Supercrops

Cropia is a global global Swiss agribusiness that produces agrochemicals to improve crop yield and performance. The R&D division of Cropia has developed Supercrops, a chemical that helps control the ripening of produce.

Key question: Is the estimated profitability high enough for Cropia to attempt to commercialize this chemical?

Exhibit 1 

 

Suggested steps ranked by priority:

1. Volumes: Understand whether the market size is large enough to justify the product launch. If there’s no market, no point in launching the product.
2. Price: Identify the right pricing point based on:
1. Availability of similar products on the market
2. [If similar products are not available in the market] Value (incremental profit) generated for customers
3. Profitability
1. Cost base: Check that cost base ensures profitability at the optimal price level
2. Estimate potential profit

1. Volumes

The interviewee should enquire about the revenue generated by growing strawberries in the US. 

Exhibit 2 

 

Market size estimate: The total revenue generated by growing strawberries in the US is given by

Hence,

36,000$∗(45∗2,000)=3.24 𝐵𝑛$

Key insight

The market size looks large enough to continue the analysis.

2. Cost synergies

a. Value added

b. Benefits: improved quality

The interviewee should estimate the benefit for farmers in terms of improved quality. From the previous table he should remember that the revenue/acre/year is 36,000. Since the yield of Magnus strawberries is going to increase, we can assume revenues for Magnus strawberries to increase in line. Also, since there is no hint suggesting that any of the cost drivers will change, we can expect the increase in revenue to translate itself in a profit increase.

𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡:36,000$∗0.75∗0.20=5,400$/acre/year

b. Benefits: earlier harvesting

Exhibit 3 

 

The second benefit of earlier harvesting is given by adding more cultivation cycles: since cycles will be shorter, there will be time to repeat them more times throughout the year. Currently the cycle takes 121 days and hence it is repeated 3 times per year (appr. 365/3) but in the future it will take 91 days (121 - 40) so one more cycle can be added in a year (91 is about 365/4). In order to estimate the additional profit/acre/year arising from adding a cycle we should calculate the full profit of a cycle, including the benefits estimated so far:

1. Estimate current profit/cycle

Current profit/cycle is given by the difference between the revenues per cycle and the costs listed in Exhibit 2 multiplied by the relevant days. Whilst we do not have the revenues per cycle, we can infer them by dividing the yearly revenues of 36,000$ by the current 3 cycles.

1. Estimate the additional profit per cycle given by all the benefits calculated so far (improved quality and the first benefit of earlier harvesting). Since additional profits are on a yearly basis they should be divided by three.

𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 =(5,400+2,700)/3=2,700$/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟

1. Sum up total additional profit arising from adding one cultivation cycle

𝑨𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝒑𝒓𝒐𝒇𝒊𝒕 𝒅𝒖𝒆 𝒕𝒐 𝟏 𝒂𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝒓𝒐𝒖𝒏𝒅 𝒐𝒇 𝒄𝒖𝒍𝒕𝒊𝒗𝒂𝒕𝒊𝒐𝒏 :𝟓,𝟖𝟎𝟎+𝟐,𝟕𝟎𝟎=𝟖,𝟓𝟎𝟎$/𝐚𝐜𝐫𝐞/𝐲𝐞𝐚𝐫

1. Incremental profit

𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡 =5,400+2,700+8,500=16,600$/acre/year

2. Share of the incremental profit can be captured through prices

Working in our client’s favour is the monopoly nature of the product, but working against it is the newness and resulting lack of social proof. The best answers will be between 20% and 50%. 

3. Profitability

Estimating potential profits

The interviewee should enquire about the production cost base to ensure that profits can be reached. 

Profitability/acre can be calculate as follows: 

𝑃𝑟𝑜𝑓𝑖𝑡/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟=𝑅𝑒𝑣𝑒𝑛𝑢𝑒/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟−𝐶𝑜𝑠𝑡/𝑎𝑐𝑟𝑒/𝑦𝑒𝑎𝑟=4,000−(7.5∗10)=3,925$/acre/year

Hence total potential profits will be given by multiplying the above by the number of acres in the market:

Potential profit: 3,925∗(45∗2,000)=353.25 m$/year

The opportunity seems too good to be true.

4. Other factors