CUTO Enterprises
EXECUTIVE SUMMARY
The main focus of CUTO Enterprises is to provide a central packaging and marketing
facility for greenhouse grown cucumbers and tomatoes. This enterprise would consist of a
collection of growers from within the province of Saskatchewan. These growers would bring
their premium quality produce to CUTO where it would be graded and packaged and then
marketed to a wholesale distributor.
Marketing
The primary focus of CUTO Enterprises is to capture the larger market of wholesale
distribution. This market would involve providing greenhouse grown cucumbers and tomatoes to
a wholesale distributor, Western Grocers or Federated Co-operatives.
The most essential component of a successful business is its customers. The customers
of CUTO include the growers, the wholesalers and the investors. The growers would pay an
annual membership fee of $100. This would entitle the grower to full marketing privileges and
up-to-date information on the greenhouse industry. A distributor fee would also be charged to the
grower based on the amount of produce the grower delivers to CUTO. This fee will cover the
packaging and marketing costs that CUTO incurs, along with a small profit margin.
The packaging and marketing service that CUTO will provide will allow the growers to
concentrate on the production methods of the industry. By allowing growers to focus their
attention to the production area, higher quality standards may be achieved. By producing a
higher quality product, higher prices may be gained.
CUTO Enterprises will set up a contract with a desired wholesaler. This contract will
bind CUTO of delivery of the produce.
Due to the constant fluctuation in demand, the
wholesalers offer a set price for the season or on a per month basis, based on negotiations with
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
i
CUTO Enterprises
CUTO Enterprises. The major factor that compels the wholesaler to purchase the product is in
the agreement of delivering a constant supply of a consistent, premium-quality product to the
warehouse.
CUTO will ensure a premium quality product is delivered to the wholesale
distributor by the agreement that is arranged between CUTO and each grower. This agreement
will consist of a level of standards in which the grower will follow. In terms of providing a
constant supply, CUTO will be able to forecast the production level of the growers. This will
allow CUTO to agree to a contract that is suitable for the specific amount of production during
the year (Appendix 1.0 in Main Report).
Potential investors will be people that want to invest in a profitable organization. Future
investors will also include the growers that make up CUTO Enterprises.
A grower contract must be signed in order to become a grower member of CUTO
Enterprises. This contract will require the grower to pay a biannual membership fee of $100,
which binds the grower to a 2-year contract.
The producer must deliver all produce to CUTO
Enterprises and will not sell any of their produce under their own brand name because the
growers are CUTO Enterprises. Production levels must be approved by CUTO before each
growing season. Through the contract, the producer agrees to sell their produce to CUTO
Enterprises for an agreed upon market value. The market value is equal to the weighted average
price minus CUTO’s distributor fee. The weighted average price is calculated by weighting the
given monthly prices by the percent of production in that month. Table 1 illustrates the weightedaverage price of tomatoes and cucumbers on a per month basis.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
ii
CUTO Enterprises
Table 1 Weighted-Average Price of Tomatoes & Cucumbers
Cucumber Prices By Month Per Unit
March
April
0.95
0.9
May
June
0.91
0.91
July
August
0.79
September
0.86
Weighted Average Price =
0.86
$
October
0.95
0.89
Tomatoe Prices By Month Per Kg
March
April
2.78
3.39
May
June
2.93
2.51
July
August
2.41
September
2.49
Weighted Average Price =
2.42
$
October
2.81
2.72
Distributor fees are based on a per unit cost of good sold plus an appropriate profit
margin. This takes into consideration the profit margin that an average Saskatchewan grower can
achieve on 2.75 acres of production. This is outlined in Appendix 2.0.
CUTO will sign a contract with a wholesale warehouse enabling CUTO to market the
packaged product for the growers. The weighted average price is negotiated based on the
fluctuating market price of the industry. CUTO assumes no price risk as the corporation’s profit
is worked into the distributor fee. Producers assume the entire market risk. Regardless of the
market price a constant distributor fee will be charged to the grower.
