Is AwardBest's Model Commercially Viable?
Posted by James Plamondon on December 07, 2015 . 0 Comments
On December 5th, the Phnom Penh Post (“PPP,” Cambodia's premier English language daily newspaper) published a piece on AwardBest's "ultra-premium" strategy. Written by the Post's Business Editor, Cam McGrath, the piece — titled Going Against the Grain — raised two questions:
- Is there a market, in the USA, for gourmet rice priced at $10/pound ($22/kg)?
- Given the high costs of freezing, frozen transportation, and frozen storage, can selling flash-frozen rice be commercially viable?
An earlier blog post answered the first question. This blog post answers the second question: Can selling flash-frozen jasmine rice be commercially viable?
The PPP article summed up the argument against AwardBest’s “ultra-premium, flash-frozen” model as follows:
Let’s accept Mr. Saran’s $3,000/ton as an accurate “worst case” estimate for the landed cost of a ton of premium jasmine rice in the USA...with the slight fudge that this higher price also includes the cost of (a) bagging the rice in 2-pound (907g) consumer-ready bags, and (b) packing those bags into 24-unit cardboard boxes. Let’s also assume that all of this packaging raises the weight of each bag, on average, from 907g (two pounds) to a full 1000g (1kg), so that 1,000 packaged bags will weigh 1 metric ton (1,000kg).
A single 20-foot refrigerated container can hold approximately 18,000 boxed bags (18 tons) of such packaged rice. At $3,000/ton, it would cost (18 tons) * (3,000 $/ton) = $54,000 to buy that rice, bag & package it, and land it in the USA.
In a previous blog post, I demonstrated that AwardBest’s proposed price of $19.95 per two-pound bag (which is approximately $10/pound and $22/kg) was reasonable, given the prices of other specialty rice products on Amazon. (These rices, like AwardBest’s, do not compete with Thai “commodity” jasmine rice any more than Rolex competes with Timex. Timex sells watches. Rolex sells luxury. AwardBest, with its patent-protected “world’s best, harvest fresh” guarantee, sells confidence to rice novices.)
Selling 18,000 bags at US$19.95/bag would generate $359,100 in gross revenue. Subtracting the $54,000 up-front costs leaves ($359,100 - $54,000 =) $305,100 in gross profit.
Operating costs would run about $230,000 (going mostly to Amazon for fulfillment and to Google, Facebook, and Amazon for advertising).
That leaves a net profit of ($305,100 - $230,000 = ) $75,100 per container. That net profit makes AwardBest’s export model “commercially viable” by any rational definition.
By way of contrast, let’s look at Mr. Saran’s “commodity” Cambodian jasmine rice price of $750/ton. Fitting 20 tons into a non-refrigerated container, that container would earn a gross revenue of (750 $/ton) * (20 tons) = $15,000.
How much profit is earned from such a “commodity” rice container? No one is telling. However, Mr. Saran himself has stated that Cambodia’s rice export industry is currently so unprofitable that, without government subsidies, it will collapse “within seven years.” Alternatively put, Cambodia’s current rice export model is not commercially viable.
According to Cambodia’s Ministry of Commerce (as quoted by Xinhua and the Cambodian Embassy to the UK), Cambodia shipped approximately 370,000 metric tons of rice in 2014 (the most recent full year for which figures are available), earning US$247 million in gross revenue. As quoted above, the profits earned from this $247 million are so low that Cambodia’s current rice export model is not commercially viable: without government subsidies (to increase profits) the industry will collapse “within seven years.”
According to the research of Clayton Christensen of the Harvard Business School, “subsistence level” net profit margins are approximately 5-6%. That is, a firm or an industry can subsist (meaning “survive, but not thrive”) on a net profit of 5-6%.
If Cambodia’s current rice export model needs government subsidies to survive, then it must be earning less than 5% net profit.
Let us give Cambodia's rice export industry the benefit of the doubt, and assume that it is earning a net profit margin of 5%. Five percent of the industry's $247 million in gross profits — that is, the “subsistence level” profit of Cambodia’s entire rice export industry — is $12,350,000. Assuming an interest rate of 10%, this profit is not enough to service the industry’s debt, which includes at least $157 million via the World Bank’s International Finance Corporation (IFC).
An industry that cannot service its debt is truly not viable. After debt service, Cambodia's rice export industry is losing money on every container it ships.
On the other hand, AwardBest's rice export model earns more than US$75,000 per container in net profits.
The conclusion is inescapable: Cambodia’s current “commodity”-focused export model is NOT commercially viable...but AwardBest's quality-focused model IS commercially viable.