Pomegranate Brandy

Preliminary Business Plan

November 2006 Amos Zhang Matthew Ng Albert Chu

Table of Contents
1. Summary ...............................................................................................................................3 1.1 Business Concept ..............................................................................................................3 1.2 Current Situation ...............................................................................................................3 1.3 Key Success Factors ..........................................................................................................3 2. Vision .....................................................................................................................................4 2.1 Mission Statement .............................................................................................................4 2.2 Business Goals ..................................................................................................................4 3. Market Analysis ....................................................................................................................5 3.1 Primary Market .................................................................................................................5 3.2 Secondary Market..............................................................................................................5 3.3 Customer Profile ...............................................................................................................5 4. Competitive Analysis.............................................................................................................5 4. 1 Industry Overview............................................................................................................5 4.2 Primary Competitors .........................................................................................................6 5. Strategy..................................................................................................................................6 5.1 Key Competitive Advantages ............................................................................................6 5.2 Key Competitive Weaknesses............................................................................................6 5.3 Implementation Strategy....................................................................................................6 6. Products.................................................................................................................................7 6.1 Primary Products ...............................................................................................................7 6.2 Secondary Products ...........................................................................................................7 6.3 Future Products and Services.............................................................................................8 7. Marketing ..............................................................................................................................8 7.1 Marketing Strategy ............................................................................................................8 7.2 Publicity............................................................................................................................8 8. Operations .............................................................................................................................9 8.1 Key Personnel ...................................................................................................................9 8.2 Product Delivery ...............................................................................................................9 8.3 Facilities............................................................................................................................9 8.4 Equipment .......................................................................................................................10 9. Financial Analysis ...............................................................................................................10 9.1 Assumptions....................................................................................................................10 9.2 Cash Flow Projection.......................................................................................................11 9.3 Comments .......................................................................................................................14

1. Summary
1.1 Business Concept
Pomegranates grow in Honduras, as well as other Central American countries, but currently have very limited commercial applications. Low demand for the nutritious fruit can be attributed to the difficulty of consuming it, and also partly because of preference for other fruits with greater availability and lower prices. Using pomegranates in Honduras to make high quality brandy represents an opportunity for a profitable business. The infrastructure and process designed for a pomegranate brandy business can be adapted, with small modifications, to make brandy from other fruits grown in Honduras as well, such as cashew apples. Cashews are grown commercially in Honduras, but most cashew apples currently go to waste. Thus, utilizing cashew apples to make brandy represents an opportunity for Honduran farmers to increase income. In addition, cashew apples and pomegranates are harvested during different seasons of the year, so using both fruits will maximize usage of the installed infrastructure.

1.2 Current Situation

The most common uses for pomegranates worldwide include eating the whole fruit, juicing, making jelly, and making grenadine. When not used as a food, pomegranate fruits are often used for decoration. The difficulty of preparing the fruit for eating has also historically limited demand for it worldwide. However, the fact that pomegranates offer greater health benefits than red wine is becoming widely advertised, and recent demand for pomegranate food products is clearly rising. There are currently no known commercial ventures engaged in the production of pomegranate brandy. Commercially produced pomegranate wine is also very rare. Our own experiments have shown that pomegranate juice can indeed be used to make alcohol with relative ease, and the current lack of pomegranate alcohols can be attributed to the limited availability of the fruit. In order to create a business for making pomegranate brandy, a staple supply of low cost fruit is required, and a dedicated orchard is most suitable for this purpose.

1.3 Key Success Factors

The most important factor in determining the success of a pomegranate brandy product is the quality of the product. Brandys traditional image of luxury and high prices are results of its high standards of quality. In fact, brandy can be considered the finest of all alcohols. The first requirement to consistent high quality is sanitation. This means that equipment used must be easy to clean and maintain. The fruit and its juice must also have minimal exposure to

contaminants. Another requirement is consistency of quality, which means certain controls may be required to maintain stable production conditions. Another important factor in the success of the product is the image of the product. A pomegranate brandy will be a unique product with no direct competitors, so the product should take every opportunity to flaunt this fact. An appropriate image for a brandy should be one of arrogance, rather than appearing as a low cost alternative. An attractively designed bottle is a key factor in achieving that image.

