Small Bakery

BUSINESS OPPORTUNITY PROFILE Prepared for the Inward Investment Facility Linden Economic Advancement Programme

SMALL BAKERY OPERATION

TABLE OF CONTENTS

INTRODUCTION

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REGION 10

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BUSINESS ENVIRONMENT

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EXECUTIVE SUMMARY

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THE OPPORTUNITY: SMALL SCALE BAKERY OPERATIONS

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PRODUCTION PROCESS AND TECHNOLOGY

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REQUIREMENTS FOR BAKERY SETUP

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ANNUAL FINANCIAL PROJECTIONS

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FINANCING SOURCES

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Business Opportunity Profile – Small Bakery

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INTRODUCTION There are numerous exciting business opportunities in Region 10 for investors who wish to invest in agriculture, agro-processing, small-scale mining, manufacturing, logging, sawmilling, tourism, transportation industry, or services to name a few. LEAP Inward Investment Facility (IIF) recognizes that potential investors need information on business opportunities. This series of Business Opportunity Profiles is intended to help investors identify viable opportunities in the various sectors. These profiles address generic issues such as the appropriate technology involved and where possible, potential markets, estimated investment and production costs. However they are not intended to be replacements for project feasibility studies. Selection of technology, financing plans, feasibility studies and other related issues remain the responsibility of the investor.

REGION 10 Region 10 is the logical hub for Guyana’s development. With an area of over 16,835sq.km (6,500sq.miles), it is centrally located and contiguous to most other administrative regions. It has abundant land and natural resources, and is the natural gateway into the hinterland’s forest and mineral reserves. Boasting excellent river and road transport links out to the coast, it is also the natural choice for Atlantic–bound South American trade. Besides the town of Linden there are significant communities in Coomacka, Old England, Great Falls, Rockstone, Anarika, Mabura, Ituni, Aroima and Kwakwani. At present, the main economic activities are mining, logging, agriculture, fishing, transportation and distribution along with manufacturing and cons truction.

THE TOWN OF LINDEN Linden, with a population of approximately 30,000 1 is the Region’s main population centre and is located inland from the coast, 107km (66miles) from the capital city Georgetown. Spread over an area of 142sq.km (55sq.miles), the town is situated on the two banks of the Demerara River. Originally a mining town, whose economy had been based on the bauxite industry, the town is redefining itself as a key port of call in and out of the hinterland. Aware that the time of the “Bauxite economy” is over, the population is increasingly involved in small business activities like merchandising, furniture manufacture, and construction, thereby transforming the town into a centre for industrial

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Census 2000 – Statistical Bureau


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and service activities. Linden is also a supply centre for hinterland communities and itinerant miners. Some of its specific strengths are: • •

•

•

• •

The size and layout of the town lends itself to easy manageability of its resources. There is a well developed network of utility services including stable electric power, water supply and telecommunication services. The town itself possesses abundant natural potential in mineral and forest resources in its immediate environs, and land is available for potential development. The location of the town on both banks of the Demerara River provides for easy transportation arrangements and lends itself to development of an entrepôt facility for Atlantic-bound Brazilian goods. Linden has an essentially young population with 85% of its residents under 45 yrs. Linden-based Industries are less prone to natural disasters than those along the coastal areas.

BUSINESS ENVIRONMENT The Government of Guyana has approved various general and sectoral incentives as part of its comprehensive strategy aimed at reviving the economic fortunes of Region 10. These incentives can be found in: • • •

Customs (Amendment) Act No. 6 of 1999, Investment Act No. 1 of 2004 Customs Duties (Amendment) (No.1) Order 2004.

Special Incentives for Region 10 and specifically for Linden, Ituni and Kwakwani are: •

•

Waiver of Customs duties and Consumption taxes on all imported items of plant, machinery, equipment and spare parts. For manufacturing and agricultural investments, waiver of Customs duties and Consumption taxes on vehicles imported exclusively for use in the business.


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EXECUTIVE SUMMARY In Region 10 as elsewhere in Guyana, bread is a staple of most diets. Unfortunately for residents here, the demand for bread outstrips the supply by both Linden-based and external bakeries. There is an opportunity for high quality operators to become primary suppliers for the Town and the Region, as well as to supply other areas. Bread sold in Linden is supplied mainly by 3 local bakeries and the 4 main operators in Georgetown. The local bakeries are Demerara Bakery (Bovell’s), JAC’s Bakery, and Barrow’s Bakery (BRL); the Georgetown operators are Bakewell, DIH, Graham’s and Humphrey’s. Besides these there are numerous small, bottom-house operators with no significant impact on the supply side. Assuming a minimal level of consumption at 2 loaves per week per household in the Region, there is a potential demand of more than 20,000 loaves per week. A wellmanaged, high quality small bakery operation, producing in the vicinity of 3,000 – 4,000 loaves per week will make handsome returns on investment. A small operation is defined as one using up to 40 bags of flour per week.

