3.Charcoal Products

Charcoal ProductsCharcoal Products Franchise Model SummaryThe Product or Service Managing the processing, marketing and distribution of UK produced charcoal products - barbecue charcoal and horticultural charcoal (fines). Primary: domestic consumers of charcoal for barbecue use; secondary: consumers and manufacturers of horticultural potting compost To create a market and develop sales channels for British charcoal and horticultural fines A producer group has the incentive to invest in developing the market for a quality product in the face of pricebased competition Industrial and Provident Society Minimum 5 charcoal burners producing approximately 20,000 kilos of charcoal in the first year

4 Business Plan

The Market

The Opportunity

The Co-operative

Advantage

Type of Farmer Marketing Size of Farmer Marketing

Group Group

Market OverviewAs the demand for industrial charcoal declined over the second half of the twentieth century, a new market has appeared for barbecue charcoal. The consumption of charcoal mainly for cooking purposes has grown from around 25,000 tons in the 1960s to some 5060,000 tons at the present day1. In contrast, UK charcoal production has shrunk from 35,000 tons in 1945 to 15,000 tons in the 1960s to fewer than 6,000 tons today. With barbeque charcoal retailing at around 1 per kilo, the market is therefore worth around 60 million per annum, with the British market share of 10% worth 6 million. There are an estimated 300 to 400 charcoal burners around the UK - most are not full time. UK domestic producers operate one- or two-man kilns holding no more than 3,500kg of wood and producing up to 600kg of charcoal. The main source of supply has shifted from Western Europe to the developing countries headed by South Africa, Nigeria and Brazil. Charcoal has become a worldwide commodity dominated by low cost Southern Hemisphere producers shipping in bulk. Imported charcoal is typically produced in huge Missouri style kilns with a capacity of 35 - 50 tonnes.2 The economies of scale are therefore quite different.1 2

Collins, E.J.T (ed): Crafts in the English Countryside: Towards a Future, May 2005 1 ton equals 0.907 metric tonnes

Plunkett Foundation The Quadrangle, Banbury Road, Woodstock Oxfordshire OX20 1LH

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Tel: +44 (0)1993 810730 Fax: +44 (0)1993 810849 E-mail: [email protected]

Business PlanBritish charcoal possesses technical advantages over most imported charcoal: it ignites more easily, reaches cooking temperature more quickly, generates more heat over a longer period of time, has a higher ratio of solids to fines and produces less smoke. Many tropical charcoals tend to be dense, poorly carbonised and less volatile. In terms of heat output and convenience British charcoal can be technically better value than many of its rivals, but this is not always fully reflected in the price differential. The environmental damage being caused by deforestation in the developing world is not taken into account, and neither are the carbon emissions of the shipping miles. There is also another market for charcoal products which is largely untapped. Fines are the fragments of charcoal which are too small to sell for barbecue use, and which have been regarded as a waste by-product. However they can be used to enrich horticultural potting compost and to improve its water-retaining abilities. Now that the use of peat in potting compost is reducing for environmental reasons, there is an opportunity to market fines as an additive to potting compost. The product could be sold to the manufacturers of compost for use as an additive in existing products, or direct to the general public. Further markets exist for charcoal dust, which is used in the pharmaceutical and chemical industries for odour control and filtration. Although relatively high value, this is a small, specialised market with very specific requirements and equipment. There are also niche markets for animal nutrition and artists' charcoal. None of these markets have been included in the model business plan, but the animal nutrition market could be supplied with minimal equipment outlay if the opportunity arose.

The OpportunityBritish charcoal has many unique selling points which can be exploited. The main challenges are promoting the product, educating the consumer and establishing channels to market. Only British charcoal burners themselves have any incentive to do this. By forming co-operatives, the charcoal burners can pool their resources to work on market development, and acquire the economies of scale and continuity of supply necessary to supply the market outside their immediate locality. The aims and objectives of a charcoal burners' co-operative are to:

5 produce premium quality charcoal from sustainably managed woodland; 5 operate a central packaging facility to grade, pack and deliver charcoal products;

5 create access to local, regional and national sales channels; 5 provide an income stream for woodland workers which contributes towards the viability of their livelihoods. The final point above requires some explanation. The Business Model below shows that no one can expect to make huge profits from charcoal burning in the UK. The majority of co-operative members are expected to be foresters, who make charcoal from woodland arisings (i.e. the thinings from coppicing woodland) on a part-time basis, and for whom the sale of charcoal is one of a number of income streams. The co-operative will help provide a livelihood for forestry workers in two ways. Firstly, it will create a market for charcoal products, and secondly it will provide part-time employment for the members who operate the grading and packaging machinery. The co-operative will benefit rural areas by providing employment and income, and benefit the environment by reducing CO2 emissions and de-forestation. It will help enable British woodlands to be properly managed for the benefit of wildlife.

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Plunkett Foundation The Quadrangle, Banbury Road, Woodstock Oxfordshire OX20 1LH Tel: +44 (0)1993 810730 Fax: +44 (0)1993 810849 E-mail: [email protected]

Business PlanMarket Sector AnalysisKey Success FactorsChapter 3 identified the Key Success Factors that will enable farmer marketing groups to establish successfully in specific market sectors - the sector should be emerging, fragmented and co-operative friendly. The market for commodity barbecue charcoal is established, and the 70% of the retail side is consolidated in the hands of the major supermarkets, DIY centres and petrol retailers. Some of these retailers deal direct with the suppliers, but most use the services of the wholesale trade. However, the market for British charcoal is not consolidated - organisations are generally small or micro businesses. They supply local outlets direct, and also market through Farmers' Markets, country fairs and agricultural shows - although some have contracts with the large retailers. The market for horticultural fines is both emerging and fragmented. Michael Porter's Five Forces Analysis is used to consider the competitive Porter's Five Forces Model3

forces acting in this market sector in more detail:

3

Porter, M E: Competitive

Strategy: Techniques for Analysing Industries and Competitors,

1980

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Business PlanIndustry StructureCompetitive rivalry HIGH Distribution is concentrated and competition is entirely based on price. Supply side inputs are minimal and widely available. The charcoal market is price-based and there are many suppliers. British charcoal will have to compete on quality benefits and its environmental pedigree Many overseas producers already. There is a risk that British producers could end up competing with each other on a price basis if market fails to grow. Gas barbecues already exist and have advantages in ease of use but are more expensive. There is some risk of substitutes in the horticultural fines market.