2. Vision
2.1 Mission Statement
The ultimate mission is to create a profitable brandy making business in Honduras, using fruits, primarily pomegranates, which are currently unused. When successful, this business will also serve as a model for other potential entrepreneurs, in Honduras as well as other developing countries, interested in similar ventures.

2.2 Business Goals

The key goal of this business is to increase income for farmers in Honduras. In order to achieve this, various channels of wealth distribution are built into the business model, including: The purchase of large quantities of fruit from farmers. It is important to note that reliance on buying pomegranates can pose a serious challenge to the profitability of the business. This is not a concern with other low cost fruits, especially the cashew apple. The creation of jobs with fixed wages. Farmers will be needed to maintain the orchard, and part type positions will be available during the alcohol production seasons. The selling of fertilizers to farmers at very low prices. The increased availability of fertilizer can in turn increase future production for farmers. Other main business goals are: To demonstrate the viability of commercially producing alcohol using low cost equipment. The brandy making process is understood, so low cost substitutes can be designed with the same functionality as standard equipment used in the industry. The investment required can be reduced by a factor of five or more when these low cost designs are used. To establish a niche for exotic fruit brandy. The pomegranate is perhaps the perfect fruit to use to achieve this goal. It has an easily accepted taste, a unique image, and known health benefits. Once demand for exotic fruit brandy is established, it will be easier for future ventures based on this businesss model to introduce their products into the market.

3. Market Analysis
3.1 Primary Market
The primary market to be targeted by this product will be the United States, where all alcohols together make up an industry with sales of more than $100 billion per year. The market for brandy is over $600 million. On a volume basis, the U.S. imports more than eight times more brandy than it exports, and on a value basis, that ratio is over 26. This represents a well established market for imported brandy beverages in the U.S. The key success factors, quality and image, are especially important for success in this U.S. market.

3.2 Secondary Market

Aside from exporting to the U.S., and possibly other developed nations, the pomegranate brandy produced can also be sold locally in Honduras as well. However, while there is a market alcohol in Honduras, there is no real established market for brandy, and most alcohol consumed is either beer or rum. Alcohol in Honduras also carries a 15% sales tax. As there is no established market for brandy, it would be important to price the brandy competitively in Honduras. It is possible to achieve a lower retail price in Honduras because the brandy will not have to be sold through a distributor. Pomegranate brandy will also have the potential to gain recognition among Hondurans because it is a unique product that is produced locally.

3.3 Customer Profile

The typical consumer of brandy in the U.S. is a financially well-off adult with some knowledge of fine alcohols. This profile again highlights the importance of product quality. The brandy consumer also has a high likelihood of being a return consumer. A good brandy also has the potential to attract wine enthusiasts. Finally, brandy also makes for an impressive and valued gift.

4. Competitive Analysis
4. 1 Industry Overview
Annual brandy sales in the United States totals to over $600 million. Of this amount, over 90% are from imported brandies. Brandies imported from France, including cognac, account for over 70% of all imports. Recent alcohol market reports have shown that the market for brandy has been steadily increasing since mid-1990. The size of the current market is actually larger than the stated $600

million. Part of brandys recent success in the U.S. can be attributed to the shift in marketing strategy from promoting low prices to appealing to the customers desire for higher end products.

4.2 Primary Competitors

The pomegranate brandy produced in this business will be a unique product. The most direct competitors will be other brandies made from fruits other than grapes. The most common of such products include brandies made from pears, apples, plums, and various berries. The typical retail price range for these products is from $15 to $30, with some premium products costing much more. It is important to note that this product will not be in direct competition with the more popular grape based brandies, including cognac. These products make up the majority of the brandy market, but there is much more competition among them.

5. Strategy
5.1 Key Competitive Advantages
The key competitive advantage of a pomegranate brandy is that it is made from pomegranates. There is more excitement surrounding pomegranates right now than any other fruit. There have been many recent studies on the health benefits of pomegranates, and the unanimous conclusion is that pomegranates provide greater health benefits than even red wine. Another competitive advantage of this business is that production will be carried out in Honduras. The business can benefit from lower production costs in Honduras. For comparison, pomegranates are currently produced commercially in California, but retail value of pomegranate fruits and juice are so high that there will be no incentive to produce brandy.

