9.

PROFILE ON PET (CAT AND DOG) FOOD

MANUFACTURING
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TABLE OF CONTENTS

PAGE

I. SUMMARY 9-3

II. PRODUCT DESCRIPTION & APPLICATION 9-3

III. MARKET STUDY AND PLANT CAPACITY 9-4

A. MARKET STUDY 9-4
B. PLANT CAPACITY & PRODUCTION PROGRAMME 9-7

IV. MATERIALS AND INPUTS 9-7

A. RAW & AUXILIARY MATERIALS 9-7
B. UTILITIES 9-8

V. TECHNOLOGY & ENGINEERING 9-9

A. TECHNOLOGY 9-9
B. ENGINEERING 9-11

VI. MANPOWER & TRAINING REQUIREMENT 9-14

A. MANPOWER REQUIREMENT 9-14
B. TRAINING REQUIREMENT 9-15

VII. FINANCIAL ANLYSIS 9-15

A. TOTAL INITIAL INVESTMENT COST 9-16
B. PRODUCTION COST 9-17
C. FINANCIAL EVALUATION 9-18
D. ECONOMIC BENEFITS 9-20
 9-3

I. SUMMARY

This profile envisages the establishment of a plant for the production of pet food
with a capacity of 40 tonnes per annum. Pet foods are balanced feed enriched with the
desirable proteins and a mineral required to maintain pet’s health.

The major inputs are sorghum, maize, bone, meat by-products, wheat bran, salt, etc. Most
of the raw materials can be obtained locally.

The present demand for the proposed product is estimated at 26.5 tonnes per annum.
The demand is expected to reach at 83.2 tonnes by the year 2020.

The total investment requirement is estimated at Birr 2.62 million, out of which Birr 500
thousand is required for plant and machinery. The plant will create employment
opportunities for 14 persons.

The project is financially viable with an internal rate of return (IRR) of 13.38 % and a
net present value (NPV) of Birr 553.20 thousand, discounted at 8.5%.

The project has backward linkage effect with the agricultural and agro processing
industrial sector. The establishment of such factory will have a foreign exchange saving
effect to the country by substituting the current imports.

II. PRODUCT DESCRIPTION AND APPLICATION

Pet food is a specialty food for domesticated animals (cat and dog) that is formulated
according to their nutritional needs. Pet food generally consists of meat, meat byproducts,
cereals, grain, vitamins, and minerals. There are different pet food products, including the
dry, canned, and semi-moist types, as well as snacks such as biscuits, kibbles, and treats.
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III. MARKET STUDY AND PLANT CAPACITY

A. MARKET STUDY

1. Past Supply and Present Demand

When a pet is introduced into the home a regular schedule of feeding and water, cleaning
and care should be established. Nowadays, it has become customary to feed pets with
balanced and healthier foods prepared scientifically. Owing to this fact nationals, mostly
in the higher income group, and foreign residents in the country are feeding their pets
with industrially processed and imported foods. This could be evidenced from the
amount of pet food imported to the country in the past 10 years (see Table 3.1).

Table 3.1
IMPORT OF PET (CAT AND DOG) FOOD (KG)

Year Import
1997 1,075
1998 1,171
1999 819
2000 1,463
2001 6,187
2002 1,400
2003 10,442
2004 325
2005 14,910
2006 25,148

Source: - Customs Authority.

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Table 3.1 reveals that feeding of pets with industrially processed and imported food has
become common. It is also observed that the feeding of pets with imported and
industrially processed food has increased through time. When the data set presented in
Table 3.1 is analyzed by grouping in to three periods the following results are observed.

 During the period 1997-1999 the yearly average level of imported pet food
was around 1,022 kilograms.
 In the middle of the data set i.e. during the period 2000-2002, the yearly
average quantity imported has reached to a level of about 3,017 kilograms.
 In the recent four years i.e. 2003-2006 the average quantity imported has
shown a big increase. During this period the annual average level of import
has reached at 12,706 kilograms.

The recent fours average is higher by more than 4 times compared to the preceding three
years average which indicates the fast growing of demand for pet food.

In order to determine the current demand the historical data is taken as a starting base.
Hence, the recent two years average, i.e., year 2005-2006 import, is taken as the effective
demand for the year 2006 and is found to be 20,029 kilograms or about 20 tonnes. By
applying an annual growth of 15% (which is much less than the historical trend) current
(year 2008) effective demand for pet food is estimated at 26.5 tonnes. This is a
conservative estimate since Ethiopia has imported more 25 tons of pet food in the year
2006.