Bargaining power of suppliers Bargaining power of customers

LOW

HIGH

Threat of new entrants

MED/LOW

Threat of substitutes

MED

Market Factors Impacting the BusinessIThe following table analyses the political, economic, social and technical factors which affect Woodland Products:

PEST Analysis - Woodland ProductsPoliticalEnvironmental damage caused by deforestation in the developing world Global warming impact of importing charcoal from around the world Positive impact of British charcoal burning in forestry management and rural employment

EconomicAdditional cost of British charcoal Level of demand amongst horticultural companies for fines as a compost additive

SocialLow level of knowledge amongst the general public of the qualities of British charcoal or the environmental issues surrounding imported charcoal Public interest in rural and environmental issues

Technical

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Issues around transporting, storing a n d p a c k a g i n g c h a r c o a l ; n o i n f r a s t r u c t u r e i n p l a c e Access to sales channels

Business Plan

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Business PlanThree key issues arise from this analysis: 5 Customer Awareness; 5 Market Access; 5 Price.

Customer AwarenessBarbecue CharcoalBritish charcoal can establish a market share as a sustainably-produced, quality product aimed at green consumers and consumers interested in a local, quality product. British charcoal enables proper forestry management and does not destroy rainforest. It supports jobs in the rural economy and uses much less CO2 in its transportation. It is easy to use because it lights easily and burns hotter. These benefits need to be promoted to consumers. This does not necessarily involve expensive advertising - a carefully planned PR campaign would be less costly and probably more effective. Charcoal also lends itself to branding. It is sold packaged and can be identified by a name and a logo. There is considerable potential for British charcoal to displace imported charcoal, which is usually own-brand or generic. PR and branding are covered in more detail in the Marketing Strategy section below.

Horticultural FinesOnly 80% of charcoal is suitable for barbeque use. Pieces smaller than 20mm, but larger than 5mm, are classed as horticultural fines. The benefits of charcoal as an organic soil improver and conditioner have been known for many years, it: 5 retains moisture and improves drainage; 5 helps prevents water stagnation in ponds; 5 retains moisture in potted plants, including bonsai specimens; 5 is an excellent mulch or top dressing; 5 improves nutrient uptake from soil; and 5 is high in potash with a pH value of between 8 and 9. Despite this, charcoal is not routinely added to potting compost, nor is charcoal readily available as a soil conditioner in garden centres. There is clear potential here which needs to be tapped both by building consumer awareness and establishing channels to market.

PriceBarbecue CharcoalImported barbecue charcoal sells for as little as 2.00 per 3kg bag (66p per kg) whilst British charcoal typically retails at between 3.50 to 4.99 per 3kg bag (116p to 166p per kg) or 2.99 - 3.99 per 2kg bag.4 The reasons for this price differential are mainly to do with economies of scale and the price of labour. The UK will never match the production scale of Southern African or South America, nor their labour rates.4

Internet research, April 2006

Business PlanMany consumers buy the cheapest charcoal available, being unaware of any quality issues. The challenge of educating the consumer about quality has been addressed above. The charcoal burners who took part in our research believed that price in itself was not an obstacle to purchase if the benefits were understood, and repeat purchases readily occurred once the product had been tried. British charcoal may actually be cheaper because it is so much more effective. The main barrier is availability.

Horticultural CharcoalHorticultural charcoal is only available at a limited number of outlets, or on the internet. The price is between 5 and 6 per kilo, and it normally retails in small packs of 350g or 500g, with a pack price of 2 - 2.50. This represents a much improved margin for the manufacturer, but it is a small and specialised market.

Market AccessBarbecue CharcoalCentralised bulk buying means that British charcoal produced in small batches is difficult to sell through national and regional chains of supermarkets, DIY stores and garages. National retail chains are estimated to control at least 70% of the charcoal market5. Producers are heavily dependent on local sales channelled through independent outlets, mainly small shops, farmers' markets and fairs. The potential market for British charcoal is considerable, especially amongst leading supermarket chains. Retailers such as B&Q and Co-op stores have already stocked British charcoal in a small number of stores, and sales have been acceptable. However, national supply contracts require delivery schedules to be met and economies of scale achieved in order to drive down costs. These challenges could be met by a producer co-operative. Good marketing, clear branding, reliable supply and realistic business plans are required.

Horticultural CharcoalChannels to market need to be created from scratch. There are two potential routes: either create a branded product and sell it through garden centres, or sell the basic product direct to manufacturers of potting compost and other horticultural goods. Comments above regarding the need for good marketing, economies of scale and reliable supply also apply.5

See www.bioregional.com


Business PlanThe Business ModelThis is the outline business model for a charcoal products co-operative: 5 a group of charcoal burners sets up a co-operative through the co-op each year; and each member commits to selling a specified weight of charcoal to directors of companies; initially on a freelance or part-time basis;

5 members of the co-operative elect a Board who have similar responsibilities the co-operative buys in the expertise to promote and market its products,

5 the co-operative sets up a central processing facility to grade, pack and deliver charcoal and fines; these facilities are operated by co-op members; and 5 members pay a marketing/processing levy on all charcoal sold through the co-operative; central processing facility, marketing and administration. this levy funds the cost of the

Advantages of the Co-operative Business ModelIn order to develop a regional or national market for both charcoal and fines, producers need to work together. They alone have an interest in promoting British charcoal products and establishing new routes to market. Only by acting together can they develop the critical mass, economies of scale and reliability of service needed to supply these markets. By combining forces they can establish a central processing facility and acquire the expertise to market the product successfully. Charcoal burning is by its very nature an isolated and solitary occupation. Many small producers are not specialist charcoal burners and will switch between charcoal making and other coppice and greenwood work according to seasons and perceived demand. The co-operative will need to address issues of training, quality control and particularly commitment at an early stage.

Legal StructureThe recommended legal structure for a Woodland Products co-operative is an Industrial and Provident Society (I&PS). This is the traditional and best-know form of co-operative organisation. An I&PS has limited liability in exactly the same way as a company limited by shares or by guarantee. The characteristics of a standard I&PS co-operative are as follows: 5 one member one vote; 5 return on capital must be limited; 5 if surpluses are to be shared among the members, this must be done in proportion to the fees or subscriptions paid; and 5 no artificial restrictions on memberships.

