Management Decision Making

GREEN ACRES FARMERS MARKET

Alicia and Clifford were on the horns of a dilemma. A piece of land on the main road through the town of St. Mary's had just become available for sale and it was expected to sell quickly. It was the last undeveloped lot with a significant amount of road frontage in a high traffic area. Alicia and Clifford had always felt that their area was ripe for a farmer's market. But it was already March -- if they decided to go ahead and open this year, 2014, they would have to act quickly.

The dilemma arose because there was a municipal development agreement on the land and public approval was required before a farmer's market could be established. If Alicia and Clifford determined that the market could be a profitable opportunity, they had no assurance that a development agreement would be signed in enough time to enable them to start operations in 2014.

The question today was whether or not they should they go ahead and buy the land before knowing the outcome of the municipal decision ? An assessment of the profitability of the opportunity would help them make that decision.

The Village of St. Mary's

Alicia and Clifford lived in St. Mary's, a semi-rural town of 3000 people about a half hour's drive outside of a major centre in the Maritimes. The town and the much larger surrounding area were growing, as the suburbs pushed their boundaries further from the city and people fled to the commutable country environment. The area was also home to a significant rural population who had large gardens, large house lots, and who liked the small town life. A number of small villages and towns dotted the general area. Exhibit 1 shows St. Mary's and the surrounding area.

Within a half-hour's drive of St. Mary's were a variety of operations which catered to a tourist population. Tourist attractions included: horse-back riding, tidal bore rafting, government-operated and private campgrounds, public and private golf courses, and beaches. The area was rich with crafts persons - some with their own shops - and an internationally recognized sculptor also lived in the area.

In addition to the traditional crafts persons, there were a variety of talented individuals involved in making: specialty meats; specialized in honey-related products like brandied honey, honey butter, and honey with the comb in the bottle; sugar bush candy makers; and what was reputed to be the best bread in the province.

Clifford had always felt the farmer's market idea was a valuable one in the "corridor", the secondary highway that linked several communities off the main divided highway - # 108. People travelled the corridor on their way to the neighbouring community of Lucas. Lucas had a mall which housed a large bargain store, grocery store, liquor store and a number of food and retail outlets. When travelling home from work, many people who lived beyond St. Mary's often took the first exit off the main highway because they wanted to get off the highway as soon as possible. Although this route was slightly longer, it took them through the towns of St. Mary's and Lucas and past many of the local businesses.

The land that was for sale was located on the "way home" side of the street. The lot was barely cleared and required a significant amount of work to get it ready for construction. The owner was asking $42,000 and Clifford felt an offer of $40,000 would be accepted by the owner. The lot was about an acre and a half, had 400 feet of road frontage, and was near a subdivision where many young families lived. A sewer tax of $3,500 would have to be paid to the municipality before construction could begin.

Located on the Gloosecap Trail, a popular destination drive for tourists, Alicia and Clifford felt they were perfectly positioned to capture the travelling tourist population, the metro traffic seeking a not-too-distant Sunday drive, and the local market.

The Partners

Clifford talked about the farmer's market idea with some friends, who he thought might be interested in a business opportunity. Anna was a partner with Clifford in another very successful business and she and her husband, Howard, frequently socialized with Clifford and Alicia. All four were entrepreneurs in other ventures. Anna and Howard were semi-retired and had significant land holdings. Clifford and Alicia each worked at their businesses, owned a number of properties, and were always looking for new opportunities.

Anna and Howard were interested and pursued the idea along with Alicia and Clifford. Anna and Howard agreed to join Alicia and Clifford in a four-way, equally-split corporation, if the idea appeared to be a profitable opportunity.

Green Acres

The four believed the success of a farmer's market depended on the ability of the market to satisfy a variety of needs from three distinct groups: residents who wanted locally produced quality goods, tourists who were looking for quality goods provided in the context of "a Nova Scotian shopping experience," and the metro traffic who came on the weekends for a drive in the country.

