and/or sociological issues, and will expect the company and its principles to have reasoned opinions or at least a range of thoughtful responses on the matter. For natural meat, an obvious and logical issue to support is the preservation of family ranches and rural agricultural communities.

d) Match or beat conventional counterparts in taste and quality.
In the current natural foods industry, there is no longer any patience (as there once may have been) for products, taste, quality, texture, appearance, etc. that are in any way less than the attributes of conventional counterparts. The current expectation is parity or better vs. conventional.

e) Interact with the trade “early and often” at all levels - national, regional and the store level.
While the hierarchy of sales in the grocery channel is traditional and is segmented by seniority and title, the hierarchy of the natural foods trade is more diffused, distributed, overlapped and non-traditional in nature. So-called “knowledge power” is prevalent, in which knowledgeable people with expertise hold authority and veto power regardless of position or title. Thus, one cannot automatically assume that the vice president is more “important” than the store clerk. Quite often, when new products are being considered, the vice president will call the store clerk and ask for his/her opinion. Or, the CEO may bypass the vice president and ask the store clerk. Regional staff may “trump” their superiors in expertise and may have veto power, either formal or behind-the-scenes, over decisions supposedly made at the national level.

Many times vendors have come away from meetings in the natural food trade thinking that a decision was made, or that their product / program was accepted, only to find out later that it was not. Or, a program may be accepted at the regional level but not at the national level. Or, the program may be accepted at the national level but then vetoed by regional subordinates. Or, a regional buyer may hold off on the decision, then contact other regions or store-level personnel to determine the viability of the proposition.

The only way to operate successfully in this distributed knowledge and decision network is to work all levels of trade management simultaneously, frequently and repeatedly. A good policy is to assume that every person one meets is important and could be the key decision-maker, regardless of job or title, then treat them with utmost importance. Working all of the many levels and networks can seem very frustrating to vendors. However, the positive side of this policy is that it allows the company to “win over” the customer at multiple levels, with multiple persons and in multiple interactions. The end result can be extremely strong and beneficial trade relationships that can and do last for many years.

f) Never abandon the natural foods channel, nor give preferential treatment to customers outside of natural foods.
In the history of natural foods trade relations, several prominent companies have pursued the strategy of first building their business in natural foods, then “turning their back” and focusing instead on the grocery channel because they believed grocery to be the bigger opportunity. In every case known to the authors, this policy has led to disaster. Natural foods is the “birthplace” of most natural companies, and a strong ongoing business in natural foods is critical to the future success of the company. When grocery buyers are presented with natural foods opportunities, their first question will be “how are you doing in natural?” If the company is not strong in natural, grocery buyers will either reject the proposition outright or will retain significant doubts about the viability of the company. Thus, no matter how strong the company seeks to become in grocery, a strong ongoing base in natural foods is a must. Furthermore, if the natural foods trade suspects that the company is “turning its back” on natural foods to seek “greener pastures” in grocery, the natural buyers will frequently retaliate by reducing commitments, canceling promotions, reducing sku’s or even eliminating the vendor. As one natural buyer colorfully put it, “We took you to the dance. Don’t you dare go home with somebody else.” Similar retaliations will occur if natural foods buyers learn that the company is giving preferential pricing, promotions, etc. to other customers outside of natural foods. The best guide is to maintain a scrupulous parity between channels, to treat natural food customers as extremely important (communicating that fact often), and to ensure that non-natural customers never receive a better “deal” than natural customers.

g) In the grocery channel, become the trusted knowledge leader to help the buyer succeed in the natural portion of her / his vendor portfolio.
In the grocery channel, buyers are frequently given natural foods portfolios to manage but don’t have the knowledge to run the natural programs effectively. These buyers look to knowledge experts among their vendors to teach them about natural foods, brands, trends, consumers, etc. in order to make good decisions. It is possible for companies to gain a strong trusted position with the grocery buyers by helping to provide them with information necessary to succeed in their jobs. In many cases, thankful buyers who trust vendors to work for the good of the category (and not just for their own self-interest) will give those trusted vendors carte blanche to manage the overall category. This position of trust is one of the strongest forms of trade relationship that can be formed, and it can serve the company well for many years.

h) In marketing, “tell a story” for consumers.
One consumer branding expert from Europe has declared that “brands, at their essence, are really stories.” According to this theory, which the authors have implemented successfully, consumers (and especially natural food consumers) form emotional bonds with the brands they trust. These bonds come from knowing the brand’s history, its personality the “direction” of the brand - - in essence the brand’s “story.” Natural food consumers where the brand came from, who created it, why it exists, why they as consumers should care. If marketers can bring out the best quality of the brand via its narrative or story, then a strong communications platform can be built to increase brand awareness, trial and repeat purchase.

i) Communicate personal and health benefits first, and environmental benefits second.
The differentiating benefits of natural fall into two basic categories: 1) personal benefits (health, safety, taste, etc.), and 2) environmental or “save the planet” benefits (farming, pesticides, soils, water, etc.). Although many in the natural foods industry focus their communication on environmental benefits, a broad range of studies demonstrates that personal benefits are more motivating to most consumers. The difficulty in marketing natural foods is that the most motivating benefits, those surrounding health, have less documentation (at least currently), while the benefits with the greatest documentation, those surrounding the environment and farm policy, have a lower motivating power.

There are two principle ways to bridge this gap. One way is focus on those benefits which are beginning to come to light in documented studies. An example in natural meat is the new research demonstrating that naturally-raised, grass-fed cattle contain significantly higher levels of Omega-3 compounds and conjugated linoleic acid (CLA), both proved beneficial to human health. The second way is to provide clear, understandable information on the differentiating facts about the product (produced without hormones or antibiotics) then allow consumers to “connect the dots” regarding toe potential benefits. For example, because there is growing concern about the presence of hormones and antibiotics in the food supply, therefore it makes sense for mom’s to buy meat produced without these potentially harmful substances.

C. Natural Meat Products.
1. History.
As the natural foods industry developed through the 1970’s, innovative producers began developing natural alternatives in many conventional categories. In both meat and poultry, certain producers began to question the conventional husbandry practices, which they believed to be wasteful, unnecessary and unhealthy for both the animals and consumers. A series of informal protocols developed for the production of natural beef, including the use of natural grass pasture for most or all of the diet and avoidance of hormones and antibiotics.

The first company to achieve significant size in natural beef was Coleman Natural Beef, founded in 1979 by Mel Coleman of the 100-year old Coleman ranch in Colorado. Coleman beef products gained wide distribution in natural foods and selected distribution in grocery, and Mr. Coleman himself became a well-known figure in the natural products industry and a passionate spokesperson for the overall proposition of beef raised the “natural” way. Following in Coleman’s footsteps, several other natural beef companies entered (and continue to enter) the natural foods marketplace. A description of these competitors is give in section “3” below.