Co-operative PrinciplesA co-operative is an organisation set up by its members, controlled by them and run for their benefit. The benefits derived from its commercial activities are returned to the members in relation to their use of its services or facilities and not on the basis of their investment. A co-operative is an extension of each member's own business and is managed in such a way to obtain better incomes and/or improved services for its members. Democratic control, fair and equitable treatment for all members and the opportunity for the transfer of information and knowledge amongst the membership are amongst the core values of a co-operative organisation. However, it must always be remembered that a co-operative exists in the same commercial environment as investor led businesses and therefore to


be able to compete must adhere to sound business practices in areas such as planning, marketing and finance.

Business Plan


Business PlanHow to set up the Co-operativeIndustrial and Provident Societies are governed by different regulations to limited companies, but the principles are very similar. The following is a summary of how the system works. I&PS are registered under the Industrial and Provident Societies Act 1965-2002. To qualify for registration a body must be a bona-fide co-operative carrying on an industry, business or trade, whether retail or wholesale. I&PS are administered by the Mutual Societies Registration Section of the Financial Services Authority (FSA). The Industrial and Provident Societies Acts are generally more sympathetic to social benefit and co-operative organisations in that there are fewer administrative and legal requirements, although it is still necessary to keep accurate records of membership. I&PS legislation is generally less complicated, putting more trust in the directors to act in good faith. Annual fees based on size of co-operative are payable to the FSA This is the procedure for setting up an I&PS. 5 A minimum of three members are needed to register and maintain an I&PS. 5 The governing document for an I&PS is known simply as the rules. 5 Co-operatives UK and the Plunkett Foundation have developed a set of model rules (standardised governing documents which have been previously approved by the regulator) which are suitable for a Charcoal Products co-operative. 5 Model rules must be presented through a sponsoring body. The current cost of registering an I&PS through Co-operatives UK using a set of model rules is 650. 5 Specially written rules can be used, but the process will be slower and more expensive as the regulator examines the rules more carefully. The Co-operatives UK model rules can incorporate up to six minor changes after initial registration at no additional cost.

Member Commitment and Member AgreementsThe co-operative's primary purpose is to provide services for its members and a member's return depends on his use of its services or facilities rather than his investment in it. It follows that, ideally: 5 members should be committed to use the facilities; 5 investment by members should be related to these commitments; and 5 control should be in the hands of committed members. One of the conditions of membership (possibly the most important) that should be included in the Rules is that members should be required to sign an agreement to set out their participation in the activities with their co-operative. Failure to sign such an agreement (Members' Agreement) can prevent a producer obtaining or retaining membership. This ensures that all members are committed to use the organisations facilities and that control is fully in the hands of committed members. Member Agreements set out the responsibilities of both parties each to the other and particularly:

5 to ensure that members are committed to using facilities or services for a minimum period (usually one year); 5 to set out the quantity or percentage of members produce that will be committed to the organisation for marketing; 5 to ensure that investment and charges paid by members relate to both commitment and actual usage; 5 to set out how the operational activities of the organisation are to be administered; 5 to bind the organisation to the marketing of committed produce and to the provision of services; 5 to ensure the stability of the organisation, and give confidence 5 to ensure continuity of supplies to customers; and 5 to ensure the protection of the member in his relationship between themselves. with the organisation and the protection of members to members, customers, suppliers and bankers;

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Business PlanThe Member Agreement requires considerable thought and discussion if its objectives are to be fulfilled. The specific requirements and circumstances of a particular organisation should be taken fully into account. Appendix 1 illustrates the type of information that should be included in a Farmers' Markets Member Agreement, and provides a guide upon which organisations may begin to formulate their individual agreements. The legal structure and associated internal documents (e.g. Member Agreements) under which co-operatives are formed and operate should satisfy and be driven by the aims, objectives and operational needs of the business and its members, and not the other way round. Early professional advice should be sought to ensure this condition is met. Plunkett and Cooperatives UK have developed a template for Member Agreements which would enable them to construct a Member Agreement suitable for a Charcoal Products co-operative.

Costs of EstablishmentThe current total cost of setting up a co-operative will be approximately 2,000. This includes the Model Rules and the Member Agreement offered by Co-operatives UK and Plunkett, together with appropriate legal advice.

Corporate GovernanceAll co-operatives have some measure of good corporate governance built into their legal structure. The way in which a business is run by its Board of Directors is, subject to compliance with law, very much a matter for the Board alone. However, there are four main areas of responsibility 5 Strategy - The Board should set the co-operative's and others are understood and met. that apply to all Boards. values and standards and ensure that its obligations to its members

5 Monitoring - The Board is collectively responsible for promoting the success of the co-operative supervising the co-operative's affairs.

by directing and

5 Risk - The Board's role is, together with the executive management, to provide entrepreneurial leadership of the co-operative within a framework of prudent and effective controls which enables risk to be assessed and managed. 5 People - The Board should set the co-operative's strategic aims, ensure that the necessary financial and human resources are in place for the co-operative to meet its objectives, and review management performance. Within the responsibility for people, the Board needs to consider its own position regarding Board size and tenure of Board members. The inclusion of a non -producer director (s) should also be considered to alleviate any skills deficit from within the board elected by the membership. Recognised best practice standards exist in the form of The Combined Code on Corporate Governance published by the Financial Reporting Council in July 2003. The Code contains 17 main principles divided into 5 areas: directors, remuneration, accountability and audit, relationships with shareholders and institutional shareholders. Adoption of the code is voluntary, but there are some aspects of it that are clearly desirable to adopt. Chapter 6 below explains how to get a copy of the Code.

Directors' ResponsibilitiesThe Directors have the following responsibilities: 5 to members, for the safeguarding and husbanding of the assets, and for the effective conduct of the business; 5 to employees, for job security, and for reasonable working conditions; to creditors, for the due payments of debts; and 5 to the general public, particularly the local community, not to act against the public interest, e.g. pollution or noise late at night, etc.