The tone of the market would be more up-scale than some existing markets and would be open from May to October. In the spring and early summer, the major selling items would be seeds: bulbs, bedding and potted plants, manure, fertilizer, and other gardening products. As the season progressed, seasonal fresh fruit and vegetables would be supplied by local farmers and non-seasonal items would be supplied by wholesalers. Locally grown products available throughout the season would include: potatoes, lettuce, broccoli, green peppers, turnip, strawberries, blueberries, plums, apples, squash, onions, carrots, chard, raspberries, peas, beans, pumpkins and watermelon. Some items to be supplied by wholesalers would be red peppers, mangos, and certain varieties of apples, plums, onions and oranges.

In addition to the produce, they expected to include: a wide selection of crafts from local area crafts persons; preserves, compotes, honey and maple syrup; a variety of locally made deli meats, sausages and pasta salads; prepared foods such as barbecued specialty sausages; ice cream and a bakery. The four believed the bakery to be the key to the farmer's market based on their discussions with other owners and their own observations. The bakery was a strong drawing card. Alicia envisioned townspeople and tourists dropping by at lunch or on weekends for big, juicy locally-made Octoberfest sausages, barbecued and served with locally-made sauerkraut and bun. This tasty treat would be eaten at picnic tables on the deck located near the property's edge by a small brook.

To encourage the tourist traffic, they planned to establish a tourist information area on the site. With brochures, pamphlets, and travel guides supplied by the local tourist bureau, the farmer's market would be better able to assist tourists. In future years, the tourist bureau might consider relocating their booth from its present location on a tertiary highway to the Green Acres location. Bicycle and bus tours through the area were common, and they hoped to capitalize on this as time passed.

Alicia wanted to set aside a small area in the proposed building where weekend activities would take place. Here, local artisans could work allowing patrons to watch them and provide activities for children. She had already developed a short list of activities for children and adults:

quilting demonstration

smocking demonstration

highland dancing

wood carving

kite making

bicycle maintenance

tole painting

weed and reed weaving

pumpkin painting and carving

antique car display

flea markets

The market could also provide tourists staying at the beautiful government-operated provincial park with grocery items, crafts and gifts.

The Development Agreement Process Moves Slowly

The county municipality bylaws required that a development agreement be signed between the landowners and the municipality if the intended use of any lot exceeded the uses permitted by the lot's zoning. The farmer's market exceeded the zoning allowances for the property the Green Acres partners were investigating.

The partners did not see signing a development agreement as a problem. What they did see as a problem was the amount of time that would be required to have all the necessary approvals and paperwork accomplished. They had to have a new environmental assessment completed at a cost of $500, drawings made of the proposed new building, and a new survey of the lot and plot plan developed ($300). All of these plans must be submitted to the municipal planning group for approval.

The municipal planning group would only give its approval after it had notified the public at large. Notices would appear in the paper indicating that someone had made application to use the land for the purpose of a farmer's market. Any opposition would be a strike against allowing a development agreement to be signed. If there was significant opposition from the public, the development agreement may not be granted at all. Municipal officials assured Alicia, however, that public opposition to a farmer's market was like public opposition to a medical centre -- virtually nonexistent. "Everyone likes to see a medical centre in their community," they said.

Timing was a concern. If the partners bought the land and started the development agreement process immediately, the soonest the municipal and public consultation process could be finished would be the first week of June, and this was if everything went smoothly. This did not account for any problems if someone objected to a farmer's market on the property. The Green Acres partners could not apply for the development agreement without purchasing the land, nor are they allowed to start building on the property until the development agreement had been approved.

In deciding whether or not to go ahead at this stage, the partners developed a business plan which they hoped would help them to decide whether or not to purchase the land. They were wondering if they should take the risk of buying the land and then possibly finding out that the development agreement had met with opposition. If the project was not feasible in the first place, they did not have to worry about whether or not to buy the land.

The second concern was that if there were no problems with the development agreement, would the plan be feasible given the fact that it would appear they only have half a season for their first year's operations.

They hoped that an examination of the revenues and costs would help them with their decision.

A Beautiful Building

Their observations and research showed that other farmer's markets generally needed to expand their premises a couple of years after opening. This information generated discussion amongst the partners as to the size of the building that would be built. Alicia argued strongly against the large, and therefore more expensive and impersonal 4000-square foot building that was being considered. Clifford and Anna believed it was far better to build a large building now than have to add on in a couple of years.

