Baby formula factory: Feasibility study reduces business risk

The challenge

Our client had identified an opportunity in the market where most baby formula products are imported. Demand for these products was increasing due to population growth and the fact that more and more women were entering the workforce and interested in buying affordable convenient-food products to feed their families. Before investing in this opportunity, our client wanted to develop a feasible strategy for entering the market that took account of the risks and provided a good business return on investment.

The solution

Phased market entry reduces risk and upfront investment

We conducted in-depth market research to confirm the opportunity and identified interest in locally produced, more economically priced baby formula. From this, we projected market share and growth rate to estimate production capacity required. We proposed a phased market entry strategy, initially importing client-branded product from a third party which reduces risk and is less capital-intensive and more versatile. Once a certain market share had been achieved, investment to build a factory is triggered.

We also explored a two-phase greenfield factory investment, starting with a simpler process flow of mixing and packaging. 

To help our client in the start-up phase, we looked into possible suppliers of raw and packaging material and processing equipment. 

Study helps management to deliver a higher IRR and shorter payback time

From here we developed a financial model, taking into account investment, operational expenditures and sales income.

The result

Our study demonstrated that the investment to market and manufacture a range of baby formula products results in a positive business case. The phasing strategy reduces the business risk while ensuring that the opportunity is captured by investing in a timely manner. 

The study helped management in their strategic decision-making to deliver a higher IRR and a shorter pay-back time. It was concluded that the best way for the client to proceed is to start with the importing business for brand penetration, and to establish a blending and packaging factory once the threshold market share set out in the phasing framework is achieved.

The result of our in-depth studies guided our client to a phased project execution strategy, preparing the company to acquire a 30% market share over a 5-year period.