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Business PlanA director may be held liable at law, for behaving irresponsibly or fraudulently. Directors who act honestly and in good faith for the good of the co-operative, with knowledge of the co-operatives legal requirements and activities are very unlikely to be held liable. The directors usually appoint from amongst their number a chairperson who has the primary role of supervising the work of individual Board members and ensuring that Board decisions are implemented. He/she will chair Board meetings and will be the arbitrator in differences in opinion between Directors. He/she will also ensure that the legal obligations of the Company are met. It is good practice to allocate specific responsibilities to other board members to maximise the benefit of the skills that they bring to the board. For example individual directors may have the responsibility for finance, marketing, production and membership.

Organisational StructureThe organisational structure is simple. The Board is elected from amongst the co-operative members. Four Board members with specific areas of responsibility are recommended: Chairman, Treasurer, Marketing Director and Production Director. The Board members perform the same roles as the directors of a shareholder owned company and carry the same legal responsibilities. The diagram below shows the organisational structure: BOARD OF DIRECTORS Chairman

Treasurer

Marketing Director

Production Director

EXECUTIVE

Marketing Co-ordinator

Processing Labour

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Roles and ResponsibilitiesBoard Members' Roles The Chairman is responsible for supervising the work of individual Board members and ensuring that Board decisions are implemented. He/she will chair Board meetings and will be the arbitrator in differences in opinion between Directors. He/she will also ensure that the legal obligations of the Company are met. The Treasurer will keep records of income and expenditure, creditors and debtors and will regularly keep the Board informed of the financial position. He/she will regularly produce forecasts for future financial decisions and will advise the Board of the likely financial effects of decisions. The Marketing Director will be responsible for planning the marketing strategy and overseeing its implementation. Together with the Board he/she will decide on product pricing and negotiating terms and conditions of supply of products. The Production Director will be responsible for co-ordinating the delivery or collection of charcoal from members, processing and packing and supply of products to customers. They will also oversee the safe and effective operation of the central processing facility, and will claim expenses for this work. Together with other members of the Board the Production Director will plan for future production quantities and methods. Employees Labour will be hired by the hour as and when needed to operate the processing and packing facility. Co-op members could undertake this work, overseen by the Production Director. Health and safety factors and training needs when operating machinery must be remembered. In the first two years there is no provision for a salaried manager for the central processing facility, but this is included from year three onwards. In practice, this salary may be paid to the Production Director as expenses. The co-operative will also employ a Marketing Co-ordinator to work with the Marketing Director and help implement the marketing strategy. Initially at least, this appointment will be on a freelance basis, with the Co-ordinator working from home. The co-ordinator will promote the co-operative's products, build brand recognition, seek new customers and establish new sales channels. They will also attend events such as country fairs where British charcoal can be demonstrated and sold.

The Central Processing FacilityThe co-operative should establish a central processing facility to grade, pack and store charcoal. Individual members will be responsible for the production process itself (harvesting wood, stacking the kilns and burning). The co-operative can co-ordinate the sharing of woodland equipments as well as help, advice and training in this regard. Benchmarking of production margins between individual processors would help each member produce the desired quality at the lowest possible cost. The profitability of the business will largely be determined by the efficiencies of the central processing facility. The cooperative organises delivery of the charcoal to the central site where it can be graded, bagged and stored ready for delivery. It is assumed in the Financial Model given below that a suitable site for the processing facility can be obtained at minimal cost by renting land and facilities belonging to the members. The building doesn't need to be sophisticated, just dry - a farm building or barn with a concrete floor is sufficient. A major quality issue is controlling the moisture content and a good processing facility and proper storage under cover can ensure better consistency. The Financial Model allows for 3,000 square feet of space. Grading and packaging machinery is required, and the Financial Model includes figures for the purchase of a second hand grader, packer, simple weighing station and a bag stitcher. A fork lift truck is also needed to handle bulk material and pallets. All British charcoal should be produced from FSC (Forestry Stewardship6

Council) certified woodlands6.

See www.fsc-uk.info


Marketing StrategyThe objectives of the marketing strategy are to: 5 generate consumer knowledge and interest in British BBQ charcoal and horticultural charcoal; and 5 establish routes to market for charcoal produced by the co-operative

The ProductsThe two products - barbeque charcoal and horticultural charcoal - that the co-operative will produced have already been described above. The market analysis indicates that there is a demand for both products, which will have to compete on quality, rather than price. The benefits of the British barbecue charcoal to the consumer fall into three categories: 5 quality benefits: easy to light - no need for lighter fluid or fire lighters; burns at a hotter temperature, so cooks better; stays hot for longer, so you need to use less; 5 environmental benefits no rain forest damage; considerably less energy used in transport; enables proper forestry management (coppicing) of the countryside; 5 benefits to the local economy: creates employment in the rural economy; and provides trade for village shops, farm shops and local markets. The main focus of promotional efforts should be on the quality benefits, with the environmental and local economy benefits in second place. Consumers generally find self-interest benefits more appealing than selfless ones. British horticultural charcoal has no specific advantage over imported, but competition is less intense. Establishing a market is the priority. which benefits wildlife and improves the appearance

PackagingBarbecue charcoal will be packaged in 2kg bags - the reasons for this are outlined in the section on Pricing below. A simple paper sack is printed with the co-operative brand and outline quality benefits. Horticultural charcoal is available in 500g pouches, again branded with the co-operative logo.

Pricing PolicyBarbecue CharcoalImported charcoal will continue to retail at a lower price than British charcoal. The product will have to compete on quality, and the findings of the charcoal burners who took part in our research indicate that it can do that - consumer price seems to be reasonably elastic if promotional efforts focus on the quality of the product. ABC1 consumers may not be unwilling to pay 5-6 for a 3kg bag when the organic meat they intend cooking on the barbeque cost three or four times that much.


The size of bags can affect the price perception of customers. A 2kg bag is lighter to carry and contains enough charcoal for one average barbecue. This may sell better at some outlets such as Farmers' Markets where parking is likely to be further away. A 2kg can take a price of 3.99 when the imported competition is priced at 2.99 - consumers are more likely to notice the pack price and less likely to work out the comparable price per kilo. The Financial Model assumes a pack size of 2kg. Our telephone research, carried out in May 2006 indicated that trade customers will expect to mark up by 100% or possibly more7.