2. Projected Demand

The demand for pet food will grow with urbanization, income and increase of the number
of the international community in the country. In addition to this the increase of
awareness of the general public in caring pets will result in proper feeding of pets.
Considering the historical growth trend and the above assumptions an annual average
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growth rate of 10% is applied to forecast the future demand. The demand projection
executed based on this assumption is given in Table 3.2.

Table 3.2
PROJECTED DEMAND FOR PET (CAT & DOG) FOOD (TONNES)

Year Projected
Demand
2009 29.2
2010 32.1
2011 35.3
2012 38.8
2013 42.7
2014 46.9
2015 51.6
2016 56.8
2017 62.5
2018 68.7
2019 75.6
2020 83.2

3. Pricing and Distribution

The average the CIF price of pet food from abroad during year 2006 is Birr 11.26 per kg.
Allowing 45% for inland transport, taxes, and other charges Birr 16.33 per kg is
recommended as a factory gate price.

In the developed world pet foods are sold at super markets. The envisaged plant also will
utilize the existing super markets for its market outlet.
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B. PLANT CAPACITY AND PRODUCTION PROGRAMME

1. Plant Capacity

In this study, a plant with annual capacity of 40 tonnes is envisaged considering the
market study and minimum economies of scale. The plant will operate a single shift of 8
hours a day, and 300 days a year.

2. Production Programme

The plant will start operation at 85% of its rated capacity in the first year. It will then
build up its production capacity to 95% and 100% in the second and third year,
respectively.

The low production level at the initial stage is to develop substantial market outlets for
the product. Machinery operators will also get enough time to develop the required
skills and experience.

IV. MATERIALS AND INPUTS

A. RAW & AUXILARY MATERIALS

The primary ingredients in pet food are by-products of meat, poultry, and seafood, feed
grains, and soya bean meal. The animal parts used for pet food may include damaged
carcass parts, bones, and cheek meat, and organs such as intestines, kidneys, liver, lungs,
udders, spleen, and stomach tissue. These animal parts can be found from the currently
operating slaughter houses in and near the city. The Cereal grains, such as soybean meal,
corn meal, cracked wheat, and barley, are often used to improve the consistency of the
product as well as to reduce the cost of raw materials. These agricultural products can be
found from the nearby towns of oromia. Liquid ingredients may include water, meat
broth, or blood. Salt, preservatives, stabilizers are often necessary.
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The annual requirement for raw materials and their costs are indicated in Table 4.1.
Accordingly, the basic raw materials are: by products of meat processing plants including
blood; grains like wheat, maize; oil cake, salt and limestone. All the raw materials are
locally available. The total annual cost of raw material is estimated at Birr 221,150.

Table 4.1
THE ANNUAL REQUIREMENT OF RAW MATERIAL AND THEIR
RESPECTIVE COSTS

Sr. Description Qty Unit Total Cost

No. (Tonnes) Price
1. By product of meat processing
plant (carcasses, liver, blood,
bone meal etc.) 50 3000 150,000
2 Oil cake 10 1000 10,000
3 Cereals (wheat, maize, barley
etc.) 10 600 60,000
4 Salt 0.5 2000 1000
5 Limestone (ground) 0.5 300 150
Grand Total 221,150

B. UTILITIES

Utilities required by the plant consist of electricity and water. Electricity is required to
run the production machinery and to provide lighting for the plant. Water is required for
general purposes. The annual requirement and costs of these utilities are shown in Table
4.2. The total cost of utilities is estimated at 41,972.
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Table 4.2
UTILITIES REQUIREMENT AND COST (AT FULL CAPACITY)

Sr. Item Annual Unit cost Cost ('000 Birr)

No. Requirement
1 Electricity 20,000 kWh 0.4736 9,472
2 Water 10,000 m3 3.25 32,500
Total 41,972

V. TECHNOLOGY AND ENGINEERING

A. TECHNOLOGY

1. Production Process

The production of pet food involves the following process steps:

 Grinding and pre-cooking the meat processing plant by products

The meat by products is coarsely ground to the desired texture manually since the
capacity of the plant is small. To facilitate further processing, the ground meat is cooked
in a continuous cooker (digester) at the appropriate temperature. The flesh products are
reground after initial cooking to produce a more uniform consistency.