2. Size of the Natural Meat Category.
The size of the natural beef industry in 2002 is estimated at approximately $200 million in manufacturer sales, including both branded products and a large percent of product sold unbranded by weight in meat cases. The largest competitor, Coleman Natural Meats, had sales of approximately $60 million in 2001. Other competitors are smaller, some significantly so, with many companies limited to small geographic regions or just a few divisions of retailers.

In general, natural beef is a fragmented and underdeveloped category relative to both its conventional counterpart and to other perishable natural categories. For comparison purposes, the organic milk market is about $250 million in size, comprising 2.5% of the total fluid milk market of $10.5 billion. Organic produce also comprises 2% or more of total produce sales. Because red meat is a $55 billion category, a similar level for natural meat at 2% of category sales would total $1.1 billion in natural meat sales. Because actual sales are only $200 million, there is an “opportunity” gap of at least $900 million in sales which has not yet been realized by the current group of competitors.

This opportunity gap, combined with the fragmentation and underdevelopment of the category, leads us to believe that there is a large opportunity for new brands and new companies to enter the natural meat market. In addition, none of the current companies exerts a strong leadership role in driving sales or the development of the category, not even Coleman, whose sales and distribution have grown more slowly than other natural industry leaders in recent years. As a result, there is opportunity for an innovative company to enter the market to seize both the mantle of category leadership as well as leadership in sales and market share.

3. Competition.
The most recognized name and the long-time leader in natural meat has been Coleman. It and other natural meat companies are listed below. In addition, pages from competitor websites are shown in Exhibit H at the end of the report.

Company Founded Location Website
Coleman Natural Meats 1979 CO www.colemannatural.com.

Niman Ranch 1979 CA www.nimanranch.com

Laura’s Lean 1985 KY www.laurasleanbeef.com

Harris Beef early 1980’s CA www.harrisbeef.com

Maverick Ranch 1985 ID www.mavranch.com

Cimarron Ranch 1987 AZ www.soarizona.com/cimarron
Natural Beef

Blaine Cattle Ranch 1988 ID www.moscow-id.com/business/
bcrbeef/

Meyer Natural Angus 1990 MT www.meyerbeef.com

Conservation Beef 1995 MT www.conservationbeef.org

Broken Oak Ranches mid-1990’s TX www.brokenoakranches.com

Lasater Grasslands 1996 CO www.lasatergrasslandbeef.com

7A Ranch Heritage 1996 TX www.7aranch.com
Beef
Ervin’s Natural Beef 1996 AZ www.ervins.com

Painted Hills Natural 1997 OR www.natural-beef.com
Beef

Rocky Reef Farms 1997 NY www.sandbook.com/sandbook/
farms/rockyreef

4. Products and Prices.
By in large, natural meat companies produce the same cuts of salable primals and sub-primals produced by conventional meat companies, though the full range of products is smaller for natural meat companies than for their conventional counterparts. For example, a conventional grocery retailer will have 75 to 100 different sku’s cuts in the system approved for purchase, comprised of different cuts plus different case pack sizes, whereas a “super-natural” retailer will limit itself to the 20 to 24 top cuts. A list of cuts, prices and % of sales is shown in Chart 4 below.

 

5. Margins and financial considerations.
The gross margins in natural beef are different for different sales channels. In general, gross margins are highest in natural foods, less high in grocery, and lowest in mass / club. Several different factors contribute to the margin calculations of retail channels, including: a) overall margin targets for the store in total; b) specific margins for the meat department; c) average volume per item and in total; and d) average percent spoilage per item and in total. The average margins encountered in different sales channels are shown in Chart 5 below.

IV. The Natural Meat Business Plan.

A. Overall goals

1. Profitability for Rancher/Owners “On the Hoof” and in the P&L.
The most fundamental goal for the natural beef program is to provide the rancher / owners with a profitable business model whereby they can raise and sell cattle profitably over the long-term. The co-op has determined that company ownership is their preferred pathway to long-term profitability rather than continuing past models in which the ranchers supply cattle to other business entities. In the natural beef business plan, profitability to the rancher / owners takes two forms:
a) Profitable, consistent and growing sales of live animals “on the hoof” into the supply chain at a price that is profitable for the ranchers and reasonable in terms of the business plan P&L.
b) Profitable sales and operation of the business company in the whole, as evidenced by a strong P&L with consistent operating income of 5% or greater.

There is a balance between the two areas of profitability, and both must be managed to a win-win solution in which there are consistently profitable live animal payments and consistently profitable income statements for the food company.

2. Full Utilization of the Animal.
One of the serious financial problems in the natural meat business is that only the primals, accounting for 26% of cold carcass weight, are sold into the market at a premium. The other 74% of cold carcass weight is sold off into the conventional meat market at commodity prices. Because every aspect of natural meat production, from animal husbandry to fabrication to freight, costs more than the large industrially produced animals, every pound of cold carcass weight is more expensive for a natural meat program. If 74% of this expensive ingredient is sold at commodity prices, the resulting negative margin pulls down the entire gross margin for the company.

The RMNMC natural meat business plan proposes that, beyond the sale of primals, two other value-added sales programs are created to utilize the animal more fully and reap additional margin from the natural ingredients:

a) Natural Pet Food. Offal (lung, liver, etc.) constitutes about 36% of live animal weight. The business plan will build a line of canned dog and cat food that is all natural and 100% beef. There are currently very few equivalent products on the market. In so doing, the non-edible offal can be utilized at a price of $0.30 - $0.40 per lb. rather than the commodity price of $0.05 - $0.10 per lb.

b) Ethnic “Carneceria” Program. Edible offal (tripe, brainmeats, kidney, etc.) constitutes about 2% of cold carcass weight. These products are the preferred meats consumed by a large and growing segment of ethnic Americans, many of them of Mexican or Central American heritage. These consumers shop in Spanish language meat & food markets called “carnecerias.” The carneceria business in American is growing rapidly, esp. in cities in the West and Southwest with large populations of consumers of Latino heritage. The business plan will build an ethnic carneceria program to sell all-natural ethnic cuts in carnecerias.

3. Size and Scale.
In the natural foods industry, larger companies with dominant market shares enjoy a disproportionate share of the benefits and the profits of their respective categories. Among the benefits of being the clear leader are the following:
a) Status as “category captain” of the category, with the role of setting the entire set of the section in partnership with the store’s merchandising manager, resulting in preferential positioning for the leader’s products.
b) Greater access to trade programs, promotions, flyers, ads, deals, etc. that are not granted lesser competitors.
c) Greater acceptance of the leader’s new products, company-driven consumer promotions, in-store materials, coupons etc. which help to drive the company’s business.
d) Insider status with the retailer at round-tables, strategic retreats and events where the future of the retailer and the different categories is discussed.
e) Greater access to the media and greater feature in articles, profiles, etc.