Alicia finally conceded to the larger building with the assurances from the group that expensive fibreglass panels would be inserted into the metal roof to add daylight to what otherwise would have been a very dark interior.

Total building costs for a 4000-square foot wooden structure, with wood siding, a metal cantilever roof, an unfinished interior, a verandah, a cement floor, two bathrooms, a cold room and an office would be approximately $60,000. This figure did not include the $40,000 cost of buying the 1.5-acre lot.

While the land was in a very desirable location and had 400 feet of road frontage, it was only partially cleared. To clear the remainder of the land and make it suitable for building and parking would cost an additional $20,000 for heavy equipment and gravel. Picnic tables would dot the exterior of the building and there would be parking for 20 cars.

Management

Alicia and Anna planned to manage the operations for the first year and pay themselves a salary to do so: Alicia for one half of the reduced season, Anna for the other half. Clifford and Howard would be there to pinch hit when needed. Anna thought that this would be a good retirement project for herself and Howard, since they were semi-retired. Alicia and Clifford could devote themselves to the planning and operations in the first year, but not on a regular basis, since each had unrelated business activities. None of the partners had any significant experience in retail sales or produce. In the long run, they hoped to be able to find a good manager that they could trust to oversee the operations.

There was a supply of available labour in the area and they did not foresee any problems finding good people to train.

Other Farmer's Markets Nearby

A number of competitors existed within a 20-kilometre radius of the proposed location.

1. Darby's market was located approximately 5 kilometres down Highway 318 from the Exit 9 turnoff of Highway 108. Darby's sold fruit, vegetables, bedding plants, shrubs, ice cream and other related products in an unfinished building with few structural or cosmetic niceties. Darby's offered ample parking. In discussion with one of the Darby brothers, he noted that their operation grossed $250,000 during their six-month season. The Green Acres' partners felt that the Darby operation did not take advantage of the increasing "country/ urban commuting resident" who wanted the feel of a country market with the specialty products and variety of a superstore. Their location was dingy and dark and they did not sell any local crafts.

2. Farmer's Friend had several locations throughout Nova Scotia and had two in the immediate area. A long established site on Highway 8 (about 20 kilometres further down the road from the proposed Green Acres site) focused more on shrubs, bedding plants, gardening supplies, fertilizers, and seeds. Fruit and vegetables and a 36 flavours of ice cream rounded out their product selection during seasonal peaks. A member of the board of directors for Farmers Friend said this site was their "best" location in the province. The Green Acres partners assumed this exceeded "another site" which the board member had said "had revenues of $200,000 based on an eight-month year." (The partners actually believed this number to be much greater, but used this number as the low or worst case scenario.)

3. This Farmer's Friend was virtually next door to a smaller operation which sold only fruit and vegetables. The owner travelled twice weekly to the valley to replenish his supply. There were no crafts or related products at this location.

4. Farmer's Friend had just established a very large nursery and retail outlet on the main highway. It was immediately off the main highway and was very visible. The extremely large size of their operation made it appear that they were positioned for warehouse, wholesale, contractor, and major landscaping sales. No crafts or produce were sold there.

5. Sobey's was located at the main highway intersection near Lucas. Their strength and buying power made them a formidable competitor. Green Acres would hope to compete with them on the basis of location, service, and price. Many people coming home would have to pass Green Acres first because people who lived in the neighbouring towns generally took the St. Mary's exit to get off the main highway and drive through town. When people buy from farmer's markets they want to be assured they are buying local which was more likely to be stressed by the Green Acres' staff, and prices would be lower. Sobey's had the superstore product without the country appeal. They had no local crafts.

Traffic Counts

Alicia collected the Department of Transportation travel statistics for Highway # 8 as well as traffic counts for highways near other successful farmer's markets. The partners hoped an examination of the traffic counts for a variety of locations relative to Green Acres and its competitors would help them develop an index to determine demand. The following traffic counts were supplied by the Nova Scotia Department of Transportation shown in Exhibit 2.

EXHIBIT 2:

Department of Transportation Traffic Counts

Highway # Location # Cars/Day

8 County Line 5190 2012

Green Acres

8 County Line 2840

2010

Farmer's Friend

318 between #108 & 14 2940

2007

Darby's

8 North of #318 4280

2012

These numbers were equivalent to a day in May or October and were the annual average daily traffic for the road noted. The Nova Scotia Department of Transportation noted that these numbers were higher in the summer due to tourist traffic. The year denotes the year the traffic survey was conducted, and the competitors name notes the competitor closest to the traffic count.

