Business Plan for Introducing Erythritol in Indonesia - Term Paper Example

Business Plan for Introducing Erythritol in Indonesia Overview: In the modern world, increasingly sedentary lifestyles have meant increased incidences of obesity and diabetes. To fight these lifestyle diseases, scientists are constantly in search for products that are good to the palate but do not add to the waistline. Erythritol is one such product. Erythritol is a natural sugar alcohol which has been approved for use as a sugar substitute in most parts of the world. It is 70% as sweet as sugar but virtually calorie free. Erythritol occurs naturally in several fruits and is easy to digest. Unlike other sugar substitutes, it is made from naturally occurring substances and hence is largely free from side-effects. Indonesia is an archipelago of 13,367 islands with a total land area of 1,907,950 square kilometers. The reforms undertaken by Indonesian government since the 1997 economic crisis have resulted in very conducive environment for establishing a new business. The low cost of labor in Indonesia makes setting an Erythritol production factory a very profitable enterprise. Besides, with increasing consumer awareness in Indonesia, it will also be profitable to market and sell this zero-calorie, no side-effect sugar substitute in Indonesia. Cost of Starting a New Business in Indonesia Although Indonesia is not an easy place to start a new business Indonesian government encourages foreign investment in Indonesia. Considering the low cost of labor, it would be cheaper to setup a factory in Indonesia rather than importing Erythritol from outside. According to www.doingbusiness.org, it takes an average of 97 days and a minimum capital of IDR 20,000,000 (USD 2500) to obtain the required licenses to launch a new business in Jakarta. Another 40,000,000 (USD 5000) is needed to obtain the required permits and registrations for a warehouse. Hence the main costs would be of building the factory and buying/leasing equipments. Unfortunately, in Indonesia this cost could be prohibitive. Another hurdle in setting up a factory in Indonesia is the long time it takes to get all the required approvals and licenses. There are a large number of procedures and it can take up to a year to get all the approvals. Location of Factory Erythritol is produced by fermentation of glucose using yeast. Glucose can be obtained from a number of high starch crops. Since corn is readily available crop in Indonesia and has high glucose content, it is the first choice for raw material for production of Erythritol. The crop is mainly grown on the island of Java. So it is best to locate the factory on the island, near the raw material. While deciding the location of the factory, we have to consider the cost of land. In the urban areas and in major cities, including Jakarta, there is limited land area and hence the price is extremely high. In fact, many cities have forbidden setting up of new factories within their municipal limits. Hence it would be better and cheaper to locate the factory in the rural area where there is plentiful of land and adequate manpower. Raising Capital Due to the huge benefits of Erythritol as a sugar substitute and the cheap cost of labor in Indonesia, setting up a factory in Indonesia represents a low-risk business. Capital is needed for buying real estate, building factory, buying corn from farmers, buying equipment, labor and marketing. There are several options for raising capital. However, the best and the cheapest option is a bank loan. With a low-risk strategy and a solid business plan, getting a bank to finance the new business should be easy. The land and factory can be used as collateral in the bank loan. Company Operations The company will be hiring local population for all major positions, including the Chief Executive Officer. The local people understand the local customs better and thus will be in a better position to handle the day-to-day operations. The low labor cost in Indonesia also makes this proposition an attractive one. The raw material, corn in this case can be easily obtained from the farmers at a competitive rate. It will be used to produce Erythritol in the factory using the leased/bought equipments. A part of the Erythritol would be exported to the established markets like Japan. The remaining will be marketed and sold within Indonesia. Thus the company will have a three-fold strategy to make profit. a. Producing Erythritol at a low cost location b. Exporting Erythritol. c. Marketing Erythritol in the local markets. Production Indonesia being a low cost destination with low labor costs, it makes economic sense to manufacture Erythritol in the country. The raw material, corn, is also abundantly available in Indonesia, specifically, the island of Java. The production process involves the following steps. i. separation of starch from the raw material, i.e. corn ii. Turning it into glucose through enzymatic hydrolysis iii. Yeast fermentation of glucose iv. Sterilization of the fermented broth