Horticultural CharcoalThe margin on fines is considerably higher. The product can be sold in 0.5kg bags for around 2.75 each, giving a wholesale price of around 2.75 per kilo (barbecue charcoal wholesale price is 1 per kilo). There is no research available on consumer price perception for this sector, but it seems unlikely that price is a barrier.

Sales Channel DevelopmentIn the early years, the co-operative will need to pursue a wide range of different sales outlets and routes to market in order to establish the products and gain critical mass for the business. Thereafter it will be able to concentrate on developing its most profitable sales routes.

Barbeque CharcoalThe traditional outlets for charcoal are supermarkets, garages, garden centres and DIY centres -outlets with car parking on site are preferred, as charcoal is heavy to carry. Charcoal is also sold at farm shops, farmers' markets, craft fairs and country shows - anywhere that food or barbeques are sold is also a potential outlet for charcoal. The co-operative needs to establish contact with regional and national supermarkets, DIY centres. Garden centres and garages. Some will have a national buying policy, but others will be independent businesses or part of small local chains. Although it will probably be easier to establish relationships with smaller, local businesses, the co-operative should vigorously pursue deals with the multiples. A large, regional or national deal will provide logistical challenges, but will offer the economy of scale needed to make the co-operative viable. The Marketing Director also needs to research and establish contact with wholesalers in the region. Sales through these channels are all likely to be at wholesale price, so bulk orders are important. The other avenue to pursue is non-traditional routes to market, particularly direct sales to consumers at retail price. Internet supply is feasible if the issue of delivery costs can be overcome. Consumers are prepared to pay for the convenience of home delivery, but clever pricing and offers are vital. It may be possible to offer home delivery for internet orders in the local area by using the members' own transport, or to set up an arrangement with another local delivery network. Do any local shops deliver? Could the local butchers' shops deliver charcoal along with the barbecue meats and sausages? Are there other fuel supplies such as coal or bottle gas merchants who might carry supplies, or even the milkman? The Marketing Director must be energetic and creative - building this niche sector is vital to establish sales at a higher margin.

Horticultural CharcoalThe main trade outlets for this product will be garden centres and DIY stores. Few outlets sell horticultural charcoal at present, so the first step will be to create an understanding of the product benefits and persuade the buyers to trial the product (see promotion strategy below).7

Telephone research (unpublished)

by Plunkett consultants,

May 2006

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Promotion and Public RelationsA strong promotion and public relations strategy is the key to building a market for British charcoal, for barbeque and horticultural use. The benefits have been outlined in the section above, and the promotion strategy must focus on getting the message across to consumers. There will be limited funds available for this, so the promotional spend is focused on areas which produce direct sales, with free publicity used to gain more general exposure of the products.

Advertising and PromotionThe Business Plan includes a marketing budget for the following items. 5 Branding. Establishing a brand for the co-operative's products is important. The brand name should be short and snappy, and the logo needs to reflect the green credentials of the product. The brand name should always be combined with the tag line Quality British Charcoal to benefit from any advertising or promotion done by others. The brand should be used on all advertising and promotional materials and on the packaging. 5 Website. The co-operative will need a website with a shopping cart facility. The design and build of this has been included in the set-up costs. Orders will be processed by the Sales and Marketing Co-ordinator, and fulfilled by the Production Director. 5 Product demonstrations. These will be a key part of promotion strategy. These can take place at any retail outlet farm shops, garden centres etc. at weekends, or by taking stalls at country fairs. Country fairs will incur stall fees, but promotional events at retail outlets should be free of charge. Costs could be reduced by joining forces with another business -a manufacturer of locally-produced sausages, for example, or a plant nursery owner. Co-operative members should be prepared to attend this type of event on a voluntary basis.

Press and Public Relations ActivitiesThe Marketing Director should establish links with local food organisations and businesses. Selling local charcoal alongside local food offers an opportunity to promote the quality, environmental, and economic benefits of both. Links could also be made with any organisations in the region involved in promoting wildlife or woodland conservation or similar areas, with the aim of generating joint publicity opportunities. The British charcoal story is very media-friendly, as the product has so many benefits for the local area. The Marketing Director and Co-ordinator should aim to get features in local newspapers during the barbecue season. The co-operative could also run open days during the summer season, offering a tour of the woodland and a demonstration of charcoal burning. This might be attractive to schools, but care would need to be taken to ensure that health and safety requirements are complied with. These activities are not very costly in financial terms, but do take up a lot of staff/member time. The Marketing Director and Co-ordinator will need to be very pro-active and imaginative in creating publicity opportunities. The co-operative has a limited marketing spend, so will need to leverage free publicity possibilities to the full.

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Business PlanFinanceThe Financial Model below makes the following assumptions charcoal produced: Year 1 2 3 4 5 Members 5 6 7 8 9 Kilos Produced 20,000 35,000 50,000 65,000 80,000 on the size of the co-operative and the amount of Sales Value 27,500 46,500 68,000 90,250 112,500 Marketing Levy 80% 70% 65% 60% 58% Member Payment per kilo 0.275 0.40 0.48 0.56 0.59

Production is divided between barbecue and horticultural charcoal as it is graded. Sales are also divided between the two products, and assumptions have been made in the Financial Model about the value of these markets, and the amount of product that can be sold through retail and wholesale channels. Payment is made to members, less the marketing levy, once the charcoal is sold and payment has been received. operative does not own the product, it simply acts as a marketing agent. The co-

The marketing levy is set at a rate of 80% of sales during year one, falling to 58% by year five. These rates are necessary to cover the considerable value added to the charcoal during processing and packaging, and to pay for the marketing and administrative operations (including set-up costs and the website in year one). Members also benefit from storage for their product whilst it awaits sale. The members may in later years receive a share of any surplus made, divided in accordance they have sold through the co-operative - see below for details of how this works. with the amount of charcoal

Core FundingA Woodland Products co-operative needs to invest in some assets, primarily machinery for the central processing facility. The total sum required for the various items is around 10,000. Start-up capital can be raised from two main sources - members' Qualification Loans and grant funding. Most cooperatives will be eligible for grants under the England Rural Development Programme. Details of the schemes in operation and the qualification rules can be found at: www.defra.co.uk/erdp. Local Authorities, charitable trusts and other groups interested in woodland preservation may also offer grants. Please see Chapter 6 for more information. Grants may only be available to cover part of the start-up costs (often 30-50%) so Qualification Loans will be required to make up the difference. The Financial Model below shows that a qualification loan of 700 per member is required, with the balance coming from grant funding and income.