The absolute numbers themselves are less important than the relationship to revenues implied by them. Alicia believed she could develop an index to estimate revenues using the traffic counts combined with the estimated revenues from other competitive operations. Developing an index of "dollars of revenue per car passing by," she extrapolated enough information to develop an estimate of revenues for Green Acres.

Revenues

Since the first part of the season would be missed, it was important to know how much of the business' seasonal sales potential they would lose. The partners estimated the sales per month as shown in Exhibit 3. In Exhibit 3, the sales per month are shown as a percentage of the total amount of business for the six-month-a-year operation.

EXHIBIT 3

Percentage of Total Sales by Month

May 10%

June 15%

July 25%

August 25%

September 15%

October 10%

The various product groups would represent different proportions of the revenues at different times of the year. For example, ice cream would sell much more in July and August than in October; local produce sales would be big in August and September but not in May; and bedding plants would be big sellers in May and June but not in September and October. Because each product group would represent a different profit margin and because their first year would not be a full season, these breakdowns were important to the "go/no go"decision. Each product group and its estimated proportion of revenues is listed in Exhibit 4.

EXHIBIT 4

Revenue Provided by Product by Month (%)

M J J A S O

Ice Cream 5 10 10 10 10 5

Plants 30 40 20 10 10 20

Produce 30 25 60 70 60 55

Related 35 25 10 10 20 20

While all the partners believed a bakery to be essential to the long term success of a farmer's market such as this, they did not feel they could acquire the necessary equipment and the necessary expertise to open the bakery in the first year. It would take approximately $10,000 in set-up costs and an experienced baker to make the bakery operable.

Despite a knowledgeable staff, more customer awareness, and a better product selection, they only allowed themselves a four percent increase in revenues for Year 2. This was an effort to demonstrate the most conservative scenario.

During the winter months, Clifford thought they could store cars in the building to produce some revenue during the down season. He estimated the building would hold 10 cars for which they could charge $250 each.

Costs

Costs of goods sold were calculated using percentage markups on selling prices provided by Farmers Dairy and the owners of other large markets and bakeries. See Exhibit 5.

EXHIBIT 5

Markup on Selling Price by Product Type

Ice Cream $.60 cost per $1.25 of revenue

Plants 10%

Produce 35%

Related/Craft 20%

Other costs are estimated as follows:

Number of Employees - the revenue per hour is calculated for each month. Assuming the average cash register transaction was $5.00 and each employee was expected to conduct 10 transactions per hour, the number of employees per day could be determined assuming each person worked 8 hours.

Employee Wages - the cost of each employee, associated costs (uniforms, etc), and vacation pay was set at $17.00 per hour.

Managers Wages - the wages paid to Alicia and Anna for the four months of the first year's day to day operations. They would pay themselves $1000 per week for eight weeks each and each would be expected to be at the location all day, every day for the period for which they ran the operations during its start-up year. In all likelihood, next year's day to day operations would be handled by a senior employee who would be paid accordingly.

Equity - each partner would be expected to contribute $5000. The remainder would come from the mortgage on the property and the building, and a demand loan to begin initial operations.

Bank Loan - the bank loan monthly payment of $1300/month was calculated on $100,000 for ten years at 10 percent.

Demand Loan - interest would have to be paid on the demand loan until revenues were such that it could be paid out. The rate was expected to be 12 percent, a rate slightly higher than the mortgage. Only as much of the line of credit would be used as was necessary on a month to month basis.

Promotion - the initial promotional for signs and local advertising was set at $5,000. On-going promotion in the local weekly newspaper was planned at 300/month.

Utilities - nominal figures for utilities (electricity, water, garbage removal, etc.) and other incidental expenses had to be included. It was noted that deli coolers, pop coolers, ice machines, and the cold storage room were a significant draw on electricity. They allocated $500/month for this cost.

A decision needed to be made quickly. Should the partners go ahead and buy the land in anticipation of setting up the market, or should they wait.