Advantages to investing in this industry: •

•

•

Very good returns on investment in a relatively short period are possible once the operation is managed efficiently with a good product range exhibiting consistent excellence and coupled with an aggressive marketing programme. The initial set-up costs are typically recoverable within the first 5 years of the operation of a small bakery. A modern bakery operation is not very labour intensive, and usually production can be increased without incurring significant additional labour costs.

Advantages for investing in Linden/Region 10: •

•

The Government of Guyana’s support for Region 10’s development includes a regime of investment incentives which are provided for in Customs (Amendment) Act No. 6 of 1999, Investment Act No. 1 of 2004 and Customs Duties (Amendment) (No.1) Order 2004. Included in the legislation are Incentives for Communities of Linden, Ituni and Kwakwani: ■

Waiver of Customs Duty and Consumption Tax on all imported plant, machinery, equipment and spare parts.

A small bakery operation may be set up for as little as $9million. A full feasibility study will be required prior to startup to determine actual startup costs, working capital and financing requirements.


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THE OPPORTUNITY:

SMALL SCALE BAKERY OPERATIONS

Bakeries, existing since the dawn of civilization in one form or the other, have been primary food providers for countless generations of people. Indeed, the truism that “man must eat”, may have a corollary truism that “man must eat bread”, for certainly, wherever it’s possible, all cultures evince a distinct preference for the production of bread and similar baked products as a major source of nutrients. In Guyana generally, and in Region 10, the same consumption patterns exist, bread is a staple food for many people at breakfast and supper, for the same reasons that apply anywhere else, its relative durability, convenience, adaptability, nutritive value and potentially low cost. The problem for Lindeners and others in the Region is that existing bakeries do not meet the local demand resulting in “importation” of bread from Georgetown, although people still seem to prefer the fresher bread of the local bakeries. Even with the bread coming from Georgetown, there is still a frequent shortage, particularly at weekends, when fresh bread is hard to locate. Consequently there is tremendous potential for a small bakery operation marketing within and outside the region. The rewards are likely to be significant with Linden, the main population centre, being the optimal location.

Existing Operators The bakeries serving Region 10 are: 1. Demerara Bakery (Bovell’s), in Wismar, Linden, a main supplier for Wismar and Christianburg residents because of its west bank location; 2. JAC’s Bakery and Snackette, in Mackenzie, Linden, a main supplier in the entire Linden area based on good quality, and reliability; 3. Barrow’s Bakery (BRL), in Mackenzie, Linden, a relatively new, small operator who has quickly developed a reputation for good taste and quality and has a loyal clientele particularly in Mackenzie. Despite a recent increase in oven size, this operator still cannot supply scores of customers every day. In terms of “imports” the greatest penetration is by the 4 m ajor producers in Georgetown: 1. Bakewell, the dominant supplier on the coast and with penetration into Berbice and Region 10 as well; 2. DIH’s Golden Harvest, with strong market share in Region 4, particularly Georgetown, and with a presence in Region 10 as well; 3. Grahams’ Bakery, with a reputation for good taste and medal-winning quality in International competitions, has strong market share in Region 4 and some presence in Linden as well; 4. Humphrey’s Bakery also with a strong Georgetown reputation for excellent taste and quality has little presence in Linden because of insufficiency of supply.


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Besides those listed, there are numerous “bottom house” outfits in the region with extremely small production, approximately 40 – 50 loaves per day, catering to those who prefer bread of the “home-made” variety.

Demand

Based on an estimate of 10,000 households consuming an average of 2 loaves per week there is a potential demand for 20,000 loaves per week in the Region. The local bakeries and the imports do not satisfy the demand for bread and pastry. Consequently there are advantages to investing in this area including: •

• • •

Satisfactory returns on the investment if the operation is managed at a high level of efficiency. Increase of output does not necessarily require additional labour. Capital costs are recoverable within the first 5 years of operation. Cheap electrical power supply.