Most natural food categories have a clearly dominant leader. However, this is not true in natural meat, where several smaller companies operate in a fragmented, underdeveloped category.

The RMNMC business plan recommends a very large-scale, bold development of the company to build it to a size and scale sufficient to claim the “brass ring” as the undisputed leader of the category. For natural meat, we believe that the benchmark for this leadership is $150 million or greater in sales. At this size, the RMNMC business would be at lest 2x the size of other competitors and would be among the 10 largest natural food companies. The business would also be well beyond the $100 million minimum threshold at which Wall Street food analysis and the media begin following the development and the strategies of company as a genuine “player” in the industry. While we don’t envision this Wall Street attention as leading to an IPO or public ownership, nevertheless it’s important for the company to be profiled by the food analysts in their reports as one of the leaders to track in the natural foods or “healthy living” sector.

B. Strategies to achieve goals

1. Build it from the beginning planning for eventual sales of $150 million or more.
 Building a larger size has distinct advantages in terms of market share, leadership, scale and efficiency.

2. Create 3 separate value-added programs with unique brands and products.
 By creating separate programs, the goal of full utilization of the animal is realized.
 Having several different categories with the AFFI umbrella fits with the long-term AFFI goal of having many different products in different categories.

3. Run it as a food company.
 Develop P&L parameters which accommodate the trade and consumer spending required to succeed as a food company in the food industry.

4. Use co-pack partners for supply chain rather than purchasing “bricks and mortar.”
 Conserve scarce and precious capital to build the brand rather than use those resources to buy plants and equipment.

5. Minimize company overhead and utilize AFFI shared overhead to reduce expenses.
 Us the AFFI facilitation team for the most expensive staff – CEO, VP’s of Sales, Marketing etc. sharing those costs with other AFFI organizations.
 By sharing expenses, each AFFI organization is able to utilize top food industry talent and experience at less than the full expense of those resources.

C. P&L.
Below in Chart 6 is an abbreviated income statement for the company at its eventual size of $150 million or more. This income statement is found in complete form in Exhibit A at the end of the report.

2. An abbreviated five-year income statement is shown in Chart 7 below. For the full set of financial documents, please refer to Exhibits A, B and C at the end of the report.

D. Supply Chain.

1. Producers.
In the AFFI model, producers have a special relationship because, unlike conventional producers, they are not just the suppliers of the primary ingredient for the company’s products. Much more importantly, producers are the owners of the company, and the chief focus of the business plan is to provide for the financial success of the producers.

Several different issues must be addressed for the success of producers in the business plan:

a) Financial sustainability for producers at the farm gate.
 Producers need to receive above-breakeven prices for live animals at the farm gate in order for their financial sustainability to be assured.
 Currently, the breakeven price for naturally-raised steers is about $75.00 per cwt.
 Realistically, producers need to receive $3.00 to $5.00 per cwt. above breakeven pricing for their finances to work.
 Thus, the current price for live animals should be $78.00 to $80.00 per cwt.

b) Financial return for producers, as owners of the company, at the net income level.
 As mentioned above in the discussion of major strategies, the AFFI model required profitability for producers both at the farm gate and in the P&L.
 The producers, as owners, will be investing financial resources as well as time and talent into the company. In exchange, they should receive a fair return on their investment in the company.
 Producers should plan for an operating income of at least 5.0%.

c) Fair and equitable return on the incremental resources put into the program for natural animals.
 Producers make a very large commitment when a natural beef program is undertaken. Not only are the animals raised at higher expense vs. conventional, but the ranch itself is administered differently to conform to the guidelines of natural production. Financial return needs to be built into the financial structure so that producers are paid the full value for the many beneficial and incremental services they provide.

d) Clear and workable protocols for animal husbandry
 The animal husbandry protocols for natural beef are one of the most important parts of the entire concept. These protocols will be described more completely below, but at their essence they are the “validation” of the primary benefits of the product for consumers.
 For the producers, the protocols need to as clear, understandable and easy to implement as possible.

e) Producer Contracts.
 Much of the “industrial” meat system is moving to the use of production contracts, in which the contracting company rather than the producers own the animals being raised. However, we feel it is very important for the producers to maintain legal title and control of the animals throughout the chain of custody.
 As a result, we recommend that marketing contracts be used for the supply of animals to be used.

2. Protocols and Certification.
As mentioned above, protocols and certification are extremely important for natural meat because they provide documentation for the fundamental consumer benefit of being natural such as produced without hormones and antibiotics, grass fed, humanely raised, etc. There are several keys to an effective system of protocols and certification:

a) The protocols need to be clear, workable and consistent with the normal, efficient way in which steers are raised. Said another way, the protocols should not impose inefficient extra steps or “throw a wrench” in the well-established husbandry techniques.

b) The protocols should establish up front the points at which certain procedures are used. For example, if electronic ID’s are implanted into the ears to facilitate source trace-ability of the animals through the system, the system should be set up so that calves are implanted at the correct time.

c) Certification should be 3rd party administered and audited by an accredited certification agency rather than self-certified by the ranchers or the co-op. Self certification has lost most if not all of its former validity, due in part to the language in the National Organic Program that eliminates self-certification and establishes instead a strict system of independent, 3rd party certifiers.

3. The “Hub and Spoke” Supply Chain System.

a) One of the most important principles of AFFI is the preserve the local / regional nature of the product. In order to achieve this principle, the supply chain needs to be set up to keep ranching, production and supply chain in close proximity to the retail markets and consumers in the dame region.

b) For AFFI natural meat, regional production is achieved by creating a “hub and spoke” system of ranching groups, fabricators and public warehouses which are in regional proximity to retail customers and consumers.

c) The current plan envisions as many as four to six regional systems in the U.S., with ranchers, feedlots, fabricators and warehouses linked in regional production systems.

d) For a national business with approximately 120,000 animals, the hub and spoke regionality would create four systems, each accommodating 30,000 animals.

e) A diagram of the hub and spoke system is shown in Exhibit C at the end of the report.