Qualification LoansWhilst there are many methods of introducing members funds into the co-operative a form of interest free loan has become a preferred and widely used method of member investment, especially for a capital intensive project. It is often referred to as a 'Qualification Loan'. The details for regulating this loan should be included in the members' agreement. The amount required of each member is directly related to their commitment e.g. volume of product to be marketed. Whilst accepting that this will vary year on year, the loans required can be adjusted annually to reflect this (either in advance against the production/services profile or in retrospect against actual for previous year). Experience shows that where members have a financial stake in the co-operative then they are more likely to support it and therefore increase its chances of success. The qualification loan is regarded as semi-permanent investment. The minimum period is covered by the initial term of the members' agreement, and which usually covers the time to repay any outside borrowing.

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Business PlanAfter any bank loans (in respect of capital investment) have been repaid, repayment of the qualification loan is usually at the discretion of the Board of Directors. However, since all successful businesses require continuing funds for operation and expansion, this will either come from reserves or from leaving the loans in place. In all cases the loans can be repaid to members given the right financial circumstances and the directors' approval. If a member resigns in accordance with his Members' Agreement, the directors must not unreasonably withhold their agreement to his repayment, but directors must protect the group and remaining members from the effect of withdrawal of funds. New members would be required to provide loans in the same way as existing members to ensure fair and equitable treatment for the membership as a whole. However if the additional funds raised in this way result in an excess of funds required to run the business the directors may decide to reduce the loan requirements for all members and to repay pro-rata the excess funds available. Since the funding from members would be in line with their usage of the facility, no interest payments would be necessary. It should be appreciated that qualification loans being 'member investment' are not a revenue cost chargeable against profits in the members own business for tax purposes. As Qualification Loans are seen as 'semi-permanent' capital (depending on the repayment conditions) banks will usually be prepared to consider them as member investment. However, whenever capital investment is proposed to be financed in this way, approval by the lending bank should be sought at the initial stages. In the event of co-operative insolvency, qualification out when all other creditors have been satisfied. loans rank with other ordinary creditors, whilst shares are only paid

RevenueThe co-operative's revenue comes entirely from the levy it takes on sales of charcoal. overheads are controlled and the margin is maintained at an acceptable level. This is why it is crucial that The Financial Model shows that the organisation can be self-financing from the first year of operation, providing grant funding is obtained. The business is self-sustaining from year x onwards. The co-operative must also take full account of the voluntary work inputs from elected directors. The first year of operation shows an operating loss, which could be reduced if more voluntary labour can be used. However, the co-operative must be certain that those offering voluntary labour do possess the skills needed to do the job effectively. The responsibility for financing the members. Losses made in the initial made good as soon as possible and 'next year' will be better. Members running the organisation. co-operative to ensure that it recovers its operating costs belongs to the individual years, when throughput levels are being built up to an economic level, need to be it is bad practice to continually carry forward losses year on year on the premise that are responsible for paying charges or levies that are sufficient to cover the cost of

Initial losses if part of a planned budget can be covered by ensuring that members investment i.e. qualification loans are set at a level to cover financing for this as well as the need for capital expenditure and general working capital. However, the use of qualification loans in this way is only a short term option since the co-operative will be required at some future date to repay the loans to its members. Grant aid if available would have the effect of reducing the initial operating loss but must also be seen as a 'one off' and short term solution. A co-operative that sets out a business plan that is only sustainable by the receipt of grant is failing to 'grasp the nettle' of ensuring that members take the responsibility of funding their organisation effectively.

Surpluses and DeficitsThe treatment of surpluses and deficits in relation to members within a co-operative Articles or Rules or additionally within the Member Agreement. is set out in the Memorandum and Surpluses or Deficits relating to each financial year should, after transfers to General Reserve (if any), be either repaid or 'notionally' allocated to members in accordance with charges paid by them or trade conducted by them during the annual accounting period. Commonly, the directors have absolute discretion as to whether these reserves should be paid out (or deficits recovered) and members are not entitled to any payment from a reserve fund until the directors exercise that discretion.

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Business PlanAny sums in allocated reserves are the co-operative's property. If the members were absolutely entitled to repayment of sums in reserves, they would probably be liable to personal taxation on the 'allocated' sums as soon as they were put to reserves. If a co-operative is to use this form of reserve fund, it is vital that the Member Agreements should make the contingent nature of the members' position absolutely clear otherwise members are likely to be in difficulty with the Inland Revenue. Where provision is made for allocations to be made in this way it is important that Member Agreements are not in conflict with the Rules or Memorandum & Articles on this issue and in particular it is important to ensure that on winding up such allocated reserves are dealt with before any final distribution is made to members under a winding up clause of any residual funds.

Financial ModelWoodland Producers Co-operativeData Membership numbers Units of members charcoal sold BBQ Charcoal retail sales 2.0 BBQ charcoal wholesale 2.0 Horticultural Charcoal retail sales Horticultural charcoal wholesale Horticultural charcoal wholesale (loose) Yr1 5 kg bag kg bag 0.5 kg 0.5 kg per kg units units units units units 3,000 5,000 500 1,500 1,000 Yr2 6 4,000 10,000 1,000 3,000 2,000 Yr3 7 5,000 15,000 2,000 4,500 4,000 Yr4 8 6,000 20,000 3,000 6,500 6,000 Yr5 9 7,000 25,000 4,000 8,500 8,000

Weight of charcoal at retail point BBQ Charcoal retail sales BBQ charcoal wholesale BBQ grade

2.0 kg 2.0 kg

6,000 10,000 16,000

8,000 20,000 28,000

10,000 30,000 40,000

12,000 40,000 52,000

14,000 50,000 64,000

Horticultural Horticultural Horticultural Hortic grade

Charcoal retail sales charcoal wholesale charcoal wholesale (loose)