 Blending

The meat mixture is weighed and blended with other ingredients such as cereal grains,
vitamins, and minerals by means of mixer. In this process, fatty ingredients like oil cake
and skim of cooking of the by products of meat processing plant are added to the
materials in order to raise the nutritional value of the feed.
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 Fine crushing

After the feed is thoroughly mixed it is further crushed by means of crusher. The feed is
crushed to particle sizes of about 1mm diameter.

 Pellet making

The feed that is crushed into fine particles is further formed into pellets. These pellets,
which are cylindrical type and come in sizes measuring 6mm in diameter and 2cm in
length are then dried.

 Packaging and labeling

Measured amounts of the product are packaged into appropriate containers. Dry foods
are poured into pre-printed containers. Moist canned foods are vacuum sealed to reduce
the oxygen content and prevent spoilage of fats in the food. For the purpose of this profile
it can be packed in polyethylene plastic bag of 1kg each.

Since there is no any by – product in the process the project is free form negative
environmental effect.

2. Source of Technology

The following company could supply the required machinery and technology.

Sunita impex Pvt. Ltd.

36A Bentinck street, 1st floor, Kolkata 700069, India,
ph: 2248 1986/87, 2243 0102
Fax: 91-33-2248 3664
E-mail: Kolkata: admin@sunitaimpex.com, sutimpex@cal2.vsnl.net.in
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B. ENGINEERING

1. Machinery and equipment

Machinery and equipment required by the plant, including the auxiliary equipment are
given in Table 5.1. The total cost of plant machinery and equipment is estimated at Birr
500,000, of which Birr 425,000 is required in foreign currency.

Table 5.1
MACHINERY AND EQUIPMENT REQUIRED BY CATTLE
FEED PRODUCING PLANT

Sr. Description Qty. Cost(Birr)

No. LC FC TC
1 Tank and silos for raw materials 3
storage 7,875 44,625 52,500
2 Metal screen and shaker 1 10,125 57,375 67,500
3 Hammer Mill (crusher) 1 16,500 93,500 11,0000
4 Blender 1 9,750 55,250 65,000
5 Weighing scale (larger and 2
smaller ) 3,750 21,250 25,000
6 Digester for meat processing 1
plant by products 6,375 36,125 42,500
7 Pellet producing machine 1 11,250 63,750 75,000
8 Polyethylene plastic cutter and 1
sealant 9,375 53,125 62,500
Total 75,000 425,000 500,000

2. Land, Building and Civil Works

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The total land area of the plant including the open space for future expansion is 500 m 2.
The built-up area required by the plant is estimated at 200 m 2. The production hall covers
an area of 100m2, the store 60m2 and the office 40m2.The total cost of civil works and
construction at the rate of Birr 2300 per m2 is estimated at Birr 460,000.

According to the Federal Legislation on the Lease Holding of Urban Land (Proclamation
No 272/2002) in principle, urban land permit by lease is on auction or negotiation basis,
however, the time and condition of applying the proclamation shall be determined by the
concerned regional or city government depending on the level of development.

The legislation has also set the maximum on lease period and the payment of lease
prices. The lease period ranges from 99 years for education, cultural research health,
sport, NGO , religious and residential area to 80 years for industry and 70 years for trade
while the lease payment period ranges from 10 years to 60 years based on the towns
grade and type of investment.

Moreover, advance payment of lease based on the type of investment ranges from 5% to
10%.The lease price is payable after the grace period annually. For those that pay the
entire amount of the lease will receive 0.5% discount from the total lease value and those
that pay in installments will be charged interest based on the prevailing interest rate of
banks. Moreover, based on the type of investment, two to seven years grace period shall
also be provided.

However, the Federal Legislation on the Lease Holding of Urban Land apart from setting
the maximum has conferred on regional and city governments the power to issue
regulations on the exact terms based on the development level of each region.

In Addis Ababa the City’s Land Administration and Development Authority is directly
responsible in dealing with matters concerning land. However, regarding the
manufacturing sector, industrial zone preparation is one of the strategic intervention
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measures adopted by the City Administration for the promotion of the sector and all
manufacturing projects are assumed to be located in the developed industrial zones.