4. Slaughter and Fabrication.

a) Slaughter and fabrication needs to be accomplished at clean, modern USDA-approved facilities.

b) The facilities chosen for AFFI should be of a scale that matches the size of the AFFI program and the high quality, “artisan” nature of the product. Plants should be chosen whose daily capacity is approx. 600 head or fewer.

c) All facilities should have excellent HAACP procedures in place.

d) All meat must be handled and stored in accordance with USDA Institutional Meat Procurement Standards. (“IMPS”)

e) In order to stay consistent with the principles of natural beef production, the procedures in the facilities should practice humane handling and slaughter policies.

f) The production facilities must have well-developed processes in place for segregation of natural beef inventories from other conventional inventories.

g) Source trace-ability is very important for the natural beef program and to fulfill AFFI principles. This trace-ability must begin at the ranch and continue throughout the chain of custody to the retailer. Slaughter and fabrication facilities must have systems in place to track the source of all animals and cold carcasses “on the rail.”

h) Important standards must be maintained for trim. The system needs to be “closed” so that no outside trim is allowed to co-mingle with trim from naturally raised beef. The trim itself must conform to strict quality standards.

i) The plant must have procedures for capturing and segregating natural beef offal, which will be used for the natural pet food program.

5. Warehousing and Logistics.

a) AFFI products will be stored in public cold storage warehouses.

b) AFFI facilities need to follow USDA “IMPS” storage and handling guidelines for packaging materials, pallets, refrigeration and handling.

c) Cold storage facilities must also have excellent HAACP procedures in place as well as a system to maintain segregated inventory for the AFFI product to avoid co-mingling of product.

E. USDA and Government Resources.

There are distinguishing features which make the AFFI opportunity of special interest to USDA and other governmental organizations and which can lend assistance to the success of the venture. AFFI is seen by family farming experts within USDA as a very innovative and promising model for the future growth and viability of the small family-farming sector of agriculture. In meetings and calls with USDA officials, a consistent theme of feedback has been the excitement and promise expressed by these officials, most of whom are “battle-scarred” from many years of working with co-op ventures. For these officials, way that AFFI fits together and blends co-op strengths with market economy strengths is seen as a distinct plus for the program. USDA officials have expressed a strong willingness to promote AFFI, to work towards its success, and to make available all possible funds to help pay for the many steps required the startup of the venture.

F. Sales.

1. Natural Foods.

a) The cornerstone of the AFFI opportunity is having a very strong program in natural foods. First, natural foods represents the most concentrated large group of interested consumers who are likely to become purchasers of AFFI products. Second, the channel itself and its buyers and stakeholders are culturally attuned to understand and embrace both the AFFI concept and AFF products. Finally, natural foods represents the core of any natural product’s success as viewed by other channels. For example, when a presentation of AFFI is made in Grocery, the first question from the grocery buyer is likely to be “So, how are you doing in natural?” Grocery buyers look to success in natural as a foundation of a brand’s viability.

b) Regarding this AFFI report, the key natural food customers targeted are Wild Oats Markets, Inc. with 103 stores across the United States, Whole Foods Markets (with 135 stores also across the U.S.), and 20 other so-called “supernaturals” which are the larger independent natural food stores, co-ops, etc. We believe that the AFFI opportunity is great enough, the growth of natural foods strong enough, and the interest in regional foods and family farms / ranches high enough, that there is the opportunity to gain distribution over the planning period in nearly every one of the major natural food stores in the country.

c) The natural meat product profile for natural foods will be the full range of 20-24 primal and sub-primal cuts. The list of cuts is shown in Exhibit E at the end of the report.

d) Pet food also represents a major opportunity in natural foods, both in AFFI branded and private label forms. Like all pet owners, natural food pet owners place dietary guidelines on their pets similar to those they place on themselves. Thus, for a natural food consumer seeking natural alternatives to foods with hormones, antibiotics, chemicals and such, they seek similar qualities in the foods for their pets. In addition, the pet food section in natural foods stores is generally underdeveloped, and buyers have shown receptivity to more and better alternatives in natural pet foods.

2. Grocery.

a) The sales strategy for Grocery involves selecting the sub-set of more upscale chains, or the upscale store formats within a chain, in which there is a large segment of consumers interested in AFFI natural products.

b) The current AFFI model calls for 500-600 stores in Grocery during the planning period, representing 1.5 – 2.0 % all-commodity volume (“ACV”). However, the long-term opportunity is much greater than the numbers shown in the plan. Other natural and organic categories have much higher penetration in grocery, for example:
 Refrigerated soy beverage 30,000 stores 85% ACV
 Organic milk 26,500 stores 75% ACV
 Branded organic produce 22,750 stores 65% ACV.

For comparison purposes, the most widely distributed natural meat, Laura’s Lean, is distributed in approximately 4,000 stores representing 11% ACV.

As natural meat grows and develops as a category, we see the very real potential to build the distribution of AFFI natural meat to up 30% ACV or greater, representing 10,500 or more stores.

3. Ethnic / Carneceria.

The ethnic / carneceria market is almost completely untapped by natural foods, which has traditionally been targeted at upscale, mostly-white consumers and has not seen Latino consumers as an area of major focus or opportunity. This bias has left a large, important and growing part of the U.S. consumer base almost totally without natural food alternatives. However, the sales and market dynamics of this market are changing, with the emergence of a new channel of ethnic supermarkets and carnecerias to provide quality foods for Latino consumers.

The AFFI plan call for the introduction of branded ethnic natural meats into the carneceria channel as a way to achieve fuller utilization of the natural steers by selling these meats at above-commodity prices. The strategy for implementing the plan involves partnering with a carneceria distribution resource, creating branded in-store POS, featuring Latino members of the meat co-op in brochures and in-store materials, and offering periodic trade deals to promote the products with sale prices.

In addition to the opportunities in Latino food channels outlined above, there is also an opportunity for AFFI natural meat in the Asian market, where thinner meats are preferred for Asian dishes such as stir-frying. The Asian market opportunity is not outlined in this report, but it should be explored as another potential area of opportunity.

4. Food Service.
Food service has not been discussed in other sections of the report, but this channel represents another opportunity for incremental sales of natural meat cuts. Many restaurants are now offering natural beef as a menu item, with the natural qualities symbolizing high quality and the small-batch, artisan aspects of the meat.

The strategy n Food Service would focus on building effective relationships with food service distributors to provide natural beef cuts to them for their restaurant clients. Volume estimates and financials for Food Service have not been included in this report, but would be developed in subsequent phases of the plan.