The contract between the wholesaler and CUTO will be based on projected production
numbers. From these projections, the wholesaler will determine when they will buy the product.
These projected production numbers also allows the wholesaler to purchase the product for the
production year.
By combining the producers of Saskatchewan, a production level would be achieved that
would allow the growers to capture the wholesale market. When entering a larger market, higher
profit margins could be attained. These higher profit margins would allow the grower to stay
competitive in the greenhouse industry through technology advancements and expansion. If any
grower is hesitant in becoming a part of a collective marketing organization it is important to note
that the growers are CUTO Enterprises.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
iii
CUTO Enterprises
Production & Operations
CUTO will be located in Saskatoon, Saskatchewan at 1323 Fletcher Road. This location
is near the wholesale market that CUTO is aiming to penetrate. In order for this venture to be
viable, an expansion of the greenhouse industry must take place.
Another advantage of
Saskatoon is the South Saskatchewan River, which facilitates this expansion of the greenhouse
industry by providing the necessary water that is required for commercial greenhouses.
CUTO accepts delivery of fresh cucumbers and tomatoes from member growers. The
produce is stored in the warehouse. The product is then cleaned, graded, packaged and finally
shipped to the wholesaler. Any product that is not up to CUTO standards will be thrown out, this
is assumed to be 5% of total production. The packaged produce is then placed on pallets and is
subsequently loaded in a van trailer. The trailer is then picked up and brought to the wholesaler
markets. Figure 1 illustrates the planned CUTO packaging and marketing facility.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
iv
CUTO Enterprises
70’
Bookkeeper/
Secretary
Reception
Marketing
Files
Office
MaintWash
Room enance
General
Manager
Facility
Supervisor/
Inspector
Lockers
Workers
Lunch
Room
25’
WashRooms
20’
Cucumber
Line
Tomato
Line
100’
175
’
100’
Small Dock
Cucumber
Raw
Produce
Tomato
Raw
Produce
Large Truck Dock
Packaged
Produce
Figure 1 Building Plan
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
v
CUTO Enterprises
Delivery coordination is essential for CUTO to meet market demand at the appropriate
times. If too much produce is delivered during low demand periods, losses will be incurred.
Increased spoilage of product will result if the produce sits in warehouses too long. It is also
undesirable to have all of CUTO’s growers at peak production at the same time since it will be
then difficult for the packaging plant to keep up.
The scheduling of deliveries will be done in conjunction with the grower contracts
outlined in Appendix 1.0.
The contract states the date at which delivery to CUTO will
commence. This will allow CUTO to stagger deliveries in order to remain efficient. Growers will
be contacted throughout the growing season to line up deliveries to the plant. The growers will
be notified as to which day they can bring their produce in, which is coordinated with the delivery
of produce to wholesalers. This will make the procedure more efficient for CUTO and for the
growers, since they will not have to wait in a line when they bring their produce in. Produce will
be shipped out to wholesalers at the same rate that it is received at CUTO. Figure 2 illustrates the
flow of product from grower to distributor.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
vi
CUTO Enterprises
Greenhouse
Grower
Raw
Produce
Storage
Cucumber
Cleaning
Tomato
Cleaning
Cucumber
Grading
Line
Tomato
Grading
Line
Cucumber
Packaging
Line
Tomato
Packaging
Line
Waste
Produce
Growers
or
Garbage
Packaged
Produce
Storage
Wholesale
Figure 2 Process Flow Diagram
Currently, the packaging facility of CUTO is scheduled to operate only 8 months of the
year, due to the higher costs of production and decreased vegetable yields in the winter months.
CUTO turns a profit at this point, but alternatives have to be looked at to determine the feasibility
of operating the plant during the winter months to make the additional profit. Alternatives
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
vii
CUTO Enterprises
include packaging produce from the United States during the winter months. The full-time
employees will remain on during the off-season conducting various business activities.
The total capital and set-up costs incurred by building a vegetable packaging and
marketing facility total $1.7 million.
