The most common question from entrepreneurs seeking to invest in coconut oil production in Kenya is usually how profitable is the business. In this article, we explore the profitability of the venture using data gathered from a real coconut entrepreneur.
1. Assessing the profitability of coconut oil business – methodology
Considering the profitability of coconut oil processing in Kenya is important for among others, to inform policy, to improve county strategies, and to gauge the viability of the venture. For this article, we will assess the profitability to a small scale virgin oil coconut business to gauge the viability of the venture. I considered two ways of assessing the profitability of the business-reviewing literature and assessing data from a real coconut entrepreneur in Kenya. The first option proved difficult considering the limited number of coconut oil processing literature from Kenya. What is more, the few literatures that exist hardly have the data required to assess the profitability of the venture. Thus, for the rest of the article we will review data from a real coconut entrepreneur to assess the crop’s profitability.
2. Assessing the profitability of a coconut business-Background of entrepreneur
Zeis Enterprises is sole proprietor virgin coconut oil business in Mtwapa in Kilifi County. His story is a fairly accurate account on how to start a coconut oil business in Kenya. The entrepreneur started his business journey over ten years ago. Back then, he would have women in the village split and grate for him the coconuts required for the business. The women would also filter the grated coconuts using a traditional Kifumbi, to extract coconut milk, which the entrepreneur would decant to extract oil. The process was entirely manual and the entrepreneur would hire about 4 women to work for him at a go. This approach had several limitations; the cost of the laborers was high as the women had to be paid per grated nut and the volumes of grated coconut and the subsequent coconut oil were low. Moreover, the scalability of the business was a challenge as that would entail managing a huge number of laborers, which would distract the sole proprietor from his core business of producing virgin coconut oil.
The entrepreneur contacted ATDC-Mtwapa, a regional Agricultural Engineering Station, to help him develop a mechanized system of producing virgin coconut oil. The station fabricated for him a coconut grater and referred him to a local dealer, who would make for him a mechanical press. He no longer needed to hire women to grate coconuts, as he could do all this entirely by himself using the motorized grater. His production data, which I used to assess the profitability of coconut oil business is presented in the next section (I gathered the data after working with the entrepreneur at ATDC Mtwapa and have his permission to publish it here).
3. Assessing the profitability of a coconut business - Business data
The entrepreneur buys the coconuts locally at a price of 20 shillings per nut. He splits the coconuts manually to expose the flesh and to expel coconut water. He then grates the coconut using the motorized grater developed from ATDC-Mtwapa. On average, he grates 30 nuts in about two minutes. He then places the nuts into a mechanical press, which he uses to extract coconut milk. The milk is placed on containers for two days to allow the mixture to settle and decant. Decantation ensures the coconut oil floats to the top and is poured or scooped away for packaging. The oil is packaged in 250 ml, 500 ml, and 1 liter bottles, which the entrepreneur buys at between 20 to 30 shillings per bottle. To improve visual appeal, the entrepreneur brands his coconut oil using a well-designed label, which he buys for 20 shillings per bottle. The entrepreneur sells the packaged virgin coconut oil at the current market rates which range between 1000 to 1500 per liter.
4. Assessing the profitability of a coconut business-Production costs
I assessed the profitability of the coconut oil business from this data in two ways. First, I assessed the profitability per liter of oil and secondly the gross monthly income that an entrepreneur is likely to earn from the business. Per liter of coconut oil, the entrepreneur incurs the following costs. First he buys the nuts at 20 shilling per unit. Since he requires about 30 units to produce a liter of oil, the total cost of nuts comes to 600 shillings (30*20). Transporting the nuts cost him 100 shillings per batch of 50 nuts; thus, for 30 nuts, the entrepreneur pays about 35 shillings for transport. Packaging and labelling costs him an additional 50 shillings. He also pays himself a stipend of 100 shillings per liter of coconut, which he views as his labor costs. Thus, the total cost of production, comprising of buying the nuts (600), transport (35), packaging and labelling (50), labor (100); comes to 785 thousand shillings. These are operational costs and are exclusive of business set up costs.
5. Assessing the profitability of a coconut business-Gross margins
Assuming a liter of oil goes for 1200, which was the price at the time of writing this article, the entrepreneur makes around 415 shillings per liter. Depending on the availability of the coconuts and the market demand, the entrepreneur can sell about 5 liters of the oil per day, in a 5-day week, while resting on the weekends. This brings his monthly gross profits to about 41,500 shillings. However, with support and access to other markets, the entrepreneur can sell as much as 20 liters per day, which translates to a monthly income of about 166,000 per month. This was the direction the business was headed before the pandemic. At the moment, the entrepreneur sells just 2 liters of oil per day, earning him 16,600 per month. All in all, from the data and analysis, small scale coconut oil production is a profitable business venture in Kenya.