5. Go to Market strategies.
There are general strategies that apply to all channels and selling efforts, combined with individual strategies unique to each channel.

a) Overall sales strategies.
 Offer the range of products desired by each customer at competitive prices.
 Serve as a knowledge leader for the natural meat category to give the meat buyers assistance with all aspects of natural meat sales, and to help the buyers understand the purchase dynamics of their customers.
 Highlight the co-op, family ranch / farm, and local production benefits of AFFI for the retailer, which allows the retailer to support local agriculture and family ranches / farms.

b) Natural Foods.
 Show, via the AFFI facilitation team and the hub & spoke system, that AFFI can achieve the simultaneous goals of: 1) ability to work with the natural foods retailer on a national level; 2) ability to give individual regions of the retailer a locally-produced option that supports the goals of local & regional agriculture and support for local ranches / farms.
 Offer a natural pet food solution in either branded or private label applications.

c) Grocery
 Give the chain a comprehensive natural meat program to satisfy the needs of its natural food consumers and to provide the meat department with higher margin products with higher dollar profit per unit sold.
 Provide service to the chain as the knowledge leaders in natural foods and natural meats, and give the buyers useful advice and information to help them manage the category more effectively.
 Provide a natural pet food alternative for the consumers in the chain who want a pet food produced naturally without hormones, antibiotics or the possibility of rendered meat ingredients.
 Highlight the local / regional aspect of the AFFI model to show how the retailer can support local agriculture.

d) Ethnic / Carneceria.
 Link up with a distributor of products to the latin supermarket and carneceria channel.
 Provide a natural program of ethnic meats.
 Communicate the benefits of family ranches / farms.
 Focus on the Latino members of the meat co-op and the heritage of Latino ranching in the rocky mountain region.

e) Brokers.
 Utilize brokers in natural foods and grocery to provide representation for the brands.
 Use broker reps to leverage the sales management resources of the company to increase the number of “touch points” for the company and to increase the frequency of company contact with the trade.
 Plan on budgeting about 0.7% of retail sales for meat brokerage, in line with similar brokerage arrangements in the meat business.

6. Trade expenses.
a) In general, the natural meat program will be based more on everyday pricing and consistent supply rather than an aggressive “high-low” pricing program, which other natural food categories frequently employ
b) Off-invoice allowances – Budget 2.0% of retail sales for periodic off-invoice deals to give feature prices at the retail shelf.
c) Market Development Funds (“MDF”). Budget 1.0 % of retail sales for occasional special programs with retailers to feature the product in ads, circulars, mailings, etc.
d) Trade show and sales administrative expenses. Budget 0.3% of sales to fund trade shows, including both Natural Product Expo’s, FMI and regional shows.

G. Marketing
1. Branding strategies.
The foundation of the AFFI marketing strategy is the creation of unique brands which speak to both the functional needs and the emotional needs of target consumers. Each of the three product groups recommended in this report – natural meat, ethnic meat and pet food - will have unique brand names, positionings, creative platforms and marketing strategies.

Understanding budget limitations, even at the eventual larger size of the company, we recommend a mix of non-traditional marketing strategies and programs that utilize grassroots techniques and “guerrilla” programs rather than mass-scale traditional media. This non-traditional approach will also tap into the special character of the AFFI proposition and inherent newsworthiness of the project. For example, there is a very real possibility of capturing the “hearts and minds” of reporters and the media, due to the special nature of a co-op based food company, to generate significant public relations success for the company.

2. The role of the “Family Farm” name and brand equity.
Although the name “Family Farm” figures prominently in the name of the company, its mission and guiding principles, we recommend that the brands NOT be called the “Family Farm” brand of meat, pet food etc. Rather, we recommend that there be different brand names for each product group that uniquely bring out the unique and special character of the product. On the package somewhere will be a smaller identifier (burst, medallion etc.) which identifies the product as belonging to the Association of Family Farms Inc.

There are several reasons for this recommendation:

a) Each product group should have a special and unique brand name that brings out the special qualities that are most motivating to consumers and appropriate for the product. Each name, along with excellent imagery and graphics, will be developed in the next phase of the project, using the creative platforms below as guides to the brand development team.

b) The words “Family Farm,” though highly motivating as a unifying concept and a goal (e.g. “save the family farm”), do not bring out any special and unique attributes of natural meat, ethnic meat or pet food as products.

c) For consumers, the primary benefit of each brand will be something other than the fact that the products come from family farms. This is not to say that the idea of “family farm” is lacking in any way. ON the contrary, for certain stakeholders and in certain situations, the reality of the link to family farms will be highly beneficial. However, looking specifically at consumers and their interaction with the brand on shelf, in marketing materials, etc., it will be product qualities other than being “family farm” that will lead to awareness, trial repeat purchase and long-term emotional links to the brand.

d) The name “family farm” is a common figure of everyday speech, and the name may have difficulties achieving “circle R” trademark status due to the common usage of the term.

3. Creative Platform – Recommended strategy and template.

For each of the product groups, we recommend using the classic marketing / consumer products creative platform template of defining the target audience, the frame of reference, the differentiating benefit etc. Platforms based on these templates have shown very high usability in developing brand names and positionings, and the discipline of this methodology is a significant aid to the creative process.

Below is the creative platform template with underlines for each of the elements to be defined:

For (target audience), (name of product) is the (type of product or frame of reference) which gives consumers (differentiating benefit) because of
(support points). The brand will “look and feel” like (tonality).

4. Creative Platform – Retail natural meat.
Target:
Health-conscious consumers interested in premium niche products
70-80% female
Above average interest in health and nutrition.
In terms of personal values & behaviors, identified as “Cultural Creatives.”
(see consumer profile of “Cultural Creatives” in Exhibit XX)

Brand Name:
t.b.d. (will use “AFFI Natural Meat” for now as a placekeeper, then change to
real brand name once the name is developed in later phase of project)

Frame of Reference:
“Alternative to conventional meat.”
 Assumes that AFFI will source volume from conventional meat.
 AFFI will provide a more natural alternative.
 Differentiating benefit and support points will highlight the difference between AFFI and conventional meat.

Differentiating Benefit:
“Safety” and “Peace of Mind”
“AFFI Natural Meat gives you peace of mind about the quality and purity of meat for yourself and your family.”

Support Points (reason to believe):
 More pure, more “clean,” produced without hormones / antibiotics.
 Fresh, high quality, minimally-processed, wholesome goodness.
 Naturally-raised, Grass-fed cattle from family ranchers who really care.
 Certified production methods, Source-identified to individual ranches.

Tonality:
Personality: Warm, friendly, approachable, sincere.
Look & Feel: Simple, clean, modern but not “hip.”
Outlook on life: Upbeat, optimistic, hopeful
Advocacy: Passionate, but not preachy.

Creative Platform:
For Health-conscious consumers interested in premium meats, AFFI Natural Meat is the Alternative to conventional meat which gives consumers Peace of Mind about the quality and purity of meat for yourself and your family because of a) Produced without hormones / antibiotics; b) Fresh, high-quality, minimally-processed; c) Naturally-raised, grass-fed cattle from family ranchers who really care; d) “certified” natural and source-identified to individual ranches. The brand will “look and feel” like a) Warm, friendly, approachable, sincere; b) simple, clean, modern; c) upbeat, optimistic, hopeful; d) passionate but not preachy.