Any new operation entering this industry for the first time will have to produce at the highest level of efficiency. The product must be excellent in quality and marketed aggressively, with close attention paid to packaging and distribution. The operation may eventually offer a diversified product mix of bread, cakes, sweetbreads, pastries etc. Market Potential

The market potential of any operation such as a small bakery will depend on classic plant location and sizing decisions with demand influenced by issues like proximity to the consumption center. There may be competition from other existing bakeries. However an operation that is well organized and efficiently run with a distinct quality product can achieve comparatively high returns from this investment, as there should be no difficulty in disposing of bakery products. Market Strategy

Several strategies will need to be implemented to establish a credible presence in the market for any new outfit. These may include: • • • •

Distributing one-third of the products by selling at the bakery. Selling one-third to private distributors at wholesale prices. Selling one-third to supermarket outlets and to shops at wholesale prices. Specialty items like cakes and pastries may be sold to schools, canteens and snackettes at wholesale prices or at the bakery at retail prices.


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PRODUCTION PROCESS AND TECHNOLOGY In recent decades bread-making technology has gone way past the firewood outfits that were commonplace even in the 1960s. Improved mechanical designs, new materials and computer controlled systems have revolutionized the industry. There is a wide variety of production equipment and machinery available. However, at the most basic level of production, the process is as follows: • • • • •

Weighing and combining ingredients in a dough mixer, Shaping the mixed dough manually or with a dough moulder, Allowing fermentation for approx 1½ hours, Cutting the dough and reshaping into required sizes for baking, Baking the dough, usually at 180°C (350° F).

Equipment Dough Mixers

These are used to combine the ingredients and come in a variety of sizes. The most commonly used mixer that is conveniently sized for a small bakery is either a 30 quart (34litre) or 60 quart (68litre) model. These sizes are able to mix 1 or 2 bags of flour at each mixing. Dough Moulders

After the mixing of ingredients, a dough moulder may be used to shape the dough before it is allowed to ferment. Shaping contributes to smooth texture in the final product. This equipment may be considered optional as the process may be done manually, but it is imperative if one is to compete with the products from the more established bakeries. Dough Dividers

In larger bakeries where high output production is necessary, dividers cut the dough into uniform sizes after moulding. In the process the dough is also homogenized and degassed. The equipment is entirely optional as the cutting process can be done manually with a dough knife but the degassing benefit is lost. Ovens

Ovens are one of two main types, direct fired and indirect fired. In direct fired ovens the heat is inserted directly into the baking chamber, resulting in more uniform baking temperatures and more accurate heat control. In indirect fired ovens, fuel is burned in an external combustion chamber and the heat is circulated around the baking chamber by a blower system. These ovens are 20% more expensive in fuel consumption and consequently not as cost effective for small operations.


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Ovens can be either the traditional deck type or of rotating design. A rotating oven with up to 4 times the capacity of the conventional deck ovens plus a better “finish” (color and texture) is the better option. These ovens are typically available in sizes from 16 to 48 pans. A 24-pan unit is adequate for an operation producing 2,000 to 3,000 loaves per week. The usual energy sources for modern bakery operation are either electricity or propane gas. Potential investors should note that use of combustible wood and charcoal is not recommended though present in large reserves, since those options cannot match the consistency of modern computer-driven operations. At any rate, the easy availability of cheap electricity in Linden will offer distinct advantages to using electrical ovens here. Good used equipment is available through Internet suppliers and also from within the Caribbean region.


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REQUIREMENTS FOR BAKERY SETUP Some of the critical factors to be taken into account prior to establishing a bakery are :

1. Location It is critical to identify a building in an area that is clean and environmentally friendly. Once sales are going to be conducted at the bakery outlet as suggested above, it is necessary to ensure that all forms of traffic, pedestrian and mechanical, can come and go unencumbered. There are several suitable areas in the Region and specifically in Linden, particularly in the densely populated areas like Amelia’s Ward, Wismar Hill, One Mile, Half Mile, Wisroc or Blue Berry Hill. It will be important to carry out detailed surveys in order to determine demand and preferences in given locales as well as to ascertain the level and effectiveness of competition. Rental costs can vary from as low as $20,000 per month to $50,000 depending on location and the nature of the negotiations. Alternatively it may be possible to buy out some location. Property values and prices are significantly lower than in Georgetown and other urban centres on the coast.

2. Building The actual building housing the bakery operations should be adequate for proper layout of equipment and furnishings (ovens, tables etc) as well as providing space for storage of supplies and finished products. A small operation will require between 230sq.m. 465sq.m. (2,500sq.ft. - 5,000sq.ft.)

3. Electrical Supply The building should be wired (or rewired) for the type of equipment used, to avoid electrical overloads and risk of electrical fire. Certified electrical contractors should be employed to inspect, determine and where required install appropriate supply wiring based on the needs of the operation and the location. Fortunately Linden has a surfeit of qualified, skilled personnel who are available as private contractors for just such activities.