Regarding land allocation of industrial zones if the land requirement of the project is
blow 5000 m2 the land lease request is evaluated and decided upon by the Industrial Zone
Development and Coordination Committee of the City’s Investment Authority. However,
if the land request is above 5,000 m2 the request is evaluated by the City’s Investment
Authority and passed with recommendation to the Land Development and
Administration Authority for decision, while the lease price is the same for both cases.

The land lease price in the industrial zones varies from one place to the other. For
example, a land was allocated with a lease price of Birr 284 /m 2 in Akakai-Kalti and Birr
341/ m2 in Lebu and recently the city’s Investment Agency has proposed a lease price of
Birr 346 per m2 for all industrial zones.

Accordingly, in order to estimate the land lease cost of the project profiles it is assumed
that all manufacturing projects will be located in the industrial zones. Therefore, for the
this profile since it is a manufacturing project a land lease rate of Birr 346 per m 2 is
adopted.

On the other hand, some of the investment incentives arranged by the Addis Ababa City
Administration on lease payment for industrial projects are granting longer grace period
and extending the lease payment period. The criterions are creation of job opportunity,
foreign exchange saving, investment capital and land utilization tendency etc.
Accordingly, Table 5.2 shows incentives for lease payment.

Table 5.2
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INCENTIVES FOR LEASE PAYMENT OF INDUSTRIAL PROJECTS

Payment Down
Grace Completion Paymen
Scored Point Period Period t
Above 75% 5 Years 30 Years 10%
From 50 - 75% 5 Years 28 Years 10%
From 25 - 49% 4 Years 25 Years 10%

For the purpose of this project profile the average i.e. five years grace period, 28 years
payment completion period and 10% down payment is used. The period of lease for
industry is 60 years.

Accordingly, the total lease cost, for a period of 60 years with cost of Birr 346 per m 2, is
estimated at Birr 10.38 million of which 10% or Birr 1,038,000 will be paid in advance.
The remaining Birr 9.34 million will be paid in equal installments with in 28 years i.e.
Birr 333,643 annually.

VI. MANPOWER AND TRAINING REQUIREMENTS

A. MANPOWER REQUIREMENT

The manpower requirement of the plant will be 14 persons, out of which 6 will be
engaged in production activities and the remaining 8 will be involved in administrative
activities. Table 6.1 shows the details of manpower requirement of the plant and
estimated annual labour cost including fringe benefits. The total annual cost of man
power is estimated at Birr 139,500.

Table 6.1
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ANNUAL MANPOWER REQUIREMENT AND ESTIMATED

LABOUR COST

Sr. Description No. of Monthly Annual

No. Persons Salary, Birr Salary, Birr
1 Plant Manager 1 2,500 30,000
2 Secretary 1 700 8,400
3 Accountant 1 1,200 14,400
4 Salesperson/purchaser 1 1,200 14,400
5 Technician operators 2 1,800 21,600
6 Laborers 4 1,600 19,200
7 Cleaner 1 350 4,200
8 Driver 1 450 5400
9 Guard 2 700 8,400
Sub-total 14 111,600
Benefit (20% BS) 27,900
Total Cost 14 139,500

B. TRAINING REQUIREMENT

The production process is so simple and special training is not required. On-site short-
term training for about one week by the machinery supplier is required for the operator
technicians on operation and maintenance of machinery and equipment. The cost of such
training is estimated to be Birr 20,000.

VII. FINANCIAL ANALYSIS

The financial analysis of the pet food project is based on the data presented in the
previous chapters and the following assumptions:-

Construction period 1 year

Source of finance 30 % equity
70 % loan
Tax holidays 2 years
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Bank interest 8.5%

Discount cash flow 8.5%
Accounts receivable 30 days
Raw material local 30 days
Raw material import 90 days
Work in progress 1 days
Finished products 30 days
Cash in hand 5 days
Accounts payable 30 days
Repair and maintenance 5% of machinery cost

A. TOTAL INITIAL INVESTMENT COST

The total investment cost of the project including working capital is estimated at Birr
2.62 million, of which 3 per cent will be required in foreign currency.

The major breakdown of the total initial investment cost is shown in Table 7.1.