5. Creative Platform – Ethnic / Carneceria

Target:
Ethnic (Latino) consumers who want naturally produced ethnic meats.
 80-90% female
 Knowledgeable cooks who know the traditional cuisine and who enjoy making the beloved dishes of their heritage.
 Interested in pure, wholesome, natural meats for themselves and

Brand Name:
AFFI Carneceria Meats (placekeeper, real name t.b.d.)

Frame of Reference:
Highest quality natural meat for you and your family.

Differentiating Benefit:
“The naturally-delicious taste of your heritage for you and your family”

Support Points (reason to believe):
 The highest-quality meats that you know and love.
 Your family means everything and deserves the best, most natural meat.
 Naturally produced grass-fed cattle from Western ranches.
 Produced without hormones or antibiotics.
 Brings out the natural goodness of your favorite cuisine.

Tonality:
Personality: Pride in heritage and cuisine.
Look & Feel: Strong links to “ranchero” heritage and imagery.
Consider using colorful “vaquero” imagery in packaging,
marketing materials, POS etc.
Consider featuring Latino members of meat co-op in PR, on
brochures, posters, etc.
Outlook on life: Strong desire to preserve roots while embracing the new
country.
Advocacy: Pride in the rich history of Latino cuisine made with carneceria meats. Celebration of rich “vaquero” heritage.

Creative Platform:
For Latino consumers who want naturally-produced ethnic meats, AFFI Carneceria Meat is the highest quality natural meat which gives consumers The naturally-delicious taste of your heritage for yourself and your family because of a) Highest quality meats in the forms you know and love b) Grass-fed natural beef from Western ranches; c) Produced with out hormones / antibiotics; d) Brings out the natural goodness of your favorite cuisine. The brand will “look and feel” like a) Pride in heritage and cuisine; b) Strong links to ranching “vaquero” heritage; c) Desire to preserve roots while embracing the new country; d) Celebration of rich history.

6. Creative Platform – Pet Food.

Target:
Upscale pet lovers who want the very best for their “best friend”
50% / 50% Male / Female
Will spend a little more for the very best – price of pet food not a concern.
Values-wise, could be “Cultural Creatives” or “Modernists”

Brand Name:
AFFI Natural Petfood (placekeeper, real name t.b.d.)

Frame of Reference:
Alternative to low-quality or “adulterated” conventional pet food

Differentiating Benefit:
100% Pure Goodness from 100% natural beef.

Support Points (reason to believe):
100% natural beef – no fillers, no byproducts, no additives.
Highest-quality natural beef – no hormones, no antibiotics.
Delicious natural flavor your pet will love.
Natural beef raised by family ranchers who really care.

Tonality:
Personality: Warm, friendly, approachable, sincere.
Look & Feel: Simple, clean, modern but not “hip.”
Outlook on life: Upbeat, optimistic, concerned about quality & purity.
Advocacy: Passionate, but not preachy.

Creative Platform:

For Upscale pet lovers who want the best for their “Best Friend.” AFFI Natural Petfood is the Alternative to trashy, adulterated conventional petfood which gives consumers 100% Pure Goodness from 100% Natural Beef because of a) 100% natural beef – no fillers, byproducts or additives; b) Highest-quality natural beef with no hormones or antibiotics ; c) Delicious natural flavor your pet will love; d) Naturally-raised, grass-fed cattle from family ranchers who really care. The brand will “look and feel” like a) Warm, friendly, approachable, sincere; b) simple, clean, modern; c) upbeat, optimistic, concerned about quality & purity; d) passionate but not preachy.

7. Marketing programs.
The most effective marketing programs will be those that capitalize on the news-worthiness of the AFFI proposition, and programs that utilize grassroots or guerrilla marketing techniques. The exact plan will be contingent on establishing a firm budget, but the programs will fall into several groups:

a) Packaging
For AFFI, like most natural products companies, packaging and graphics are the primary way in which consumers learn about the product and make their initial purchase decisions. Packaging is the only marketing tool utilized by every natural products company. Natural products consumers are very accustomed to gathering much of their decision-making information from packages. These consumers are label readers and package examiners. As such, considerable time and resources should be devoted to creating the best possible packaging that is evocative of the brand’s character to the fullest extent.

b) In-store marketing.
More than 70% of consumer products purchase decisions are made after consumers enter the store. For AFFI, this purchase dynamic, combined with the lack of broad-scale awareness-generating media to build product awareness prior to store visit, means that almost all of the decision-making by consumers for the AFFI products will be made in the store. As a result, every possible marketing tool should be considered that reaches consumers inside stores.

c) Sampling.
For consumers in general, sampling is one of the best (if expensive) methods to surmount the awareness and trial “hurdles” which inhibit initial trial of new product, and to convince consumers to try the AFFI products. This phenomenon is particularly noticeable for consumers considering whether or not to try natural products. The resistance to trial is strong, thus the benefit of trial-inducing vehicles such as sampling is especially useful.

d) Public Relations (PR).
The PR opportunities for the AFFI concept are extremely promising and should be to the fullest extent possible. Everything about the concept is tailor-made to be favorable for reporters and PR opportunities: a) support for family farms; b) improved economic health for rural ranching communities; c) the independent spirit of Western ranchers; d) the “David vs. Goliath” story of small independents vs. industrial agribusiness; e) natural husbandry techniques whereby steers are raised without artificial hormones / antibiotics; f) the human health benefits of natural, grass-fed beef; g) the culinary benefits of small-batch, artisan products produced with care for superior flavor; and several other PR story possibilities.

e) Event Marketing.
As with PR, event marketing is also tailor-made for the AFFI in several respects, thinking especially about the links to events that support family farms. One could easily see major events for AFFI with the following types of events: a) FarmAid celebrations; b) individual rock concerts with family farm supporters such as John Mellancamp and Neil Young; c) major political events, rallies and fund-raisers with governors, senators and representatives of both parties who are farm supporters; events Hollywood celebrities who want to commit their fame to help family farms; events at state fairs and other venues where family farms are supported and celebrated; etc.

f) Tie-in promotions with complimentary products.
In natural foods, one of the most effective means to achieve both marketing and budget goals is to “combine forces” with complimentary partners to run joint marketing programs. For example, with in-store sampling, it costs nearly the same to feature two products as one. Thus, when two brands share a sampling event, the cost per company drops nearly in half. Similar savings can be realized in other types of marketing programs such as in-store events, direct mail and coupon distribution, event marketing and public relations. One example of a joint in-store event would be a summer “cookout” promotion in partnership with organic ketchup and mustard, pickles and organic buns. The AFFI brands should utilize every opportunity to create joint partner promotions with a range of complimentary products and brands.

g) Internet and “connectedness” marketing.
Natural foods consumers are active internet users and website visitors. They read in breadth and depth, and they have a curiosity to know about the world around them. These behaviors fit perfectly with an internet communications strategy for the AFFI brands. There is also the phenomenon of “connectedness” with internet marketing that facilitates the connection of persons of like interest from around the country.