5.2 Key Competitive Weaknesses

The main competitive weakness of this business is its limited financial resources. This implies that there will be very little product promotion and advertising. Fortunately, this product is not going to be in the more competitive segments of the market. Also, the small scale of this business means that a very small supply will be introduced into the market in the first years.

5.3 Implementation Strategy

As it takes time to grow a pomegranate orchard, this business will require a few years to become fully operational. During the first year, juicing, fermentation, and distillation equipment will be built, and land will be bought and planted. The fruit can first be harvested after three years, so

production during this time will rely on fruits bought directly from local farmers. Due to the high cost of pomegranates, the production level during these first three years will be very low, and the bottles produced will actually be sold at a loss. However, it is important to use these first bottles produced to build up a market so that many more bottles can be sold later. This business will work with a distribution partner to reach retailers. The complete, bottled product will be sold to the distributor, who will then transport it to retailers in the primary market. Wide margins have been allotted for both the distributor and the final retailer in order to encourage distribution of this product. The pomegranate brandy will be promoted mainly by allowing potential customers sample it at retailer locations. Approximately 10% of all bottles produced each year will be set aside for promotional purposes.

6. Products
6.1 Primary Products
The primary product of this business is pomegranate brandy. This will be produced by fermenting, distilling, and aging pomegranate juice. Although initially, aging of this brandy will be limited to half a year. The sugar content of the juice will be high enough so that not all sugars will be fermented, leaving a slightly sweet taste. The beverage will carry a taste and scent that is unique to pomegranates. The final brandy will have an alcohol content of 40% (or 80 proof), which is standard among brandies. Aside from the brandy itself, the packaging is also a key part of the product. The current idea is to make custom pomegranate shaped bottles to hold the brandy. This design is intended to attract customers by its uniqueness and to remind them that this is a pomegranate based product. The crown, resembling the pomegranates prominent calyx, at the top of the bottle gives the product a feel of grandeur and arrogance. Besides brandy made from pomegranates, there is a high likelihood that this business will make brandy from cashew apples as well. However, because there have been no available cashew apples for experimentation, details about the characteristics of such a product cannot be provided at this time.

6.2 Secondary Products

This business, in the process of making brandy, will create large quantities of fruit pulp. The easiest way to use the pulp is as fertilizer. Some of this fertilizer will be kept for the business own orchard, while the rest will be sold to local farmers for very low costs. Numerous nutrients left in the pulp will definitely make it a good fertilizer. The pulp can be sold without further processing, and can be used by simply spreading it on the ground and covering it with topsoil to keep away animals.

6.3 Future Products and Services

This business will continue to seek improvements on its current products. Some of the brandy produced that is not intended to be sold will be used in further experiments to identify ways to alter the process to improve final taste. Some of the brandy will also be aged for longer periods of time to see if the taste will benefit from aging. If it is found that extended aging can significantly improve taste, a premium version of the brandy can be sold. The equipment built for this business can also be used to serve local residents. The harvesting equipment can be lent to other farmers during harvest seasons of other fruits. The juice press can be used to easily juice most fruits. Finally, the distillation and fermentation equipment will be useful for any locals who wish to explore a newly discovered passion in home wine or brandy making. In the future, this business intends to serve as consultants for other Central American small scale wine and brandy enterprises. As cost is a significant factor for such enterprises, this business can offer low cost equipment either built or as blueprints. Experiences with local fruits such as cashew apples will also help these enterprises make products with greater potential for success.

7. Marketing
7.1 Marketing Strategy
The main focus of marketing for pomegranate brandy will be on its quality and exclusivity. Once again, this will be a unique product in the market, and it will not be in the more competitive market segments. What sets this brandy apart from its most direct competitors is its material, and this product will use every opportunity to remind the consumer that it is made from pomegranates. Such opportunities include branding, labeling, and packaging. The mention of pomegranates will generate much more interest than any other fruit. Another additional strategy to be considered in marketing this product is to appeal to the consumers inner philanthropist. Honduras is a developing nation with a large population of farmers living on a dollar a day, and the success of this product can directly improve the lives of some of these farmers. The added feeling of generosity can improve overall customer satisfaction.