0.5 kg 0.5 kg 1.0 kg

250 750 1,000 2,000 18,000 12.5% 20,000

500 1,500 2,000 4,000 32,000 14.3% 35,000

1,000 2,250 4,000 7,250 47,250 18.1% 50,000

1,500 3,250 5,000 9,750 61,750 18.8% 65,000

2,000 4,250 6,000 12,250 76,250 19.1% 80,000

Hortic & BBQ in Kgs Ratio of hortic to BBQ grades Ungraded Charcoal required to be graded (Rounded kgs) Mail order & Post Percentage of retail sales per Assumptions Cost of postage after deducting contribution Record of Fines produced / sold / stocked. fines available fines required Fines in stock at y/e cumulative Fines in stock Waste is the 5% dust which is not recorded kg kg kg kg 40% 6.49

2,600

3,460

4,330

5,190

6,060

100 Ungraded units provides 15 Units of Hortic byproduct 15.00% 3,000 2,000 1,000 1,000 5,250 4,000 1,250 2,250 7,500 7,250 250 2,500 9,750 9,750 0 2,500 12,000 12,250 -250 2,250

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Business PlanSales of members product.BBQ Charcoal BBQ Charcoal Horticultural Horticultural Horticultural retail sales wholeslale Charcoal retail sales charcoal wholesale charcoal wholesale (loose) 4.25 2.00 3.00 1.50 1.00 unit unit unit unit kg Yr1 12,750 10,000 1,500 2,250 1,000 27,500 22,000 5,500 Yr2 17,000 20,000 3,000 4,500 2,000 46,500 32,550 13,950 Yr3 21,250 30,000 6,000 6,750 4,000 68,000 44,200 23,800 Yr4 25,500 40,000 9,000 9,750 6,000 90,250 54,150 36,100 Yr5 29,750 50,000 12,000 12,75 8,000 112,500 65,250 47,250

Total Sales Value less: Levy retained by Co-op Proceeds remitted to members

Co-op Income and Expenditure AccountRate Levy required of Members, paid in to Co-op Revenue Grants receivable RES Grant re Capital Asset (SL & released over 10 years) Total income for Co-op. Less: Direct costs BBQ product line packaging grading & packing labour grading & packing machinery repairs Postage costs of Mail order delivery Added costs of BBQ charcoal production Hortic product line Charcoal - byproduct so not costed packaging grading & packing labour grading machinery Repairs - as by product delivery grading, labour & delivery, loose charcoal Added costs of Hortic Charcoal sold Cost of BBQ & Hortic lines Total income less Direct Costs 80.0% 22,000 11,007 500 33,507 70.0% 32,550 7,151 500 40,201 65.0% 44,200 6,176 500 50,876 60.0% 54,150 4,662 500 59,312 58.0% 65,250 2,599 500 68,349

0.18 0.32 0.15 0.12

/unit /unit /unit /unit

1,440 2,560 1,200 2,600 960 8,760

2,520 4,480 2,100 3,460 1,680 14,240

3,600 6,400 3,000 4,330 2,400 19,730

4,680 8,320 3,900 5,190 3,120 25,210

5,760 10,240 4,800 6,060 3,840 30,700

0.00 /kg 0.12 /unit 0.32 /unit no costs attributed. 0.06 /unit 0.20 /unit

240 640 0 120 200

480 1,280 0 240 400 2,400 16,640 23,561

780 2,080 0 390 800 4,050 23,780 27,096

1,140 3,040 0 570 1,000 5,750 30,960 28,352

1,500 4,000 0 750 1,200 7,450 38,150 30,199

1,200 9,960 23,547

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Business PlanYr1 0 5,200 3,328 1,600 100 1,000 3,000 250 500 735 15,713 2500 300 700 3,500 700 2,000 100 2,800 1,000 23,013 534 Yr2 0 5,200 3,328 1,600 100 1,000 3,000 300 500 800 15,828 250 300 700 1,250 700 100 800 1,000 18,878 4,683 Yr3 2,600 5,200 3,328 1,600 100 1,000 3,000 350 500 860 18,538 250 300 700 1,250 700 100 800 1,000 21,588 5,508 Yr4 5,200 5,200 3,328 1,600 100 1,000 3,000 400 500 930 21,258 250 300 700 1,250 700 100 800 1,000 24,308 4,044 Yr5 7,800 5,200 3,328 1,600 100 1,000 3,000 450 500 960 23,938 250 300 700 1,250 700 100 800 1,000 26,988 3,211

Less: Overheads Managers Salary Marketing Co-ordinator Book keeper / admin Staff expenses & travelling costs Directors expenses & travelling costs Grading & packing machinery Running costs Rent & rates General Insurance Computers & IT support Misc, electric, Tel & Stationery Office Costs Website (design & hosting) Leaflets & promo materials Shows & fairs Promotional Costs Accountancy fees Legal fees - formation costs Interest paid Bank charges Admin Costs Depreciation ( SL over 10 years)

500 Sq ft

Total Overheads Net Loss / Surplus

Financial NotesGrant Payable on Rates in use Office costs Admin costs Promotion Grant Reserve Account Gross costs => Grant Gross costs => Grant Grant rate Asset at cost SL release over 10 years Reserve C / fwd 50% 15,713 2,800 18,513 9,257 3,500 1,750 50% 10,000 500 4,500 40% 15,828 800 16,628 6,651 1,250 500 5,000 500 4,000 30% 18,538 800 19,338 5,801 1,250 375 500 3,500 20% 21,258 800 22,058 4,412 1,250 250 500 3,000 10% 23,938 800 24,738 2,474 1,250 125 500 2,500

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Business PlanCash FlowIncome & Expenditure Account Add back: Deprn (non cash item) Less: Annual credit from Grant Reserve (non cash item) Cash from Operations Add: Finance by Members Qualification loans on Joining 700per head Share capital 1per head Add: RES Capital Grants on Capital equip. Yr1 534 1,000 -500 1,034 3,500 5 5,000 9,539 Less: Capital Spend - Grader packing etc. Balance for Year Balance C / Fwd 10,000 -461 -461 5,884 5,423 6,709 12,132 5,245 17,377 4,412 21,789 Yr2 4,683 1,000 -500 5,183 700 1 5,884 Yr3 5,508 1,000 -500 6,008 700 1 6,709 Yr4 4,044 1,000 -500 4,544 700 1 5,245 Yr5 3,211 1,000 -500 3,711 700 1 4,412