v. Purification and crystallization The equipment required for these processes can be either leased or bought depending on the capital raised. Permanent labor will have to be hired locally. Exporting Since Erythritol is already an established sugar substitute in several parts of the world, including Japan and many European countries it makes economic sense to export the product to these countries. It was also help offset the initial investment and help in making revenues during the lead period of introducing the product in Indonesian markets. Marketing Erythritol in Indonesia Indonesia is has the fourth largest population in the world at 238.5 million. According to the World Bank estimates, about 17% of the people live below poverty line. Only 43% of the people live in urban areas. The GDP growth rate is about 6%. The per capita income according to purchasing power parity is $3210. Thus Indonesia has a huge population of middle class people with disposable income who are increasingly becoming health conscience. The zero calorie, naturally obtained, no side-effect sugar substitute, Erythritol will appeal to these people. Target Market The target market for Erythritol is the urban dwelling upwardly-mobile middle class population of Indonesia. These people shop both at the local markets to get bargain prices as well as at supermarkets. If properly marketed, it should be easy to get this population to try Erythritol at least once. By stressing the various health benefits, we can also get a number of return customers. And by comparing the good properties of Erythritol with the bad properties of sugar, it should be possible to completely replace sugar with Erythritol. Marketing Marketing Erythritol should stress upon the benefits of this sugar-substitute while highlighting the harmful effects of sugar. The best way to reach the target audience is through advertisements in the print and electronic media. Another way to market Erythritol could be publish newspaper reports regarding the harmful effects of sugar and mentioning Erythritol as a natural substitute. Educating consumers about the harms of sugar will force them to look for substitutes and Erythritol can then easily slip into this role. It will also help to advertise the fact that Erythritol looks feels and tastes like sugar. And we will have to come up with a commercially usable brand name (Erythritol being too scientific for common consumer). Benefits of Erythritol a. Erythritol has a very low calorie content, almost zero per gram b. Erythritol is directly absorbed in the small intestine and thus not cause any gaseous and laxation side effects. c. It is safe for diabetics d. It does not cause tooth decay e. It is safe for human consumption since it is naturally present in many fruits and vegetables and a part of normal diet. Business Development and Market Penetration Once Erythritol has been introduced in the market, the next step will be developing the business and further penetration of market. This means marketing Erythritol to the low-income groups and in rural areas. For this the market price of Erythritol should be slightly lower than the market price of sugar. By setting up our own factory in Indonesia, it will be possible to keep the prices low. The prices can be further subsidized through exports. Secondly, the markets need to be flooded with Erythritol and easy availability of the product has to be ensured. Erythritol should not only be available at supermarkets but also at the traditional stores. Thus the twin effect of low prices and easy availability will combined with the benefits of Erythritol over sugar will help it to replace sugar completely. Once everyone has switched to Erythritol, the prices can be raised slightly. Revenue and Expenditure Projections Setting up a new business is not easy or cheap and the initial expenses will be high. The cost of land, factory and equipments, labor and raw material will the major expenses. The other major expense will be advertising. Further studies need to be conducted to come to a more accurate estimate of the capital needed to start the factory. The capital requirement will depend on various factors including the exact location of the factory, the ease of availability of land, the market price of corn, whether the equipment is brought or leased, the cost labor etc. Once the factory is up and running, the operational costs can be immediately covered through exports. However, marketing and business development within Indonesia can take several years. Depending on the exact expenditure, it may take up to five years to break even. Conclusion Indonesia is a developing market with a high rate of GDP growth. The middle class is growing and becoming more and more health conscience. Hence, a zero-calorie, healthy sugar substitute will attract this demographic. The rural population can be attracted by keeping rates competitive. The benefits of Erythritol will sell itself to the vast majority of the Indonesian population. A good marketing strategy will sell it others. Read More