4. Ventilation The location will need to be properly ventilated to avoid the buildup of heat during baking operations. Fans (cooling and extractor) should be installed to ensure adequate air circulation within the work area.

5. Furnishings Furnishings will include heavy-duty working / mixing tables. At least two 1.8m (6ft.) tables will be required for a small operation. Though stainless steel tables are more professional, wooden tables are as effective and will be cheaper to acquire.


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Fridge/freezer facilities will be needed to store ingredients, products stocks and raw dough, to prevent spoilage.

6. Equipment This will include sets of heavy-duty hand tools like rolling pins, metal scrapers, bowl scrapers, spatulas, dough knives, baking tins, racks for cooling and scale(s) for weighing ingredients.

7. Food Handler’s Permits The operation of the bakery will require clearance from the Municipal Public Health Department and food handler permits for anyone involved in the production, sale or distribution activities of the business. At any rate the Municipality’s Regional Health Officers (RHOs) will periodically visit the operations to enforce health standards for operations and personnel.

8. Waste Management Proper facilities will be required for garbage and effluent disposal.


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ANNUAL FINANCIAL PROJECTIONS

700 loaves / day: 3,500 loaves / week $150 per loaf retail 5 days (unskilled labour typically works 12 hr/day, 6-day weeks) 52 weeks

Output: Selling price: Workweek: Work year:

Assuming a potential market of 20,000 loaves per week in Region 10 alone, at a typical user rate of 2 loaves per week, this production level will address less than 10% of the existing market.

$ 9,000,000

Investment Year 1

Revenues

$27,300,000

Expenditure

$19,000,270

Net Margin

$ 8,299,730

BreakBreakBreakBreak-

even point even point even point even point

Period Percentage Sales Production


1½ Months 14.43% $ 3,289,157 26,269 loaves

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The major capital and operational items associated with this level of operations are:

Investment Items Land and building Plant and machinery Working capital for 2 months Total capital investment Receipts per annum Cost of production per annum Annual Fixed costs Profit per annum Break Even point Net Margin as a percentage Break Even point in months

3,000,000 5,250,000 750,000 9,000,000 27,300,000 17,600,270 1,400,000 7,298,000 14.43% 30.40% 1.7months

Machinery & Equipment

Operational items

Rotating Oven 24-pan 1-Bag Dough Mixer Dough Breaker Working Tables (2 or 3) Fridge/Freezer (11cu. ft.) Cash register or Point Of Sale Computer Bread Moulder (Optional) Delivery Van (second hand) Scales Bread Slicer

Bread pans (approx 150) Cooling racks Hand tools and utensils: knives, bowls etc. Plastic bags and labels

Labour

Other Considerations

Manager (Owner/Manager) 1 Master baker 1 Asst Baker 4 Utility workers 3 Sales and distribution workers

Rent Water supply Electricity Transportation Insurance Licenses and permits


Production Items Flour Sugar Lard Salt Dry Yeast Other ingredients

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FINANCING SOURCES The following are some of the funding sources from which a borrower may access financing for an operation of this nature, either singly or in combination. •

The Linden Economic Advancement Fund (LEAF) provides financing for Region 10 projects.

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Small Business Development Trust

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Institute of Private Enterprise Development

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National Bank of Industry and Commerce

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Citizens Bank


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Small Bakery Operation Detailed Analysis

Production costs: Direct materials Direct labor Indirect production costs electricity, fuel Other expenses: Sales and Advertising expenses etc Insurance of Equipment, Workers Rent or Lease of land General expenses: Office salaries Supplies Miscellaneous Totals

Fixed Costs

Variable Costs

$350,000

$79.44 $16.42 $0.38

$240,000 $120,000 $30,000

Sales and Income data: Selling price per unit Expected unit sales Target operating income for the period Cost of Production per annum Variable & Total

$0.25

$600,000 $40,000 $20,000 $1,400,000

$96.70

17,600,270

$150.00 182,000 5,000,000 19,000,270

$0.22

Results

Contribution margin per unit Unit sales at break-even point Dollar sales at break-even point Dollar sales at expected level Net Annual Profit at expected level Unit sales at target operating income Dollar sales at target operating income Break Even Percentage Net Annual Margin at expected level as a Percentage Break Even Period in months

$53.30 26,269 $3,940,316 $27,300,000 $8,299,730 120,086 $18,012,873

14.43 30.40 1.7

Costs etc Salary Owner/ Mgr $50k/mth Skilled Wages 1x 2500/day + 1x 2000 day= $4500/day Utility Wages 7x 1000 = $7000/day


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Small Bakery

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