Balance SheetsFixed Assets At Cost Accumulated Deprn. Net Book value Less Grant Reserve re F.A. Yr1 10,000 1,000 9,000 4,500 4,500 Current Assets Cash in hand -461 4,039 Members funds Share capital Members Qualification Loans Income & Expenditure account 5 3,500 534 4,039 6 4,200 5,217 9,423 7 4,900 10,725 15,632 8 5,600 14,769 20,377 9 6,300 17,980 24,289 5,423 9,423 12,132 15,632 17,377 20,377 21,789 24,289 Yr2 10,000 2,000 8,000 4,000 4,000 Yr3 10,000 3,000 7,000 3,500 3,500 Yr4 10,000 4,000 6,000 3,000 3,000 Yr5 10,000 5,000 5,000 2,500 2,500

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The Future Development section for the Charcoal Products franchise model will be available shortly.

5 Planning for the Future21


The following organisations, websites and publications can provide additional information for people interested in setting up a farmer marketing group based on the Charcoal Products franchise models.

6 Further Help and Information22

OrganisationsThe Dorset Charcoal Company www.dorsetcharcoal.co.uk Bioregional Charcoal Company Ltd w.bioregional.com Wessex Coppice Group www.coppice.org.uk

PublicationsAuthor(s)Collins, E.J.T (ed)

TitleCrafts in the English Countryside: Towards a Future, May 2005.

Available from:http://www.craftsinthe englishcountryside.org.uk/


A1 Appendix 1 Member Agreements23

The legal structure and associated internal documents under which Cooperatives are formed and operate should satisfy the overall aim and objectives of their members and meet the appropriate legal, financial, taxation and operational requirements to enable the business to function effectively. Too often, Co-operatives are legally registered and agreements put in place before full consideration has been given to their implications, particularly to financial and taxation issues. Professional advice is recommended at an early stage.

Typical Contents of a Member AgreementPartiesThe parties to the agreement will be co-operative and the grower or producer. If the producer is a partnership or a company, care must be taken to state the correct registered name.

ProductsSpecify the products to be marketed (e.g. wood chip, charcoal, fruit, meat etc) including type, size and quality.

ProductsList all the definitions used in order to make the meaning of the agreement clear.

Membership of the Co-operativeThe agreement should state that the producer must become a member of the co-operative, and that it will terminate when the producer ceases to be a member.

DurationStates the length of notice required to terminate the agreement, when it is not terminated for other reasons.

DefaultGives either party the right to terminate the agreement following persistent failure to comply with the terms of the Member Agreement by the other party.

InsolvencyGives either party the right to terminate the agreement if the other is insolvent.

Consequences of TerminationCovers the responsibilities of both parties to each other at the time of termination, including any repayments or recovery of allocations of Surpluses or Deficits to member reserves.

Force MajeureProtection for both the member and the organisation against exceptional conditions, industrial action or any other cause outside his or its control. weather

DisputesProvisions for appointing a mediator or an arbitrator to resolve disputes that cannot be settled by agreement.


Appendix 1 Member AgreementsCommitmentSpecifies the extent to which the producer is committed to market the products through the organisation. This may be expressed as a percentage of the member's production, the number of tonnes, litres, quantities of livestock, number of markets attended etc.

ShortfallSpecifies the penalties to be paid if members do not deliver the products committed. These could be the payment of full charges or the coverage of losses or damage incurred by the organisation due to the failure of members to supply.

Specification of ProductThe detailed specification (type, size, quality etc.) for the committed products. to enable it to

InformationIt is normally required that the member undertakes to provide information required by the co-operative carry out its marketing function e.g. projected deliveries, volume and time periods.

ProductionIt is normally specified that the member is required to comply with production criteria imposed by the co-operative.

InspectionAllows access to the members' premises by any authorised representative of the co-operative.

DeliverySets out who is responsible for delivery to the buyer, collection point or central facility and who is required to cover these costs.

Quality ControlDetails of the quality control procedures in place and the consequences required that: of non-compliance. For example, it may be 5 Sub-standard products are returned to a member at his own expense, and that the member is responsible for the full members' charges as if the product had been sold by them 5 Sub-standard products are sold at the best realistic price, but that the member still has to pay the full member charges.

Co-operative's right to impose conditionsIn some cases the co-operative may be provided with the right to impose conditions on the disposal of rejected products. is given full control for marketing of members' produce, with the proviso that

MarketingIt is often specified that the Co-operative all members are treated fairly.

OwnershipIf the Co-operative acts as an agent for its members, the ownership of the products supplied does not pass to the co-operative but directly to the buyer, under a contract of sale negotiated by the co-operative. This is the most frequently-used approach. Alternatively, if the co-operative is to buy the product and re-sell it this would be clearly stated in the regulation. This would also affect the wording of the provisions of charges.

RiskThe agreement should clearly state where the risk lies if the product is damaged or lost when in the hands of the cooperative or its haulier. If the risk is assumed by the co-operative, then it will need to insure against loss or damage and civil responsibility in respect of any claim.

Sub-AgentsIf the co-operative agent. sells to an agent, it is advisable to also provide it with the authority to delegate, e.g. to a marketing

Proceeds of SaleThe co-operative may be given the authority to collect the proceeds of sale on behalf of the members in the case of an agency agreement.

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Appendix 1 Member AgreementsPayment to MembersThis will specify how members are to be paid for their produce. This could be the sale price less agreed charges, with an indication of the number of days following receipt of payment by the organisation that the account will be settled.

Bed DebtsThe policy in relation to bad debts should be stated, indicating what will be paid to members in such cases; when an outstanding debt from a customer should be considered bad; and what action is to be taken.

ChargesSpecifies the method of setting member charges (for co-operative dates on which these charges are payable. services and the provision of facilities etc) including the

There may also be a provision to include bad debts as a cost to be included within members' charges, and therefore borne by all members. The method for allocating surpluses and deficits to members' reserves should also be specified.

Qualification LoansIf necessary, provision can be made for members' Qualification membership and following termination of membership. Loans, specifying the conditions for repayment during

AmendmentsStates how and under what circumstances the agreement may be amended.

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3.Charcoal Products

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