7.2 Publicity
Due to limited financial resources and low volume when starting this business, there will be no advertising campaigns of any form. Approximately 10% of all bottles of brandy produced are not intended for sale, and some of these bottles will be used for promotion. The product may be brought to appropriate trade shows. Bottles can be sent to various professionals for review, and

their positive feedback may be used for publicity. Some bottles may also be sent to retailer locations to let potential customers sample it.

8. Operations
8.1 Key Personnel
An on-site general manager will be required to oversee the enterprise. He will be responsible for finding and training staff, ensuring proper use and maintenance of equipment, purchasing fruits in the first three years, overseeing delivery of finished products to the distributor, and distributing wages. He will preferably be a local resident who is familiar with the surrounding conditions. He will also preferably be someone with an entrepreneurial spirit who will seek out alternative services that the business can provide for locals. For encouragement, he will be given part ownership of the business. Farmers will be required to tend to the orchard. They will be responsible for planting and training the trees, maintaining the land, and harvesting the fruit. As a key factor for success for this product is quality, the farmers will play a role in ensuring quality as well. Farmers must harvest the fruit when they are fully ripe. Pomegranates will not ripen further after they are picked. While pomegranates do not have any common diseases, fruits that crack, which often happens when it is too ripe, can easily rot on the inside. There is a budget for tools to assist in proper harvesting of the fruit. Several workers will also be required for juicing, fermentation, distillation, and bottling. These processes are mostly not carried out in parallel, so dedicated workers are not needed for each step. Again, to ensure quality, all of these workers must be trained so they have a good understanding of the process. Their understanding guarantees proper use and maintenance of equipment, correct timing of procedures, and allows for rapid adaptation to changing conditions.

8.2 Product Delivery

The pomegranate brandy will be delivered to the retailer through a distributor. The business can benefit from the distributors existing shipping channels, knowledge of importation regulations, and retail contacts. A wide margin has been allocated for the distributor to encourage this partnership.

8.3 Facilities
An orchard will be required to grow pomegranates. A starting orchard size of 10 acres will be used, and the size can increase if the product is successful and demand is strong. Pomegranates are known to be very robust plants, so the orchard does not need to be located on premium land,

although high quality is still preferred for high yield. Trees will be planted 18 feet apart from each other. A winery will be built next to the orchard. This is essentially a simple building that houses the equipment for juicing, fermentation, and distillation. All equipment must remain clean. Also, Fermentation should be carried out in a cool atmosphere for best results. Finally, there is the possibility of building a cellar near the winery, where the brandy will be aged. It is important for the temperature here to remain cool throughout the year.

8.4 Equipment
While standard equipment is available for every step in making brandy, this business will design and use low cost alternatives. There is also focus on identifying and reusing materials. It is also easy to scale the business using these equipments as increasing production volume will not represent significant additional investments. Our juice press design is a pin-based rack and pinion system, as opposed to the standard screw based press. This design uses mostly parts that can be salvaged from junked cars, for significant savings on materials without sacrificing endurance. A grinder unit will also be attached to the juice press to facilitate the pressing. The current estimate is that this unit can crush 140 pomegranates in one hour. For fermentation, various water containers, such as one gallon and five gallon jugs, can be modified into fermentation vessels. A key requirement in fermentation is that is must be carried out in anaerobic conditions, which means the fermenting juice must not be exposed to air. However, because carbon dioxide is a byproduct of fermentation, gas must be allowed to escape from the vessel. For this purpose, a tube will be used with one end inserted into the bottles cap, and one end submerged in a small container of water. Aging is usually carried out in oak barrels. The cost of new oak barrels is very high. However, as most wineries do not reuse barrels, used barrels may be bought at much lower prices. These used barrels may contribute to the final taste of the brandy based on what it held previously, and further studies need to be done on this effect. Another low cost alternative to using actual oak barrels is to use oak chips.

9. Financial Analysis
9.1 Assumptions
Here is a brief summary of the assumptions used in this financial analysis: Low cost land will be available for planting the orchard. Trees will begin producing fruit after three years, and will fully mature after five. This is based on actual pomegranate growth patterns. 10

A standard daily wage of $2.50 will be used for all workers, including farmers. The time lengths of production steps are based on studying experiences of others. A discount rate of 10% is used in calculating net present value. Yield factors of 90% are used in harvesting and in production. The final retail price will be $30 per 750 mL bottle.