Table 2 Capital Requirements
Land
Buildings
Equipment
Tomatoe Grader
Cucumber Grader
WAREHOUSE
Pallets (500)
Pallet Jack
Forklift
Electical Installation
Natural Gas Installation
OFFICE
Photocopier
Fax Machine
Office Desk
White Boards
Computer Chairs
Office Chairs
Laptop computers
Desktop computers
Collapsable Tables
Filing cabinets
Microwave
Lockers
Phone Installation
TOTAL
134,400
750,000
678000
77,405
4,750
479
6,000
30,000
30,000
700
230
1,150
230
900
1,960
3,600
2,600
165
1,350
150
2,400
391
1,726,860
Human Resources
CUTO Enterprises has a clear line of authority and prides itself in maintaining a positive
and healthy working environment.
A highly trained and well-experienced staff will be an
essential asset to the overall performance of CUTO.
They will ensure that only the highest
quality of cucumbers and tomatoes will be supplied to the wholesale market. This new business
venture will create a positive presence in the community, creating new jobs and an opportunity
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
viii
CUTO Enterprises
for local investors to contribute to the new development. Figure 3 illustrates the line of authority
that will exist within CUTO Enterprises.
BOARD OF
DIRECTORS
GENERAL
MANAGER
FACILITY
SUPERVISOR
QUALITY
CONTROLLER
BOOKKEEPER
MAINTENANCE
25
PART-TIME
EMPLOYEES
Figure 3 Line of Authority
Financial
Financing Budget
The venture capital needed for this enterprise will come from two sources, the sale of
shares and debt financing. The sale of 7,500, ‘class A’ voting shares will raise $750,000 in equity
financing. Greenhouse growers will be strongly encouraged to invest, however the corporation is
set up with an investment structure that allows outside investors. The remaining $1,000,000 will
come from debt financing at 9.0%. The total financing budget amounts to $1.75 million. This
very closely matches the capital cost expenditures of $1.73 million. The fiscal year-end cash
balance in excess $175,000 will be declared as dividends.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
ix
CUTO Enterprises
Table 4 shows the expected financial results garnished from the ten-year revenue
projections.
Table 4 Summary of Financial Results
Summary of Financial Results
2001
2005
Revenues
COGS
Gross Profit
Expenses
Income Before Taxes
Income Taxes
NET INCOME
$
$
$
Net Cash Flow to Equity
$
14,602,192
14,006,939
595,252 $
443,199
152,053 $
32,114
119,940 $
233,335.20
$
2010
15,805,882
15,159,490
646,392 $
451,735
194,657 $
41,112
153,546 $
7,049.97
$
17,450,971
16,675,741
775,230
457,325
317,905
79,781
238,124
7,875.04
Expected Return on Equity Investment (IRR) = 23.6%
It is important to point out that the profitability of CUTO Enterprises is dependent upon
the available cucumber and tomato production in the province. Table 5 outlines the production
per acre for both tomatoes and cucumbers.
Table 5 Production
14 ACRES
Production
(# of cucs)
Tomatoes
(kgs.)
PRODUCTION
16 ACRES
18 ACRES
20 ACRES
4,451,832
5,087,808
5,723,784
6,359,760
2,102,324
2,402,656
2,702,988
3,003,320
The simplest method of viewing CUTO Enterprise’s sensitivity to the amount of
produce delivered is by using the base case distribution fees to illustrate, as represented by
Figure 4. The internal rate of return increases as the quantity of produce delivered to CUTO
increases.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
x
CUTO Enterprises
IRR
Distributor Fees @ $0.34/kg. tomatoes &
$0.07/cucumber
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
23.6%
15.8%
7.4%
12
-1.8%
14
16
18
20
-10.0%
Acres
Figure 4 Base Case Sensitivity Analysis
As such it is safe to say that at the current size of CUTO’s sorting and packaging lines, it
is not feasible to operate at less than 15 acres of tomato and 15 acres of cucumber production
in Saskatchewan.
Comm 492 – College of Agriculture and College of Commerce, University of Saskatchewan
xi