What it takes to add value to coffee

Can coffee transform an economy? Our presidential aspirants in their manifestos, this election year, have been quoted saying they would transform Uganda to middle income country if elected.
Value addition on our produce is one way to achieve this promise. Big brands in this industry such as Kyagalanyi Coffee, Great Lakes Coffee and Good African Coffee, among others, speak volumes on the viability of coffee as a potential economic turnaround. But what do you need to set up a coffee value chain?

From the farm
It would make business sense to buy green beans right from farmers. On average a kilogramme of green beans goes for Shs7,000. But you must be careful to verify quality standards before you transport the beans to a roasting machine.

Equipment and processing
On the list of requirements is a roaster. The roasting machine turns the green coffee into espresso roasted beans ready for consumption. A roaster of choice will depend on the desired output. Commercial roasting ranges from an output of five kilogrammes to a tonne or even more. Here you need between $28,000 and $1m considering the quantity. After this process the beans will require grinding which again will need $2,500 ( and $50,000. From here you will need a packing machine which could cost you between $20,000 and $300,000 considering the quality of the desired material. If you opt to pack onto sachets, the process might cost you between $15,000 and $25,000.

To the cup
Ultimately once these coffee products are engineered and are ready for sale, the next big question would be how you will source the market for them. There is ready market for coffee. Starbucks in the US has a chain of coffee shops where the processed coffee is sold as signature coffee drinks such as cappuccino, lattes and coffee milkshakes. Hence the cliche ‘from the farm to the cup’. That is part of their marketing strategy but the coffee can as well be retailed in supermarkets locally or even sold for export.

Costing and margins
The cost of sales for an efficient operation would range between 45 per cent and 55 per cent. That should leave you with gross profit margins of between 55 per cent and 45 per cent. With a lean operation, your overheads should consume about 30 per cent to 40 per cent of gross margins leaving an operating profit of about 10 per cent to 15 per cent. Coffee is a demand in product therefore the possibility of revenues growing over time is high. Higher sales volumes would imply lower operational fixed costs and finally higher net profits.
Return on investment
From estimates, it would take roughly three years to get your initial investment back given the indicated profitability estimates.

Paul Njuguna is a financial and cost accountant: Email: paul@paulnjuguna.com.

SOURCE: DAILY MONITOR