9.2 Cash Flow Projection

These prices are estimated retail prices for pomegranate fruits in Central American countries.
Fruit Cost On market (ea) Direct from farmer (ea) $0.25 $0.20

This table shows the costs for purchasing and operating a one acre pomegranate orchard. Fruit yield for six years is also shown here.
Orchard Cost Land fixed Land yearly Trees Year Fruits per tree Yield Total Fruits Cost per tree Total tree cost Tree yearly cost each Tree yearly cost total Farmers Farmer wage per day Working days Wage total Harvest tools Yearly unexpected costs Total fixed cost Total yearly cost (per acre) $50.00 $5.00 130 0 0 90.00% 0 $0.50 $65.00 $1.00 $130.00 1 $2.50 120 $300.00 $10.00 $25.00 $125.00 $460.00 0 0 11700 14625 17550 17550 1 0 2 0 3 100 4 125 5 150 6 150

This table shows the raw material (fruit) costs for the first six years. The first three years will use fruit bought from farmers, the latter will use fruit harvested from our orchard.
Raw Material Cost Year Fruits purchased Total purchase cost Land 0 21000 $4,200.00 10 1 32000 $6,400.00 10 2 53000 $10,600.00 10 3 0 $0.00 10 4 0 $0.00 10 5 0 $0.00 10 6 0 $0.00 10

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(acres) Fruits harvested Orchard Cost Total Raw Material Cost 0 $1,250.00 $5,450.00 0 $4,600.00 $11,000.00 0 $4,600.00 $15,200.00 117000 $4,600.00 $4,600.00 146250 $4,600.00 $4,600.00 175500 $4,600.00 $4,600.00 175500 $4,600.00 $4,600.00

This shows the labor costs in the first six years for the juicing step of production. Also shown here is the final brandy production measured in bottles.
Juicing Cost Year Total juice produced (L) Distillate (L) Brandy yield Brandy produced (L) Bottles Juicing time (hr) Juicing workers Juicing time (days) Daily wage Total wage 0 1050 393.75 90.00% 354.375 472 150 2 19 $2.50 $95.00 $145.00 $240.00 $530.00 $660.00 $790.00 $790.00 540 720 229 2 29 894.375 1192 379 2 48 1974.375 2632 836 4 53 2467.96875 3290 1045 4 66 2961.5625 3948 1254 4 79 2961.5625 3948 1254 4 79 1 1600 600 2 2650 993.75 3 5850 2193.75 4 7312.5 2742.1875 5 8775 3290.625 6 8775 3290.625

This table shows labor costs in the first six years for the other steps of brandy production.
Brandy Production Cost Year Barrels Cost per barrel Total barrel cost Cost per bottle Total bottle cost Workers Daily wage Workdays Total wage Total cost 0 2 $20.00 $40.00 $1.00 $472.00 4 $2.50 39 $390.00 $902.00 1 3 $20.00 $20.00 $1.00 $720.00 4 $2.50 49 $490.00 $1,230.00 2 5 $20.00 $40.00 $1.00 $1,192.00 4 $2.50 68 $680.00 $1,912.00 3 10 $20.00 $100.00 $1.00 $2,632.00 5 $2.50 73 $912.50 $3,644.50 4 13 $20.00 $60.00 $1.00 $3,290.00 6 $2.50 86 $1,290.00 $4,640.00 5 15 $20.00 $40.00 $1.00 $3,948.00 6 $2.50 99 $1,485.00 $5,473.00 6 15 $20.00 $0.00 $1.00 $3,948.00 6 $2.50 99 $1,485.00 $5,433.00

This shows the investments required in the first six years for equipment in all steps of production. A depreciation rate of 25% is used for all equipment.
Equipment Cost Cost per juicer Cost per fermentor Cost per still Year Juicers Fermentors Stills Equipment investment $150.00 $5.00 $150.00 0 1 59 1 $595.00 1 1 89 2 $300.00 2 1 148 3 $445.00 3 2 325 4 $1,185.00 4 2 407 5 $560.00 5 2 488 5 $405.00 6 2 488 5 $0.00

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Running total Winery construction Miscellaneous costs Equipment depreciation Total cost

$595.00 $1,000.00 $200.00 $0.00 $1,795.00

$895.00 $0.00 $200.00 $148.75 $648.75

$1,340.00 $0.00 $200.00 $223.75 $868.75

$2,525.00 $0.00 $200.00 $335.00 $1,720.00

$3,085.00 $0.00 $200.00 $631.25 $1,391.25

$3,490.00 $0.00 $200.00 $622.50 $1,227.50

$3,490.00 $0.00 $200.00 $648.75 $848.75

This table contains other costs we have not considered.