Internet marketing provides depth of content, it allows consumers to view as much as they like when they like, and it’s easy to create links from other complimentary sites to AFFI. For example, one company recently teamed up with an environmental website that sends 1.3 million e-newsletters weekly to a subscriber list. For nominal cost, the company participated in a joint promotion with the environmental website, getting in return an article in the e-newsletter and a “hot-link” to the company’s website. In just 2 days after the e-newsletter was sent, visits to the company’s website increased over 650%.

V. Risks and Opportunities.

Following the standard methodology of consumer products business plans, this report shows “risks,” which are actions or events that could jeopardize achieving the plan as written, and also “opportunities,” which are actions or events that might cause the company to out-perform the plan as written.

A. Risks to the current plan.
1. Consumer awareness and concern about the issues of natural meat – hormones, antibiotics, omega 3’s, CLA, etc. – does not increase as quickly as anticipated, leading to reduced acceptance of natural meat products and slower growth for the company.

2. Retailers decline to accept introduction of the products, or take fewer sku’s than anticipated, leading to slower roll-out in Grocery vs. plan.

3. Supply of natural steers lags plan, causing insufficient supply of natural meat.

4. Latino carneceria consumers fail to “connect” with the idea of branded carneceria meats, or find the benefit of being natural not sufficiently compelling.

5. Utilization of meat, both retail natural meat and offal, is lower than budget, leading to cost of goods variances.

6. Drought or other unfavorable natural conditions cause feed costs to rise, increasing cost of goods.

7. An outbreak of disease such as BSE or Foot and Mouth could depress consumer demand for red meat as a part of the diet.

B. Opportunities to outperform the current plan

1. Customer retailer acceptance develops quicker than anticipated, leading to accelerated rollout of the program to additional retailers vs. budget.

2. Consumer awareness and concern about the issues of natural meat increases faster than anticipated, or is “spiked” by a study, 20/20 TV show, etc., which leads to faster adoption of natural meat.

3. In pet food, an expose, article or event highlights the distasteful ingredients often found in conventional pet food (e.g. rendered meat, possible presence of euthanized shelter animals, etc.) causing a rapid switch by consumers to more natural alternatives.

VI. Next Steps.

A. Build the business plan and the P&L for pet food line.

B. Develop balance sheet and cash flow models for the company.

C. Complete the work with organizational expert Steve Hock on the structure and organization of AFFI and the relationship between AFFI and its member organizations, including the meat co-op.

D. Develop brand names, packaging graphics and brand imagery.

E. Develop “road show” presentations to take the company and its strategy out to different constituencies:
a) Producers – solicit support from current co-op members and recruit new members.
b) Sales – make presentations to high-potential customers.
c) Financial – begin working with potential bank funders.
d) USDA – further the relationships between AFFI and USDA.

F. Begin negotiations and contract discussions with co-pack partners, warehouses, freight companies, etc.

VII. Exhibits.

Exhibit A
Pro Forma P&L

(insert 14-page P&L here)

Exhibit B
Animal Husbandry and Protocols for Natural Meat Co-op Members

Exhibit C
Hub and Spoke Supply Chain System.

Exhibit D
Animal Fabrication Spreadsheet, with List of Meat Types, Cuts, etc.

(insert animal fabrication spreadsheet here)

Exhibit E
List of retail primal cut products, prices and sales percentages.

(insert spreadsheet

Exhibit F
Competitor Website Pages

Exhibit G
Consumer Values & Behaviors Overview – Cultural Creatives
Exhibit H
The Association of Family Farms, Inc.

1. Overview and History.

The motto of AFFI is “beginning a new growth cycle for American agriculture.” This motto summarizes the impetus for the formation of the organization in 1997. At that time, several knowledgeable and concerned persons in the realm of agriculture met to discuss the long-term trends in agriculture, and they began to work on new models to create a more viable economic proposition for family farmers in America. Among these persons were Lawrence “Larry” Yee of the University of California Cooperative Extension Service, and Dee Hock, the founder and former CEO of VISA International.

Larry, Dee and others began their development of new agricultural models with the grim reality that family farms are in steep and continuing decline – a decline that is contributing to a major economic and social crisis in rural America. The data supporting and documenting this decline are legion, and the facts of the decline of are measured by a legion of agricultural economists. A few of these facts will serve to highlight the depth and the breadth of the crisis:

i) Due to market concentration, over 72% of the market value of U.S. farms is controlled by just 7% of farmers.
ii) 74% of farmers share only 6% of the market value of products sold.
iii) Since 1984, the value of foodstuffs at the farm level has dropped 38%, while retail prices have increased 3%.
iv) Farmers only receive $0.06 for every $1.00 sold at retail. In certain extreme examples, such as breakfast cereal, a bushel of corn sold for $4 in 1998, while a bushel of corn flakes sold for $133.
v) Farmers do not share equitably in the net income of the food industry. In 1998, the profits for cereal companies were 186 times to 740 times more profitable than the grain farmers who supply the grain for cereal.
vi) Family farm income has lagged significantly behind the income of larger corporate farms.
vii) Per-capita income in rural counties is significantly lower than in urban counties, and has declined greatly since 1970.
viii) Rural counties are now among the poorest in the country.
ix) Population has dropped dramatically in agricultural counties. In certain rural counties, population has dropped by more than 50% since 1970. Rural towns have seen population declines ranging from 50% to 75%, with an accompanying drop in tax revenue, fewer social services, lower school enrollment, lower usage of facilities such as hospitals, and declining participation in civic organizations and institutions.

Responding to the problems highlighted above, the founders of AFFI began attacking the areas of weakness in the economics of family farms by building new models that would address the problems and strengthen the financial outlook for rural family farms.

Problem – Farmers don’t receive equitable distribution of the food dollar.
Solution – Develop a new “go to market” model in which producers retain a higher share of the retail “food dollar.”

Problem – Farmers are blocked from direct access to the market and access to consumers.
Solution – Demystify the sales proposition for producers and facilitate their direct interaction with retail partners. Also, create consumer marketing and communications programs which tell the farmers’ story to consumers in ways that are understandable, empathetic and motivating.

Problem – Farmer groups and co-ops are fragmented and not coordinated with one another.
Solution – Develop a new, workable and logical system of governance whereby regional groups of producers can have authority and accountability at the regional level. Combine these regional systems with an equally workable governance at the national level such that there is authority, accountability and a voice for regional entities at the national level.

