Having looked at the profitability of coconut oil processing in Kenya in part 2 of this series on coconut value addition (Read part 1 here and part 2 here), in this next article, we review the process of starting a small scale coconut business in Kenya.
1. Starting a coconut oil Business-Market research
Market research is the best place to start when setting up a coconut oil business. The research information will not only inform the viability of the venture; moreover, it will inform the strategy to adopt when launching the business. Conducting such a research entails looking at both the demand and supply side of the business. Unfortunately, limited data from the coconut industry makes it a bit difficult to perform a holistic market research, more so for small scale production which is the focus of this series. I had to be creative when conducting the research. Most of my insights are derived directly from existing literature and indirectly by drawing inferences from my observation working with coconut entrepreneurs.
2. Starting a coconut oil Business-Demand analysis
Demand for virgin coconut oil is increasing both globally and locally. As of 2016, the value of virgin coconut oil and related products stood at 3.2 billion, which accounted for only 25 % of the full potential of the product, implying a huge demand for the product locally (KARLO, 2016). The price rises for virgin coconut oil are another indicator of its high demand. Between 2010 and 2021, the price of a liter of coconut oil doubled from an estimated 500 shillings to about 1,200 shillings. A final indicator of demand is the performance of small scale coconut businesses. From my interactions with some of the entrepreneurs, while developing for them processing machinery, the enterprises seem to be doing well. Thus, the demand for virgin coconut oil is high. What is more, As noted in part 2 of this series (Read part 1 here and part 2 here), the product is highly profitable.
3. Starting a coconut oil business-supply analysis
The supply of raw material required for producing the oil is another vital piece of information required after conducting market research. In our case, the nuts are the primary resource used in producing coconut oil. Based on data from Viffa Consult (2020), the county produced 92,560 tons of the nuts in 2018. In 2019, the volume increased to 109,889, from 86,843 acres of the crop. At the moment, the nation has about 251.8 million coconut trees, with 90 % of these in their peak productivity ages of between 20 to 60 years. This data is indicative of a sound supply of coconuts in the nation. Another probable indicator of healthy supply is the fact that while Kenya imported 732 tons of coconut in 2018, the nation also exported 832 tons to, among others, Tanzania, Egypt and Rwanda (Vita Consult, 2020). Most of these nuts are grown in the coastal counties of Kilifi, Kwale, Lamu, Mombasa and Taita Taveta. Other regions where the nuts are grown in the country include Busia, Tharaka Nithi, and Homa Bay. A final indicator of the state of the favorable state of supply comes from the information shared by coconut entrepreneurs who I have worked with over the years. Most agree that supply for the nuts exist. Their only complaint are the prices, which fluctuate throughout the year. Thus, national data and local entrepreneurial information seem to show a health supply of the nuts locally.
4. Starting a coconut oil business – business model
There is no standard way of setting up small scale business operations, more so, in the Kenyan context, which is highly dynamic. This point rings true for coconut oil businesses, which have a range of ways in which they are set up. Some are launched as part of welfare group, while others are formed as cooperatives. Others such as Zeiss enterprises are sole proprietors. A review of each of this models based on proper contextual information is important before deciding to set up operations. For this article, I will share firsthand experience of how to set up operations based on information shared from the owner of Zeiss enterprises, a coconut entrepreneur in Kilifi county. I worked with the entrepreneur in my capacity as a mechanization engineer at ATDC-Mtwapa, to develop a coconut grating machine, which he now uses to grate the nuts. I have his express permission to share information about his business here.
5. Starting a coconut oil business- steps
The first step in the process in setting up a coconut oil business is to source for a steady supply of nuts. This may entail visiting local farmers or contacting a dealer with steady supply. Next, one has to procure the necessary machinery required for the business. In the case of Zeiss enterprises, the machines were, a machete for splitting the nuts, a grater for grating, and a press for extracting the milk. The cost of machete in Kenya is about 600 shillings, while the cost of fabricating a grater or buying a new one ranges between 30,000 to 50,000 shillings. An oil press costs about 20,000, which brings the total costs of machinery to about 70,000 shillings. Additional items that should be bought include containers for holding extracted coconut milk (1,000 shillings) and packaging bottles at about 5,000 shillings. Labelling and branding can cost an additional 5,000 shillings. Regulatory costs including KEBS certification and business licenses cost about 10,000 shillings, which brings the total costs of setting up operation to between 80, 000 and 90,000 shillings. Zeiss enterprises runs his business from home and as such, he did not incur any business premises costs. He also processes the coconut oil by himself, which eliminates initial labor costs. Thus, on the higher end, with a capital of about 100,000, one can successfully set up a coconut business. On the lower end, 50,000 shillings is a reasonable startup cost for a coconut oil business in Kenya. The next blog post will discuss the process of coconut oil extraction after a business has been set up.
Viffa Consult (2020) The state of coconut commodity market in Kenya-SME Market outlook.
Kenya Agricultural & livestock Research Organization (2016). www.karlo.org/industrialcrops research institute