Table 7.1
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INITIAL INVESTMENT COST ( ‘000 Birr)

Sr. Cost Items Local Foreign Total

Cost Cost Cost
No.
1 Land lease value 1,038.00 - 1,038.00
2 Building and Civil Work 460.00 - 460.00
3 Plant Machinery and Equipment 425.00 75.00 500.00
4 Office Furniture and Equipment 100.00 - 100.00
5 Vehicle 200.00 - 200.00
6 Pre-production Expenditure* 257.72 - 257.72
7 Working Capital 73.04 - 73.04
Total Investment Cost 2,553.76 75.00 2,628.76

* N.B Pre-production expenditure includes interest during construction ( Birr 137.32

thousand , training (Birr 20 thousand ) and Birr 100 thousand costs of
registration, licensing and formation of the company including legal fees, commissioning
expenses, etc.

B. PRODUCTION COST

The annual production cost at full operation capacity is estimated at Birr 716.03 thousand
(see Table 7.2). The raw material cost accounts for 30.75 per cent of the production
cost. The other major components of the production cost are depreciation, financial cost
and direct labour cost which account for 27.78 %, 13.42% and 9.35 % respectively. The
remaining 18.75 % is the share of repair and maintenance, utility and other administration
cost.

Table 7.2
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ANNUAL PRODUCTION COST AT FULL CAPACITY ('000 BIRR)

Items Cost %
Raw Material and Inputs
220.15 30.75
Utilities 41.97 5.86
Maintenance and repair
25.00 3.49
Labour direct 66.96 9.35
Labour overheads
22.32 3.12
Administration Costs 44.64 6.23
Land lease cost
- -
Total Operating Costs 421.04 58.80
Depreciation 198.90 27.78
Cost of Finance 96.09 13.42
Total Production Cost
716.03 100

C. FINANCIAL EVALUATION

1. Profitability

Based on the projected profit and loss statement, the project will generate a profit through
out its operation life. Annual net profit after tax will grow from Birr 140.09 thousand to
Birr 211.59 thousand during the life of the project. Moreover, at the end of the project life
the accumulated cash flow amounts to Birr 2.05 million.

2. Ratios

In financial analysis financial ratios and efficiency ratios are used as an index or yardstick
for evaluating the financial position of a firm. It is also an indicator for the strength and
weakness of the firm or a project. Using the year-end balance sheet figures and other
relevant data, the most important ratios such as return on sales which is computed by
dividing net income by revenue, return on assets (operating income divided by assets),
 9-19

return on equity (net profit divided by equity) and return on total investment (net profit
plus interest divided by total investment) has been carried out over the period of the
project life and all the results are found to be satisfactory.

3. Break-even Analysis

The break-even analysis establishes a relationship between operation costs and revenues.
It indicates the level at which costs and revenue are in equilibrium. To this end, the
break-even point of the project including cost of finance when it starts to operate at full
capacity (year 3) is estimated by using income statement projection.

BE = Fixed Cost = 39 %
Sales – Variable Cost

4. Payback Period

The pay back period, also called pay – off period is defined as the period required to
recover the original investment outlay through the accumulated net cash flows earned by
the project. Accordingly, based on the projected cash flow it is estimated that the
project’s initial investment will be fully recovered within 5 years.

5. Internal Rate of Return

The internal rate of return (IRR) is the annualized effective compounded return rate that
can be earned on the invested capital, i.e., the yield on the investment. Put another way,
the internal rate of return for an investment is the discount rate that makes the net present
value of the investment's income stream total to zero. It is an indicator of the efficiency or
quality of an investment. A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate investments or putting the money
in a bank account. Accordingly, the IRR of this porject is computed to be 13.38 %
indicating the vaiability of the project.
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6. Net Present Value

Net present value (NPV) is defined as the total present ( discounted) value of a time
series of cash flows. NPV aggregates cash flows that occur during different periods of
time during the life of a project in to a common measuring unit i.e. present value. It is a
standard method for using the time value of money to appraise long-term projects. NPV
is an indicator of how much value an investment or project adds to the capital invested. In
principal a project is accepted if the NPV is non-negative.
Accordingly, the net present value of the project at 8.5% discount rate is found to be
Birr 553.20 thousand which is acceptable.

D. ECONOMIC BENEFITS

The project can create employment for 14 persons. In addition to supply of the domestic
needs, the project will generate Birr 303.25 thousand in terms of tax revenue. The
establishment of such factory will have a foreign exchange saving effect to the country by
substituting the current imports. The project has backward linkage effect with the
agricultural and agro processing industrial sector.