Problem – Agricultural systems based on high chemical input, synthetic pesticides and GMO’s, which over the long term are not sustainable.
Solution – Create clear agricultural protocols at the farm level to have integrity of product produced without synthetic pesticides, persistent toxic chemicals or GMO’s. Combine this agricultural protocol with labeling and marketing that clearly shows to consumers the beneficial product attributes of AFFI products.

Problem – Urban consumers feel emotionally and intellectually disconnected from family farms.
Solution – Create a brand identity which will highlight family farms, feature individual farmers, and help to increase the connection between farms and consumers.

Problem – Food has become “commoditized” for consumers with less individual attention and care for taste, quality.
Solution – Reintroduce the element of “craftsmanship” in food with a clear link to the producers, showing consumers how food can be produced by knowledgeable farming experts who have a personal commitment to high quality and the special nature of food.

Problem – A loss of the Local / Regional “sense of place” that formerly existed in food. Previously food was identified strongly with its Local / Regional source. But now, with food shipped nation-wide, all sense of place has disappeared and has been replaced by a generic branding mechanism which relegate the food itself to a faceless status mostly devoid of place or character.
Solution – Ensure that the local / regional source of the products and a strong sense of “place” play prominent roles in the branding, marketing and identification of the products.

Problem – Family farmers and small co-ops cannot afford to hire the services of a professional food management group.
Solution – Use the AFFI structure as a management “umbrella” in which the functional experts and managers serve across several categories and co-ops, thus amortizing the professional expenses more efficiently over several P&L’s.

As the founders of AFFI worked on solutions for the problems facing family farms, they determined that a new not-for-profit organization would be needed. The organization which emerged from their work was CAIA. This organization, led by organic farmer Linda Kleinschmidt and headquartered in Nebraska, would work to bring together different organizations, resources and funding sources to attack the problems facing rural agriculture. CAIA, in partnership with AFFI, applied for the NRFC grant which allowed the development of the AFFI feasibility study for the natural meat business. Jim Richardson of NRFC is the administrator of the grant.

2. AFFI Mission.

“The mission of AFFI is to create a balanced and holistic marketing system identified and unified by a single “umbrella” brand that enables family farms to prosper, our natural environment to become healthy and vibrant, and consumers to have ready access to wholesome food which, to the greatest extent possible, is locally or regionally grown.”

3. Guiding Principles.

i) AFFI is open to all individuals and groups who fully ascribe to the purpose and principles of the organization.

ii) AFFI members will equitably share ownership and rights in the organization as well as obligations.

iii) Each and every part of AFFI shall have the right to self-organize on any scale and in any area that is relevant to and consistent with its purpose and principles.

iv) AFFI will strive to promote policies and implement practices that help to ensure that the Earth’s resources are not degraded, acting from sound ecological practices to protect and preserve the planet for current and future generations.

v) To the greatest extent possible, products will be produced and marketed locally or regionally.

vi) AFFI will seek to create communities in which agriculture is supported because its role is understood and appreciated.

vii) Consumers will be provided with complete knowledge of how and where the AFFI products are produced. Source verification will be used to the fullest extent possible to have “source-traceability” to individual farms.

viii) At all times, the members of AFFI will act with integrity, encourage diversity and honor equity.

4. AFFI Goals.

a) Support family farms and rural communities.

b) Feature products that are locally grown and sold at the peak of freshness whenever possible.

c) Market products which are source-identified to specific farms.

d) Minimize or eliminate the use of synthetic pesticides, chemicals or genetically-modified materials

e) Coordinate the entire supply chain in a direct line from family farm to consumer;

f) Give the local farmer / rancher greater control of product and price via more direct involvement in the value chain;

g) Create “pull through” with supermarkets, restaurants and consumers through the generation of powerful brand equity for the Family Farm trademark and the value chain working together.

5. Strategies to achieve AFFI goals

a) Branding. Build a branding structure which combines individual differentiated brand names and brand imagery (“ABC Natural Meat,” “XYZ Produce,” etc.) unified by a clear identifier for AFFI across brands and categories (“a proud member of the Family Farm group”)

b) Production Protocols. Have clear and consistent production protocols that will ensure product integrity as a product grown (raised) without synthetic pesticides, toxic chemicals or GMO’s. Verify this product integrity with 3rd party certification.

c) Link Producers to Retailers. Use sales expertise and knowledge of the food distribution system to put producers in direct contact and direct contractual relationship with retailers, bypassing the intermediary steps that frequently absorb profits.

d) Logistics. Use the overall AFFI management system to coordinate operations and logistics across producers groups and local / regional co-ops to create a consistent flow of high-quality products from producers to retailers.

e) Governance. Create a governance and management system that is national in scope, but comprised of local / regional sub-units of governance. This national / local combination will allow for certain parts of the enterprise to succeed at the national level (such as communication of the Family Farm brand promise) while maintaining a strong local / regional focus (such as local sourcing and the source-identification to individual farms).

6. AFFI Organizational structure.

a) Legal and Voting Structure.
AFFI will be organized as a for-profit, non-stock, membership corporation registered in Delaware. The AFFI brand and the corporation will be owned by the members, and members will have voting rights in the corporation. Membership in the corporation and ownership of the brand is open to all co-ops and groups who subscribe to the mission and the guiding principles, but membership cannot be bought or sold. Individual members can join or leave the corporation at their discretion.

b) Local / Regional Co-ops. Different local and regional co-ops will organize at the local / regional level. These local / regional entities will have membership in the national corporation as well as in their individual regions. Thus, AFFI members have representation and voting rights at both the local / regional level and at the national level.

c) Board of Directors. The board of directors of the AFFI national corporation will be chosen in part from the membership and in part by electing independent board members.

d) Facilitation Team. A team of professional food company managers will be hired by the AFFI board to serve as a facilitation team at the national level. The facilitation team will report to the board of directors and will implement company strategies as directed by the board. There are eight principle goals of this team:
i) Manage the AFFI brand and the company for the benefit, profit and success of its members;
ii) Coordinate the logistics and operations of the co-ops across regions and categories to facilitate the smooth flow of product to retailers;
iii) Manage the warehouse, freight, order entry and other activities required to take products efficiently and accurately to market;
iv) Serve as a sales management resource to connect producers with retailers to create maximum return to the producers;
v) Create trade promotions and programs as required to succeed in the sales marketplace;
vi) Create branding, advertising, public relations and other marketing programs to build the AFFI unifying brand and the individual product brands with consumers;
vii) Oversee the certification programs and production protocols to ensure that AFFI products meet the required production and certification guidelines;
viii) Manage product quality and R&D to ensure that AFFI products meet the industry’s highest standards for quality and excellence.