Miscellaneous costs Year Unexpected costs 0 $250.00 1 $250.00 2 $250.00 3 $500.00 4 $500.00 5 $500.00 6 $500.00

This is the total cost in the first six years.

Total Cost Year 0 $8,492.00 1 $13,273.75 2 $18,470.75 3 $10,994.50 4 $11,791.25 5 $12,590.50 6 $12,171.75

This is the revenue for brandy sales. Also shown is the amount of bottles set aside for promotion each year.
Brandy Revenue Retailer to customer Distributor to retailer Price to distributor Year Bottles produced Bottles used for promotion Bottles sold Revenue $30.00 $20.00 $10.00 0 472 72 0 $0.00 1 720 120 400 $4,000.00 2 1192 192 600 $6,000.00 3 2632 232 1000 $10,000.00 4 3290 290 2400 $24,000.00 5 3948 348 3000 $30,000.00 6 3948 348 3600 $36,000.00

This is the revenue for fertilizer sales in the first six years. A set amount of fertilizer has been kept for our own orchard.
Fertilizer Revenue Fertilizer price (kg) Fertilizer used per acre (kg) Fertilizer produced (kg) Fertilizer used (kg) Fertilizer left to sell (kg) Percentage sold Revenue $0.25 100 2025 1000 1025 90.00% $0.00 3085.71429 1000 2085.71429 90.00% $230.63 5110.71429 1000 4110.71429 90.00% $469.29 11282.1429 1000 10282.1429 85.00% $924.91 14102.6786 1000 13102.6786 85.00% $2,184.96 16923.2143 1000 15923.2143 85.00% $2,784.32 16923.2143 1000 15923.2143 85.00% $3,383.68

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This table shows the total revenue in the first six years. Also shown is the value of unsold inventory at the end of each year.
Total Revenue Year Revenue Unsold inventory at year end Bottles of brandy Fertilizer (kg) Total unsold inventory value 0 $0.00 1 $4,230.63 2 $6,469.29 3 $10,924.91 4 $26,184.96 5 $32,784.32 6 $39,383.68

400 1025 $4,256.25

600 2085.71429 $6,521.43

1000 4110.71429 $11,027.68

2400 10282.1429 $26,570.54

3000 13102.6786 $33,275.67

3600 15923.2143 $39,980.80

3600 15923.2143 $39,980.80

This is the total profit in each year, and a calculation of net present value.
Profits and NPV Year Revenue Cost Profit Discounted Profit NPV 0 $0.00 $8,492.00 ($8,492.00) 1 $4,230.63 $13,273.75 ($9,043.13) 2 $6,469.29 $18,470.75 ($12,001.46) 3 $10,924.91 $10,994.50 ($69.59) 4 $26,184.96 $11,791.25 $14,393.71 5 $32,784.32 $12,590.50 $20,193.82 6 $39,383.68 $12,171.75 $27,211.93

($8,492.00) ($8,492.00)

($8,221.02) ($16,713.02)

($9,918.57) ($26,631.59)

($52.28) ($26,683.87)

$9,831.09 ($16,852.78)

$12,538.77 ($4,314.00)

$15,360.43 $11,046.42

9.3 Comments
It is very important to note that this projection uses only revenue from pomegranates. If cashew apples are added to the business as well, a net profit would be observed much sooner. There is no high retail price for cashew apple fruits as there is for pomegranates, so a dedicated orchard does not need to be grown. This means cashew apple brandy can be produced profitably starting on the first year of operations. The future profit from pomegranate brandy sales can be used to grow the business. More acres can be added to the orchard for higher production volume. Profits can also be used for more advertising and promotions.

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